Chase General (CSGN) 10-Q 2011 Q2 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended December 31, 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 January 31, 2011, there were 969,834 shares of common stock, $1.00 par value, outstanding.

Table of Contents

CHASE GENERAL CORPORATION AND SUBSIDIARY

Quarterly Report on Form 10-Q

For the Six Months Ended December 31, 2010

TABLE OF CONTENTS

PART I.      FINANCIAL INFORMATION
Item 1.	Condensed Consolidated Financial Statements
	Condensed Consolidated Balance Sheets as of December 31, 2010 (Unaudited) and June 30, 2010	3
	Condensed Consolidated Statements of Operations For the Three Months ended December 31, 2010 and 2009 (Unaudited)	5
	Condensed Consolidated Statements of Operations For the Six Months ended December 31, 2010 and 2009 (Unaudited)	6
	Condensed Consolidated Statements of Cash Flows For the Six Months ended December 31, 2010 and 2009 (Unaudited)	7
	Notes to Condensed Consolidated Financial Statements (Unaudited)	8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	14
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	21
Item 4T.	Controls and Procedures	22
PART II.      OTHER INFORMATION
Item 1.	Legal Proceedings	23
Item 1A.	Risk Factors	23
Item 3.	Defaults Upon Senior Securities	23
Item 4.	Submission of Matters to Vote of Security Holders	23
Item 6.	Exhibits	23
SIGNATURES		24

2

PART I. FINANCIAL INFORMATION

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

CHASE GENERAL CORPORATION AND SUBSIDIARY

CONDENSED CONSOLIDATED BALANCE SHEETS

ASSETS

	December 31, 2010		June 30, 2010
	(Unaudited)		(Audited)
CURRENT ASSETS
Cash and cash equivalents	$	468,313	$	106,508
Trade receivables, net of allowance for doubtful accounts, of $15,491 and $14,891, respectively		175,710		164,753
Inventories:
Finished goods		60,348		104,022
Goods in process		6,048		3,730
Raw materials		58,841		109,027
Packaging materials		175,215		186,420
Prepaid expenses		21,539		4,959
Deferred income taxes		5,350		5,844
Total current assets		971,364		685,263
PROPERTY AND EQUIPMENT - NET		467,839		512,069
TOTAL ASSETS	$	1,439,203	$	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

	December 31, 2010			June 30, 2010
	(Unaudited)			(Audited)
CURRENT LIABILITIES
Accounts payable	$	89,532		$	68,734
Current maturities of notes payable		48,644			56,820
Accrued expenses		9,516			15,337
Deferred income		1,299			1,299
Income taxes payable		93,678			2
Total current liabilities		242,669			142,192
LONG-TERM LIABILITIES
Deferred income		17,207			17,857
Notes payable, less current maturities		126,363			150,475
Deferred income taxes		84,657			93,869
Total long-term liabilities		228,227			262,201
Total liabilities		470,896			404,393
STOCKHOLDERS’ EQUITY
Capital stock issued and outstanding:
Prior cumulative preferred stock, $5 par value:
Series A (liquidation preference $2,085,000 and $2,070,000 respectively)		500,000			500,000
Series B (liquidation preference $2,040,000 and $2,025,000 respectively)		500,000			500,000
Cumulative preferred stock, $20 par value
Series A (liquidation preference $4,755,799 and $4,726,533 respectively)		1,170,660			1,170,660
Series B (liquidation preference $775,051 and $770,281 respectively)		190,780			190,780
Common stock, $1 par value		969,834			969,834
Paid-in capital in excess of par		3,134,722			3,134,722
Accumulated deficit		(5,497,689	)		(5,673,057	)
Total stockholders’ equity		968,307			792,939
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	1,439,203		$	1,197,332

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 December 31
	2010			2009
NET SALES		1,426,702		$	1,281,122
COST OF SALES		984,747			860,984
Gross profit on sales		441,955			420,138
OPERATING EXPENSES
Selling		150,046			135,456
General and administrative		76,942			79,235
Total operating expenses		226,988			214,691
Income from operations		214,967			205,447
OTHER INCOME (EXPENSE)		(2,512	)		(1,177	)
Net income before income taxes		212,455			204,270
PROVISION FOR INCOME TAXES		76,461			87,411
NET INCOME		135,994			116,859
Preferred dividends		(32,018	)		(32,018	)
Net income applicable to common stockholders	$	103,976		$	84,841
NET INCOME PER SHARE OF COMMON STOCK - BASIC	$	0.11		$	0.09
DILUTED	$	0.05		$	0.04
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)

	Six Months Ended December 31
	2010			2009
NET SALES	$	2,195,538		$	2,042,013
COST OF SALES		1,502,367			1,348,647
Gross profit on sales		693,171			693,366
OPERATING EXPENSES
Selling		230,971			207,369
General and administrative		197,269			193,960
(Gain) on sale of equipment		(500	)		—
Total operating expenses		427,740			401,329
Income from operations		265,431			292,037
OTHER INCOME (EXPENSE)		(4,908	)		(1,986	)
Net income before income taxes		260,523			290,051
PROVISION FOR INCOME TAXES		85,155			108,622
NET INCOME		175,368			181,429
Preferred dividends		(64,036	)		(64,036	)
Net income applicable to common stockholders	$	111,332		$	117,393
NET INCOME PER SHARE OF COMMON STOCK - BASIC	$	0.11		$	0.12
DILUTED	$	0.06		$	0.06
WEIGHTED AVERAGE SHARES OF COMMON STOCK OUTSTANDING		969,834			969,834

The accompanying notes are an integral part of the

condensed consolidated financial statements.

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CHASE GENERAL CORPORATION AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	Six Months Ended December 31
	2010			2009
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	175,368		$	181,429
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		55,016			37,594
Allowance for bad debts		600			600
Deferred income amortization		(650	)		(649	)
Deferred income taxes		(8,718	)		(2,729	)
(Gain) on sale of equipment		(500	)		—
Effects of changes in operating assets and liabilities:
Trade receivables		(11,557	)		49,403
Inventories		102,747			39,419
Prepaid expenses		(16,580	)		(81,921	)
Accounts payable		20,798			(81,022	)
Accrued expenses		(5,821	)		(3,984	)
Income taxes payable		93,676			110,966
Net cash provided by operating activities		404,379			249,106
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of equipment		500			—
Purchases of property and equipment		(10,786	)		(2,574	)
Net cash used in investing activities		(10,286	)		(2,574	)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from line-of-credit		40,000			210,000
Principal payments on line-of-credit		(40,000	)		(210,000	)
Principal payments on notes payable		(32,288	)		(14,619	)
Net cash used in financing activities		(32,288	)		(14,619	)
NET INCREASE IN CASH AND CASH EQUIVALENTS		361,805			231,913
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD		106,508			28,771
CASH AND CASH EQUIVALENTS, END OF PERIOD	$	468,313		$	260,684

The accompanying notes are an integral part of the

condensed consolidated financial statements.

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CHASE GENERAL CORPORATION AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 1 - GENERAL

The condensed consolidated balance sheet of Chase General Corporation (hereinafter referred to as “Chase”, “we”, “our”, and “us”) at June 30, 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 and six months ended December 31, 2010 and for the three months and six months ended December 31, 2009 are unaudited and reflect all normal and recurring accruals and adjustments which are, in the opinion of management, necessary for a fair presentation of the financial position, operating results and cash flows for the interim periods presented in this quarterly report. The condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto, together with management’s discussion and analysis of financial condition and results of operations, contained in our Annual Report on Form 10-K for the year ended June 30, 2010. The results of operations for the three and six months ended December 31, 2010 and cash flows for the six months ended December 31, 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 condensed consolidated financial statements and the Company does not expect a material impact on its condensed 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 condensed consolidated financial statements.

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CHASE GENERAL CORPORATION AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 1 - GENERAL (CONTINUED)

Management has performed an evaluation of events that have occurred subsequent to December 31, 2010, through the date of filing of this Form 10-Q. There have been no subsequent events that occurred during such period that would require disclosure in this Form 10-Q or would be required to be recognized in the condensed consolidated financial statements as of or for the six month period ended December 31, 2010.

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 December 31				Six Months Ended December 31
	2010		2009		2010		2009
Net income	$	135,994	$	116,859	$	175,368	$	181,429
Preferred dividend requirements:
6% Prior Cumulative Preferred, $5 par value		15,000		15,000		30,000		30,000
5% Convertible Cumulative Preferred, $20 par value		17,018		17,018		34,036		34,036
Total dividend requirements		32,018		32,018		64,036		64,036
Net income common stockholders	$	103,976	$	84,841	$	111,332	$	117,393
	Three Months Ended December 31				Six Months Ended December 31
	2010		2009		2010		2009
Weighted average shares - basic		969,834		969,834		969,834		969,834
Dilutive effect of contingently issuable shares		1,033,334		1,033,334		1,033,334		1,033,334
Weighted Average Shares - diluted		2,003,168		2,003,168		2,003,168		2,003,168
Basic earnings per share	$	.11	$	.09	$	.11	$	.12
Diluted earnings per share	$	.05	$	.04	$	.06	$	.06

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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, 2010 and 2009, totaled $7,244,410 and $7,116,338, respectively. Total dividends in arrears, on a per share basis, consist of the following at December 31:

	Six Months Ended December  31
	2010		2009
6% Convertible
Series A	$	16	$	15
Series B		15		15
5% Convertible
Series A		61		60
Series B		61		60

The 6% convertible prior cumulative preferred stock may, upon thirty days prior notice, be redeemed by the Corporation at $5.25 a share plus unpaid accrued dividends to date of redemption. In the event of voluntary liquidation, holders of this stock are entitled to receive $5.25 per share plus accrued dividends. It may be exchanged for common stock at the option of the shareholders in the ratio of 4 common shares for one share of Series A and 3.75 common shares for one share of Series B.

The Company has the privilege of redemption of 5% convertible cumulative preferred stock at $21.00 a share plus unpaid accrued dividends. In the event of voluntary or involuntary liquidation, holders of this stock are entitled to receive $20.00 a share plus unpaid accrued dividends. It may be exchanged for common stock at the option of the shareholders, in the ratio of 3.795 common shares for one of preferred.

10

CHASE GENERAL CORPORATION AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 3 - FORGIVABLE LOAN AND DEFERRED INCOME

During 2004, the Company received a $25,000 economic development incentive from Buchanan County, which is a five year forgivable loan at a rate of $5,000 per year. The Nodaway Valley Bank established an Irrevocable Standby Letter of Credit in the amount of $25,000 as collateral for this loan, with a maturity date of January 3, 2010. The Company met the criteria of occupying a 20,000 square foot building and creating a minimum of two new full-time equivalent jobs during the first year of operation in the new facility. In addition, the Company maintained 19 existing jobs during the five year term. Notice was received February 6, 2009 from the Buchanan County Commission, that the Company had fulfilled its minimum loan requirements so that the loan was forgiven in full with no further obligations. Since the Company was no longer legally required to return the monies, the liability was reclassified as deferred revenue and amortized into income over the life of the lease term of the new facility. At June 30, 2009, a total of $25,000 has been reclassified to deferred revenue. Deferred revenue is recognized on a straight-line basis over the lease term of 20 years. During the six months ended December 31, 2010 and 2009, deferred revenue of $650 and $649, respectively, was amortized into income for each period.

NOTE 4 - NOTES PAYABLE

The Company’s long-term debt consists of:

Payee	Terms	December 31, 2010		June 30, 2010
Ford Credit	$1,001 monthly payments including interest of 0%; secured by a vehicle. Note was paid in full during the quarter ending December 31, 2010.	$	—	$	9,003
Ford Credit	$573 monthly payments including interest of 6.99%; final payment due July 2012, secured by a vehicle.		10,664		13,636
Honda	$508 monthly payments including interest of 1.9%; final payment due December 15, 2011, secured by a vehicle.		6,032		9,007
Nissan	$557 monthly payments including interest of 3.9%; final payment due April 2012, secured by a vehicle.		8,614		11,740

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CHASE GENERAL CORPORATION AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 4 - NOTES PAYABLE (CONTINUED)

Payee	Terms	December 31, 2010		June 30, 2010
Nodaway Valley Bank	$3,192 monthly payments including interest of 6.25%; final payment due June 2015, secured by equipment.		149,697		163,909
	Total		175,007		207,295
	Less current portion		48,644		56,820
	Long-term portion	$	126,363	$	150,475
Future minimum payments are:
	2011	$	48,644
	2012		38,164
	2013		33,756
	2014		35,927
	2015		18,516
	Total	$	175,007

NOTE 5 - NOTE PAYABLE - BANK

Effective June 30, 2009, the Company had a $250,000 line-of-credit agreement which expired on January 3, 2011. The line-of-credit agreement was renewed on that date to extend until January 3, 2012 with a variable interest rate at prime, which was 5% at December 31, 2010. The line-of-credit is collateralized by certain equipment. At December 31, 2010 and June 30, 2010, there was no outstanding balance on the line-of-credit.

NOTE 6 - INCOME TAXES

The recognition of income tax expense related to uncertain tax positions is determined under the provisions of FASB ASC – 740-10. The Company had no unrecognized tax benefits as of the date of adoption. The income tax positions taken for open years are appropriately stated and supported for all open years. 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 December 31, 2010, the Company has unused contributions carryforward of $1,771 of which the Company’s profit for the six months ended December 31, 2010 fully absorbed this amount.

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CHASE GENERAL CORPORATION AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 7 - SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION

	Six Months Ended December 31
	2010		2009
Cash paid for:
Interest	$	6,024	$	2,780
Income taxes		197		385

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CHASE GENERAL CORPORATION AND SUBSIDIARY

ITEM 2. - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

OVERVIEW

Chase General Corporation (Chase) is a holding company for its wholly-owned subsidiary, Dye Candy Company. This subsidiary is the main operating company that is engaged in the manufacture of confectionery products which are sold primarily to wholesale houses, grocery accounts, vendors, and repackers. The subsidiary (Company) operates two divisions, Chase Candy division and Seasonal Candy division, which share a common labor force and utilize the same basic equipment and raw materials. Therefore, segment reporting for the two divisions is not maintained by Management.

RESULTS OF OPERATIONS - Three Months Ended December 31, 2010 Compared with Three Months Ended December 31, 2009 and Six Months Ended December 31, 2010 Compared with Six Months Ended December 31, 2009

The following management comments regarding Chase’s results of operations and outlook should be read in conjunction with the condensed consolidated financial statements included pursuant to Item 1 of the quarterly report.

The following table sets forth certain items as a percentage of net sales and revenues for the periods presented:

	Three Months Ended December 31						Six Months Ended December 31
	2010			2009			2010			2009
Net sales		100	%		100	%		100	%		100	%
Cost of sales		69			67			68			66
Gross profit		31			33			32			34
Operating expenses		16			17			20			20
Income from operations		15			16			12			14
Net income before income taxes		15			16			12			14
Provision for income taxes		5			7			4			5
Net income		10	%		9	%		8	%		9	%

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CHASE GENERAL CORPORATION AND SUBSIDIARY

ITEM 2. - MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION (CONTINUED)

NET SALES

Net sales increased $145,580 or 11% for the three months ended December 31, 2010 to $1,426,702 compared to $1,281,122 for the three months ended December 31, 2009. Gross sales for Chase Candy decreased $13,131 to $442,650 for the three months ended December 31, 2010 compared to $455,781 for 2009. Gross sales for Seasonal Candy increased $178,280 to $1,011,034 for the three months ended December 31, 2010 compared to $832,754 for 2009.

The 3% decrease in gross sales of Chase Candy of $13,131 for the three months ended December 31, 2010 over the same period ended December 31, 2009, is primarily due to the discontinuation of the Mini Mash Limited Addition Tin combined with one customer reducing orders approximately $16,100. The 21% increase in gross sales of Seasonal Candy of $178,280 for the three months ended December 31, 2010 over the same period ended December 31, 2009, is primarily due to increased orders from one customer totaling approximately $80,000 combined with approximately a $60,000 increase due to shipment during this quarter verses first quarter a year ago.

Net sales increased $153,525 or 8% for the six months ended December 31, 2010 to $2,195,538 compared to $2,042,013 for the six months ended December 31, 2009. Gross sales for Chase Candy decreased $29,627 to $868,199 for the six months ended December 31, 2010 compared to $897,826 for 2009. Gross sales for Seasonal Candy increased $208,286 to $1,374,406 for the six months ended December 31, 2010 compared to $1,166,120 for 2009.

The 3% decrease in gross sales of Chase Candy of $29,627 for the six months ended December 31, 2010 over the same period ended December 31, 2009, is primarily due to the discontinuation of the Mini Mash Limited Addition Tin combined with one customer reducing orders of approximately $33,600. The 18% increase in gross sales of Seasonal Candy of $208,286 for the six months ended December 31, 2010 over the same period ended December 31, 2009, is primarily due to increased orders from two customers totaling $200,000.

COST OF SALES

The cost of sales increased $123,763 to $984,747 increasing to 69% of related revenues for the three months ended December 31, 2010, compared to $860,984 or 67% of related revenues for the three months ended December 31, 2009.

Direct costs of goods for materials manufactured for the three months ended December 31, 2010, increased $102,278 to $637,498 as compared to $535,220 for the three months ended December 31, 2009, which is primarily due to raw material price increases in chocolate, peanuts, and sugar which were not passed along to customers. Direct labor costs for the three months ended December 31, 2010 increased $11,336 to $133,070 as compared to $121,734 for the three months ended December 31, 2009, which is a 9% increase and comparable to a 11% increase in net sales.

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CHASE GENERAL CORPORATION AND SUBSIDIARY

ITEM 2. - MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION (CONTINUED)

COST OF SALES (CONTINUED)

The cost of sales increased $153,720 to $1,502,367 or 68% of related revenues for the six months ended December 31, 2010, compared to $1,348,647 or 66% of related revenues for the six months ended December 31, 2009.

Direct costs of goods for materials manufactured and net change in inventories for the six months ended December 31, 2010, increased $116,437 to $825,718 as compared to $709,281 for the six months ended December 31, 2009, which is primarily due to raw material price increases in chocolate, peanuts, and sugar which were not passed along to customers. Freight in/out for the six months ended December 31, 2010 increased $5,885 to $97,084 as compared to $91,229 for the six months ended December 31, 2009 as a result of having to ship product using refrigeration services as summer temperatures continued to be high into late fall. Direct labor costs for the six months ended December 31, 2010 increased $32,555 to $279,851 as compared to $247,296 for the six months ended December 31, 2009, which is a 13% increase due to increased bonus payments paid at the end of the busy season.

The Company decreased finished goods inventory for the six months ended December 31, 2010 to $60,348 or 42% from the June 30, 2010 finished goods inventory of $104,022 due to the end of the Company’s busy season. Raw material inventory of $58,841 and packaging materials inventory of $175,215 is 21% lower than the June 30, 2010 inventories of $109,027 raw material and $186,420 packaging materials as a result of not purchasing excess inventory to carry into the next quarter, due to higher pricing.

SELLING EXPENSES

Selling expenses for the three months ended December 31, 2010 increased $14,590 to $150,046, which is 11% of sales, compared to $135,456 or 11% of sales for the three months ended December 31, 2009.

The increase of $14,590 in selling expenses for the three months ended December 31, 2010 is primarily due to higher commissions and premium promotions being paid, and sample costs for the period in an effort to increase sales volume. Commissions and premium promotions, and sample costs increased $10,877 to $107,967 for this period from $97,090 for the three months ended December 31, 2009.

Selling expenses for the six months ended December 31, 2010 increased $23,602 to $230,971, which is 11% of sales, compared to $207,369 or 10% of sales for the six months ended December 31, 2009.

The increase of $23,602 in selling expenses for the six months ended December 31, 2010 is primarily due to higher commissions and premium promotions being paid, and sample costs for the period in an effort to increase sales volume. Commissions and premium promotions, and sample costs increased $17,381 to $140,975 for this period from $123,594 for the six months ended December 31, 2009.

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CHASE GENERAL CORPORATION AND SUBSIDIARY

ITEM 2. - MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION (CONTINUED)

GENERAL AND ADMINISTRATIVE EXPENSES

General and administrative expenses for the three months ended December 31, 2010 decreased $2,293 to $76,942 and decreased to 5% of sales, compared to $79,235 or 6% of sales for the three months ended December 31, 2009. The decreased costs are primarily because of a $2,942 decrease in professional fees offset by a $2,587 increase in office supplies and website expense.

General and administrative expenses for the six months ended December 31, 2010 increased $3,309 to $197,269, or 9% of sales, compared to $193,960 or 10% of sales for the six months ended December 31, 2009. The increased costs are primarily because of a $4,961 increase in office supplies and website expense.

OTHER INCOME (EXPENSE)

Other income and (expense) increased by $1,335 for the three months ended December 31, 2010 to $(2,512), compared to $(1,177) for the three months ended December 31, 2009. Other income and expense increased by $2,922 for the six months ended December 31, 2010 to $(4,908), compared to $(1,986) for the six months ended December 31, 2009 primarily due to an increase in interest expenses.

PROVISION FOR INCOME TAXES

The Company recorded a tax provision for the three months ended December 31, 2010 of $76,461 as compared to $87,411 for the three months ended December 31, 2009. The Company recorded tax expense for the six months ended December 31, 2010 of $85,155 as compared to the tax expense of $108,622 for the six months ended December 31, 2009. The net tax expense recorded for the three and six months ended December 31, 2010 and 2009 is primarily due to recognizing taxes related to current profitable operations.

NET INCOME

The Company reported a net income for the quarter ended December 31, 2010 of $135,994, compared to a net income of $116,859 for the quarter ended December 31, 2009. This increase of $19,135 is explained above.

The Company reported a net income for the six months ended December 31, 2010 of $175,368 compared to a net income of $181,429 for the six months ended December 31, 2009. This decrease of $6,061 is explained above.

PREFERRED DIVIDENDS

These amounts reflect additional preferred stock dividends in arrears for the three and six months ended December 31, 2010 and 2009, respectively, on the Company’s Series A and Series B $5 par value preferred stock and its Series A and Series B $20 par value preferred stock.

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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 income applicable to common stockholders for the three months ended December 31, 2010 was $103,967, which is an increase of $19,126 as compared to the three months ended December 31, 2009 of $84,841.

Net income applicable to common stockholders for the six months ended December 31, 2010 was $111,332, which is a decrease of $6,061 as compared to the six months ended December 31, 2009 of $117,393. These items are explained above.

LIQUIDITY AND CAPITAL RESOURCES

The table below presents the summary of cash flow for the fiscal period indicated.

	2010			2009
Net cash provided by operating activities	$	404,379		$	249,106
Net cash used in investing activities	$	(10,286	)	$	(2,574	)
Net cash used in financing activities	$	(32,288	)	$	(14,619	)

The $10,286 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 $32,288 of cash used in financing activities is 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 $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.

CRITICAL ACCOUNTING POLICIES

Use of Estimates

The preparation of the condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect certain reported amounts and disclosures. Significant estimates used in preparing these condensed consolidated financial statements include those assumed in computing the carrying value of equipment and allowance for doubtful trade receivables. Accordingly, actual results could differ from those estimates. Any changes in estimates are recorded in the period in which they become known.

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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)

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 December 31, 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 collectability of specific customer accounts and the aging of the accounts receivable. If there is a deterioration of a major customer’s credit worthiness or actual defaults are higher than the historical experience, management’s estimates of the recoverability of amounts due the Company could be adversely affected. All accounts or portions thereof deemed to be uncollectible or to require an excessive collection cost are written off to the allowance for doubtful accounts.

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.

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 condensed consolidated financial statements and the Company does not expect a material impact on its condensed consolidated financial statements related to the Level 3 fair value disclosures.

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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)

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 condensed 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.

ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLSOURES ABOUT MARKET RISK

Not applicable to a smaller reporting company.

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CHASE GENERAL CORPORATION AND SUBSIDIARY

ITEM 4T. - CONTROLS AND PROCEDURES

(a) Evaluation of Disclosure Controls and Procedures

Chase’s management, with the participation of the Chief Executive Officer, has evaluated the effectiveness of Chase’s disclosure controls and procedures, as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as mended (the “Exchange Act”), as of the end of the period covered by this report. Based on such evaluation, this officer has concluded that Chase’s disclosure controls and procedures are effective to provide reasonable assurance that information required to be disclosed in periodic filings under the Exchange Act is accumulated and communicated to management, including those officers, and to members of the Board of Directors, to allow timely decisions regarding required disclosure.

(b) Changes in Internal Control over Financial Reporting

There were no significant changes in Chase’s internal control over financial reporting or in other factors that in management’s estimates are reasonably likely to materially affect Chase’s internal control over financial reporting subsequent to the date of the evaluation.

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PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

a. None

ITEM 1A. RISK FACTORS

Not applicable to a smaller reporting company.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

a. None

b. The total cumulative preferred stock dividends contingency at December 31, 2010 is $7,244,410.

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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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	Chase General Corporation and Subsidiary
	(Registrant)
February 11, 2011
Date	By: Barry M. Yantis
	Chairman of the Board, Chief Executive Officer,
	President and Treasurer

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