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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 September 30, 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 October 31, 2010, there were 969,834 shares of common stock, $1.00 par value, outstanding.
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CHASE GENERAL CORPORATION AND SUBSIDIARY
Quarterly Report on Form 10-Q
For the Three Months Ended September 30, 2010
TABLE OF CONTENTS
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CHASE GENERAL CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
September 30, 2010 | June 30, 2010 | |||||||
(Unaudited) | (Audited) | |||||||
CURRENT ASSETS | ||||||||
Cash and cash equivalents | $ | 58,406 | $ | 106,508 | ||||
Trade receivables, net of allowance for doubtful accounts of $15,191 and $14,891, respectively | 384,657 | 164,753 | ||||||
Inventories: | ||||||||
Finished goods | 360,459 | 104,022 | ||||||
Goods in process | 8,667 | 3,730 | ||||||
Raw materials | 62,377 | 109,027 | ||||||
Packaging materials | 151,272 | 186,420 | ||||||
Prepaid expenses | 2,507 | 4,959 | ||||||
Deferred income taxes | 5,816 | 5,844 | ||||||
Total current assets | 1,034,161 | 685,263 | ||||||
PROPERTY AND EQUIPMENT - NET | 486,329 | 512,069 | ||||||
TOTAL ASSETS | $ | 1,520,490 | $ | 1,197,332 | ||||
The accompanying notes are an integral part of the
condensed consolidated financial statements.
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CHASE GENERAL CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS’ EQUITY
September 30, 2010 | June 30, 2010 | |||||||
(Unaudited) | (Audited) | |||||||
CURRENT LIABILITIES | ||||||||
Accounts payable | $ | 301,897 | $ | 68,734 | ||||
Current maturities of notes payable | 53,023 | 56,820 | ||||||
Notes payable - line-of-credit | 40,000 | — | ||||||
Accrued expenses | 32,156 | 15,337 | ||||||
Deferred income | 1,299 | 1,299 | ||||||
Income taxes payable | 13,541 | 2 | ||||||
Total current liabilities | 441,916 | 142,192 | ||||||
LONG-TERM LIABILITIES | ||||||||
Deferred income | 17,532 | 17,857 | ||||||
Notes payable, less current maturities | 139,732 | 150,475 | ||||||
Deferred income taxes | 88,996 | 93,869 | ||||||
Total long-term liabilities | 246,260 | 262,201 | ||||||
Total liabilities | 688,176 | 404,393 | ||||||
STOCKHOLDERS’ EQUITY | ||||||||
Capital stock issued and outstanding: | ||||||||
Prior cumulative preferred stock, $5 par value: | ||||||||
Series A (liquidation preference $2,077,500 and $2,070,000 respectively) | 500,000 | 500,000 | ||||||
Series B (liquidation preference $2,032,500 and $2,025,000 respectively) | 500,000 | 500,000 | ||||||
Cumulative preferred stock, $20 par value | ||||||||
Series A (liquidation preference $4,741,166 and $4,726,533 respectively) | 1,170,660 | 1,170,660 | ||||||
Series B (liquidation preference $772,666 and $770,281 respectively) | 190,780 | 190,780 | ||||||
Common stock, $1 par value | 969,834 | 969,834 | ||||||
Paid-in capital in excess of par | 3,134,723 | 3,134,722 | ||||||
Accumulated deficit | (5,633,683 | ) | (5,673,057 | ) | ||||
Total stockholders’ equity | 832,314 | 792,939 | ||||||
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | $ | 1,520,490 | $ | 1,197,332 | ||||
The accompanying notes are an integral part of the
condensed consolidated financial statements.
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CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended September 30 | ||||||||
2010 | 2009 | |||||||
NET SALES | $ | 768,836 | $ | 760,891 | ||||
COST OF SALES | 517,620 | 487,663 | ||||||
Gross profit on sales | 251,216 | 273,228 | ||||||
OPERATING EXPENSES | ||||||||
Selling | 80,925 | 71,913 | ||||||
General and administrative | 120,327 | 114,725 | ||||||
(Gain) on sale of equipment | (500 | ) | — | |||||
Total operating expenses | 200,752 | 186,638 | ||||||
Income from operations | 50,464 | 86,590 | ||||||
OTHER INCOME (EXPENSE) | (2,396 | ) | (809 | ) | ||||
Net income before income taxes | 48,068 | 85,781 | ||||||
PROVISION FOR INCOME TAXES | 8,694 | 21,211 | ||||||
NET INCOME | 39,374 | 64,570 | ||||||
Preferred dividends | (32,018 | ) | (32,018 | ) | ||||
Net income applicable to common stockholders | $ | 7,356 | $ | 32,552 | ||||
NET INCOME PER SHARE OF COMMON STOCK | ||||||||
BASIC | $ | .01 | $ | .03 | ||||
DILUTED | $ | .00 | $ | .02 | ||||
WEIGHTED AVERAGE SHARES OF COMMON STOCK OUTSTANDING | 969,834 | 969,834 | ||||||
The accompanying notes are an integral part of the
condensed consolidated financial statements.
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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended September 30 | ||||||||
2010 | 2009 | |||||||
CASH FLOWS FROM OPERATING ACTIVITIES | ||||||||
Net income | $ | 39,374 | $ | 64,570 | ||||
Adjustments to reconcile net income to net cash (used in) operating activities: | ||||||||
Depreciation and amortization | 27,091 | 18,718 | ||||||
Provision for bad debts | 300 | 300 | ||||||
Deferred income amortization | (324 | ) | (324 | ) | ||||
Deferred income taxes | (4,845 | ) | (787 | ) | ||||
(Gain) on sale of equipment | (500 | ) | — | |||||
Effects of changes in operating assets and liabilities: | ||||||||
Trade receivables | (220,204 | ) | (203,203 | ) | ||||
Inventories | (179,576 | ) | (194,388 | ) | ||||
Prepaid expenses | 2,452 | 10,062 | ||||||
Accounts payable | 233,163 | 119,837 | ||||||
Accrued expenses | 16,819 | 4,748 | ||||||
Income taxes payable | 13,539 | 21,867 | ||||||
Net cash (used in) operating activities | (72,711 | ) | (158,600 | ) | ||||
CASH FLOWS FROM INVESTING ACTIVITIES | ||||||||
Proceeds from sale of equipment | 500 | — | ||||||
Purchases of property and equipment | (1,351 | ) | (2,574 | ) | ||||
Net cash (used in) investing activities | (851 | ) | (2,574 | ) | ||||
CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||
Proceeds from line-of-credit | 40,000 | 210,000 | ||||||
Principal payments on notes payable | (14,540 | ) | (7,320 | ) | ||||
Net cash provided by financing activities | 25,460 | 202,680 | ||||||
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS | (48,102 | ) | 41,506 | |||||
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD | 106,508 | 28,771 | ||||||
CASH AND CASH EQUIVALENTS, END OF PERIOD | $ | 58,406 | $ | 70,277 | ||||
The accompanying notes are an integral part of the
condensed consolidated financial statements.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - GENERAL
The condensed consolidated balance sheet of Chase General Corporation (hereinafter referred to as “Chase”, “we”, “our”, and “us”) at June 30, 2010 has been taken from audited consolidated financial statements at that date and condensed. The condensed consolidated financial statements as of and for the three months ended September 30, 2010 and for the three months ended September 30, 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, 2010. The results of operations and cash flows for the three months ended September 30, 2010 are not necessarily indicative of the results for the entire fiscal year ending June 30, 2011. Where appropriate, items within the condensed consolidated financial statements have been reclassified from the previous periods’ presentation. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary to fairly present financial position, results of operations and cash flows for the periods have been included.
During the third quarter 2010, Chase adopted FASB ASU No. 2010-06 Fair Value Measurements and Disclosures (Topic 820). This ASU requires new disclosures for transfers in and out of Levels 1 and 2, and Activity in Level 3 fair value measurements. The update also clarifies the level disaggregation and disclosures about inputs and valuation techniques. The new disclosures and clarifications of existing disclosures are effective for interim and annual reporting periods beginning after December 15, 2009. The requirement related to Level 3 fair value measurements is effective for the Company for interim and annual reporting periods beginning after January 28, 2011. The adoption of the effective portions of this new standard did not have a material impact on the Company’s consolidated financial statements and the Company does not expect a material impact on its consolidated financial statements related to the Level 3 fair value disclosures.
In June 2009, the FASB issued new guidance on the consolidation of variable interest entities (“VIE”) in response to concerns about the application of certain key provisions of pre-existing guidance, including those regarding the transparency of the involvement with a VIE. Specifically, this new guidance requires a qualitative approach to identifying a controlling financial interest in a VIE and requires ongoing assessment of whether an interest in a VIE makes the holder the primary beneficiary of the VIE and whether an entity is a VIE when a triggering event occurs. In addition, this new guidance requires additional disclosures about the involvement with a VIE and any significant changes in risk exposure due to that involvement. This new guidance is effective for fiscal years beginning after November 15, 2009. The Company adopted the new guidance in the first quarter of fiscal year 2011, which did not have a material impact on its consolidated financial statements.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 September 30 | ||||||||
2010 | 2009 | |||||||
Net income (loss) | $ | 39,374 | $ | 64,570 | ||||
Preferred dividend requirements: | ||||||||
6% Prior Cumulative Preferred, $5 par value | 15,000 | 15,000 | ||||||
5% Convertible Cumulative Preferred, $20 par value | 17,018 | 17,018 | ||||||
Total dividend requirements | 32,018 | 32,018 | ||||||
Net income (loss) applicable to common stockholders | $ | 7,356 | $ | 32,552 | ||||
Three Months Ended September 30 | ||||||||
2010 | 2009 | |||||||
Weighted average shares - basic | 969,834 | 969,834 | ||||||
Dilutive effect of contingently issuable shares | 1,033,334 | 1,033,334 | ||||||
Weighted Average Shares - diluted | 2,003,168 | 2,003,168 | ||||||
Basic earnings per share | $ | .01 | $ | .03 | ||||
Diluted earnings per share | $ | .00 | $ | .02 | ||||
Cumulative Preferred Stock dividends in arrears at September 30, 2010 and 2009, totaled $7,212,392 and $7,084,320, respectively. Total dividends in arrears, on a per share basis, consist of the following at September 30:
Three Months Ended September 30 | ||||||||
2010 | 2009 | |||||||
6% Convertible | ||||||||
Series A | $ | 16 | $ | 15 | ||||
Series B | 15 | 15 | ||||||
5% Convertible | ||||||||
Series A | 61 | 60 | ||||||
Series B | 61 | 60 |
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 2 - NET INCOME 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 share of preferred stock.
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. A total of $25,000 has been reclassified to deferred revenue. Deferred revenue is recognized on a straight-line basis over the lease term of 20 years. During the three months ended September 30, 2010 and 2009, deferred revenue of $324 was amortized into income for each period.
NOTE 4 - NOTES PAYABLE
The Company’s long-term debt consists of:
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 4 - NOTES PAYABLE (CONTINUED)
Payee | Terms | September 30, 2010 | June 30, 2010 | |||||||
Ford Credit | $1,001 monthly payments including interest of 0%; final payment due March 2011, secured by a vehicle. | $ | 6,001 | $ | 9,003 | |||||
Ford Credit | $573 monthly payments including interest of 6.99%; final payment due July 2012, secured by a vehicle. | 12,144 | 13,636 | |||||||
Honda | $508 monthly payments including interest of 1.9%; final payment due December 15, 2011, secured by a vehicle. | 7,524 | 9,007 | |||||||
Nissan | $557 monthly payments including interest of 3.9%; final payment due April 2012, secured by a vehicle. | 10,220 | 11,740 | |||||||
Nodaway Valley Bank | $3,192 including interest of 6.25%; final payment due June 2015, secured by equipment. | 156,866 | 163,909 | |||||||
Total | 192,755 | 207,295 | ||||||||
Less current portion | 53,023 | 56,820 | ||||||||
Long-term portion | $ | 139,732 | $ | 150,475 | ||||||
Future minimum payments are: | ||||||||||
2011 | $ | 53,023 | ||||||||
2012 | 45,768 | |||||||||
2013 | 33,287 | |||||||||
2014 | 34,822 | |||||||||
2015 | 25,855 | |||||||||
Total | $ | 192,755 | ||||||||
NOTE 5 - NOTE PAYABLE - LINE-OF-CREDIT
Effective June 30, 2010, the Company had a $250,000 line-of-credit agreement which will expire on January 3, 2011. Currently, the interest rate is 5.5% and is collateralized by certain equipment. At September 30, 2010 and June 30, 2010, the outstanding balance on the line-of-credit was $40,000 and $-0-, respectively.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 6 - INCOME TAXES
The recognition of income tax expense related to uncertain tax positions is determined under the provisions of FASB ASC - 740-10. The Company had no unrecognized tax benefits as of the date of adoption, the income tax positions taken for open years are appropriately stated and supported for all open years. The Company’s federal tax returns for the fiscal years ended 2008, 2009 and 2010 are subject to examination by the IRS taxing authority.
As of September 30, 2010, the Company has unused contributions carryforward of $1,400 of which the Company’s profit for the three months ended September 30, 2010 did not fully absorb these amounts.
NOTE 7 - SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Three Months Ended September 30 | ||||||||
2010 | 2009 | |||||||
Cash paid for: | ||||||||
Interest | $ | 2,544 | $ | 1,230 | ||||
Income taxes | — | 131 |
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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 September 30, 2010 Compared to the Three Months Ended September 30, 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 September 30 | ||||||||
2010 | 2009 | |||||||
Net sales | 100 | % | 100 | % | ||||
Cost of sales | 67 | 64 | ||||||
Gross profit | 33 | 36 | ||||||
Operating expenses | 26 | 25 | ||||||
Earnings from operations | 7 | 11 | ||||||
Net earnings before income taxes | 6 | 11 | ||||||
Provision for income taxes | (1 | ) | (3 | ) | ||||
Net income | 5 | % | 8 | % | ||||
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ITEM 2. - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
NET SALES
Net sales increased $7,945 or 1% for the three months ended September 30, 2010 from $760,891 to $768,836. Gross sales for Chase Candy division decreased $16,496 from $442,045 to $425,549. Gross sales for Seasonal Candy division increased $30,006 from $333,366 to $363,372.
The decrease in gross sales, for the three month period ended September 30, 2010 for the Chase Candy division, is due to one customer reducing orders by approximately $17,500. The increase in gross sales for the Seasonal Candy division is due to timing of shipping bulk orders netting approximately $30,000 that were shipped in the second quarter last year.
COST OF SALES
Cost of sales increased $29,957 from $487,663 or 64% of related revenues for the three months ended September 30, 2009, to $517,620 or 67% of related revenues for the three months ended September 30, 2010.
The increase in cost of sales of $29,957 is a 6% increase. Increases included: direct cost of materials of 18% from $379,641 for the three months ended September 30, 2009 to $449,594 for the three months ended September 30, 2010 as a result of increased prices for sugar, peanuts and chocolate of which were not passed along to customers. Freight in/out increased 30% from $41,855 for the three months ended September 30, 2009 to $54,205 for the three months ended September 30, 2010 as a result of having to ship product using refrigeration services since summer temperatures were too high to not use these services. A new plant manager hired in the prior year to replace the manager who retired in December 2009 was a result of indirect labor costs decreasing $13,232 or 18% from $72,304 for the three months ended September 30, 2009 to $59,072 for the three months ended September 30, 2010. Occupancy costs increased $11,984 or 17% from $71,928 for the three months ended September 30, 2009 to $83,912 for the three months ended September 30, 2010 as a result of rising costs for utilities, machinery depreciation and insurance. Change in goods-in-process and finished goods inventory increased $55,794 or 27% from $205,580 for the three months ended September 30, 2009 to $261,374 for the three months ended September 30, 2010 as a result of building up finished goods for product to be delivered in October 2010.
SELLING EXPENSE
Selling expense for the three months ended September 30, 2010 increased $9,012 from $71,913 or 9% of sales, to $80,925 or 11% of sales for the three months ended September 30, 2010. The increase in selling expenses is due to increased commissions, sample and advertising costs. Commissions’ sample and advertising costs increased 25% to $33,004 for this period from $26,504 for the three months ended September 30, 2009.
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ITEM 2. - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
GENERAL AND ADMINISTRATIVE EXPENSE
General and administrative expense for the three months ended September 30, 2010 increased $5,602 from $114,725 or 15% of sales, to $120,327 or 16% of sales for the three months ended September 30, 2010, primarily for increases in employee health insurance, and website and miscellaneous expenses.
OTHER INCOME (EXPENSE)
Other income and (expense) increased by $1,587 for the three months ended September 30, 2010 from $(809), to $(2,396) for the three months ended September 30, 2010 due to an increase in interest expense.
PROVISION FOR INCOME TAXES
The Company recorded tax expense for the three months ended September 30, 2010 of $8,694 as compared to the tax expense of $21,211 for the three months ended September 30, 2009. The net tax expense recorded for the three months ended September 30, 2010 and 2009 is primarily due to recognizing taxes related to current operations.
NET INCOME
The Company reported net income for the three months ended September 30, 2010 of $39,374, compared to $64,570 for the three months ended September 30, 2009. This decrease of $25,126 is explained above.
PREFERRED DIVIDENDS
Preferred dividends were $32,018 for the three months ended September 30, 2010 and 2009 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 was $7,356 for the three months ended September 30, 2010 compared to $32,552 for the three months ended September 30, 2009 for the reasons discussed above.
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ITEM 2. - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 2010, Chase had $58,406 in cash and cash equivalents compared to $106,508 as of June 30, 2010 and $70,277 as of September 30, 2009. Management had to draw $40,000 from its line-of-credit, since this is the start of busy season for Chase as reflected in increased receivables of $220,204, inventories of $179,576, and accounts payable of $233,163.
The table below presents the summary of cash flow for the fiscal period indicated.
2010 | 2009 | |||||||
Net cash used in operating activities | $ | (72,711 | ) | $ | (158,600 | ) | ||
Net cash used in investing activities | $ | (851 | ) | $ | (2,574 | ) | ||
Net cash provided by financing activities | $ | 25,460 | $ | 202,680 |
The $851 of cash used in investing activities was the result of capital expenditures. Management has no material commitments for capital expenditures during the remainder of fiscal 2011. The $25,460 of cash provided by financing activities is the receipt of $40,000 drawn from the line-of-credit net of principal payments on equipment and vehicle loans. Management believes that the projected cash flow from operations, combined with its existing cash balances, will be sufficient to meet its funding requirements for the foreseeable future. Chase does have $210,000 remaining on its bank line-of-credit, which could be utilized to help fund any working capital requirements.
Management believes that inflation will have only a minimal effect on future operations since such effects will be offset by sales price increases, which are not expected to have a significant effect upon demand.
CRITICAL ACCOUNTING POLICIES
Use of Estimates
The preparation of the condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect certain reported amounts and disclosures. Significant estimates used in preparing these condensed consolidated financial statements include those assumed in computing the carrying value of equipment and allowance for doubtful accounts receivable. Accordingly, actual results could differ from those estimates. Any changes in estimates are recorded in the period in which they become known.
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ITEM 2. - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
CRITICAL ACCOUNTING POLICIES (CONTINUED)
Disclosures about Fair Value of Financial Instruments
The Company’s financial instruments consist principally of cash and cash equivalents, trade receivables and payables, and notes payable. There are no significant differences between the carrying value and fair value of any of these consolidated financial instruments. As of September 30, 2010, the amount of the Company’s long-term debt approximates fair value based on the present value of estimated future cash flows using a discount rate commensurate with a borrowing rate available to the Company.
Credit Risk
Financial instruments that potentially subject Chase to concentrations of credit risk consist principally of cash and accounts receivable. Chase grants unsecured credit to substantially all of its customers. Management does not believe that it is exposed to any extraordinary credit risk as a result of this policy. Chase deposits all monies at the Nodaway Valley Bank. These accounts are insured up to $250,000 by the Federal Deposit Insurance Corporation. Chase has not experienced any losses in such accounts. Management does not believe Chase is exposed to any significant credit risk with respect to its cash and cash equivalents.
Revenue Recognition
The Company recognizes revenues as product is shipped to the customers. Net sales are comprised of the total sales billed during the period including shipping and handling charges to customers, less the estimated returns, customer allowances and customer discounts.
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 collectibility of specific customer accounts and the aging of the accounts receivable. If there is a deterioration of a major customer’s credit worthiness or actual defaults are higher than the historical experience, management’s estimates of the recoverability of amounts due the Company could be adversely affected. All accounts or portions thereof deemed to be uncollectible or to require an excessive collection cost are written off to the allowance for doubtful accounts.
Inventories
Inventories are carried at the “lower of cost or market value” with cost being determined on the “first-in, first-out” basis of accounting. Finished goods and goods in process include a provision for manufacturing overhead.
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ITEM 2. - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
CRITICAL ACCOUNTING POLICIES (CONTINUED)
Property and Equipment
Property and equipment is recorded at cost. The Company’s property and equipment is 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.
IMPACT OF NEW ACCOUNTING PRONOUNCEMENTS
During the third quarter 2010, Chase adopted FASB ASU No. 2010-06 Fair Value Measurements and Disclosures (Topic 820). This ASU requires new disclosures for transfers in and out of Levels 1 and 2, and Activity in Level 3 fair value measurements. The update also clarifies the level disaggregation and disclosures about inputs and valuation techniques. The new disclosures and clarifications of existing disclosures are effective for interim and annual reporting periods beginning after December 15, 2009. The requirement related to Level 3 fair value measurements is effective for the Company for interim and annual reporting periods beginning after January 29, 2011. The adoption of the effective portions of this new standard did not have a material impact on the Company’s consolidated financial statements and the Company does not expect a material impact on its consolidated financial statements related to the Level 3 fair value disclosures.
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ITEM 2. - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
CRITICAL ACCOUNTING POLICIES (CONTINUED)
IMPACT OF NEW ACCOUNTING PRONOUNCEMENTS (CONTINUED)
In June 2009, the FASB issued new guidance on the consolidation of variable interest entities (“VIE”) in response to concerns about the application of certain key provisions of pre-existing guidance, including those regarding the transparency of the involvement with a VIE. Specifically, this new guidance requires a qualitative approach to identifying a controlling financial interest in a VIE and requires ongoing assessment of whether an interest in a VIE makes the holder the primary beneficiary of the VIE and whether an entity is a VIE when a triggering event occurs. In addition, this new guidance requires additional disclosures about the involvement with a VIE and any significant changes in risk exposure due to that involvement. This new guidance is effective for fiscal years beginning after November 15, 2009. The Company adopted the new guidance in the first quarter of fiscal year 2011, which did not have a material impact on its consolidated financial statements.
Forward-Looking Information
This report as well as our other reports filed with the Securities and Exchange Commission (“SEC”) contains forward-looking statements made pursuant to the safe harbor provisions of The Private Securities Litigation Reform Act of 1995. The words “believe,” “estimate,” “anticipate,” “project,” “intend,” “expect,” “plan,” “outlook,” “forecast,” “may,” “will,” “should,” “continue,” “predict” and similar expressions are intended to identify forward-looking statements. This report contains forward-looking statements regarding, among other topics, our expected financial position, results of operations, cash flows, strategy, and management’s plans and objectives. Accordingly, these forward-looking statements are based on assumptions about a number of important factors. While we believe that our assumptions about such factors are reasonable, such factors involve risks and uncertainties that could cause actual results to be different from what appear here. These risk factors include: the ability to adequately pass through to 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.
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ITEM 4T. - CONTROLS AND PROCEDURES
(a) | Evaluation of Disclosure Controls and Procedures |
Chase’s management, with the participation of the Chief Executive Officer, has evaluated the effectiveness of Chase’s disclosure controls and procedures, as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as of the end of the period covered by this report. Based on such evaluation, this officer has concluded that Chase’s disclosure controls and procedures are effective to provide reasonable assurance that information required to be disclosed in periodic filings under the Exchange Act is accumulated and communicated to management, including those officers, and to members of the Board of Directors, to allow timely decisions regarding required disclosure.
(b) | Changes in Internal Control over Financial Reporting |
There were no significant changes in Chase’s internal control over financial reporting or in other factors that in management’s estimates are reasonably likely to materially affect Chase’s internal control over financial reporting subsequent to the date of the evaluation.
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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 September 30, 2010 is $7,212,392. |
ITEM 4. | SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS |
None
ITEM 6. | EXHIBITS |
a. | Exhibits. |
Exhibit 31.1 | Certification of Chief Executive Officer and Treasurer pursuant to Section 302 of Sarbanes-Oxley Act of 2002. | |
Exhibit 32.1 | Certification of President and Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
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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) | ||||||
November 12, 2010 | ||||||
Date | By: Barry M. Yantis Chairman of the Board, Chief Executive Officer, |
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