Chase General (CSGN) 10-Q 2014 Q3 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 March 31, 2014

o       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	(IRS Employer Identification No.)
incorporation or organization)

	1307 South 59th, St. Joseph, Missouri 64507
(Address of principal executive offices, Zip Code)

	(816) 279-1625
(Issuer’s telephone number, including area code)

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 o

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 x     No o

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 o	Accelerated filer o
Non-accelerated filer  o (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 o     No x

As of May 9, 2014, there were 969,834 shares of common stock, $1.00 par value, outstanding.

CHASE GENERAL CORPORATION AND SUBSIDIARY

Quarterly Report on Form 10-Q

For the Three Months Ended March 31, 2014

TABLE OF CONTENTS

PART I		FINANCIAL INFORMATION
	Item 1.		Condensed Consolidated Financial Statements	3
			Condensed Consolidated Balance Sheets as of March 31, 2014 (Unaudited) and June 30, 2013	3
			Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2014 and 2013 (Unaudited)	5
			Condensed Consolidated Statements of Operations for the Nine Months Ended March 31, 2014 and 2013 (Unaudited)	6
			Condensed Consolidated Statements of Cash Flows for the Nine Months Ended March 31, 2014 and 2013 (Unaudited)	7
			Notes to Condensed Consolidated Financial Statements (Unaudited)	8
	Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations	13
	Item 3.		Quantitative and Qualitative Disclosures About Market Risk	21
	Item 4.		Controls and Procedures	21
PART II		OTHER INFORMATION
	Item 1.		Legal Proceedings	22
	Item 1A.		Risk Factors	22
	Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds	22
	Item 3.		Defaults Upon Senior Securities	22
	Item 4.		Mine Safety Disclosures	22
	Item 5.		Other Information	22
	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

	March 31,		June 30,
	2014		2013
	(Unaudited)
CURRENT ASSETS
Cash and cash equivalents	$	336,355	$	28,564
Trade receivables, net of allowance for doubtful accounts of $17,196 and $16,196, respectively		178,368		166,585
Inventories:
Finished goods		67,514		258,392
Goods in process		6,650		10,942
Raw materials		97,588		81,515
Packaging materials		120,323		158,283
Prepaid expenses		15,256		5,414
Deferred income taxes		6,748		6,863
Total current assets		828,802		716,558
PROPERTY AND EQUIPMENT
Land		35,000		35,000
Buildings		77,348		77,348
Machinery and equipment		738,633		717,985
Trucks and autos		188,594		188,594
Office equipment		31,518		30,826
Leasehold improvements		72,068		72,068
Total		1,143,161		1,121,821
Less accumulated depreciation		819,356		759,996
Total property and equipment, net		323,805		361,825
TOTAL ASSETS	$	1,152,607	$	1,078,383

The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.

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CHASE GENERAL CORPORATION AND SUBSIDIARY

CONDENSED CONSOLIDATED BALANCE SHEETS (CONTINUED)

LIABILITIES AND STOCKHOLDERS’ EQUITY

	March 31,			June 30,
	2014			2013
	(Unaudited)
CURRENT LIABILITIES
Accounts payable	$	55,947		$	66,598
Current maturities of notes payable		31,568			54,172
Accrued expenses		38,381			27,466
Income taxes payable		58,464			3,711
Deferred income		1,299			1,299
Total current liabilities		185,659			153,246
LONG-TERM LIABILITIES
Deferred income		12,986			13,960
Notes payable, less current maturities		6,200			39,787
Deferred income taxes		81,327			93,973
Total long-term liabilities		100,513			147,720
Total liabilities		286,172			300,966
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS’ EQUITY
Capital stock issued and outstanding:
Prior cumulative preferred stock, $5 par value:
Series A (liquidation preference $2,182,500 and $2,160,000, respectively)		500,000			500,000
Series B (liquidation preference $2,137,500 and $2,115,000, respectively)		500,000			500,000
Cumulative preferred stock, $20 par value:
Series A (liquidation preference $4,946,031 and $4,902,131, respectively)		1,170,660			1,170,660
Series B (liquidation preference $806,053 and $798,899, 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		(5,599,561	)		(5,688,579	)
Total stockholders’ equity		866,435			777,417
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	1,152,607		$	1,078,383

The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.

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CHASE GENERAL CORPORATION AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

	Three Months Ended
	March 31
	2014			2013
NET SALES	$	462,112		$	452,217
COST OF SALES		372,767			352,654
Gross profit on sales		89,345			99,563
OPERATING EXPENSES
Selling		70,054			74,865
General and administrative		108,816			110,915
Total operating expenses		178,870			185,780
Loss from operations		(89,525	)		(86,217	)
OTHER INCOME (EXPENSE)
Miscellaneous income		602			640
Interest expense		(440	)		(1,317	)
Total other income (expense), net		162			(677	)
Net loss before income taxes		(89,363	)		(86,894	)
CREDIT FOR INCOME TAX BENEFIT		(31,412	)		(31,129	)
NET LOSS	$	(57,951	)	$	(55,765	)
NET LOSS PER SHARE OF COMMON STOCK
- BASIC	$	(0.09	)	$	(0.09	)
- DILUTED	$	(0.09	)	$	(0.09	)

The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.

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CHASE GENERAL CORPORATION AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

	Nine Months Ended
	March 31
	2014			2013
NET SALES	$	2,775,917		$	2,725,012
COST OF SALES		1,969,368			1,922,781
Gross profit on sales		806,549			802,231
OPERATING EXPENSES
Selling		328,091			331,981
General and administrative		342,317			328,020
Loss (gain) on sale of equipment		93			(22,254	)
Total operating expenses		670,501			637,747
Income from operations		136,048			164,484
OTHER INCOME (EXPENSE)
Miscellaneous income		2,938			1,402
Interest expense		(3,581	)		(6,347	)
Total other income (expense), net		(643	)		(4,945	)
Net income before income taxes		135,405			159,539
PROVISION FOR INCOME TAXES		46,387			64,176
NET INCOME	$	89,018		$	95,363
NET INCOME (LOSS) PER SHARE OF COMMON STOCK
- BASIC	$	(0.01	)	$	0.00
- DILUTED	$	(0.01	)	$	0.00

The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.

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CHASE GENERAL CORPORATION AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	Nine Months Ended March 31
	2014			2013
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	89,018		$	95,363
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		65,366			68,015
Allowance for bad debts		400			600
Deferred income amortization		(974	)		(974	)
Deferred income taxes		(12,531	)		46,653
Loss (gain) on sale of equipment		93			(22,254	)
Effects of changes in operating assets and liabilities:
Trade receivables		(12,183	)		(3,668	)
Inventories		217,057			165,504
Prepaid expenses		(9,842	)		(3,916	)
Accounts payable		(10,651	)		(37,932	)
Accrued expenses		10,915			14,899
Income taxes payable		54,753			17,523
Net cash provided by operating activities		391,421			339,813
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of equipment		-			22,500
Purchases of property and equipment		(27,439	)		(2,225	)
Net cash (used in) provided by investing activities		(27,439	)		20,275
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from line-of-credit		290,000			310,050
Principal payments on line-of-credit		(290,000	)		(350,050	)
Principal payments on notes payable		(56,191	)		(54,284	)
Net cash used in financing activities		(56,191	)		(94,284	)
NET INCREASE IN CASH AND CASH EQUIVALENTS		307,791			265,804
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD		28,564			17,949
CASH AND CASH EQUIVALENTS, END OF PERIOD	$	336,355		$	283,753

The accompanying notes are an integral part of the unaudited 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, 2013 has been taken from audited consolidated financial statements at that date and condensed. The condensed consolidated financial statements as of and for the three and nine months ended March 31, 2014 and for the three and nine months ended March 31, 2013 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, 2013. The results of operations for the three and nine months ended March 31, 2014 and cash flows for the nine months ended March 31, 2014 are not necessarily indicative of the results for the entire fiscal year ending June 30, 2014. 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.

No events have occurred subsequent to March 31, 2014, through the date of filing this form, 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 three and nine months ended March 31, 2014.

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CHASE GENERAL CORPORATION AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 2 - EARNINGS PER SHARE

The income per share was computed on the weighted average of outstanding common shares during the period. Diluted earnings per share is calculated by including contingently issuable shares with the weighted average shares outstanding.

	Three Months Ended March 31						Nine Months Ended March 31
	2014			2013			2014			2013
Net (loss) income	$	(57,951	)	$	(55,765	)	$	89,018		$	95,363
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 loss - common stockholders	$	(89,969	)	$	(87,783	)	$	(7,036	)	$	(691	)
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	$	(0.09	)	$	(0.09	)	$	(0.01	)	$	0.00
Diluted earnings per share	$	(0.09	)	$	(0.09	)	$	(0.01	)	$	0.00

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CHASE GENERAL CORPORATION AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 2 - EARNINGS PER SHARE (CONTINUED)

Cumulative Preferred Stock dividends in arrears at March 31, 2014 and 2013 totaled $7,660,644 and $7,532,572, respectively. Total dividends in arrears, on a per share basis, consist of the following:

	Nine Months Ended March 31
	2014		2013
6% Convertible
Series A	$	17	$	16
Series B		16		16
5% Convertible
Series A		65		64
Series B		65		64

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.

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CHASE GENERAL CORPORATION AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 3 - NOTES PAYABLE

The Company’s long-term debt consists of:

		March 31,		June 30,
Payee	Terms	2014		2013
Nodaway Valley Bank	$350,000 line-of-credit agreement expiring on January 3, 2015, with a variable interest rate at prime but not less than 5%. The line-of-credit agreement replaced an existing line-of-credit agreement that expired on January 3, 2014. The line-of-credit is collateralized by substantially all assets of the Company.	$	-	$	-
Ford Credit	$679 monthly payments, interest of 0%; final payment due March 2016, secured by a vehicle.		-		22,413
Ford Credit	$517 monthly payments, interest of 0%; final payment due March 2016, secured by a vehicle.		12,400		17,050
Nodaway Valley Bank	$3,192, including interest of 5.75%; final payment due June 2015, secured by equipment.		21,687		48,698
Toyota Financial Services	$305 monthly payments including interest of 2.9% due March 2015, secured by a vehicle.		3,681		5,798
	Total		37,768		93,959
	Less current portion		31,568		54,172
	Long-term portion	$	6,200	$	39,787

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CHASE GENERAL CORPORATION AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 3 - NOTES PAYABLE (CONTINUED)

Future minimum payments for the twelve months ending March 31 are:

2015	$	31,568
2016		6,200
Total	$	37,768

NOTE 4 - INCOME TAXES

The Company follows the provisions for uncertain tax positions as addressed in Financial Accounting Standards Board Accounting Standards Codification 740-10. The Company recognized no liability for unrecognized tax benefits at March 31, 2014. The Company has no material tax positions at March 31, 2014 for which the ultimate deductibility is highly certain, but for which there is uncertainty about the timing of such deductibility. The Company’s federal income tax returns for the fiscal years ended 2011, 2012 and 2013 are subject to examination by the IRS taxing authority. The Company had no accruals for interest and penalties at March 31, 2014.

NOTE 5 - SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION

	Nine Months Ended March 31
	2014		2013
Cash paid for:
Interest	$	3,563	$	6,347
Income taxes		4,105		-

NOTE 6 - CONTINGENCIES

The Company has received correspondence from the legal counsel for the Public Building Commission of Chicago (PBC) in August 2012, alleging that the Company previously owned and operated a manufacturing facility in Chicago and that the Company is a liable party for environmental response costs incurred by the PBC in the amount of $822,642. It is the opinion of management, after reviewing the letter with counsel, that further information is required to determine the validity of the claim, the likelihood of an unfavorable outcome to the Company, and an amount of potential loss to the Company, if any at all. Management believes significant questions need to be resolved and answered before completing its assessment of the validity of the claim. In the event that a loss were to be incurred by the Company in connection with this claim, the loss would be material.

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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.

The Company’s business, like that of many other confectionary product manufacturers, is seasonal. Historically, the Company has realized more of its revenue and earnings in the fiscal second quarter, which includes the majority of the holiday shopping season, than in any other fiscal quarter.

RESULTS OF OPERATIONS - Three Months Ended March 31, 2014 Compared to Three Months Ended March 31, 2013, and Nine Months Ended March 31, 2014 Compared to Nine Months Ended March 31, 2013

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						Nine Months Ended
	March 31						March 31
	2014			2013			2014			2013
Net sales		100	%		100	%		100	%		100	%
Cost of sales		81			78			71			71
Gross profit on sales		19			22			29			29
Operating expenses		39			41			24			23
Income (loss) from operations		(20	)		(19	)		5			6
Other income (expense), net		-			-			-			-
Income (loss) before income taxes		(20	)		(19	)		5			6
Provision (benefit) for income taxes		(7	)		(7	)		2			2
Net income (loss)		(13	) %		(12	) %		3	%		4	%

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CHASE GENERAL CORPORATION AND SUBSIDIARY

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)

NET SALES

Net sales increased $9,895 or 2% for the three months ended March 31, 2014 to $462,112 compared to $452,217 for the three months ended March 31, 2013. Gross sales for Chase Candy increased $29,268 to $460,349 for the three months ended March 31, 2014, compared to $431,081 for 2013. Gross sales for Seasonal Candy decreased $24,193 to $18,076 for the three months ended March 31, 2014, compared to $42,269 for 2013.

The 7% increase in gross sales of Chase Candy of $29,268 for the three months ended March 31, 2014 over the same period ended March 31, 2013, is primarily due to the net effect of the following: 1) increased sales of the L278/L212 Mini Mash division by approximately $17,000 versus the third quarter a year ago due to three customers increasing orders; 2) increased sales of the Cherry Mash Merchandiser division by approximately $12,000 versus the third quarter a year ago primarily due to four customers increasing orders; 3) increased sales of the L279/L299 Bulk Mini Mash division by approximately $1,000 versus the third quarter a year ago; and offset by 4) decreased sales of the L260 Changemaker Jar division by approximately $1,000 versus the third quarter a year ago primarily due to one customer decreasing orders.

The 57% decrease in gross sales of Seasonal Candy of $24,193 for the three months ended March 31, 2014 over the same period ended March 31, 2013, is primarily due to the net effect of the following: 1) decreased sales in the clamshell seasonal division totaling approximately $25,000 versus third quarter a year ago primarily due to decreased orders from one customer and a sales price decrease of approximately 5%; 2) decreased sales in the generic seasonal division by approximately $1,000 versus the third quarter a year ago primarily due to decreased sales to one customer; offset by 3) increased sales in the bulk seasonal division by approximately $1,000 versus the third quarter a year ago primarily due to increased orders from one customer; 4) various other fluctuations netting an increase of approximately $1,000.

Net sales increased $50,905 or 2% for the nine months ended March 31, 2014 to $2,775,917 compared to $2,725,012 for the nine months ended March 31, 2013. Gross sales for Chase Candy increased $126,144 to $1,525,743 for the nine months ended March 31, 2014, compared to $1,399,599 for 2013. Gross sales for Seasonal Candy decreased $87,953 to $1,281,283 for the nine months ended March 31, 2014, compared to $1,369,236 for 2013.

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CHASE GENERAL CORPORATION AND SUBSIDIARY

ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)

NET SALES (CONTINUED)

The 9% increase in gross sales of Chase Candy of $126,144 for the nine months ended March 31, 2014 over the same period ended March 31, 2013, is primarily due to the net effect of the following: 1) increased sales of the L276 Cherry Mash Distributor Pack division by approximately $71,000 versus the same period a year ago primarily due to two customers increasing orders; 2) increased sales of the L278 Mini Mash division by approximately $2,000 versus the same period a year ago primarily due to one customer increasing orders 3) increased sales of the L212 Mini Mash division by approximately $20,000 versus the same period a year ago due to one customer increasing orders; 4) increased sales of the Cherry Mash Merchandisers division by approximately $19,000 versus the same period a year ago primarily due to four customers increasing orders; 5) increased sales of the L279/L299 Bulk Mini Mash division by approximately $19,000 versus the same period a year ago primarily due to one customer increasing orders; 6) various other fluctuations netting an increase of approximately $4,000; and offset by 7) decreased sales of the L260 Changemaker Jar division by approximately $9,000 versus the same period a year ago primarily due to two customers decreasing orders.

The 6% decrease in gross sales of Seasonal Candy of $87,953 for the nine months ended March 31, 2014 over the same period ended March 31, 2013, is primarily due to the net effect of the following: 1) decreased orders from various customers in the bulk seasonal division netting approximately $16,000 versus the same period a year ago primarily due a sales price decrease of approximately 5%; 2) decreased orders from various customers in the clamshell seasonal division totaling approximately $109,000 versus the same period a year ago due to decreased orders and a sales price decrease of approximately 5%; 3) various other fluctuations netting a decrease of approximately $3,000; and offset by 4) increased orders in the generic seasonal division by approximately $40,000 due to increased sales to one customer.

COST OF SALES

The cost of sales increased $20,113 to $372,767 or 81% of related revenues for the three months ended March 31, 2014, compared to $352,654 or 78% of related revenues for the three months ended March 31, 2013.

The 6% increase in cost of sales of $20,113 is primarily due to the 2% increase in net sales of $9,895 and a 12% increase in the raw material costs of peanuts compared to the same period ended March 31, 2013. Due to volatility in the regions where these raw materials are grown, management anticipates the prices of these raw materials to continue to fluctuate primarily based on supply and demand.

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CHASE GENERAL CORPORATION AND SUBSIDIARY

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)

COST OF SALES (CONTINUED)

The cost of sales increased $46,587 to $1,969,368 or 71% of related revenues for the nine months ended March 31, 2014, compared to $1,922,781 or 71% of related revenues for the nine months ended March 31, 2013.

The 2% increase in cost of sales of $46,587 is primarily due to the 2% increase in net sales of $50,905.

The Company decreased total inventory $217,057 or 43% to $292,075 at March 31, 2014 from $509,132 held in inventory at June 30, 2013 due to the Company’s busy season coming to an end. The Company decreased finished goods inventory 74% during the nine months ended March 31, 2014 to $67,514 from the June 30, 2013 finished goods inventory levels of $258,392. The Company decreased goods in process inventory 39% during the nine months ended March 31, 2014 to $6,650 from the June 30, 2013 goods in process inventory levels of $10,942. The Company increased raw materials inventory 20% during the nine months ended March 31, 2014 to $97,588 from the June 30, 2013 raw materials inventory levels of $81,515. The Company decreased packaging materials inventory 24% during the nine months ended March 31, 2014 to $120,323 from the June 30, 2013 packaging materials inventory levels of $158,283.

SELLING EXPENSES

Selling expenses for the three months ended March 31, 2014 decreased $4,811 to $70,054, which is 15% of sales, compared to $74,865 or 17% of sales for the three months ended March 31, 2013.

The decrease of $4,811 in selling expenses for the three months ended March 31, 2014 is primarily due to lower commissions, lower premium promotions being paid, lower sample costs, and decreased advertising expense for the period. Commissions, promotions, sample costs, and advertising decreased $4,612 to $23,525 for this period from $28,137 for the three months ended March 31, 2013.

Selling expenses for the nine months ended March 31, 2014 decreased $3,890 to $328,091, which is 12% of sales, compared to $331,981 or 12% of sales for the nine months ended March 31, 2013.

The decrease of $3,890 in selling expenses for the nine months ended March 31, 2014 is primarily due to the net effect of the following: 1) lower depreciation expense of $4,000, 2) lower advertising costs of $3,000, 3) lower commissions of $2,000, 4) lower truck expense of $1,000 offset by 5) increased promotions of $2,000, 6) increased sales salaries of $2,000, 7) increased customer shows of $1,000 and 8) various other fluctuations netting an increase of approximately $1,000.

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CHASE GENERAL CORPORATION AND SUBSIDIARY

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)

GENERAL AND ADMINISTRATIVE EXPENSES

General and administrative expenses for the three months ended March 31, 2014 decreased $2,099 to $108,816 and decreased to 24% of sales, compared to $110,915 or 25% of sales for the three months ended March 31, 2013. The decreased costs are primarily because of a $10,322 decrease in professional fees offset by a $5,541 increase in insurance expense and a $1,670 increase in office salaries.

General and administrative expenses for the nine months ended March 31, 2014 increased $14,297 to $342,317 or 12% of sales, compared to $328,020 or 12% of sales for the nine months ended March 31, 2013. The increased costs are primarily because of a $13,913 increase in professional fees, a $2,577 increase in office salaries offset by a $4,829 decrease in insurance expense.

OTHER INCOME (EXPENSE)

Other income and (expense) increased by $839 for the three months ended March 31, 2014 to $162, compared to $(677) for the three months ended March 31, 2013 primarily due to a decrease of $895 in interest expense and a decrease of $38 in miscellaneous income.

Other income and (expense) increased by $4,302 for the nine months ended March 31, 2014 to $(643), compared to $(4,945) for the nine months ended March 31, 2013 primarily due to a decrease of $3,141 in interest expense and an increase of $1,536 in miscellaneous income.

PROVISION (BENEFIT) FOR INCOME TAXES

The Company recorded an income tax benefit for the three months ended March 31, 2014 of $31,412 as compared to a tax benefit of $31,129 for the three months ended March 31, 2013. The Company recorded an income tax expense for the nine months ended March 31, 2014 of $46,387 as compared to an income tax expense of $64,176 for the nine months ended March 31, 2013. The net income tax expense recorded for the nine months ended March 31, 2014 is primarily due to recognizing income taxes related to current profitable operations.

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CHASE GENERAL CORPORATION AND SUBSIDIARY

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)

NET INCOME (LOSS)

The Company reported a net loss for the three months ended March 31, 2014 of $57,951, compared to a net loss of $55,765 for the three months ended March 31, 2013. This decrease in earnings of $2,186 is explained previously in this filing. The Company reported net income for the nine months ended March 31, 2014 of $89,018, compared to net income of $95,363 for the nine months ended March 31, 2013. This decrease in earnings of $6,345 is explained previously in this filing.

PREFERRED DIVIDENDS

Preferred dividends were $32,018 for the three months ended March 31, 2014 and 2013, which reflects additional preferred stock dividends in arrears on the Company’s Series A and Series B $5 par value preferred stock and its Series A and Series B $20 par value preferred stock.

Preferred dividends were $96,054 for the nine months ended March 31, 2014 and 2013, which reflects additional preferred stock dividends in arrears on the Company’s Series A and Series B $5 par value preferred stock and its Series A and Series B $20 par value preferred stock.

NET INCOME (LOSS) APPLICABLE TO COMMON STOCKHOLDERS

Net loss applicable to common stockholders for the three months ended March 31, 2014 was $89,969 which is a increase of $2,186 as compared to the net loss for the three months ended March 31, 2013 of $87,783.

Net loss applicable to common stockholders for the nine months ended March 31, 2014 was $7,036 which is a increase of $6,345 as compared to the net loss for the nine months ended March 31, 2013 of $691.

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CHASE GENERAL CORPORATION AND SUBSIDIARY

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)

LIQUIDITY AND CAPITAL RESOURCES

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

	Nine Months Ended
	March 31
	2014			2013
Net cash provided by operating activities	$	391,421		$	339,813
Net cash (used in) provided by investing activities	$	(27,439	)	$	20,275
Net cash used in financing activities	$	(56,191	)	$	(94,284	)

Management has no material commitments for capital expenditures during the next 12 months. The $56,191 of cash used in financing activities is due to principal payments on equipment and vehicle loans. At March 31, 2014, the Company had $350,000 available on the line-of-credit, which could be utilized to help fund any working capital requirements.

Management believes that the projected cash flow from operations, combined with its existing cash balances, will be sufficient to meet its funding requirements in the foreseeable future.

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 OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)

CRITICAL ACCOUNTING POLICIES

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 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable to a smaller reporting company.

ITEM 4. CONTROLS AND PROCEDURES

(a)	Evaluation of Disclosure Controls and Procedures
	Chase’s Management, with the participation of the Chief Executive Officer, has evaluated the effectiveness of Chase’s disclosure controls and procedures, as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as of the end of the period covered by this report. Based on such evaluation, the Chief Executive Officer and Management 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
	The Company has received correspondence from the legal counsel for the Public Building Commission of Chicago (PBC) in August 2012, alleging that the Company previously owned and operated a manufacturing facility in Chicago and that the Company is a liable party for environmental response costs incurred by the PBC in the amount of $822,642. It is the opinion of management, after reviewing the letter with counsel, that further information is required to determine the validity of the claim, the likelihood of an unfavorable outcome to the Company, and an amount of potential loss to the Company, if any at all. Management believes significant questions need to be resolved and answered before completing its assessment of the validity of the claim. In the event that a loss were to be incurred by the Company in connection with this claim, the loss would be material.
ITEM 1A.	RISK FACTORS
	Not applicable to a smaller reporting company.
ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
		None
ITEM 3.	DEFAULTS UPON SENIOR SECURITIES
	a.	None
	b.	The total cumulative preferred stock dividends contingency at March 31, 2014 is $7,660,644.
ITEM 4.	MINE SAFETY DISCLOSURES
	Not applicable.
ITEM 5.	OTHER INFORMATION
	a.	None

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PART II. OTHER INFORMATION (CONTINUED)

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.
		Exhibit 101	The following financial statements for the quarter ended March 31, 2014, formatted in XBRL: (i) Condensed Consolidated Balance Sheets as of March 31, 2014 and June 30, 2013, (ii) Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2014 and 2013, (iii) Condensed Consolidated Statements of Operations for the Nine Months Ended March 31, 2014 and 2013, (iv) Condensed Consolidated Statements of Cash Flows for the Nine Months Ended March 31, 2014 and 2013, and (v) the Notes to Condensed Consolidated Financial Statements, tagged as blocks of text.

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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)
May 9, 2014	/s/ Barry M. Yantis
Date	Barry M. Yantis
	Chairman of the Board, Chief Executive Officer and
	Chief Financial Officer, President and Treasurer

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