UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
| x | QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended December 31, 2007
| ¨ | TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT |
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)
Check whether the issuer (1) filed all reports required to be filed by Section 12, 13 or 15(d) of the Exchange Act during the past 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 is a shell company (as defined in Rule 12b-2 of the Exchange Act) Yes ¨ No x
As of January 31, 2008, there were 969,834 shares of common stock, $1 par value, issued and outstanding.
Transitional Small Business Disclosure Format Yes ¨ No x
Index
Form 10-QSB for the Quarter Ended December 31, 2007
2
| ITEM 1. | FINANCIAL STATEMENTS |
CHASE GENERAL CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
| December 31, 2007 | June 30, 2007 | |||||
| (Unaudited) | ||||||
CURRENT ASSETS | ||||||
Cash and cash equivalents | $ | 41,817 | $ | 22,232 | ||
Trade receivables, net | 192,837 | 182,345 | ||||
Inventories: | ||||||
Finished goods | 47,185 | 68,079 | ||||
Goods in process | 8,999 | 2,279 | ||||
Raw materials | 49,407 | 23,396 | ||||
Packaging materials | 196,811 | 119,341 | ||||
Prepaid expenses | 3,105 | 6,500 | ||||
Deferred income taxes | 4,671 | 3,961 | ||||
Total current assets | 544,832 | 428,133 | ||||
PROPERTY AND EQUIPMENT—NET | 261,768 | 290,595 | ||||
OTHER ASSETS | ||||||
Deferred income taxes—noncurrent | — | 11,789 | ||||
TOTAL ASSETS | $ | 806,600 | $ | 730,517 | ||
The accompanying notes are an integral part of these
condensed consolidated financial statements.
3
CHASE GENERAL CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS’ EQUITY
| December 31, 2007 | June 30, 2007 | |||||||
| (Unaudited) | ||||||||
CURRENT LIABILITIES | ||||||||
Current maturities of forgivable loan—bank | $ | 5,000 | $ | 5,000 | ||||
Notes payable—stockholder | — | 45,000 | ||||||
Accounts payable | 119,648 | 168,562 | ||||||
Accrued expenses | 2,725 | 22,764 | ||||||
Income taxes payable | 2,129 | — | ||||||
Deferred income | 1,299 | 1,299 | ||||||
Total current liabilities | 130,801 | 242,625 | ||||||
LONG-TERM LIABILITIES | ||||||||
Deferred income | 11,103 | 6,753 | ||||||
Deferred income taxes | 11,822 | — | ||||||
Forgivable loan—bank, less current maturities | 5,000 | 10,000 | ||||||
Total long-term liabilities | 27,925 | 16,753 | ||||||
Total liabilities | 158,726 | 259,378 | ||||||
STOCKHOLDERS’ EQUITY | ||||||||
Capital stock issued and outstanding: | ||||||||
Prior cumulative preferred stock, $5 par value: | ||||||||
Series A (liquidation preference $1,995,000 and $1,980,000 respectively) | 500,000 | 500,000 | ||||||
Series B (liquidation preference $1,950,000 and $1,935,000 respectively) | 500,000 | 500,000 | ||||||
Cumulative preferred stock, $20 par value | ||||||||
Series A (liquidation preference $4,580,203 and $4,550,937 respectively) | 1,170,660 | 1,170,660 | ||||||
Series B (liquidation preference $746,431 and $741,661 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 | (5,818,122 | ) | (5,994,857 | ) | ||||
Total stockholders’ equity | 647,874 | 471,139 | ||||||
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | $ | 806,600 | $ | 730,517 | ||||
The accompanying notes are an integral part of these
condensed consolidated financial statements.
4
CHASE GENERAL CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
| Three Months Ended December 31 | ||||||||
| 2007 | 2006 | |||||||
| NET SALES | $ | 1,479,052 | $ | 1,187,403 | ||||
| COST OF SALES | 1,012,546 | 840,094 | ||||||
Gross profit on sales | 466,506 | 347,309 | ||||||
| OPERATING EXPENSES | ||||||||
Selling expense | 143,353 | 110,400 | ||||||
General and administrative expenses | 67,253 | 89,076 | ||||||
Total operating expenses | 210,606 | 199,476 | ||||||
Income from operations | 255,900 | 147,833 | ||||||
| OTHER INCOME (EXPENSE) | (3,092 | ) | (2,215 | ) | ||||
Net income before income taxes | 252,808 | 145,618 | ||||||
| PROVISION FOR INCOME TAXES | 28,762 | 38,434 | ||||||
| NET INCOME | 224,046 | 107,184 | ||||||
Preferred dividends | (32,018 | ) | (32,018 | ) | ||||
Net income applicable to common stockholders | $ | 192,028 | $ | 75,166 | ||||
| NET INCOME PER SHARE OF COMMON STOCK—BASIC | $ | .20 | $ | .08 | ||||
| NET INCOME PER SHARE OF COMMON STOCK—DILUTED | $ | .11 | $ | .05 | ||||
The accompanying notes are an integral part of these
condensed consolidated financial statements.
5
CHASE GENERAL CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
| Six Months Ended December 31 | ||||||||
| 2007 | 2006 | |||||||
| NET SALES | $ | 1,882,480 | $ | 1,646,902 | ||||
| COST OF SALES | 1,311,056 | 1,173,503 | ||||||
Gross profit on sales | 571,424 | 473,399 | ||||||
| OPERATING EXPENSES | ||||||||
Selling expense | 200,075 | 164,813 | ||||||
General and administrative expenses | 165,510 | 206,426 | ||||||
Total operating expenses | 365,585 | 371,239 | ||||||
Income from operations | 205,839 | 102,160 | ||||||
| OTHER INCOME (EXPENSE) | (4,074 | ) | (2,463 | ) | ||||
Net income before income taxes | 201,765 | 99,697 | ||||||
| PROVISION FOR INCOME TAXES | 25,030 | 24,955 | ||||||
| NET INCOME | 176,735 | 74,742 | ||||||
Preferred dividends | (64,036 | ) | (64,036 | ) | ||||
Net income applicable to common stockholders | $ | 112,699 | $ | 10,706 | ||||
| NET INCOME PER SHARE OF COMMON STOCK—BASIC | $ | .12 | $ | .01 | ||||
| NET INCOME PER SHARE OF COMMON STOCK—DILUTED | $ | .08 | $ | .01 | ||||
The accompanying notes are an integral part of these
condensed consolidated financial statements.
6
CHASE GENERAL CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
| Six Months Ended December 31 | ||||||||
| 2007 | 2006 | |||||||
CASH FLOWS FROM OPERATING ACTIVITIES | ||||||||
Net income | $ | 176,735 | $ | 74,742 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
Depreciation and amortization | 29,330 | 28,753 | ||||||
Provision for bad debts | 600 | 600 | ||||||
Deferred income amortization | (650 | ) | (650 | ) | ||||
Deferred income taxes | 22,901 | 11,774 | ||||||
Effects of changes in operating assets and liabilities: | ||||||||
Trade receivables | (11,092 | ) | (58,975 | ) | ||||
Income tax refund claims receivable | — | 23,855 | ||||||
Inventories | (89,307 | ) | 6,713 | |||||
Prepaid expenses | 3,395 | 7,383 | ||||||
Accounts payable | (48,914 | ) | 50,636 | |||||
Accrued expenses | (20,039 | ) | (3,925 | ) | ||||
Income taxes payable | 2,129 | 13,181 | ||||||
Net cash provided by operating activities | 65,088 | 154,087 | ||||||
CASH FLOWS FROM INVESTING ACTIVITIES | ||||||||
Decrease in advance to officer | — | 9,000 | ||||||
Purchases of equipment | (503 | ) | — | |||||
Net cash (used in) provided by investing activities | (503 | ) | 9,000 | |||||
CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||
Proceeds from line-of-credit | 250,000 | — | ||||||
Principal payments on line-of-credit | (250,000 | ) | — | |||||
Proceeds from stockholder notes payable | 20,000 | — | ||||||
Principal payments on stockholder notes payable | (65,000 | ) | — | |||||
Net cash (used in) financing activities | (45,000 | ) | — | |||||
NET INCREASE IN CASH AND CASH EQUIVALENTS | 19,585 | 163,087 | ||||||
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD | 22,232 | 26,558 | ||||||
CASH AND CASH EQUIVALENTS, END OF PERIOD | $ | 41,817 | $ | 189,645 | ||||
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: | ||||||||
Cash payments for: | ||||||||
Income taxes, net of (refunds) | $ | — | $ | (23,855 | ) | |||
Interest | $ | 5,312 | $ | 3,502 | ||||
Non-cash transaction: | ||||||||
Reclass of forgivable loan to deferred income | $ | 5,000 | $ | 5,000 | ||||
The accompanying notes are an integral part of these
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 (“Chase” or “we”, “us”, or “our”) at June 30, 2007 has been taken from audited consolidated financial statements at that date and condensed. The condensed consolidated financial statements as of and for the three months and six months ended December 31, 2007 and for the three months and six months ended December 31, 2006 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-KSB for the year ended June 30, 2007. The results of operations for the three months and six months ended December 31, 2007 and cash flows for the six months ended December 31, 2007 are not necessarily indicative of the results for the entire fiscal year ending June 30, 2008. Where appropriate, items within the condensed consolidated financial statements have been reclassified from the previous periods’ presentation.
NOTE 2—NET INCOME PER SHARE
The basic income per share was computed on the weighted average of outstanding common shares as follows:
| Three Months Ended December 31 | Six Months Ended December 31 | |||||||||||
| 2007 | 2006 | 2007 | 2006 | |||||||||
Net income | $ | 224,046 | $ | 107,184 | $ | 176,735 | $ | 74,742 | ||||
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 | $ | 192,028 | $ | 75,166 | $ | 112,699 | $ | 10,706 | ||||
Weighted average of outstanding common shares | 969,834 | 969,834 | 969,834 | 969,834 | ||||||||
Net income per share—basic | $ | .20 | $ | .08 | $ | .12 | $ | .01 | ||||
8
CHASE GENERAL CORPORATION AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 2—NET INCOME PER SHARE (CONTINUED)
The diluted earnings per share was computed on the weighted average of outstanding common shares plus potential dilutive common shares as follows:
| Three Months Ended December 31 | Six Months Ended December 31 | |||||||||||
| 2007 | 2006 | 2007 | 2006 | |||||||||
Net income | $ | 224,046 | $ | 107,184 | $ | 176,735 | $ | 74,742 | ||||
Preferred dividend requirements: | ||||||||||||
6% Series Convertible | ||||||||||||
Series A | — | — | — | 15,000 | ||||||||
Series B | — | — | — | 15,000 | ||||||||
5% Series Convertible | ||||||||||||
Series A | — | — | 29,266 | 29,266 | ||||||||
Series B | — | — | 4,770 | 4,770 | ||||||||
Total Dividend Requirements | — | — | 34,036 | 64,036 | ||||||||
Net Income Common Stockholders | 224,046 | 107,184 | 142,699 | 10,706 | ||||||||
Weighted average of outstanding common shares | 969,834 | 969,834 | 969,834 | 969,834 | ||||||||
Dilutive effect of conversion: | ||||||||||||
6% Series Convertible | ||||||||||||
Series A | 400,000 | 400,000 | 400,000 | — | ||||||||
Series B | 375,000 | 375,000 | 375,000 | — | ||||||||
5% Series Convertible | ||||||||||||
Series A | 222,133 | 222,133 | — | — | ||||||||
Series B | 36,201 | 36,201 | — | — | ||||||||
Weighted average of diluted outstanding common shares | 2,003,168 | 2,003,168 | 1,744,834 | 969,834 | ||||||||
Diluted Earnings Per Share | $ | .11 | $ | .05 | $ | .08 | $ | .01 | ||||
9
CHASE GENERAL CORPORATION AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 2—NET INCOME PER SHARE (CONTINUED)
Cumulative Preferred Stock dividends in arrears at December 31, 2007 and 2006, totaled $6,860,194 and $6,732,122, respectively. Total dividends in arrears, on a per share basis, consist of the following at December 31:
| Six Months Ended December 31 | ||||||
| 2007 | 2006 | |||||
6% Convertible | ||||||
Series A | $ | 15 | $ | 14 | ||
Series B | 14 | 14 | ||||
5% Convertible | ||||||
Series A | 58 | 57 | ||||
Series B | 58 | 57 | ||||
Six percent 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 has established an Irrevocable Standby Letter of Credit in the amount of $25,000 as collateral for this loan, with a maturity date of December 31, 2009. The Company has met the criteria of occupying a 20,000 square foot building and the criteria of 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 for two years thereafter and will be required to do so until the five year term has expired. Once the Company is no longer legally required to return the monies, the liability will be reclassified as deferred revenue and amortized into income over the life of the lease term of the new facility. As of December 31, 2007 and June 30, 2007, $15,000 and $10,000, respectively, has been reclassified to deferred revenue. During the six months ended December 31, 2007 and 2006, $650 and $650 has been amortized into income, respectively.
10
CHASE GENERAL CORPORATION AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 4—NOTE PAYABLE—BANK
Effective July 20, 2007, the Company had a $250,000 line-of-credit agreement which expired on January 1, 2008. This line-of-credit agreement was renewed on that date to extend until January 1, 2009 at an annual rate of 7.25%. The line-of-credit was collateralized by certain equipment. At December 31, 2007, the outstanding balance on the line-of-credit was $-0-. There were no outstanding borrowings on the line-of-credit at June 30, 2007.
NOTE 5—NOTES PAYABLE—STOCKHOLDER
The Company borrowed $45,000 from a stockholder/officer during fiscal year ended June 30, 2007 and $20,000 during the six months ended December 31, 2007, which was repaid by December 31, 2007. These unsecured loans had no maturity date and carried a 5% annual interest rate. The outstanding balance at December 31, 2007 was $-0-. Interest expense on stockholder/officer notes was $1,367 and $-0- for the six months ending December 31, 2007 and 2006, respectively.
NOTE 6 – PROVISION FOR INCOME TAXES
The Company had a net operating loss carryforward of approximately $203,000 as of June 30, 2007. The net operating loss carryforward increased to approximately $248,000 as of September 30, 2007. Based on the available objective evidence available at September 30, 2007, it was determined more likely than not, that the full loss would not be fully utilized. Therefore, an allowance of $148,000 was recorded for the three months ended September 30, 2007 as compared to $100,000 at June 30, 2007. However, for the six months ended December 31, 2007, the Company’s profit absorbed the available net operating loss carryforward so that no allowance has been recorded for this period. The deferred income taxes for the six months ended December 31, 2007 decreased $22,901 to $(7,151) compared to $15,750 at June 30, 2007.
The net deferred tax assets (liability) are presented in the accompanying balance sheet as follows:
| 2007 | 2006 | ||||||
Current deferred tax asset | $ | 4,671 | $ | 3,961 | |||
Noncurrent deferred tax asset | — | 11,789 | |||||
Long-term deferred tax liability | (11,822 | ) | — | ||||
Net deferred tax assets (liability) | $ | (7,151 | ) | $ | 15,750 | ||
11
CHASE GENERAL CORPORATION AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 7—RECENT ACCOUNTING PRONOUNCEMENTS
In June 2006, the FASB issued Interpretation No. 48“Accounting for Uncertainty in Income Taxes”(“FIN 48”). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with SFAS No. 109,“Accounting for Income Taxes”. This interpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. This interpretation also provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, and disclosure. The Company adopted FIN 48 as of July 1, 2007. The adoption of FIN 48 had no impact on the Company’s financial statements for the six months ended December 31, 2007.
We recognize interest and penalties related to uncertain tax positions in general and administrative expense. As of December 31, 2007, we have not recorded any provisions for accrued interest and penalties related to uncertain tax positions.
In September 2006, the FASB issued SFAS No. 157,Fair Value Measurements (“ SFAS No. 157”). SFAS No. 157 defines fair value, establishes a framework for measuring fair value under generally accepted accounting principles and expands disclosure about fair value measurements. SFAS No. 157 emphasizes that fair value is a market-based measurement, not an entity-specific measurement. Therefore, a fair value measurement should be determined based on the assumptions that market participants would use in pricing the asset or liability. This statement clarifies that market participant assumptions include assumptions about risk. A fair value measurement should include an adjustment for risk if market participants would include one in pricing the related asset or liability, even if the adjustment is difficult to determine. This statement also clarifies that market participant assumptions should also include assumptions about the effect of a restriction on the sale or use of an asset. This statement clarifies that fair value measurement for a liability should reflect nonperformance risk (the risk that the obligation will not be fulfilled). This statement expands disclosures about the use of fair value to measure assets and liabilities in interim and annual periods subsequent to initial recognition. The disclosures focus on the inputs used to measure fair value and for recurring fair value measurements using significant unobservable inputs and the effect of the measurements on earnings (or changes in net assets) for the period. SFAS No. 157 is effective for financial statements issue for fiscal years beginning after November 15, 2007. We are evaluating the impact that SFAS No. 157 may have on our consolidated financial statements.
In February 2007, the FASB issued SFAS No. 159.The Fair Value Option of Financial Assets and Financial Liabilities (“SFAS No. 159”). SFAS No. 159 provides an option to report selected financial assets and financial liabilities using fair value. The standard establishes required presentation and disclosures to facilitate comparisons with companies that use different measurements for similar assets and liabilities. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007, with early adoption allowed if SFAS No. 157 is also adopted. The Company is currently evaluating the impact of adopting SFAS No. 159 on its consolidated financial statements.
12
CHASE GENERAL CORPORATION AND SUBSIDIARY
ITEM 2.—MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
This Management’s Discussion and Analysis or Plan of Operation section and other parts of this Report contain forward-looking statements that involve risks and uncertainties. The Company’s actual results and the timing of certain events may differ significantly from the results and timing discussed in the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed or referred to in this report and in Item 6 of the Annual Report on Form 10-KSB for the year ended June 30, 2007.
The following discussion is intended to provide a better understanding of the significant changes in trends relating to Chase’s financial condition and results of operations. Management’s Discussion and Analysis should be read in conjunction with the accompanying condensed consolidated financial statements and notes thereto.
OVERVIEW
Chase General 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
The following table sets forth certain items as a percentage of net sales and revenues for the periods presented:
| Three Months Ended December 31 | Six Months Ended December 31 | |||||||||||
| 2007 | 2006 | 2007 | 2006 | |||||||||
Net sales | 100 | % | 100 | % | 100 | % | �� | 100 | % | |||
Cost of sales | 69 | 71 | 70 | 71 | ||||||||
Gross profit | 31 | 29 | 30 | 29 | ||||||||
Operating expenses | 14 | 17 | 19 | 23 | ||||||||
Net income from operations | 17 | 12 | 11 | 6 | ||||||||
Net income before income taxes | 17 | 12 | 11 | 6 | ||||||||
Provision for income taxes | 2 | 3 | 1 | 2 | ||||||||
Net income | 15 | % | 9 | % | 10 | % | 4 | % | ||||
13
CHASE GENERAL CORPORATION AND SUBSIDIARY
ITEM 2.—MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION (CONTINUED)
NET SALES
Net sales increased $291,649 or 25% for the three months ended December 31, 2007 to $1,479,052 compared to $1,187,403 for the three months ended December 31, 2006. Gross sales for Chase Candy increased $10,532 to $396,371 for the three months ended December 31, 2007 compared to $385,839 for 2006. Gross sales for Seasonal Candy increased $284,911 to $1,094,257 for the three months ended December 31, 2007 compared to $809,346 for 2006.
Net sales increased $235,578 or 14% for the six months ended December 31, 2007 to $1,882,480 compared to $1,646,902 for the six months ended December 31, 2006. Gross sales for Chase Candy decreased $22,378 to $730,098 for the six months ended December 31, 2007 compared to $752,476 for 2006. Gross sales for Seasonal Candy increased $262,192 to $1,173,375 for the six months ended December 31, 2007 compared to $911,183 for 2006.
The 25% increase in net sales of $291,649 for the three month period ended December 31, 2007, over the same period ended December 31, 2006, is due to two factors. Certain Seasonal Candy customers placed orders later this year, which are reflected in current quarter sales rather than in the first quarter. In addition, Seasonal sales from new business orders amounted to approximately $262,192 of the $291,649 increase in net sales. The year to date net sales increase of 14% includes these new customers.
COST OF SALES
The cost of sales increased $172,452 to $1,012,546 decreasing to 69% of related revenues for the three months ended December 31, 2007, compared to $840,094 or 71% of related revenues for the three months ended December 31, 2006. The cost of sales increased $137,553 to $1,311,056 decreasing to 70% of related revenues for the six months ended December 31, 2007, compared to $1,173,503 or 71% of related revenues for the six months ended December 31, 2006.
The increase in cost of sales is a 20.5% increase which is proportionate to the 25% increase in net sales for the three months ended December 31, 2007 as reflected above. Direct costs of goods for materials manufactured and production labor force for the three months ended December 31, 2007 increased $156,788 to $517,970 as compared to $361,182 for the three months ended December 31, 2006 as a result of raw material price increases for sugar—4 cents per pound; peanuts 8 cents per pound and a 4% raise for the production labor force.
Direct costs of goods for materials manufactured and production labor force for the six months ended December 31, 2007 increased $169,358 to $944,855 as compared to $775,497 for the six months ended December 31, 2006 which also is a result of the increased pricing as explained for the three month period ended December 31, 2007.
14
CHASE GENERAL CORPORATION AND SUBSIDIARY
ITEM 2.—MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION (CONTINUED)
COST OF SALES (CONTINUED)
The Company decreased finished goods inventory for the three months ended December 31, 2007 to $47,185 or 31% from the June 30, 2007 finished goods inventory of $68,079 due to the end of the Company’s busy season. Raw material inventory of $49,407 and packaging materials inventory of $196,811 is 73% higher than the June 30, 2007 inventories of $23,396 raw material and $119,341 packaging as a result of purchasing inventory to take advantage of favorable pricing but not all of this inventory was used during the second quarter ending December 31, 2007.
SELLING EXPENSES
Selling expenses for the three months ended December 31, 2007 increased $32,953 to $143,353, which is 10% of sales, compared to $110,400 or 9% of sales for the three months ended December 31, 2006. Selling expenses for the six months ended December 31, 2007 increased $35,262 to $200,075, which is 10% of sales, compared to $164,813 or 10% of sales for the six months ended December 31, 2006.
The increase of $32,953 in selling expenses for the three months ended December 31, 2007 is due to higher commissions being paid and sample costs for the period. Commissions and sample costs increased 42% to $69,471 for this period from $48,924 for the three months ended December 31, 2006.
The increase of $35,262 in selling expenses for the six months ended December 31, 2007 is also due to higher commissions being paid as a result of increased sales along with sample costs for this period. Commissions and sample costs increased 37% to $85,337 for this period from $62,370 for the six months ended December 31, 2006.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses for the three months ended December 31, 2007 decreased $21,823 to $67,253, and decreased to 4% of sales, compared to $89,076 or 8% of sales for the three months ended December 31, 2006. General and administrative expenses for the six months ended December 31, 2007 decreased $40,916 to $165,510, and decreased to 9% of sales, compared to $206,426 or 13% of sales for the six months ended December 31, 2006. The decreased costs are due to decreased professional fees of $51,436, of which were in connection with legal proceedings settled in the prior fiscal year.
OTHER INCOME (EXPENSE)
Other income and (expense) increased by $877 for the three months ended December 31, 2007 to $(3,092), compared to $(2,215) for the three months ended December 31, 2006. Other income and expense increased by $1,611 for the six months ended December 31, 2007 to $(4,074), compared to $(2,463) for the six months ended December 31, 2006. This was primarily due to an increase in interest expense.
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CHASE GENERAL CORPORATION AND SUBSIDIARY
ITEM 2.—MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION (CONTINUED)
PROVISION FOR INCOME TAXES
The Company recorded a tax provision for the three months ended December 31, 2007 of $28,762 as compared to $38,434 for the three months ended December 31, 2006. The Company recorded a tax provision for the six months ended December 31, 2007 of $25,030 as compared to $24,955 for the six months ended December 31, 2006. The effective tax rate of 12% for the six months ended December 31, 2007 decreased from 25% for the six months ended December 31, 2006. The Company had incurred losses for the past two years, which is not available to carry back and obtain previously paid income taxes. This loss can be fully utilized against taxable income for the six months ended December 31, 2007 which results in an effective tax rate of 12%. For the three months ended September 30, 2007, the Company provided for a valuation allowance against its net deferred tax asset. Based on available objective evidence at that time, management estimated it was more likely than not, that the net deferred tax asset would not be fully realizable. Since the net operating loss is fully used against operating income for the six months ended December 31, 2007, the valuation allowance of $148,000 was reduced to zero. The net change in deferred taxes for the three months and six months ended December 31, 2007 was $(26,633) and $(22,901), respectively. There was no valuation allowance at December 31, 2006.
NET INCOME
The Company reported a net income for the quarter ended December 31, 2007 of $224,046, compared to a net income of $107,184 for the quarter ended December 31, 2006. This increase of $116,862 is explained above.
The Company reported a net income for the six months ended December 31, 2007 of $176,735, compared to a net income of $74,742 for the six months ended December 31, 2006. This increase of $101,993 is explained above.
PREFERRED DIVIDENDS
These amounts reflect additional preferred stock dividends in arrears for the three and six months ended December 31, 2007 and 2006, respectively, on the Company’s Series A and Series B $5 par value preferred stock and its Series A and Series B $20 par value preferred stock.
NET INCOME APPLICABLE TO COMMON STOCKHOLDERS
Net income applicable to common stockholders for the three months ended December 31, 2007 was $192,028 which is an increase of $116,862 as compared to the three months ended December 31, 2006 of $75,166.
Net income applicable to common stockholders for the six months ended December 31, 2007 was $112,699 which is an increase of $101,993 as compared to the six months ended December 31, 2006 of $10,706. These items are explained above.
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CHASE GENERAL CORPORATION AND SUBSIDIARY
ITEM 2.—MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION (CONTINUED)
LIQUIDITY AND CAPITAL RESOURCES
Positive cash flows from operating activities were generated for the six months ended December 2007 in the amount of $65,088. The positive cash flow is to be expected during this time period, since this is the end of the busy season for the Company as reflected in decreased accounts payable of $48,914 and accrued expenses of $20,039 from June 30, 2007 fiscal year end balances of $168,562 accounts payable and $22,764 accrued expenses. The positive cash flows from operating activities included borrowings from and payments on the line-of-credit of $250,000 and proceeds from borrowings from a stockholder of $20,000 and payments on notes payable to a stockholder of $65,000, which results in net cash used in financing activities of $45,000 for the six months ended December 31, 2007. Positive cash flows were generated for the six months ended December 2006 in the amount of $154,087 from operating activities and $9,000 from investing activities.
Overall cash and cash equivalents increased $19,585 to $41,817 at December 31, 2007 from $22,232 at June 30, 2007.
To date, there are no material commitments by the Company for capital expenditures. At December 31, 2007, the Company’s accumulated deficit was $5,818,122, compared to accumulated deficit of $5,994,857 as of June 30, 2007. Working capital as of December 31, 2007 increased 123% to $414,031 from $185,508 as of June 30, 2007.
In order to maintain funds to finance operations and meet debt obligations, it is the intention of management to continue its efforts to expand the present market area and increase sales to its existing customers. Management also intends to continue tight control on all expenditures.
There has been no material impact from inflation and changing prices on net sales or on income from continuing operations for the last three months.
ITEM 3.—CONTROLS AND PROCEDURES
As of the end of the period covered by this report, the Company conducted an evaluation, under the supervision and with the participation of the principal executive officer and principal financial officer, of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”). Based on this evaluation, the principal executive officer and principal financial officer concluded that the Company’s disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms. There was no change in the Company’s internal control over financial reporting during the Company’s most recently completed fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
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| ITEM 1. | LEGAL PROCEEDINGS |
| a. | None |
| ITEM 3. | DEFAULTS UPON SENIOR SECURITIES |
| a. | None |
| b. | The total cumulative preferred stock dividends contingency at December 31, 2007 is $6,860,194. |
| ITEM 6. | EXHIBITS |
Exhibits.
| 31 | Certification of Chief Executive Officer and Treasurer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
| 32 | Certification of Chief Executive Officer and Treasurer 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
Registrant
| Dated: | February 12, 2008 | By: | /s/ Barry M. Yantis | |||||
| Barry M. Yantis | ||||||||
President, Chief Executive Officer, Treasurer and Chairman of the Board | ||||||||
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