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, 2009
| ¨ | 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)
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 has submitted electronically and posted on its corporate Web site, 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, 2009, there were 969,834 shares of common stock, $1 par value, issued and outstanding.
CHASE GENERAL CORPORATION AND SUBSIDIARY
INDEX
2
CHASE GENERAL CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
| March 31, 2009 | June 30, 2008 | |||||
| (Unaudited) | (Audited) | |||||
CURRENT ASSETS | ||||||
Cash and cash equivalents | $ | 165,516 | $ | 24,828 | ||
Trade receivables, net | 123,117 | 211,932 | ||||
Other receivable | 11,000 | — | ||||
Inventories: | ||||||
Finished goods | 35,563 | 72,651 | ||||
Goods in process | 9,801 | 3,857 | ||||
Raw materials | 95,455 | 56,346 | ||||
Packaging materials | 151,170 | 170,276 | ||||
Prepaid expenses | 19,092 | 6,146 | ||||
Deferred income taxes | 2,251 | 8,890 | ||||
Total current assets | 612,965 | 554,926 | ||||
PROPERTY AND EQUIPMENT - NET | 345,399 | 274,024 | ||||
OTHER ASSETS | ||||||
Deferred income taxes - noncurrent | — | 12,024 | ||||
TOTAL ASSETS | $ | 958,364 | $ | 840,974 | ||
The accompanying notes are an integral part of the condensed consolidated financial statements.
3
CHASE GENERAL CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS’ EQUITY
| March 31, 2009 | June 30, 2008 | |||||||
| (Unaudited) | (Audited) | |||||||
CURRENT LIABILITIES | ||||||||
Accounts payable | $ | 106,602 | $ | 84,879 | ||||
Current maturities of notes payable | 29,448 | 62,007 | ||||||
Current maturities of forgivable loan - bank | — | 5,000 | ||||||
Notes payable - stockholder | — | 140,000 | ||||||
Accrued expenses | 17,311 | 17,582 | ||||||
Deferred income | 1,299 | 1,299 | ||||||
Accrued income taxes payable | 10,360 | — | ||||||
Total current liabilities | 165,020 | 310,767 | ||||||
LONG-TERM LIABILITIES | ||||||||
Deferred income | 19,480 | 10,454 | ||||||
Forgivable loan - bank, less current maturities | — | 5,000 | ||||||
Notes payable, less current maturities | 50,112 | 21,012 | ||||||
Deferred income taxes | 11,053 | — | ||||||
Total long-term liabilities | 80,645 | 36,466 | ||||||
Total liabilities | 245,665 | 347,233 | ||||||
STOCKHOLDERS’ EQUITY | ||||||||
Capital stock issued and outstanding: | ||||||||
Prior cumulative preferred stock, $5 par value: | ||||||||
Series A (liquidation preference $2,032,500 and $2,010,000 respectively) | 500,000 | 500,000 | ||||||
Series B (liquidation preference $1,987,500 and $1,965,000 respectively) | 500,000 | 500,000 | ||||||
Cumulative preferred stock, $20 par value | ||||||||
Series A (liquidation preference $4,653,368 and $4,609,469 respectively) | 1,170,660 | 1,170,660 | ||||||
Series B (liquidation preference $758,356 and $751,201 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 | (5,753,297 | ) | (5,972,255 | ) | ||||
Total stockholders’ equity | 712,699 | 493,741 | ||||||
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | $ | 958,364 | $ | 840,974 | ||||
The accompanying notes are an integral part of the condensed consolidated financial statements.
4
CHASE GENERAL CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
| Three Months Ended March 31 | ||||||||
| 2009 | 2008 | |||||||
NET SALES | $ | 395,000 | $ | 390,808 | ||||
COST OF SALES | 331,822 | 363,993 | ||||||
Gross profit on sales | 63,178 | 26,815 | ||||||
OPERATING EXPENSES | ||||||||
Selling | 66,478 | 63,056 | ||||||
General and administrative | 64,867 | 62,751 | ||||||
(Gain) on sale of equipment | (6,762 | ) | — | |||||
Total operating expenses | 124,583 | 125,807 | ||||||
Income (loss) from operations | (61,405 | ) | (98,992 | ) | ||||
OTHER INCOME (EXPENSE) | (23 | ) | 427 | |||||
Net income (loss) before income taxes | (61,428 | ) | (98,565 | ) | ||||
(BENEFIT) FOR INCOME TAXES | (36,717 | ) | (28,265 | ) | ||||
NET (LOSS) | (24,711 | ) | (70,300 | ) | ||||
Preferred dividends | (32,018 | ) | (32,018 | ) | ||||
NET (LOSS) APPLICABLE TO COMMON STOCKHOLDERS | $ | (56,729 | ) | $ | (102,318 | ) | ||
NET (LOSS) PER SHARE OF COMMON STOCK - BASIC | $ | (.06 | ) | $ | (.11 | ) | ||
WEIGHTED AVERAGE SHARES OF COMMON STOCK OUTSTANDING | 969,834 | 969,834 | ||||||
The accompanying notes are an integral part of the condensed consolidated financial statements.
5
CHASE GENERAL CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
| Nine Months Ended March 31 | ||||||||
| 2009 | 2008 | |||||||
NET SALES | $ | 2,553,842 | $ | 2,273,288 | ||||
COST OF SALES | 1,760,323 | 1,675,049 | ||||||
Gross profit on sales | 793,519 | 598,239 | ||||||
OPERATING EXPENSES | ||||||||
Selling | 297,033 | 263,131 | ||||||
General and administrative | 244,826 | 228,261 | ||||||
(Gain) on sale of equipment | (12,014 | ) | — | |||||
Total operating expenses | 529,845 | 491,392 | ||||||
Income from operations | 263,674 | 106,847 | ||||||
OTHER INCOME (EXPENSE) | (4,640 | ) | (3,647 | ) | ||||
Net income before income taxes | 259,034 | 103,200 | ||||||
PROVISION (BENEFIT) FOR INCOME TAXES | 40,076 | (3,235 | ) | |||||
NET INCOME | 218,958 | 106,435 | ||||||
Preferred dividends | (96,054 | ) | (96,054 | ) | ||||
NET INCOME APPLICABLE TO COMMON STOCKHOLDERS | $ | 122,904 | $ | 10,381 | ||||
NET INCOME PER SHARE OF COMMON STOCK - | ||||||||
BASIC | $ | .13 | $ | .01 | ||||
DILUTED | $ | .06 | $ | .01 | ||||
WEIGHTED AVERAGE SHARES OF COMMON STOCK OUTSTANDING | 969,834 | 969,834 | ||||||
The accompanying notes are an integral part of the condensed consolidated financial statements.
6
CHASE GENERAL CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
| Nine Months Ended March 31 | ||||||||
| 2009 | 2008 | |||||||
CASH FLOWS FROM OPERATING ACTIVITIES | ||||||||
Net income | $ | 218,958 | $ | 106,435 | ||||
Adjustments to reconcile net income (loss) to net cash provided by operating activities: | ||||||||
Depreciation and amortization | 51,800 | 43,954 | ||||||
Provision for bad debts | 900 | 900 | ||||||
Deferred income amortization | (975 | ) | (974 | ) | ||||
Deferred income taxes | 29,716 | (3,235 | ) | |||||
(Gain) on sale of equipment | (12,041 | ) | — | |||||
Effects of changes in operating assets and liabilities: | ||||||||
Trade receivables | 87,915 | 47,720 | ||||||
Other receivable | (11,000 | ) | — | |||||
Inventories | 11,141 | (72,409 | ) | |||||
Prepaid expenses | (12,946 | ) | 3,090 | |||||
Accounts payable | 21,723 | (96,802 | ) | |||||
Accrued expenses | (271 | ) | (6,360 | ) | ||||
Accrued income taxes payable | 10,360 | — | ||||||
Net cash provided by operating activities | 395,280 | 22,319 | ||||||
CASH FLOWS FROM INVESTING ACTIVITIES | ||||||||
Proceeds from sale of equipment | 24,000 | — | ||||||
Purchases of property and equipment | (74,577 | ) | (7,673 | ) | ||||
Net cash (used in) investing activities | (50,577 | ) | (7,673 | ) | ||||
CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||
Proceeds from line-of-credit | 145,000 | 250,000 | ||||||
Principal payments on line-of-credit | (195,000 | ) | (250,000 | ) | ||||
Proceeds from notes payable - stockholder | — | 50,000 | ||||||
Principal payments on notes payable - stockholder | (140,000 | ) | (65,000 | ) | ||||
Principal payments on vehicles notes payable | (14,015 | ) | — | |||||
Net cash (used in) financing activities | (204,015 | ) | (15,000 | ) | ||||
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS | 140,688 | (354 | ) | |||||
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD | 24,828 | 22,232 | ||||||
CASH AND CASH EQUIVALENTS, END OF PERIOD | $ | 165,516 | $ | 21,878 | ||||
The accompanying notes are an integral part of the condensed consolidated financial statements.
7
CHASE GENERAL CORPORATION AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1- GENERAL
The condensed consolidated balance sheet of Chase General Corporation (“Chase” or “we”, “us”, or “our”) at June 30, 2008 has been derived from audited consolidated financial statements at that date. The condensed consolidated financial statements as of and for the three months and nine months ended March 31, 2009 and for the three months and nine months ended March 31, 2008 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, 2008. The results of operations for the three months and nine months ended March 31, 2009 and cash flows for the nine months ended March 31, 2009 are not necessarily indicative of the results for the entire fiscal year ending June 30, 2009. 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.
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. No computation was made on common stock equivalents outstanding for the three months ended March 31, 2008 and 2007 EPS because loss per share would be anti-dilutive.
| Three Months Ended March 31 | Nine Months Ended March 31 | |||||||||||||
| 2009 | 2008 | 2009 | 2008 | |||||||||||
Net income (loss) | $ | (24,711 | ) | $ | (70,300 | ) | $ | 218,958 | $ | 106,435 | ||||
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 | $ | (56,729 | ) | $ | (102,318 | ) | $ | 122,904 | $ | 10,381 | ||||
8
CHASE GENERAL CORPORATION AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 2 - NET INCOME PER SHARE (CONTINUED)
| Three Months Ended March 31 | Nine Months Ended March 31 | |||||||||||||
| 2009 | 2008 | 2009 | 2008 | |||||||||||
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 | $ | (.06 | ) | $ | (.11 | ) | $ | .13 | $ | .01 | ||||
Diluted earnings per share | $ | — | $ | — | $ | .06 | $ | .01 | ||||||
Cumulative Preferred Stock dividends in arrears at March 31, 2009 and 2008, totaled $7,020,284 and $6,892,212, respectively. Total dividends in arrears, on a per share basis, consist of the following at March 31:
| Nine Months Ended March 31 | ||||||
| 2009 | 2008 | |||||
6% Convertible | ||||||
Series A | $ | 15 | $ | 5 | ||
Series B | 15 | 14 | ||||
5% Convertible | ||||||
Series A | 60 | 59 | ||||
Series B | 60 | 59 | ||||
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.
9
CHASE GENERAL CORPORATION AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 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 has fulfilled its minimum loan requirements so that the loan has been forgiven in full and has no further obligations. As 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 on the lease term of the new facility. At March 31, 2009 and June 30, 2008, a total of $25,000 and $15,000, respectively, had been 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, 2009 and 2008, deferred revenue of $975 was amortized into income for each period.
NOTE 4 - NOTE PAYABLE - VEHICLES
The Company has four vehicle loans payable as follows:
| 1) | $1,001 monthly payments, including interest of -0-%; final payment due March 2011, secured by a vehicle. |
| 2) | $573 monthly payments, including interest of 6.99%; final payment due July 2012, secured by a vehicle. |
| 3) | $508 monthly payments, including interest of 1.9%; final payment due January 2012, secured by a vehicle. |
| 4) | $556 monthly payments, including interest of 3.9%, final payment due April 2012, secured by a vehicle. |
Future minimum payments are:
2010 | $ | 29,448 | |
2011 | 30,256 | ||
2012 | 17,523 | ||
2013 | 2,333 | ||
Total | $ | 79,560 | |
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CHASE GENERAL CORPORATION AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 5 - NOTES PAYABLE - BANK
Effective July 1, 2008, the Company had a $250,000 line-of-credit agreement which expired on January 1, 2009. This line-of-credit agreement was renewed on that date to extend until January 3, 2010 with a variable interest rate at prime. The line-of-credit was collateralized by certain equipment. At March 31, 2009 and June 30, 2008, the outstanding balance on the line-of-credit was $-0- and $50,000, respectively.
NOTE 6 - NOTES PAYABLE - STOCKHOLDER
The Company borrowed $140,000, from a stockholder/officer during the fiscal year ending June 30, 2008, which was repaid by December 31, 2008. These unsecured loans had no maturity date and carried a 4.5% annual interest rate effective September 1, 2008.
NOTE 7 - INCOME TAXES
The Company adopted the provisions of Financial Accounting Standard Board Interpretation No. 48 (“FIN 48”)Accounting for Uncertainty in Income Taxes – An Interpretation of FASB No. 109 effective July 1, 2007, which clarified the accounting for uncertainty in tax positions. 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, and the adoption of FIN 48 did not have a material effect on the Company’s consolidated financial statements.
As of June 30, 2008 and 2007, the Company had a net operating loss carryforward of approximately $170,706 and $203,000, respectively. However, for the nine months ended March 31, 2009 and 2008, 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 nine months ended March 31, 2009 decreased $29,716 to $(8,802) compared to $20,914 at June 30, 2008.
The net deferred tax assets (liability) are presented in the accompanying balance sheet as follows:
| March 31, 2009 | June 30, 2008 | ||||||
Current deferred tax asset | $ | 2,251 | $ | 8,890 | |||
Noncurrent deferred tax asset | — | 12,024 | |||||
Long-term deferred tax liability | (11,053 | ) | — | ||||
Net deferred tax assets (liability) | $ | (8,802 | ) | $ | 20,914 | ||
11
CHASE GENERAL CORPORATION AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 8 - SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
| Nine Months Ended March 31 | ||||||
| 2009 | 2008 | |||||
Cash paid for: | ||||||
Interest | $ | 5,802 | $ | 5,312 | ||
Non-cash transaction: | ||||||
Financing of new vehicles | $ | 60,556 | $ | 36,021 | ||
Reclass of forgiveable loan to deferred income | $ | 10,000 | $ | 5,000 | ||
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CHASE GENERAL CORPORATION AND SUBSIDIARY
ITEM 2. - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION
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, 2009 Compared with Three Months Ended March 31, 2008 and Nine Months Ended March 31, 2009 Compared with Nine Months Ended March 31, 2008
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 | |||||||||||
| 2009 | 2008 | 2009 | 2008 | |||||||||
Net sales | 100 | % | 100 | % | 100 | % | 100 | % | ||||
Cost of sales | 84 | 93 | 69 | 74 | ||||||||
Gross profit | 16 | 7 | 31 | 26 | ||||||||
Operating expenses | 32 | 32 | 21 | 22 | ||||||||
Income (loss) from operations | (16 | ) | (25 | ) | 10 | 4 | ||||||
Net income (loss) before income taxes | (15 | ) | (25 | ) | 10 | 5 | ||||||
Provision (benefit) for income taxes | (9 | ) | (7 | ) | 2 | — | ||||||
Net income (loss) | (6 | )% | (18 | )% | 8 | % | 5 | % | ||||
13
CHASE GENERAL CORPORATION AND SUBSIDIARY
ITEM 2. - MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION (CONTINUED)
NET SALES
Net sales increased $4,192 or 1% for the three months ended March 31, 2009 to $395,000 compared to $390,808 for the three months ended March 31, 2008. Gross sales for Chase Candy increased $4,186 to $396,592 for the three months ended March 31, 2009 compared to $392,406 for 2008. Gross sales for Seasonal Candy decreased $10,623 to $7,774 for the three months ended March 31, 2009 compared to $18,397 for 2008.
Net sales increased $280,554 or 12% for the nine months ended March 31, 2009 to $2,553,842 compared to $2,273,288 for the nine months ended March 31, 2008. Gross sales for Chase Candy increased $198,805 to $1,321,309 for the nine months ended March 31, 2009 compared to $1,122,504 for 2008. Gross sales for Seasonal Candy increased $76,811 to $1,268,583 for the nine months ended March 31, 2009 compared to $1,191,772 for 2008.
The 12% increase in net sales of $280,554 for the nine month period ended March 31, 2009, over the same period ended March 31, 2008 is due to price increase in the Chase Candy line put into place in April and November of 2008 along with Cherry Mash Bar and Mini Mash sales increasing 18% over last year. In addition, Chase Candy line includes increases for new customer orders of $71,427. Seasonal sales from new business orders for the nine months amounted to approximately $44,000 of the $76,811 increase in net sales, along with an average 6.2% price increase.
COST OF SALES
The cost of sales decreased $32,171 to $331,822 decreasing to 84% of related revenues for the three months ended March 31, 2009, compared to $363,993 or 93% of related revenues for the three months ended March 31, 2008. The cost of sales increased $85,274 to $1,760,323 decreasing to 69% of related revenues for the nine months ended March 31, 2009, compared to $1,675,049 or 74% of related revenues for the nine months ended March 31, 2008.
The decrease in cost of sales for the three months ended March 31, 2009 is a 9% decrease from the three months ended December 31, 2008. Direct costs of goods for materials manufactured and production labor force for the three months ended March 31, 2009 decreased $17,231 to $197,039 as compared to $214,270 for the three months ended March 31, 2008, which includes freight in/out decreasing $14,674 as a result of reduced fuel surcharges.
14
CHASE GENERAL CORPORATION AND SUBSIDIARY
ITEM 2. - MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION (CONTINUED)
COST OF SALES (CONTINUED)
Direct costs of goods for materials manufactured and production labor force for the nine months ended March 31, 2009, increased $42,297 to $1,201,421 as compared to $1,159,124 for the nine months ended March 31, 2008, which is 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.
The Company decreased finished goods inventory for the three months ended March 31, 2009 to $35,563 or 51% from the June 30, 2008 finished goods inventory of $72,651 due to the end of the Company’s busy season. Raw material inventory of $95,455 and packaging materials inventory of $151,170 is 9% higher than the June 30, 2008 inventories of $56,346 raw material and $170,276 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, 2009.
SELLING EXPENSES
Selling expenses for the three months ended March 31, 2009 increased $3,422 to $66,478, which is 17% of sales, compared to $63,056 or 16% of sales for the three months ended March 31, 2008. Selling expenses for the nine months ended March 31, 2009 increased $33,902 to $297,033, which is 12% of sales, compared to $263,131 or 12% of sales for the nine months ended March 31, 2008.
The increase of $3,422 in selling expenses for the three months ended March 31, 2009 is due to higher commissions, premium promotions being paid and sample costs for the period. Commissions, premium promotions, and sample costs increased 8% to $28,047 for this period from $25,976 for the three months ended March 31, 2008.
The increase of $33,902 in selling expenses for the nine months ended March 31, 2009 is also due to higher commissions, premium promotions being paid as a result of increased sales along with sample costs for this period. Commissions, premium promotions, and sample costs increased 20% to $178,644 for this period from $148,598 for the nine months ended March 31, 2008.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses for the three months ended March 31, 2009 increased $2,116 to $64,867, and 16% of sales, compared to $62,751 or 16% of sales for the three months ended March 31, 2008. General and administrative expenses for the nine months ended March 31, 2009 increased $16,565 to $244,826, or 9% of sales, compared to $228,261 or 10% of sales for the nine months ended December 31, 2008. The increased costs are primarily because of a $13,928 increase in costs updating Chase’s website.
15
CHASE GENERAL CORPORATION AND SUBSIDIARY
ITEM 2. - MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION (CONTINUED)
OTHER INCOME (EXPENSE)
Other income and (expense) decreased by $450 for the three months ended March 31, 2009 to $(23), compared to $427 for the three months ended March 31, 2008. Other income and expense increased by $993 for the nine months ended March 31, 2009 to $(4,640), compared to $(3,647) for the nine months ended March 31, 2008. This was primarily due to an increase in interest expense.
PROVISION FOR INCOME TAXES
The Company recorded a tax (benefit) for the three months ended March 31, 2009 of $(36,717) as compared to $(28,265) for the three months ended March 31, 2008. The Company recorded a tax provision for the nine months ended March 31, 2009 of $40,076 as compared to $(3,235) for the nine months ended March 31, 2008. The Company had incurred losses for the past two years, which is not available to carry back to obtain previously paid income taxes. This loss can be fully utilized against taxable income for the nine months ended March 31, 2009, which results in an effective tax rate of 20%. The net change in deferred taxes for the three months and nine months ended March 31, 2009 was $(4,996) and $(29,716), respectively. There was no valuation allowance at March 31, 2009 or 2008, since the losses are fully utilized.
NET INCOME (LOSS)
The Company reported a net loss for the quarter ended March 31, 2009 of $(24,711), compared to a net loss of $(70,300) for the quarter ended March 31, 2008. This decrease of $45,589 is explained above.
The Company reported a net income for the nine months ended March 31, 2009 of $218,958, compared to a net income of $106,435 for the nine months ended March 31, 2008. This increase of $112,523 is explained above.
PREFERRED DIVIDENDS
These amounts reflect additional preferred stock dividends in arrears for the three and nine months ended March 31, 2009 and 2008, 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.
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CHASE GENERAL CORPORATION AND SUBSIDIARY
ITEM 2. - MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION (CONTINUED)
NET INCOME APPLICABLE TO COMMON STOCKHOLDERS
Net (loss) applicable to common stockholders for the three months ended March 31, 2009 was $(56,729), which is a decrease of $45,589 as compared to the three months ended March 31, 2008 of $(102,318).
Net income applicable to common stockholders for the nine months ended March 31, 2009 was $122,904 which is an increase of $112,523 as compared to the nine months ended March 31, 2008 of $10,381. These items are explained above.
LIQUIDITY AND CAPITAL RESOURCES
The table below presents the summary of cash flow for the fiscal period indicated.
| 2009 | 2008 | |||||||
Net cash provided by operating activities | $ | 395,280 | $ | 22,319 | ||||
Net cash used in investing activities | $ | (50,577 | ) | $ | (7,673 | ) | ||
Net cash used in financing activities | $ | (204,015 | ) | $ | (15,000 | ) | ||
The $50,577 of cash used in investing activities was the result of capital expenditures. Management has no commitment for capital expenditures during the remainder of fiscal 2009. The $204,015 of cash used in financing activities is receipt of $145,000 proceeds from the line-of-credit and payments on the vehicle loans, line-of-credit and stockholder loan. 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.
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CHASE GENERAL CORPORATION AND SUBSIDIARY
ITEM 2. - MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION (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 accounts receivable. 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 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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CHASE GENERAL CORPORATION AND SUBSIDIARY
ITEM 2. - MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION (CONTINUED)
CRITICAL ACCOUNTING POLICIES (CONTINUED)
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
Effective July 1, 2008, Chase adopted Statement of financial Accounting Standard No. 157 (“SFAS 157”),Fair Value Measurements, SFAS 157 defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. SFAS 157 applies to other accounting pronouncements that require or permit fair value measurements, but does not require any new fair value measurements. The adoption of SFAS 157 did not have any effect on Chase’s results of operations, financial condition and cash flows.
Effective July 1, 2008, Chase adopted Statement of Financial Accounting Standard No. 159 (“SFAS 159”),The Fair Value Option for Financial Assets and Financial Liabilities – Including an amendment of FASB Statement No. 115.SFAS 159 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. SFAS 159 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 FASB Statement No. 115,Accounting for Certain Investments in Debt and Equity Securities, applies to all entities with available-for-sale and trading securities. The adoption of SFAS 159 did not have any effect on Chase’s results of operations, financial condition and cash flows.
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CHASE GENERAL CORPORATION AND SUBSIDIARY
ITEM 2. - MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION (CONTINUED)
CRITICAL ACCOUNTING POLICIES (CONTINUED)
New Accounting Pronouncements (Continued)
In December 2007, the FASB issued SFAS No. 141(R),Business Combinations (“SFAS 141R”) and SFAS No. 160,Accounting and Reporting of Noncontrolling Interest in Consolidated Financial Statements(“SFAS 160”). 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. SFAS 141R and SFAS 160 are required to be adopted simultaneously. SFAS 141 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. SFAS 160 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 Company is currently evaluating the impact of adopting SFAS 141R and SFAS 160 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 customers unanticipated future increases in raw material costs, decreased demand for products, expected orders that do not occur, loss of key customers, the impact of competition and price erosion as well as supply and manufacturing constraints, and other risks and uncertainties. In light of these risks and uncertainties, there can be no assurance that the forward-looking information contained in this report will prove accurate, and our actual results may differ materially from these forward-looking statements. We assume no obligation to update any forward-looking statements made herein.
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CHASE GENERAL CORPORATION AND SUBSIDIARY
ITEM 4T. – CONTROLS AND PROCEDURES
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.
Change in Internal Controls
There were no significant changes in Chase’s internal controls over financial reporting or in other factors that in management’s estimates are reasonably likely to materially affect Chase’s internal controls over financial reporting subsequent to the date of the evaluation.
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| a. | None |
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
| a. | None |
| b. | The total cumulative preferred stock dividends contingency at March 31, 2009 is $7,020,284. |
| a. | Exhibits. |
| Exhibit 31.1 | Certification of the Chief Executive Officer and Treasurer | |
| Exhibit 32.1 | Certification of the 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) |
/s/ Barry M. Yantis |
| Barry M. Yantis |
| President, Chief Executive Officer, |
| Treasurer and Chairman of the Board |
Date: May 11, 2009
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