Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
x | QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2010
¨ | TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number 2-5916
Chase General Corporation
(Exact name of small business issuer as specified in its charter)
MISSOURI | 36-2667734 | |
(State or other jurisdiction of incorporation or organization) | (IRS Employer Identification No.) |
1307 South 59th, St. Joseph, Missouri 64507
(Address of principal executive offices, Zip Code)
(816) 279-1625
(Issuer’s telephone number, including area code)
NONE
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 12, 13, or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant (1) has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ¨ No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer | ¨ | Accelerated filer | ¨ | |||
Non-accelerated filer | ¨ (Do not check if a smaller reporting company) | Smaller reporting company | x |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Securities Exchange Act of 1934) Yes ¨ No x
As of April 30, 2010, there were 969,834 shares of common stock, $1.00 par value, outstanding.
Table of Contents
CHASE GENERAL CORPORATION AND SUBSIDIARY
Quarterly Report on Form 10-Q
For the Nine Months Ended March 31, 2010
TABLE OF CONTENTS
Table of Contents
ITEM 1. FINANCIAL STATEMENTS
CHASE GENERAL CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
March 31, 2010 | June 30, 2009 | |||||
(Unaudited) | (Audited) | |||||
CURRENT ASSETS | ||||||
Cash and cash equivalents | $ | 260,785 | $ | 28,771 | ||
Trade receivables, net (less allowance for doubtful accounts, March 31, 2010 - $16,636 and June 30, 2009 - $15,736) | 217,356 | 229,909 | ||||
Inventories: | ||||||
Finished goods | 58,058 | 119,116 | ||||
Goods in process | 13,954 | 4,932 | ||||
Raw materials | 112,075 | 69,960 | ||||
Packaging materials | 187,534 | 172,764 | ||||
Prepaid expenses | 119,952 | 16,858 | ||||
Deferred income taxes | 3,664 | 4,626 | ||||
Total current assets | 973,378 | 646,936 | ||||
PROPERTY AND EQUIPMENT - NET | 274,587 | 328,482 | ||||
TOTAL ASSETS | $ | 1,247,965 | $ | 975,418 | ||
The accompanying notes are an integral part of the
condensed consolidated financial statements.
3
Table of Contents
CHASE GENERAL CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS’ EQUITY
March 31, 2010 | June 30, 2009 | |||||||
(Unaudited) | (Audited) | |||||||
CURRENT LIABILITIES | ||||||||
Accounts payable | $ | 86,731 | $ | 158,570 | ||||
Current maturities of notes payable | 174,030 | 30,142 | ||||||
Accrued expenses | 17,779 | 15,487 | ||||||
Deferred income | 1,299 | 1,299 | ||||||
Income taxes payable | 86,494 | 185 | ||||||
Total current liabilities | 366,333 | 205,683 | ||||||
LONG-TERM LIABILITIES | ||||||||
Deferred income | 18,181 | 19,155 | ||||||
Notes payable, less current maturities | 20,302 | 42,604 | ||||||
Deferred income taxes | 16,352 | 21,986 | ||||||
Total long-term liabilities | 54,835 | 83,745 | ||||||
Total liabilities | 421,168 | 289,428 | ||||||
STOCKHOLDERS’ EQUITY | ||||||||
Capital stock issued and outstanding: | ||||||||
Prior cumulative preferred stock, $5 par value: | ||||||||
Series A (liquidation preference $2,062,500 and $2,040,000 respectively) | 500,000 | 500,000 | ||||||
Series B (liquidation preference $2,017,500 and $1,995,000 respectively) | 500,000 | 500,000 | ||||||
Cumulative preferred stock, $20 par value | ||||||||
Series A (liquidation preference $4,711,900 and $4,668,001 respectively) | 1,170,660 | 1,170,660 | ||||||
Series B (liquidation preference $767,896 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 | (5,639,199 | ) | (5,780,006 | ) | ||||
Total stockholders’ equity | 826,797 | 685,990 | ||||||
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | �� | $ | 1,247,965 | $ | 975,418 | |||
The accompanying notes are an integral part of the
condensed consolidated financial statements.
4
Table of Contents
CHASE GENERAL CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended March 31 | ||||||||
2010 | 2009 | |||||||
NET SALES | $ | 441,877 | $ | 395,000 | ||||
COST OF SALES | 382,473 | 331,822 | ||||||
Gross profit on sales | 59,404 | 63,178 | ||||||
OPERATING EXPENSES | ||||||||
Selling | 58,946 | 66,478 | ||||||
General and administrative | 66,846 | 64,867 | ||||||
(Gain) on sale of equipment | — | (6,762 | ) | |||||
Total operating expenses | 125,792 | 124,583 | ||||||
Income (loss) from operations | (66,388 | ) | (61,405 | ) | ||||
OTHER INCOME (EXPENSE) | (834 | ) | (23 | ) | ||||
Net income (loss) before income taxes | (67,222 | ) | (61,428 | ) | ||||
(BENEFIT) FOR INCOME TAXES | (26,600 | ) | (36,717 | ) | ||||
NET (LOSS) | (40,622 | ) | (24,711 | ) | ||||
Preferred dividends | (32,018 | ) | (32,018 | ) | ||||
NET (LOSS) APPLICABLE TO COMMON STOCKHOLDERS | $ | (72,640 | ) | $ | (56,729 | ) | ||
NET (LOSS) PER SHARE OF COMMON STOCK - BASIC | $ | (.07 | ) | $ | (.06 | ) | ||
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
Table of Contents
CHASE GENERAL CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Nine Months Ended March 31 | ||||||||
2010 | 2009 | |||||||
NET SALES | $ | 2,483,890 | $ | 2,553,842 | ||||
COST OF SALES | 1,731,120 | 1,760,323 | ||||||
Gross profit on sales | 752,770 | 793,519 | ||||||
OPERATING EXPENSES | ||||||||
Selling | 266,315 | 297,033 | ||||||
General and administrative | 260,806 | 244,826 | ||||||
(Gain) on sale of equipment | — | (12,014 | ) | |||||
Total operating expenses | 527,121 | 529,845 | ||||||
Income from operations | 225,649 | 263,674 | ||||||
OTHER INCOME (EXPENSE) | (2,820 | ) | (4,640 | ) | ||||
Net income before income taxes | 222,829 | 259,034 | ||||||
PROVISION FOR INCOME TAXES | 82,022 | 40,076 | ||||||
NET INCOME | 140,807 | 218,958 | ||||||
Preferred dividends | (96,054 | ) | (96,054 | ) | ||||
NET INCOME APPLICABLE TO COMMON STOCKHOLDERS | $ | 44,753 | $ | 122,904 | ||||
NET INCOME PER SHARE OF COMMON STOCK - | ||||||||
BASIC | $ | .05 | $ | .13 | ||||
DILUTED | $ | .02 | $ | .06 | ||||
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
Table of Contents
CHASE GENERAL CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended March 31 | ||||||||
2010 | 2009 | |||||||
CASH FLOWS FROM OPERATING ACTIVITIES | ||||||||
Net income | $ | 140,807 | $ | 218,958 | ||||
Adjustments to reconcile net income (loss) to net cash provided by operating activities: | ||||||||
Depreciation and amortization | 56,469 | 51,800 | ||||||
Allowance for bad debts | 900 | 900 | ||||||
Deferred income amortization | (973 | ) | (975 | ) | ||||
Deferred income taxes | (4,672 | ) | 29,716 | |||||
(Gain) on sale of equipment | — | (12,041 | ) | |||||
Effects of changes in operating assets and liabilities: | ||||||||
Trade receivables | 11,653 | 87,915 | ||||||
Other receivable | — | (11,000 | ) | |||||
Inventories | (4,849 | ) | 11,141 | |||||
Prepaid expenses | (103,094 | ) | (12,946 | ) | ||||
Accounts payable | (71,839 | ) | 21,723 | |||||
Accrued expenses | 2,292 | (271 | ) | |||||
Income taxes payable | 86,309 | 10,360 | ||||||
Net cash provided by operating activities | 113,003 | 395,280 | ||||||
CASH FLOWS FROM INVESTING ACTIVITIES | ||||||||
Proceeds from sale of equipment | — | 24,000 | ||||||
Purchases of property and equipment | (2,574 | ) | (74,577 | ) | ||||
Net cash (used in) investing activities | (2,574 | ) | (50,577 | ) | ||||
CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||
Proceeds from line-of-credit | 210,000 | 145,000 | ||||||
Principal payments on line-of-credit | (210,000 | ) | (195,000 | ) | ||||
Proceeds from equipment notes payable | 143,554 | — | ||||||
Principal payments on notes payable - stockholder | — | (140,000 | ) | |||||
Principal payments on vehicles notes payable | (21,969 | ) | (14,015 | ) | ||||
Net cash provided by (used in) financing activities | 121,585 | (204,015 | ) | |||||
NET INCREASE IN CASH AND CASH EQUIVALENTS | 232,014 | 140,688 | ||||||
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD | 28,771 | 24,828 | ||||||
CASH AND CASH EQUIVALENTS, END OF PERIOD | $ | 260,785 | $ | 165,516 | ||||
The accompanying notes are an integral part of the
condensed consolidated financial statements.
7
Table of Contents
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 nine months ended March 31, 2010 and for the three months and nine months ended March 31, 2009 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 nine months ended March 31, 2010 and cash flows for the nine months ended March 31, 2010 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.
During the third quarter, Chase adopted FASB accounting Standards Update (ASU) No. 2010-09, Amendments to Certain Recognition and Disclosure Requirements, which amends ASC 855, Subsequent Events. This ASU removes the requirement for an SEC filer to disclose a date through which subsequent events have been evaluated. This change removes potential conflicts with SEC requirements.
8
Table of Contents
CHASE GENERAL CORPORATION AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 2 - NET INCOME (LOSS) PER SHARE
The income per share was computed on the weighted average of outstanding common shares during the period. Diluted earnings per share is calculated by including contingently issuable shares with the weighted average shares outstanding.
Three Months Ended March 31 | Nine Months Ended March 31 | |||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||
Net income (loss) | $ | (40,622 | ) | $ | (24,711 | ) | $ | 140,807 | $ | 218,958 | ||||
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 | $ | (72,640 | ) | $ | (56,729 | ) | $ | 44,753 | $ | 122,904 | ||||
Three Months Ended March 31 | Nine Months Ended March 31 | |||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||
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 loss per share | $ | (.07 | ) | $ | (.06 | ) | $ | .05 | $ | .13 | ||||
Diluted earnings per share | $ | — | $ | — | $ | .02 | $ | .06 | ||||||
Cumulative Preferred Stock dividends in arrears at March 31, 2010 and 2009, totaled $7,148,356 and $7,020,284, respectively. Total dividends in arrears, on a per share basis, consist of the following at March 31:
Nine Months Ended March 31 | ||||||
2010 | 2009 | |||||
6% Convertible | ||||||
Series A | $ | 15 | $ | 15 | ||
Series B | 15 | 15 | ||||
5% Convertible | ||||||
Series A | 61 | 60 | ||||
Series B | 61 | 60 |
9
Table of Contents
CHASE GENERAL CORPORATION AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 2 - NET INCOME (LOSS) PER SHARE (CONTINUED)
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 - 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 was reclassified to deferred revenue. Deferred revenue is recognized on a straight-line basis over the lease term of 20 years. During the nine months ended March 31, 2010 and 2009, deferred revenue of $973 and $975, respectively, was amortized into income for each period.
10
Table of Contents
CHASE GENERAL CORPORATION AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 4 - NOTES PAYABLE
The Company’s long-term debt consists of:
Payee | Terms | March 31, 2010 | June 30, 2009 | |||||
Ford Credit | $1,001 monthly payments including interest of 0%; final payment due March 2011, secured by a vehicle. | $ | 12,004 | $ | 21,010 | |||
Ford Credit | $573 monthly payments including interest of 6.99%; final payment due July 2012, secured by a vehicle. | 15,008 | 19,039 | |||||
Honda | $508 monthly payments including interest of 1.9%; final payment due December 15, 2011, secured by a vehicle. | 10,484 | 14,871 | |||||
Nissan | $557 monthly payments including interest of 3.9%; final payment due April 2012, secured by a vehicle. | 13,282 | 17,826 | |||||
Nodaway Valley Bank | Lump sum payment, including interest of 6.25%, final payment due June 2010, secured by equipment (maximum financing is $160,050.) | 143,554 | — | |||||
Total | 194,332 | 72,746 | ||||||
Less current portion | 174,030 | 30,142 | ||||||
Long-term portion | $ | 20,302 | $ | 42,604 | ||||
Future minimum payments are:
2010 | $ | 174,030 | |
2011 | 17,523 | ||
2012 | 2,779 | ||
Total | $ | 194,332 | |
11
Table of Contents
CHASE GENERAL CORPORATION AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 March 31, 2010 and June 30, 2009, there was no outstanding balance on the line-of-credit.
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 had a net operating loss carryforward of approximately $4,512 and unused contributions carryforward of $874 of which the Company’s profit for the nine months ended March 31, 2010 absorbed these amounts.
NOTE 7 - SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Nine Months Ended March 31 | ||||||
2010 | 2009 | |||||
Cash paid for: | ||||||
Interest | $ | 3,346 | $ | 5,802 | ||
Income taxes | 385 | — | ||||
Non-cash transaction: | ||||||
Financing of new vehicles | — | 60,556 | ||||
Reclass of forgivable loan to deferred income | — | 10,000 |
12
Table of Contents
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.
RESULTS OF OPERATIONS - Three Months Ended March 31, 2010 Compared with Three Months Ended March 31, 2009 and Nine Months Ended March 31, 2010 Compared with Nine Months Ended March 31, 2009
The following management comments regarding Chase’s results of operations and outlook should be read in conjunction with the condensed consolidated financial statements included pursuant to Item 1 of the quarterly report.
The following table sets forth certain items as a percentage of net sales and revenues for the periods presented:
Three Months Ended March 31 | Nine Months Ended March 31 | |||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||
Net sales | 100 | % | 100 | % | 100 | % | 100 | % | ||||
Cost of sales | 87 | 84 | 70 | 69 | ||||||||
Gross profit | 13 | 16 | 30 | 31 | ||||||||
Operating expenses | 28 | 32 | 21 | 21 | ||||||||
Income (loss) from operations | (15 | ) | (16 | ) | 9 | 10 | ||||||
Net income (loss) before income taxes | (15 | ) | (15 | ) | 9 | 10 | ||||||
Provision (benefit) for income taxes | (6 | ) | (9 | ) | 3 | 2 | ||||||
Net income (loss) | (9 | )% | (6 | )% | 6 | % | 8 | % | ||||
13
Table of Contents
CHASE GENERAL CORPORATION AND SUBSIDIARY
ITEM 2. - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
NET SALES
Net sales increased $46,877 or 12% for the three months ended March 31, 2010 to $441,877 compared to $395,000 for the three months ended March 31, 2009. Gross sales for Chase Candy decreased $4,060 to $392,532 for the three months ended March 31, 2010 compared to $396,592 for 2009. Gross sales for Seasonal Candy increased $49,220 to $56,994 for the three months ended March 31, 2010 compared to $7,774 for 2009.
Net sales decreased $69,952 or 3% for the nine months ended March 31, 2010 to $2,483,890 compared to $2,553,842 for the nine months ended March 31, 2009. Gross sales for Chase Candy decreased $30,951 to $1,290,358 for the nine months ended March 31, 2010 compared to $1,321,309 for 2009. Gross sales for Seasonal Candy decreased $45,469 to $1,223,114 for the nine months ended March 31, 2010 compared to $1,290,358 for 2009.
The net 12% sales increase of $46,877 for the three months ended March 31, 2010, over the same period ended March 31, 2009 is primarily due to orders from a new customer. In addition, sales returns and allowances decreased $5,120 or 31% from $16,614 for the three months ended March 31, 2009 to $11,495 for the three months ended March 31, 2010.
The 3% decrease in net sales of $69,952 for the nine month period ended March 31, 2010, over the same period ended March 31, 2009 is primarily due to reduced orders from several customers and discontinuation of the Mini Mash Limited Addition Tin. Additionally, during 2009, the Company increased pricing and was unable to do so in 2010. Seasonal sales for the nine months were reduced approximately $90,000 from loss of a customer, but this loss was offset by additional sales of $48,000 from the clamshell product line.
COST OF SALES
The cost of sales increased $50,651 to $382,473 increasing to 87% of related revenues for the three months ended March 31, 2010, compared to $331,822 or 84% of related revenues for the three months ended March 31, 2009. The cost of sales decreased $29,203 to $1,731,120 increasing to 70% of related revenues for the nine months ended March 31, 2010, compared to $1,760,323 or 69% of related revenues for the nine months ended March 31, 2009.
The increase in cost of sales for the three months ended March 31, 2010 is a 15% increase from the three months ended March 31, 2009. Direct costs of goods for materials manufactured and production labor force increased $19,920 to $225,223 for the three months ended March 31, 2010 as compared to $205,303 for the three months ended March 31, 2009, which is the result of a bonus award to a long time retiring employee.
14
Table of Contents
CHASE GENERAL CORPORATION AND SUBSIDIARY
ITEM 2. - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
COST OF SALES (CONTINUED)
Direct costs of goods for materials manufactured and production labor force for the nine months ended March 31, 2010, decreased $58,884 to $1,150,801 as compared to $1,209,685 for the nine months ended March 31, 2009, which is a result of no raw material price increases. In addition, new transportation vendors were used which resulted in a decrease of 18% in freight costs from $145,014 for the nine months ended March 31, 2009 to $119,123 for the nine months ended March 31, 2010.
The Company decreased finished goods inventory for the three months ended March 31, 2010 to $58,058 or 51% 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 $112,075 and packaging materials inventory of $187,534 is 23% 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 third quarter ending March 31, 2010.
SELLING EXPENSES
Selling expenses for the three months ended March 31, 2010 decreased $7,532 to $58,946, which is 13% of sales, compared to $66,478 or 17% of sales for the three months ended March 31, 2009. Selling expenses for the nine months ended March 31, 2010 decreased $30,718 to $266,315, which is 11% of sales, compared to $297,033 or 12% of sales for the nine months ended March 31, 2009.
The decrease of $7,532 in selling expenses for the three months ended March 31, 2010 is due to lower commissions, premium promotions and sample costs for the period. Commissions, premium promotions, and sample costs decreased 48% to $14,584 for this period from $28,047 for the three months ended March 31, 2009.
The decrease of $30,718 in selling expenses for the nine months ended March 31, 2010 is also due to lower commissions, premium promotions and sample costs for this period. Commissions, premium promotions, and sample costs decreased 23% to $138,178 for this period from $178,644 for the nine months ended March 31, 2009.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses for the three months ended March 31, 2010 increased $1,979 to $66,846, which is 15% of sales, compared to $64,867 or 16% of sales for the three months ended March 31, 2009. General and administrative expenses for the nine months ended March 31, 2010 increased $15,980 to $260,806, which is 10% of sales, compared to $244,826 or 10% of sales for the nine months ended March 31, 2009. The increased costs are primarily because of a $16,936 increase in employee health and directors insurance.
15
Table of Contents
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) decreased by $811 for the three months ended March 31, 2010 to $(834), compared to $(23) for the three months ended March 31, 2009. Other income and expense increased by $1,820 for the nine months ended March 31, 2010 to $(2,820), compared to $(4,640) for the nine months ended March 31, 2009. This was primarily due to a decrease in interest expense since there was no stockholder note payable during the current year.
PROVISION (BENEFIT) FOR INCOME TAXES
The Company recorded a tax (benefit) for the three months ended March 31, 2010 of $(26,600) as compared to $(36,717) for the three months ended March 31, 2009. The Company recorded a tax provision for the nine months ended March 31, 2010 of $82,022 as compared to $40,076 for the nine months ended March 31, 2009. The net tax expense recorded for the nine months ended March 31, 2010 is primarily due to recognizing taxes related to current profitable operations. The Company had incurred losses in the years ending June 30, 2007 and 2008, which was not available to carry back to obtain previously paid income taxes. These losses were utilized against taxable income for the nine months ended March 31, 2009. The net change in deferred taxes for the three months and nine months ended March 31, 2010 was $1,943 and $4,672, respectively.
NET INCOME (LOSS)
The Company reported a net loss for the quarter ended March 31, 2010 of $(40,622), compared to a net loss of $(24,711) for the quarter ended March 31, 2009. This increase in losses of $15,911 is explained above.
The Company reported a net income for the nine months ended March 31, 2010 of $140,807, compared to a net income of $218,958 for the nine months ended March 31, 2009. This decrease of $78,151 is explained above.
PREFERRED DIVIDENDS
These amounts reflect additional preferred stock dividends in arrears for the three and nine months ended March 31, 2010 and 2009, 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.
16
Table of Contents
CHASE GENERAL CORPORATION AND SUBSIDIARY
ITEM 2. - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
NET INCOME APPLICABLE TO COMMON STOCKHOLDERS
Net (loss) applicable to common stockholders for the three months ended March 31, 2010 was $(72,640), which is an increase in losses of $15,911 as compared to the three months ended March 31, 2009 of $(56,729).
Net income applicable to common stockholders for the nine months ended March 31, 2010 was $44,753 which is a decrease of $78,151 as compared to the nine months ended March 31, 2009 of $122,904. These items are explained above.
LIQUIDITY AND CAPITAL RESOURCES
The table below presents the summary of cash flow for the fiscal period indicated.
2010 | 2009 | |||||||
Net cash provided by operating activities | $ | 113,003 | $ | 395,280 | ||||
Net cash used in investing activities | $ | (2,574 | ) | $ | (50,577 | ) | ||
Net cash used in financing activities | $ | 121,585 | $ | (204,015 | ) |
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 2010 of which $110,507 has been paid to date as the equipment is being built with expectation to be placed in service by June 30, 2010. Management secured financing for $160,050 effective January 4, 2010 towards this commitment and the balance will be paid with cash funds held by the Company.
The $121,585 of cash used in financing activities includes receipt of $210,000 from its line-of-credit, which was paid in full as of December 31, 2009, payments on the vehicle loans of $21,969 and receipt of $143,554 from the financing committed January 4, 2010. 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.
17
Table of Contents
CHASE GENERAL CORPORATION AND SUBSIDIARY
ITEM 2. - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
CRITICAL ACCOUNTING POLICIES
Use of Estimates
The preparation of the condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect certain reported amounts and disclosures. Significant estimates used in preparing these condensed consolidated financial statements include those assumed in computing the carrying value of equipment and allowance for doubtful trade receivables. Accordingly, actual results could differ from those estimates. Any changes in estimates are recorded in the period in which they become known.
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.
18
Table of Contents
CHASE GENERAL CORPORATION AND SUBSIDIARY
ITEM 2. - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
CRITICAL ACCOUNTING POLICIES (CONTINUED)
Inventories
Inventories are carried at the “lower of cost or market value” with cost being determined on the “first-in, first-out” basis of accounting. Finished goods and goods in process include a provision for manufacturing overhead.
Property and Equipment
Property and equipment 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.
19
Table of Contents
CHASE GENERAL CORPORATION AND SUBSIDIARY
ITEM 2. - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
CRITICAL ACCOUNTING POLICIES (CONTINUED)
During the third quarter, Chase adopted FASB accounting Standards Update (ASU) No. 2010-09, Amendments to Certain Recognition and Disclosure Requirements, which amends ASC 855, Subsequent Events. This ASU removes the requirement for an SEC filer to disclose a date through which subsequent events have been evaluated. This change removes potential conflicts with SEC requirements.
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 FASBStatement 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.
20
Table of Contents
CHASE GENERAL CORPORATION AND SUBSIDIARY
ITEM 2. - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (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.
21
Table of Contents
PART II. OTHER INFORMATION
ITEM 1. | LEGAL PROCEEDINGS |
a. | None |
ITEM 1A. | RISK FACTORS |
Not applicable to a smaller reporting company.
ITEM 3. | DEFAULTS UPON SENIOR SECURITIES |
a. | None |
b. | The total cumulative preferred stock dividends contingency at March 31, 2010 is $7,148,356. |
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 |
22
Table of Contents
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 14, 2010 | /s/ Barry M. Yantis | |||
Date | By: Barry M. Yantis | |||
Chairman of the Board, Chief Executive Officer, President and Treasurer |
23