Table ofContents

 

 

 

**UNITED STATES**

**SECURITIES AND EXCHANGECOMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-Q**

 

**QUARTERLY REPORT PURSUANT TO SECTION 13 OR15(d)**

**OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**For the Quarterly Period Ended February 28,2010**

**Commission File Number: 1-9852**

 

**CHASE CORPORATION**

(Exact name of registrant as specified in its charter)

 

| **Massachusetts**                                                | ** ** | **11-1797126**                        |
|------------------------------------------------------------------|------------|---------------------------------------|
| (State or other  jurisdiction of incorporation  of organization) |       | (I.R.S. Employer  Identification No.) |

 

**26 Summer Street, Bridgewater,Massachusetts 02324**

(Address of Principal Executive Offices, Including Zip Code)

 

**(508) 279-1789**

(Registrant’s Telephone Number, Including Area Code)

 

Indicate by check mark whether the registrant (1) hasfiled all reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934 during the preceding 12 months, and (2) hasbeen subject to such filing requirements for the past 90 days. YES x NO o

 

Indicateby check mark whether the registrant has submitted electronically and posted onits corporate Web site, if any, every Interactive Data File required to besubmitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 ofthis chapter) during the preceding 12 months (or for such shorter period thatthe registrant was required to submit and post such files).  YES o  NO o

 

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, a non-accelerated filer, or a smaller reportingcompany.  See the definitions of “largeaccelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2of the Exchange Act.

 

| Large accelerated filer o                      |   | Accelerated filer x         |
|------------------------------------------------|--------|-----------------------------|
|                                           |   |                        |
| Non-accelerated filer o                        |   | Smaller reporting company o |
| (Do not check if a smaller  reporting company) |   |                        |

 

Indicate by checkmark whether the registrant is ashell company (as defined in Rule 12b-2 of the Exchange Act).  YES o  NO x

 

The number of shares of Common Stock outstanding asof March 31, 2010 was 8,814,355.

 

 

 

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**CHASECORPORATION**

**INDEX TO FORM 10-Q**

 

**For theQuarter Ended February 28, 2010**

** **
| **Part I - FINANCIAL INFORMATION**                                                                   | ** **                                                                                                |
|-----------------------------------------------------------------------------------------------------------|-----------------------------------------------------------------------------------------------------------|
| ** **                                                                                                | ** **                                                                                                | ** ** |
| Item 1 – Unaudited Financial Statements                                                              | ** **                                                                                                |
| ** **                                                                                                | ** **                                                                                                | ** ** |
|                                                                                                      | Consolidated Balance Sheets as of February 28,  2010 and August 31, 2009                        | 3 |
|                                                                                                      |                                                                                                      |   |
|                                                                                                      | Consolidated Statements of Operations for the three  and six months ended February 28, 2010 and 2009 | 4 |
|                                                                                                      |                                                                                                      |   |
|                                                                                                      | Consolidated Statement of Stockholders’ Equity for the  six months ended February 28, 2010      | 5 |
|                                                                                                      |                                                                                                      |   |
|                                                                                                      | Consolidated Statements of Cash Flows for the six  months ended February 28, 2010 and 2009           | 6 |
|                                                                                                      |                                                                                                      |   |
|                                                                                                      | Notes to Consolidated Financial Statements                                                                | 7 |
|                                                                                                      |                                                                                                      |   |
| Item 2 – Management’s Discussion and Analysis of  Financial Condition and Results of Operations | 18                                                                                                        |
|                                                                                                      |                                                                                                      |   |
| Item 3 – Quantitative and Qualitative Disclosures  About Market Risk                                 | 25                                                                                                        |
|                                                                                                      |                                                                                                      |   |
| Item 4 – Controls and Procedures                                                                     | 25                                                                                                        |
|                                                                                                      |                                                                                                      |   |
| **Part II – OTHER INFORMATION**                                                                 |                                                                                                      |
|                                                                                                      |                                                                                                      |   |
| Item  1 – Legal Proceedings                                                                          | 26                                                                                                        |
|                                                                                                      |                                                                                                      |   |
| Item 1A – Risk Factors                                                                               | 26                                                                                                        |
|                                                                                                      |                                                                                                      |   |
| Item 4 – Submission of Matters to a Vote of Security  Holders                                        | 27                                                                                                        |
|                                                                                                      |                                                                                                      |   |
| Item 6 – Exhibits                                                                                    | 27                                                                                                        |
|                                                                                                      |                                                                                                      |   |
| **SIGNATURES**                                                                                            | 28                                                                                                        |

 

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** **

**Part I**–**FINANCIAL INFORMATION**

 

**Item 1**–**Unaudited Financial Statements**

 

**CHASECORPORATIONCONSOLIDATED BALANCE SHEETS**

(UNAUDITED)

 

*In thousands, except share andper share amounts*

 
| ** **                                                                                                                                                                                                                                                          | ** ** | **February 28,** | ** ** | **August 31,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|---------------------|------------|
| ** **                                                                                                                                                                                                                                                          | ** ** | **2010**              | ** ** | **2009**            | ** ** |
| **ASSETS**                                                                                                                                                                                                                                                          |       |                  |       |                |       |
| Current Assets:                                                                                                                                                                                                                                                     |       |                  |       |                |       |
| Cash                                                                                                                                                                                                                                                                |       | $                     | 3,333      |                | $          | 11,643 |   |
| Accounts receivable, less allowance for doubtful  accounts of $411 and $350                                                                                                                                                                                         |       | 19,268                |       | 14,536              |       |
| Inventories                                                                                                                                                                                                                                                         |       | 16,313                |       | 13,941              |       |
| Prepaid expenses and other current assets                                                                                                                                                                                                                           |       | 2,440                 |       | 607                 |       |
| Deferred income taxes                                                                                                                                                                                                                                               |       | 368                   |       | 471                 |       |
| Total current assets                                                                                                                                                                                                                                                |       | 41,722                |       | 41,198              |       |
|                                                                                                                                                                                                                                                                |       |                  |       |                |       |
| Property, plant and equipment, net                                                                                                                                                                                                                                  |       | 28,349                |       | 23,219              |       |
|                                                                                                                                                                                                                                                                |       |                  |       |                |       |
| Other Assets:                                                                                                                                                                                                                                                       |       |                  |       |                |       |
| Goodwill                                                                                                                                                                                                                                                            |       | 23,109                |       | 14,606              |       |
| Intangible assets, less accumulated amortization of  $5,922 and $4,869                                                                                                                                                                                              |       | 19,630                |       | 4,497               |       |
| Cash surrender value of life insurance                                                                                                                                                                                                                              |       | 5,770                 |       | 5,684               |       |
| Restricted investments                                                                                                                                                                                                                                              |       | 627                   |       | 573                 |       |
| Deferred income taxes                                                                                                                                                                                                                                               |       | —                |       | 1,264               |       |
| Other assets                                                                                                                                                                                                                                                        |       | 91                    |       | 25                  |       |
|                                                                                                                                                                                                                                                                |       | $                     | 119,298    |                | $          | 91,066 |   |
| **LIABILITIES AND STOCKHOLDERS’  EQUITY**                                                                                                                                                                                                                      |       |                  |       |                |       |
| Current Liabilities:                                                                                                                                                                                                                                                |       |                  |       |                |       |
| Accounts payable                                                                                                                                                                                                                                                    |       | $                     | 8,065      |                | $          | 6,319 |   |
| Accrued payroll and other compensation                                                                                                                                                                                                                              |       | 1,103                 |       | 2,561               |       |
| Accrued stock based compensation                                                                                                                                                                                                                                    |       | 335                   |       | 302                 |       |
| Accrued expenses                                                                                                                                                                                                                                                    |       | 2,874                 |       | 2,555               |       |
| Accrued income taxes                                                                                                                                                                                                                                                |       | 1,050                 |       | 1,346               |       |
| Current portion of long-term debt                                                                                                                                                                                                                                   |       | 4,400                 |       | —              |       |
| Total current liabilities                                                                                                                                                                                                                                           |       | 17,827                |       | 13,083              |       |
|                                                                                                                                                                                                                                                                |       |                  |       |                |       |
| Long-term debt, less current portion                                                                                                                                                                                                                                |       | 18,708                |       | —              |       |
| Deferred compensation                                                                                                                                                                                                                                               |       | 1,554                 |       | 1,525               |       |
| Accumulated pension obligation                                                                                                                                                                                                                                      |       | 6,036                 |       | 5,690               |       |
| Other liabilities                                                                                                                                                                                                                                                   |       | 580                   |       | 555                 |       |
| Deferred income taxes                                                                                                                                                                                                                                               |       | 2,197                 |       | —              |       |
|                                                                                                                                                                                                                                                                |       |                  |       |                |       |
| Commitments and Contingencies (Note 9)                                                                                                                                                                                                                              |       |                  |       |                |       |
|                                                                                                                                                                                                                                                                |       |                  |       |                |       |
| Stockholders’ Equity:                                                                                                                                                                                                                                          |       |                  |       |                |       |
| First Serial Preferred Stock, $1.00 par value:  Authorized 100,000 shares; none issued Common stock, $.10 par value:  Authorized 20,000,000 shares; 8,797,215 shares at February 28, 2010 and  8,714,431 shares at August 31, 2009 issued and outstanding |       | 880                   |       | 871                 |       |
| Additional paid-in capital                                                                                                                                                                                                                                          |       | 8,515                 |       | 7,489               |       |
| Accumulated other comprehensive loss                                                                                                                                                                                                                                |       | (4,405                | )          | (3,563              | )          |
| Retained earnings                                                                                                                                                                                                                                                   |       | 67,406                |       | 65,416              |       |
| Total stockholders’ equity                                                                                                                                                                                                                                     |       | 72,396                |       | 70,213              |       |
| Total liabilities and stockholders’ equity                                                                                                                                                                                                                     |       | $                     | 119,298    |                | $          | 91,066 |   |

 

See accompanyingnotes to the consolidated financial statements

 

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**CHASE CORPORATIONCONSOLIDATED STATEMENTS OF OPERATIONS**

(UNAUDITED)

 

*In thousands, except share andper share amounts*

 
| ** **                                                                           | ** ** | **Three  Months Ended February 28,** | ** ** | **Six  Months Ended February 28,** | ** ** |
|--------------------------------------------------------------------------------------|------------|-------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                                                           | ** ** | **2010**                                  | ** ** | **2009**                                | ** ** | **2010** | ** ** | **2009** | ** ** |
| ** **                                                                           | ** ** | ** **                                | ** ** | ** **                              | ** ** | ** ** | ** ** | ** ** | ** ** |
| Revenues                                                                             |       |                                      |       |                                    |       |   |   |   |   |
| Sales                                                                                |       | $                                         | 31,043     |                                    | $          | 22,751 |   | $ | 59,371 |   | $ | 53,358 |   |
| Royalties and commissions                                                            |       | 346                                       |       | 253                                     |       | 749 |   | 715 |   |
|                                                                                 |       | 31,389                                    |       | 23,004                                  |       | 60,120 |   | 54,073 |   |
| Costs and Expenses                                                                   |       |                                      |       |                                    |       |   |   |   |   |
| Cost of products and services sold                                                   |       | 21,650                                    |       | 17,640                                  |       | 40,404 |   | 39,199 |   |
| Selling, general and administrative expenses                                         |       | 6,924                                     |       | 4,847                                   |       | 13,581 |   | 10,881 |   |
|                                                                                 |       |                                      |       |                                    |       |   |   |   |   |
| Operating income                                                                     |       | 2,815                                     |       | 517                                     |       | 6,135 |   | 3,993 |   |
|                                                                                 |       |                                      |       |                                    |       |   |   |   |   |
| Interest expense                                                                     |       | (100                                      | )          | (5                                      | )          | (159 | ) | (10 | ) |
| Other income (expense)                                                               |       | (134                                      | )          | 209                                     |       | (25 | ) | 326 |   |
|                                                                                 |       |                                      |       |                                    |       |   |   |   |   |
| Income before income taxes                                                           |       | 2,581                                     |       | 721                                     |       | 5,951 |   | 4,309 |   |
|                                                                                 |       |                                      |       |                                    |       |   |   |   |   |
| Income taxes                                                                         |       | 955                                       |       | 267                                     |       | 2,202 |   | 1,595 |   |
|                                                                                 |       |                                      |       |                                    |       |   |   |   |   |
| Net income                                                                           |       | $                                         | 1,626      |                                    | $          | 454 |   | $ | 3,749 |   | $ | 2,714 |   |
|                                                                                 |       |                                      |       |                                    |       |   |   |   |   |
| Net income available to common shareholders, per common  and common equivalent share |       |                                      |       |                                    |       |   |   |   |   |
| Basic                                                                                |       | $                                         | 0.18       |                                    | $          | 0.05 |   | $ | 0.42 |   | $ | 0.32 |   |
| Diluted                                                                              |       | $                                         | 0.18       |                                    | $          | 0.05 |   | $ | 0.42 |   | $ | 0.31 |   |
|                                                                                 |       |                                      |       |                                    |       |   |   |   |   |
| Weighted average shares outstanding                                                  |       |                                      |       |                                    |       |   |   |   |   |
| Basic                                                                                |       | 8,705,638                                 |       | 8,402,995                               |       | 8,703,880 |   | 8,401,041 |   |
| Diluted                                                                              |       | 8,778,028                                 |       | 8,677,912                               |       | 8,779,386 |   | 8,668,867 |   |

 

See accompanyingnotes to the consolidated financial statements

 

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**CHASE CORPORATIONCONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY**

**SIX MONTHS ENDED FEBRUARY 28,2010**

(UNAUDITED)

 

*In thousands, except share and per share amounts*

 
| ** **                                                                        | ** ** | ** **        | ** ** | ** **  | ** ** | ** **        | ** ** | **Accumulated**    | ** ** | ** **             | ** ** | ** **        | ** ** | ** ** | ** ** |
|-----------------------------------------------------------------------------------|------------|-------------------|------------|-------------|------------|-------------------|------------|--------------------|------------|------------------------|------------|-------------------|------------|------------|------------|
| ** **                                                                        | ** ** | ** **        | ** ** | ** **  | ** ** | **Additional**    | ** ** | **Other**          | ** ** | ** **             | ** ** | **Total**         | ** ** | ** ** | ** ** |
| ** **                                                                        | ** ** | **Common  Stock** | ** ** | **Paid-In** | ** ** | **Comprehensive** | ** ** | **Retained**       | ** ** | **Stockholders’** | ** ** | **Comprehensive** | ** ** |
| ** **                                                                        | ** ** | **Shares**        | ** ** | **Amount**  | ** ** | **Capital**       | ** ** | **Income  (Loss)** | ** ** | **Earnings**           | ** ** | **Equity**        | ** ** | **Income** | ** ** |
| Balance  at August 31, 2009                                                  |       | 8,714,431         |       | $           | 871        |              | $          | 7,489              |       | $                      | (3,563     | )                 | $          | 65,416     |       | $ | 70,213 |   |   |   |
| Restricted  stock grants                                                          |       | 69,645            |       | 7           |       | (7                | )          | —             |       | —                 |       | —            |       |       |       |
| Amortization  of restricted stock grants                                          |       | —            |       | —      |       | 694               |       | —             |       | —                 |       | 694               |       |       |       |
| Amortization  of stock option grants                                              |       | —            |       | —      |       | 264               |       | —             |       | —                 |       | 264               |       |       |       |
| Exercise  of stock options                                                        |       | 13,700            |       | 2           |       | 71                |       | —             |       | —                 |       | 73                |       |       |       |
| Common  stock retained to pay statutory minimum withholding taxes on common stock |       | (561              | )          | —      |       | (7                | )          | —             |       | —                 |       | (7                | )          |       |       |
| Tax  benefit from exercise of stock options                                       |       | —            |       | —      |       | 11                |       | —             |       | —                 |       | 11                |       |       |       |
| Cash  dividend paid, $0.20 per share                                              |       | —            |       | —      |       | —            |       | —             |       | (1,759                 | )          | (1,759            | )          |       |       |
| Pension  amortization, net of tax of $60                                          |       | —            |       | —      |       | —            |       | 90                 |       | —                 |       | 90                |       | 90         |       |
| Foreign  currency translation adjustment, net of tax of $509                      |       | —            |       | —      |       | —            |       | (944               | )          | —                 |       | (944              | )          | $          | (944       | ) |
| Net  unrealized gain on restricted investments, net of tax of $8                  |       | —            |       | —      |       | —            |       | 12                 |       | —                 |       | 12                |       | 12         |       |
| Net  income                                                                       |       | —            |       | —      |       | —            |       | —             |       | 3,749                  |       | 3,749             |       | 3,749      |       |
| Comprehensive  income                                                             |       |              |       |        |       |              |       |               |       |                   |       |              |       | $          | 2,907      |   |
| Balance  at February 28, 2010                                                |       | 8,797,215         |       | $           | 880        |              | $          | 8,515              |       | $                      | (4,405     | )                 | $          | 67,406     |       | $ | 72,396 |   |   |   |
|                                                                                   |            |                   |            |             |            |                   |            |                    |            |                        |            |                   |            |            |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

See accompanyingnotes to the consolidated financial statements

 

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**CHASE CORPORATION**

**CONSOLIDATED STATEMENT OF CASHFLOWS**

(UNAUDITED)

 

*In thousands, except share and per share amounts*

 
| ** **                                                                                  | ** ** | **Six  Months Ended February 28,** | ** ** |
|---------------------------------------------------------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                                                                  | ** ** | **2010**                                | ** ** | **2009** | ** ** |
| CASH FLOWS FROM OPERATING ACTIVITIES                                                        |       |                                    |       |   |   |
| Net income                                                                                  |       | $                                       | 3,749      |   | $ | 2,714 |   |
| Adjustments to reconcile net income to net cash  provided by operating activities           |       |                                    |       |   |   |
| Depreciation                                                                                |       | 1,533                                   |       | 1,416 |   |
| Amortization                                                                                |       | 1,241                                   |       | 469 |   |
| Provision for losses on trade receivables                                                   |       | 100                                     |       | (77 | ) |
| Stock based compensation                                                                    |       | 991                                     |       | 1,121 |   |
| Realized loss (gain) on restricted investments                                              |       | (5                                      | )          | 190 |   |
| Excess tax benefit from stock based compensation                                            |       | (11                                     | )          | (6 | ) |
| Increase (decrease) from changes in assets and  liabilities (net of effect of acquisitions) |       |                                    |       |   |   |
| Accounts receivable                                                                         |       | (4,344                                  | )          | 5,949 |   |
| Inventories                                                                                 |       | (1,344                                  | )          | 255 |   |
| Prepaid expenses & other assets                                                    |       | (1,797                                  | )          | (407 | ) |
| Accounts payable                                                                            |       | 1,605                                   |       | (3,125 | ) |
| Accrued expenses                                                                            |       | (953                                    | )          | (3,458 | ) |
| Accrued income taxes                                                                        |       | 268                                     |       | 1,415 |   |
| Deferred compensation                                                                       |       | 29                                      |       | (717 | ) |
| Net cash provided by operating activities                                                   |       | 1,062                                   |       | 5,739 |   |
|                                                                                        |       |                                    |       |   |   |
| CASH FLOWS FROM INVESTING ACTIVITIES                                                        |       |                                    |       |   |   |
| Purchases of property, plant and equipment                                                  |       | (1,860                                  | )          | (3,607 | ) |
| Payments for acquisitions, net of cash acquired                                             |       | (25,593                                 | )          | (335 | ) |
| Withdrawals from restricted investments, net of  contributions                              |       | (28                                     | )          | 61 |   |
| Distributions from cost based investment                                                    |       | —                                  |       | 1 |   |
| Payments for cash surrender value life insurance,  including valuation (increase)/decrease  |       | (86                                     | )          | (79 | ) |
| Net cash used in investing activities                                                       |       | (27,567                                 | )          | (3,959 | ) |
|                                                                                        |       |                                    |       |   |   |
| CASH FLOWS FROM FINANCING ACTIVITIES                                                        |       |                                    |       |   |   |
| Borrowings on long-term debt                                                                |       | 27,112                                  |       | 12,290 |   |
| Payments of principal on debt                                                               |       | (7,005                                  | )          | (11,635 | ) |
| Dividend paid                                                                               |       | (1,759                                  | )          | (2,986 | ) |
| Proceeds from exercise of common stock options                                              |       | 73                                      |       | 16 |   |
| Payments of statutory minimum taxes on stock  options and restricted stock                  |       | (7                                      | )          | — |   |
| Excess tax benefit from stock based compensation                                            |       | 11                                      |       | 6 |   |
| Net cash provided by (used in) financing activities                                         |       | 18,425                                  |       | (2,309 | ) |
|                                                                                        |       |                                    |       |   |   |
| INCREASE (DECREASE) IN CASH                                                                 |       | (8,080                                  | )          | (529 | ) |
| Effect of foreign exchange rates on cash                                                    |       | (230                                    | )          | (816 | ) |
| CASH, BEGINNING OF PERIOD                                                                   |       | 11,643                                  |       | 3,917 |   |
|                                                                                        |       |                                    |       |   |   |
| CASH, END OF PERIOD                                                                         |       | $                                       | 3,333      |   | $ | 2,572 |   |
|                                                                                        |       |                                    |       |   |   |
| **Non-cash Investing and Financing  Activities**                                            |       |                                    |       |   |   |
| Issuance of stock based compensation previously  accrued for                                |       | $                                       | 135        |   | $ | 105 |   |
| Acquisition holdback payments, previously accrued  for                                      |       | —                                  |       | $ | 303 |   |
| Property, plant & equipment additions  included in accounts payable                |       | $                                       | 228        |   | $ | 132 |   |
| Notes payable to C.I.M. shareholders related to  acquisition                                |       | $                                       | 3,000      |   | — |   |

 

See accompanyingnotes to the consolidated financial statements

 

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**CHASE CORPORATION**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

**(UNAUDITED)**

*Inthousands, except share and per share amounts*

 

**Note 1 - Basis of Presentation**

 

Theaccompanying unaudited consolidated financial statements have been prepared inaccordance with generally accepted accounting principles for interim financialreporting and instructions to Form 10-Q and Rule 10-01 of RegulationS-X. Therefore, they do not include all information and footnote disclosurenecessary for a complete presentation of Chase Corporation’s financialposition, results of operations and cash flows, in conformity with generallyaccepted accounting principles.  ChaseCorporation (the “Company,” “Chase,” “we,” or “us”) filed audited financialstatements which included all information and notes necessary for suchpresentation for the three years ended August 31, 2009 in conjunction withits 2009 Annual Report on Form 10-K.

 

Theaccompanying unaudited consolidated financial statements contain alladjustments (consisting of normal recurring items) which are, in the opinion ofmanagement, necessary for a fair presentation of the Company’s financialposition as of February 28, 2010, the results of operations and cash flowsfor the interim periods ended February 28, 2010 and 2009, and changes instockholders’ equity for the interim period ended February 28, 2010.

 

Thefinancial statements include the accounts of the Company and its wholly-ownedsubsidiaries.  All intercompany transactions and balances have beeneliminated in consolidation.  The Company uses the U.S. dollar as thereporting currency for financial reporting. The financial position and results of operations of the Company’sHumiSeal Europe Ltd and Chase Protective Coatings divisions are measured usingthe UK pound sterling as the functional currency and the financial position andresults of operations of the Company’s HumiSeal Europe SARL division in Franceare measured using euros as the functional currency.  Foreign currency translation gains and lossesare determined using current exchange rates for monetary items and historicalexchange rates for other balance sheet items and are recorded as a change inother comprehensive income.

 

TheCompany has evaluated events and transactions subsequent to the balance sheetdate.  Based on this evaluation, theCompany is not aware of any events or transactions that occurred subsequent tothe balance sheet date but prior to filing that would require recognition ordisclosure in its consolidated financial statements.

 

Theresults of operations for the interim period ended February 28, 2010 arenot necessarily indicative of the results to be expected for any future periodor the entire fiscal year.  These interimconsolidated financial statements should be read in conjunction with theaudited consolidated financial statements for the year ended August 31,2009, which are contained in the Company’s 2009 Annual Report on Form 10-K.

 

**Note 2 —Recent Accounting Policies**

 

*RecentlyAdopted Accounting Pronouncements*

 

InJune 2009, the Financial Accounting Standards Board’s (FASB) approved the “FASBAccounting Standards Codification” (“ASC” or the “Codification”) as the singlesource of authoritative nongovernmental U.S. GAAP.  The Codification does not change current U.S.GAAP, but is intended to simplify user access to all authoritative U.S. GAAP byproviding all the authoritative literature related to a particular topic in oneplace.  All existing accounting standarddocuments will be superseded and all

 

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**CHASE CORPORATION**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**(UNAUDITED)**

*Inthousands, except share and per share amounts*

 

otheraccounting literature not included in the Codification will be considerednonauthoritative.  The Codificationbecame effective for the Company in the quarter ending November 30, 2009and the adoption did not have any effect on the Company’s consolidatedfinancial position, results of operations or cash flows.

 

InDecember 2007, the FASB issued new guidance under ASC Topic 805, “Business Combinations” (“ASC 805”).  The new guidance under ASC 805 establishesprinciples and requirements for how an acquirer in a business combinationrecognizes and measures in its financial statements the identifiable assetsacquired, the liabilities assumed and any noncontrolling interest in theacquiree; recognizes and measures the goodwill acquired in the businesscombination or a gain from a bargain purchase; expenses acquisition relatedcosts as incurred; and determines what information to disclose to enable usersof the financial statements to evaluate the nature and financial effects of thebusiness combination.  The Companyadopted the new guidance under ASC 805 as of September 1, 2009, and itsrecent acquisitions of C.I.M. Industries, Inc. (“C.I.M.”) and theServiWrap® product lines (“ServiWrap”) were both accounted for under thisstandard.

 

InJune 2008, the FASB issued guidance within ASC Topic 260, Earnings PerShare (“ASC 260”), to clarify that unvested share-based payment awards with aright to receive nonforfeitable dividends are participating securities. Thestandard provides guidance on how to allocate earnings to participatingsecurities and compute earnings per share using the two-class method.  The Company adopted the provisions of thisstandard on September 1, 2009, and the presentation of earnings per sharefor previously reported periods has been adjusted to reflect the retrospectiveadoption of this standard.

 

*Recently Issued Accounting Pronouncement*

 

InDecember 2008, the FASB issued ASC Topic 715, “Compensation—Retirement Benefits” (“ASC 715”).  ASC 715 provides additional guidance on anemployer’s disclosures about plan assets of a defined benefit pension or otherpost-retirement plan enabling users of the financial statements to assess theinputs and valuation techniques used to develop fair value measurements of planassets at the annual reporting date.  The guidance requires more detaileddisclosures about the assets of a defined benefit pension or otherpost-retirement plan and is effective for fiscal years ending after December 15,2009.  Since the guidance only requiresenhanced disclosures,the Company does not expect the adoption of ASC 715 to have an impacton its consolidated financial position and results of operations.

 

**Note 3 —Inventories**

 

Inventoriesconsist of the following as of February 28, 2010 and August 31, 2009:

 
| ** **              | ** ** | **February 28,  2010** | ** ** | **August 31,  2009** | ** ** |
|-------------------------|------------|-----------------------------|------------|---------------------------|------------|
| Raw materials           |       | $                           | 9,123      |                      | $          | 7,973 |   |
| Finished and in process |       | 7,190                       |       | 5,968                     |       |
| Total Inventories       |       | $                           | 16,313     |                      | $          | 13,941 |   |

 

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**CHASE CORPORATION**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**(UNAUDITED)**

*In thousands, except share andper share amounts*

 

**Note 4 — Net Income Per Share**

 

Thecalculation of earnings per share under the recently issued guidance within ASC260 is as follows:

 
| ** **                                   | ** ** | **Three  Months Ended February 28,** | ** ** | **Six  Months Ended February 28,** | ** ** |
|----------------------------------------------|------------|-------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                   | ** ** | **2010**                                  | ** ** | **2009**                                | ** ** | **2010** | ** ** | **2009** | ** ** |
| **Basic Earnings per Share**                 | ** ** | ** **                                | ** ** | ** **                              | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net income                                   |       | $                                         | 1,626      |                                    | $          | 454 |   | $ | 3,749 |   | $ | 2,714 |   |
| Income allocated to participating securities |       | 46                                        |       | 10                                      |       | 109 |   | 60 |   |
| Net income available to common shareholders  |       | $                                         | 1,580      |                                    | $          | 444 |   | $ | 3,640 |   | $ | 2,654 |   |
|                                         |       |                                      |       |                                    |       |   |   |   |   |
| Basic weighted averages shares outstanding   |       | 8,705,638                                 |       | 8,402,995                               |       | 8,703,880 |   | 8,401,041 |   |
|                                         |       |                                      |       |                                    |       |   |   |   |   |
| Net income per share - Basic                 |       | $                                         | 0.18       |                                    | $          | 0.05 |   | $ | 0.42 |   | $ | 0.32 |   |
|                                         |       |                                      |       |                                    |       |   |   |   |   |
| **Diluted Earnings per Share**               |       |                                      |       |                                    |       |   |   |   |   |
| Net income                                   |       | $                                         | 1,626      |                                    | $          | 454 |   | $ | 3,749 |   | $ | 2,714 |   |
| Income allocated to participating securities |       | 46                                        |       | 9                                       |       | 108 |   | 58 |   |
| Net income available to common shareholders  |       | $                                         | 1,580      |                                    | $          | 445 |   | $ | 3,641 |   | $ | 2,656 |   |
|                                         |       |                                      |       |                                    |       |   |   |   |   |
| Basic weighted averages shares outstanding   |       | 8,705,638                                 |       | 8,402,995                               |       | 8,703,880 |   | 8,401,041 |   |
| Additional dilutive common stock equivalents |       | 72,390                                    |       | 274,917                                 |       | 75,506 |   | 267,826 |   |
| Diluted weighted averages shares outstanding |       | 8,778,028                                 |       | 8,677,912                               |       | 8,779,386 |   | 8,668,867 |   |
|                                         |       |                                      |       |                                    |       |   |   |   |   |
| Net income per share - Diluted               |       | $                                         | 0.18       |                                    | $          | 0.05 |   | $ | 0.42 |   | $ | 0.31 |   |

 

Forthe three and six months ended February 28, 2010 and 2009, stock optionsto purchase 250,000 shares of common stock were outstanding, but were notincluded in the calculation of diluted income per share in either periodbecause the options’ exercise prices were greater than the average market priceof the common stock and thus their inclusion would be anti-dilutive.

 

**Note 5 —Stock Based Compensation**

 

InAugust 2008, the Board of Directors of Chase Corporation approved a planfor issuing a performance and service based restricted stock grant of 50,657shares in the aggregate, subject to adjustment, to key members of managementwith an issue date of September 1, 2008 and a vesting date of August 31,2011.  Based on the fiscal year 2009financial results coming in below the target, the aggregate size of the grantwas reduced by 15,944 shares of restricted stock subsequent to the end offiscal year 2009 in accordance with the performance measurement criteria.   The adjusted restricted stock award of34,713 shares was finalized in the quarter ended November 30, 2009 and nofurther performance-based measurements apply to this award.  Compensation expense is being recognized on aratable basis over the vesting period.

 

InAugust 2009, the Board of Directors of Chase Corporation approved a planfor issuing a performance and service based restricted stock grant of 76,874shares in the aggregate, subject to adjustment, to key members of managementwith an issue date of September 1, 2009 and a vesting date of August 31,2012.  These shares are subject to aperformance measurement based upon the results of fiscal year 2010 which willdetermine the final calculation of the number of shares that will be issued(which may be greater than or less than 76,874 shares).  Compensation expense is being recognized on aratable basis over the vesting period based on quarterly probability assessments.

 

InDecember 2009, restricted stock in amounts of 2,377 shares and 8,421shares related to the September 2008 and 2009 grants, respectively, wereforfeited in conjunction with the retirement of an executive officer of theCompany.

 

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**CHASE CORPORATION**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**(UNAUDITED)**

*In thousands, except share andper share amounts*

 

Aspart of their annual retainer, non-employee members of the Board of Directorsreceive a combined total of $135,000 of Chase Corporation common stock, in theform of restricted stock valued at the closing price of the day preceding thefirst day of the new year of Board service which generally coincides with theCompany’s annual shareholder meeting. The stock award vests one year from the date of grant.  In January 2010, non-employee members ofthe Board received a total grant of 11,092 shares of restricted stock forservice for the period from January 30, 2010 through January 30,2011.  The shares of restricted stockwill vest at the conclusion of this service period.  Compensation is being recognized on a ratablebasis over the twelve month vesting period.

 

**Note 6 — Segment Information**

 

TheCompany operates in two business segments, a Specialized Manufacturing segmentand an Electronic Manufacturing Services segment.  Specialized Manufacturing products includeinsulating and conducting materials for wire and cable manufacturers, coatingand lining systems for use in liquid storage and containment applications,protective coatings for pipeline applications, and moisture protective coatingsfor electronics and printing services. Electronic Manufacturing Services include printed circuit board andelectro-mechanical assembly services for the electronics industry.  The Company evaluates segment performancebased upon income before income taxes.

 

Thefollowing table summarizes information about the Company’s reportable segments:

 
| ** **                           | ** ** | **Three  Months Ended February 28,** | ** ** | **Six  Months Ended February 28,** | ** ** |
|--------------------------------------|------------|-------------------------------------------|------------|-----------------------------------------|------------|
| ** **                           | ** ** | **2010**                                  | ** ** | **2009**                                | ** ** | **2010** | ** ** | **2009** | ** ** |
| **Revenues from external customers** |       |                                      |       |                                    |       |   |   |   |   |
| Specialized Manufacturing            |       | $                                         | 25,763     |                                    | $          | 18,963 |   | $ | 50,027 |   | $ | 45,671 |   |
| Electronic Manufacturing Services    |       | 5,626                                     |       | 4,041                                   |       | 10,093 |   | 8,402 |   |
| Total                                |       | $                                         | 31,389     |                                    | $          | 23,004 |   | $ | 60,120 |   | $ | 54,073 |   |
|                                 |       |                                      |       |                                    |       |   |   |   |   |
| **Income before income taxes**       |       |                                      |       |                                    |       |   |   |   |   |
| Specialized Manufacturing            |       | $                                         | 3,266      |                                    | $          | 1,429 |   | $ | 7,642 |   | $ | 6,352 |   |
| Electronic Manufacturing Services    |       | 719                                       |       | 397                                     |       | 1,174 |   | 722 |   |
| Total for reportable segments        |       | 3,985                                     |       | 1,826                                   |       | 8,816 |   | 7,074 |   |
| Corporate and Common Costs           |       | (1,404                                    | )          | (1,105                                  | )          | (2,865 | ) | (2,765 | ) |
| Total                                |       | $                                         | 2,581      |                                    | $          | 721 |   | $ | 5,951 |   | $ | 4,309 |   |

 

TheCompany’s products are sold world-wide. For the quarters ended February 28, 2010 and 2009, sales from itsoperations located in the United Kingdom accounted for 15% and 7% of totalCompany revenues, respectively.  In thefiscal year to date period, sales from its operations located in the UnitedKingdom accounted for 12% of total Company revenues compared to 9% in the sameperiod in fiscal 2009.   No other foreigngeographic area accounted for more than 10% of consolidated revenues for thethree and six month periods ended February 28, 2010 and 2009.

 
| ** **                        | ** ** | **February 28, 2010** | ** ** | **August 31, 2009** | ** ** |
|-----------------------------------|------------|---------------------------------|------------|-------------------------------|------------|
| **Total assets**             |       |                            |       |                          |       |   |   |
| Specialized Manufacturing         |       | $                               | 95,823     |                          | $          | 60,713 |   |
| Electronic Manufacturing Services |       | 14,084                          |       | 12,666                        |       |
| Total for reportable segments     |       | 109,907                         |       | 73,379                        |       |
| Corporate and Common Assets       |       | 9,391                           |       | 17,687                        |       |
| Total                             |       | $                               | 119,298    |                          | $          | 91,066 |   |

 

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**CHASE CORPORATION**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**(UNAUDITED)**

*In thousands, except share andper share amounts*

 

Theincrease in total assets of the Company’s Specialized Manufacturing segment asof February 28, 2010 is primarily due to the acquisitions of C.I.M. in September 2009and ServiWrap in December 2009 (see Note 8 below).

 

Asof February 28, 2010 and August 31, 2009, the Company had long-livedassets (defined as tangible assets providing the Company with a future economicbenefit beyond the current year or operating period, including buildings,equipment and leasehold improvements) of $2,215 and $1,770, respectively,located in the United Kingdom.  Thesebalances exclude goodwill and intangibles of $14,780 and $7,199, as of February 28,2010 and August 31, 2009, respectively.

 

**Note 7 — Goodwill and Other Intangibles**

 

Thechanges in the carrying value of goodwill, by reportable segment, are asfollows:

 
| ** **                        | ** ** | **Specialized  Manufacturing** | ** ** | **Electronic  Manufacturing  Services** | ** ** | **Consolidated** | ** ** |
|-----------------------------------|------------|--------------------------------|------------|-----------------------------------------|------------|------------------|------------|
| Balance at August 31, 2009   |       | $                              | 8,607      |                                    | $          | 5,999            |       | $ | 14,606 |   |
| Acquisition of C.I.M.             |       | 8,573                          |       | —                                  |       | 8,573            |       |
| Acquisition of ServiWrap          |       | 258                            |       | —                                  |       | 258              |       |
| FX translation adjustment         |       | (328                           | )          | —                                  |       | (328             | )          |
| Balance at February 28, 2010 |       | $                              | 17,110     |                                    | $          | 5,999            |       | $ | 23,109 |   |

 

TheCompany evaluates the possible impairment of goodwill annually each fourthquarter and whenever events or circumstances indicate the carrying value ofgoodwill may not be recoverable.

 

Intangibleassets subject to amortization consist of the following at February 28,2010 and August 31, 2009:

 
| ** **                       | ** ** | **Weighted-Average  Amortization Period** | ** ** | **Gross  Carrying  Value** | ** ** | **Accumulated  Amortization** | ** ** | **Net  Carrying  Value** | ** ** |
|----------------------------------|------------|-------------------------------------------|------------|----------------------------|------------|-------------------------------|------------|--------------------------|------------|
| February 28, 2010           | ** ** | ** **                                | ** ** | ** **                 | ** ** | ** **                    | ** ** | ** **               | ** ** |
| Patents and agreements           |       | 12.7 years                                |       | $                          | 2,232      |                          | $          | 2,072                    |       | $ | 160 |   |
| Formulas and technology          |       | 9.8 years                                 |       | 3,521                      |       | 726                           |       | 2,795                    |       |
| Trade names                      |       | 4.6 years                                 |       | 1,337                      |       | 327                           |       | 1,010                    |       |
| Customer lists and relationships |       | 10.4 years                                |       | 18,462                     |       | 2,797                         |       | 15,665                   |       |
|                             |       |                                      |       | $                          | 25,552     |                          | $          | 5,922                    |       | $ | 19,630 |   |
|                             | ** ** | ** **                                | ** ** | ** **                 | ** ** | ** **                    | ** ** | ** **               | ** ** |
| August 31, 2009             |       |                                      |       |                       |       |                          |       |                     |       |
| Patents and agreements           |       | 12.6 years                                |       | $                          | 2,258      |                          | $          | 2,059                    |       | $ | 199 |   |
| Formulas and technology          |       | 9.3 years                                 |       | 1,191                      |       | 552                           |       | 639                      |       |
| Trade names                      |       | 3.8 years                                 |       | 277                        |       | 255                           |       | 22                       |       |
| Customer lists and relationships |       | 10.4 years                                |       | 5,640                      |       | 2,003                         |       | 3,637                    |       |
|                             |       |                                      |       | $                          | 9,366      |                          | $          | 4,869                    |       | $ | 4,497 |   |

 

Theincrease in gross carrying value of intangible assets for the six months ended February 28,2010 is due to the addition of intangible assets associated with the Company’sacquisitions of C.I.M. in September 2009 and ServiWrap in December 2009(see Note 8 below).  These increases werepartially offset by an $895 decrease in gross carrying value of intangibleassets over the six months ended February 28, 2010 due to a foreign currencytranslation loss related to the intangible assets associated with the Company’sEuropean operations.

 

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**CHASE CORPORATION**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**(UNAUDITED)**

*In thousands, except share andper share amounts*

 

Aggregateamortization expense related to intangible assets for the six months ended February 28,2010 and 2009 was $1,241 and $469, respectively.  Estimated amortization expense for theremainder of fiscal year 2010 and for each of the five succeeding fiscal yearsis as follows:

 
| **Years  ending August 31,** |   | **Amount** |   |
|-----------------------------------|--------|------------|--------|
| 2010 (remaining six months)       |   | $          | 1,919  |   |
| 2011                              |   | 2,393      |   |
| 2012                              |   | 2,373      |   |
| 2013                              |   | 2,256      |   |
| 2014                              |   | 2,199      |   |
| 2015                              |   | 2,001      |   |
|                              |   | $          | 13,141 |   |

 

**Note 8 —Acquisitions**

 

**C.I.M.Industries Inc.**

 

InSeptember 2009, Chase Corporation acquired all of the outstanding capitalstock of C.I.M. Industries Inc. (“C.I.M.”) which is based in Peterborough, NHand has a manufacturing facility in Texas. C.I.M. is a specialized manufacturer of high performance coating andlining systems used worldwide in the liquid storage and containmentapplications.  The total purchase price, net of cash received, was$18,894.

 

*Allocation of Purchase Price*

 

Theacquisition was accounted for as a business combination under ASC Topic 805, “BusinessCombinations.”  In accordance with thisaccounting standard, the Company expensed $130 of acquisition related costs.

 

Thepurchase price has been allocated to the acquired tangible and identifiableintangible assets and liabilities assumed based on their fair values as of thedate of the acquisition:

 
| **Assets &  Liabilities**    | ** ** | **Amount** | ** ** |
|---------------------------------------|------------|------------|------------|
| Current assets (net of cash acquired) |       | $          | 1,991      |   |
| Property, plant & equipment  |       | 4,262      |       |
| Goodwill                              |       | 8,573      |       |
| Intangible assets                     |       | 8,100      |       |
| Accounts payable and accrued expenses |       | (439       | )          |
| Deferred tax liabilities              |       | (3,593     | )          |
| Total purchase price                  |       | $          | 18,894     |   |

 

Theexcess of the purchase price over the net tangible and intangible assetsacquired resulted in goodwill of $8,573 that is largely attributable to thesynergies and economies of scale from combining the operations and technologiesof Chase and C.I.M., particularly as it pertains to the global expansion of theCompany’s product and service offerings, and marketing efforts.  This goodwill is not deductible for incometax purposes.

 

Allassets, including goodwill, acquired as part of C.I.M. are included in theSpecialized Manufacturing segment. Identifiable intangible assets purchased with this transaction are asfollows:

 

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**CHASE CORPORATION**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**(UNAUDITED)**

*In thousands, except share andper share amounts*

 
| **Intangible Asset**             | ** ** | **Amount** | ** ** | **Useful  life** | ** ** |
|----------------------------------|------------|------------|------------|------------------|------------|
| Formulas and technology          |       | $          | 1,880      |             | 10  years  |   |
| Trade names                      |       | 260        |       | 5  years         |       |
| Customer lists and relationships |       | 5,960      |       | 10  years        |       |
| Total intangible assets          |       | $          | 8,100      |             |       |   |

 

**ServiWrap Product Lines**

 

OnDecember 18, 2009, the Company acquired the full range of ServiWrappipeline protection products (“ServiWrap”) from Grace Construction ProductsLimited, a UK based unit of W.R. Grace & Co. (the “Seller”).  ServiWrap / ServiShield® anti-corrosionsystems provide protection for new and refurbished oil, gas and water pipelinesin projects around the world.  The totalpurchase price for this acquisition was £5,983(US $9,699 at the time of acquisition) andthe assets acquired by the Company include product lines, manufacturingequipment and certain intellectual property rights.

 

Beginningon the date of the acquisition through no later than September 30, 2010,the Seller will manufacture the ServiWrap products for exclusive supply to theCompany, while the Company transitions production to its own facility in theUK.

 

*Allocation of Purchase Price*

 

Theacquisition was accounted for as a business combination under ASC Topic 805, “BusinessCombinations.”  In accordance with thisaccounting standard, the Company expensed $271 of acquisition related costs.

 

Thepurchase price has been allocated to the acquired tangible and identifiableintangible assets and liabilities assumed based on their fair values as of thedate of the acquisition:

 
| **Assets & Liabilities**    | ** ** | **Amount** | ** ** |
|---------------------------------|------------|------------|------------|
| Property, plant & equipment |       | $          | 460        |   |
| Goodwill                        |       | 258        |       |
| Intangible assets               |       | 8,981      |       |
| Total purchase price            |       | $          | 9,699      |   |

 

Theexcess of the purchase price over the net tangible and intangible assetsacquired resulted in goodwill of $258 that is primarily attributable to thepotential synergies from the integration of the ServiWrap product lines intothe Company’s current product offerings.  This goodwill is deductible for income tax purposes.

 

Allassets, including goodwill, acquired as part of the ServiWrap product lineacquisition are included in the Specialized Manufacturing segment.  Identifiable intangible assets purchased withthis transaction are as follows:

 

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**CHASE CORPORATION**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**(UNAUDITED)**

*Inthousands, except share and per share amounts*

 
| **Intangible Asset**             | ** ** | **Amount** | ** ** | **Useful  life** | ** ** |
|----------------------------------|------------|------------|------------|------------------|------------|
| Backlog                          |       | $          | 924        |             | 9  months  |   |
| Formulas and technology          |       | 486        |       | 10  years        |       |
| Trade names                      |       | 876        |       | 5  years         |       |
| Customer lists and relationships |       | 6,695      |       | 12  years        |       |
| Total intangible assets          |       | $          | 8,981      |             |       |   |

 

**Supplemental Pro Forma Data**

 

The following table presents the pro forma results of the Company for the three and six month periods ended February 28, 2010 and 2009, as though the C.I.M. and ServiWrap acquisitions described above occurred on September 1, 2008.  The actual revenues and expenses for the C.I.M. and ServiWrap acquisitions are included in our fiscal 2010 consolidated results beginning on September 4, 2009 and December 18, 2009, respectively.  Revenues for C.I.M and ServiWrap since the acquisition dates included in the consolidated statement of operations were $5,512 and $1,905, respectively.  Adjustments have been made for the estimated amortization of intangibles, estimated interest expense in connection with debt financing of the acquisition, and the income tax impact of the pro forma adjustments at the statutory rate of 38%. The following pro forma information is not necessarily indicative of the results that would have been achieved if the acquisitions had been effective on September 1, 2008.

 
| ** **                                                                           | ** ** | **Three  Months Ended February 28,** | ** ** | **Six  Months Ended February 28,** | ** ** |
|--------------------------------------------------------------------------------------|------------|--------------------------------------|------------|------------------------------------|------------|
| ** **                                                                           | ** ** | **2010**                             | ** ** | **2009**                           | ** ** | **2010** | ** ** | **2009** | ** ** |
| Revenues                                                                             |       | $                                    | 32,113     |                               | $          | 28,073 |   | $ | 64,950 |   | $ | 65,473 |   |
| Net income                                                                           |       | 1,695                                |       | 1,131                              |       | 4,214 |   | 3,802 |   |
|                                                                                 |       |                                 |       |                               |       |   |   |   |   |
| Net income available to common shareholders, per common and common  equivalent share |       |                                 |       |                               |       |   |   |   |   |
| Basic                                                                                |       | $                                    | 0.19       |                               | $          | 0.13 |   | $ | 0.47 |   | $ | 0.44 |   |
| Diluted                                                                              |       | $                                    | 0.19       |                               | $          | 0.13 |   | $ | 0.47 |   | $ | 0.43 |   |

 

**Note 9 —Commitments and Contingencies**

 

TheCompany is one of over 100 defendants in a personal injury lawsuit, pending inOhio, which alleges personal injury from exposure to asbestos contained incertain Chase products.  The case iscaptioned Marie Lou Scott, Executrix of the Estate of James T. Scott v. A-BestProducts, et al., No. 312901 in the Court of Common Pleas for CuyahogaCounty, Ohio.  The plaintiff in the caseissued discovery requests to Chase in August 2005, to which Chase timelyresponded in September 2005.  Thetrial had initially been scheduled to begin on April 30, 2007.  However, that date had been postponed and nonew trial date has been set.  As of February 2010,there have been no new developments as this Ohio lawsuit has been inactive withrespect to Chase.

 

TheCompany was named as one of the defendants in a complaint filed on June 25,2009, in a lawsuit captioned Lois Jansen, Individually and as SpecialAdministrator of the Estate of Thomas Jansen v. Beazer East, Inc., et al.,No: 09-CV-6248 in the Milwaukee County (Wisconsin) Circuit Court.  The plaintiff alleges that her husbandsuffered and died from malignant mesothelioma resulting from exposure toasbestos in his workplace.  The plaintiffhas sued seven alleged manufacturers or distributors of asbestos-containingproducts, including Royston Laboratories (formerly an independent company andnow a division of Chase Corporation). Chase has filed an answer to the claim denying the material allegationsin the complaint.  The parties arecurrently engaged in discovery.

 

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**CHASE CORPORATION**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**(UNAUDITED)**

*In thousands, except share and per share amounts*

 

Inaddition to the matters described above, the Company is involved from time totime in litigation incidental to the conduct of its business.  Although the Company does not expect that theoutcome in any of these matters, individually or collectively, will have amaterial adverse effect on its financial condition or results of operations,litigation is inherently unpredictable. Therefore, judgments could be rendered or settlements entered, thatcould adversely affect the Company’s operating results or cash flows in aparticular period.  The Company routinelyassesses all of its litigation and threatened litigation as to the probabilityof ultimately incurring a liability, and records its best estimate of theultimate loss in situations where the Company assesses the likelihood of lossas probable.

 

**Note 10— Debt**

 

TheCompany borrowed $10,000 from Bank of America in September 2009 in orderto fund its acquisition of C.I.M.  Thisborrowing involved an unsecured, three year term note (“Term Note”) withinterest and principal payments due monthly.  Interest is calculated at the applicableLondon Interbank Offered Rate (“LIBOR”) plus a margin of 1.75% per annum, withinterest payments due on the last day of each month.  At February 28, 2010, the applicableinterest rate was 1.98% per annum.  Inaddition to monthly interest payments, Chase Corporation is repaying theprincipal in equal installments of $167 per month, beginning on September 30,2009, and on the last day of each month thereafter, ending on August 31,2012 (the “Repayment Period”).  In anyevent, on the last day of the Repayment Period, Chase will repay the remainingprincipal balance plus any interest then due.

 

TheTerm Note is subject to certain covenants which require the Company to maintaincertain financial ratios, which include (a) the ratio of total liabilitiesto tangible net worth and (b) the ratio of operating cash flow to debtservice on a rolling twelve month basis. The Company was in compliance with these debt covenants as of February 28,2010.   Prepayment of the Term Note isallowed at any time during the term of the loan.

 

Aspart of the C.I.M. acquisition in September 2009, the Company delivered$3,000 in non-negotiable promissory notes (the “Notes”) payable to five C.I.M.shareholders, who were the holders of all of the issued and outstanding sharesof capital stock of C.I.M. as of the acquisition date.   The principal of the Notes will be paid inthree consecutive annual installments of $1,000 each, with the initial paymentdue on September 4, 2010.  Intereston the unpaid principal balance of the Notes will accrue at a rate per annumequal to the applicable Federal rate, and will be paid annually with eachprincipal payment.  At February 28,2010, the applicable interest rate was 0.72% per annum.

 

TheCompany borrowed $7,000 from RBS Citizens in December 2009 in order tofund its acquisition of the ServiWrap product line.  The loan from RBS Citizens (the “Term Loan”)is an unsecured, three year term note with interest and principal payments duemonthly.  Interest is calculated at theapplicable LIBOR rate plus a margin of 1.90% per annum, with interest paymentsdue on the last day of each month.  Inaddition to monthly interest payments, the Company is repaying the principal inequal installments of $117 each, beginning on January 15, 2010, and on the15th day of each month thereafter, ending on December 15, 2012, on whichdate the Company will repay the remaining principal balance plus any interestthen due.  The Term Loan is subject tothe same debt covenants as the Company’s other term debt.  Prepayment of the Term Loan is allowed at anytime.  At February 28, 2010, theapplicable interest rate was 2.13% per annum.

 

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**CHASE CORPORATION**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**(UNAUDITED)**

*In thousands, except share and per share amounts*

 

**Note 11- Pensions and Other Post Retirement Benefits**

 

Thecomponents of net periodic benefit cost for the three and six months ended February 28,2010 and 2009 are as follows:

 
| ** **                         | ** ** | **Three  Months Ended** | ** ** | **Six  Months Ended** | ** ** |
|------------------------------------|------------|-------------------------|------------|-----------------------|------------|
| ** **                         | ** ** | **February 28, 2010**   | ** ** | **February 28, 2009** | ** ** | **February 28, 2010** | ** ** | **February 28, 2009** | ** ** |
| Service cost                       |       | $                       | 124        |                  | $          | 108 |   | $ | 247 |   | $ | 216 |   |
| Interest cost                      |       | 123                     |       | 137                   |       | 245 |   | 273 |   |
| Expected return on plan assets     |       | (100                    | )          | (112                  | )          | (199 | ) | (224 | ) |
| Amortization of prior service cost |       | 21                      |       | 23                    |       | 43 |   | 46 |   |
| Amortization of unrecognized loss  |       | 53                      |       | 13                    |       | 106 |   | 27 |   |
| Net periodic benefit cost          |       | $                       | 221        |                  | $          | 169 |   | $ | 442 |   | $ | 338 |   |

 

Whenfunding is required, the Company’s policy is to contribute amounts that aredeductible for federal income tax purposes. As of February 28, 2010, the Company had not made any contributionsin the current fiscal year to fund its obligations under the pension plan.

 

**Note 12— Fair Value Measurements**

 

TheCompany adopted the guidance of FASB ASC Topic 820, “Fair Value Measurementsand Disclosures” (“ASC 820”) as of September 1, 2008, as it related to allfinancial assets and financial liabilities. ASC 820 provided for a one-year deferral of the effective date as itrelated to non-financial assets and non-financial liabilities that arerecognized or disclosed at fair value in the financial statements on anon-recurring basis.

 

EffectiveSeptember 1, 2009, the Company adopted ASC 820 for all non-financialassets and non-financial liabilities that are recognized or disclosed at fairvalue in the financial statements on a non-recurring basis.  Other than the assets acquired from C.I.M.and the assets acquired as part of the ServiWrap acquisition, the Company hasnot valued any non-financial assets at fair value.  Accordingly, there was no cumulative effectof adoption and the adoption did not have an impact on the Company’s financialposition, results of operations, or cash flows. The adoption may impact futureevaluations of impairment of goodwill and long-lived assets.

 

TheCompany generally defines fair value as the price that would be received tosell an asset or paid to transfer a liability in an orderly transaction betweenmarket participants at the measurement date (exit price).  The Company uses a three-tier fair valuehierarchy, which classifies the inputs used in measuring fair values. Thesetiers include: Level 1, defined as observable inputs such as quoted prices foridentical instruments in active markets; Level 2, defined as inputs other thanquoted prices in active markets that are either directly or indirectlyobservable; and Level 3, defined as unobservable inputs in which little or nomarket data exists, therefore requiring an entity to develop its ownassumptions.

 

TheCompany endeavors to utilize the best available information in measuring fairvalue.  Financial assets and liabilitiesare classified in their entirety based on the lowest level of input that issignificant to the fair value measurement. The Company has determined that it does not have any financialliabilities measured at fair value and that its financial assets are currentlyall classified within Level 1 and Level 2 in the fair value hierarchy.

 

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**CHASE CORPORATION**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**(UNAUDITED)**

*In thousands, except share and per share amounts*

 

Thefollowing tables set forth the Company’s financial assets that were accountedfor at fair value on a recurring basis as of February 28, 2010 and August 31,2009:

 
| ** **             | ** ** | ** **             | ** ** | **Fair  value measurements at February 28, 2010 using:** | ** ** |
|------------------------|------------|------------------------|------------|----------------------------------------------------------|------------|
| ** **             | ** ** | **February  28, 2010** | ** ** | **Quoted  prices  in active markets  (Level 1)**         | ** ** | **Significant  other  observable inputs  (Level 2)** | ** ** | **Significant  unobservable inputs  (Level 3)** | ** ** |
| Restricted investments |       | $                      | 627        |                                                     | $          | 593 |   | $ | 34 |   | $ | — |   |
|                   |       |                   |       |                                                     |       |   |   |   |   |
| Total                  |       | $                      | 627        |                                                     | $          | 593 |   | $ | 34 |   | $ | — |   |

 
| ** **             | ** ** | ** **           | ** ** | **Fair value  measurements at August 31, 2009 using:** | ** ** |
|------------------------|------------|----------------------|------------|--------------------------------------------------------|------------|
| ** **             | ** ** | **August  31, 2009** | ** ** | **Quoted  prices  in active markets  (Level 1)**       | ** ** | **Significant  other  observable inputs  (Level 2)** | ** ** | **Significant  unobservable inputs  (Level 3)** | ** ** |
| Restricted investments |       | $                    | 573        |                                                   | $          | 239 |   | $ | 334 |   | $ | — |   |
|                   |       |                 |       |                                                   |       |   |   |   |   |
| Total                  |       | $                    | 573        |                                                   | $          | 239 |   | $ | 334 |   | $ | — |   |

 

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**Item 2 — Management’s Discussion and Analysis of Financial Conditionand Results of Operations**

 

Thefollowing discussion provides an analysis of the Company’s financial conditionand results of operations and should be read in conjunction with theConsolidated Financial Statements and notes thereto included in Item 1 of Part Iof this Quarterly Report on Form 10-Q and the Company’s Annual Report on Form 10-Kfiled for the fiscal year ended August 31, 2009.

 

****Recent Developments****

 

InSeptember 2009, we acquired all of the outstanding capital stock of C.I.M.Industries Inc. (“C.I.M.”), which is based in Peterborough, NH and has amanufacturing facility in Texas.  C.I.M.is a specialized manufacturer of high performance coating and lining systemsused worldwide in the liquid storage and containment industry.  With a primary focus on the water andwastewater industry, C.I.M. has the preferred products that complement ourproduct line of high performance tapes and coatings.  The total purchase price for this acquisitionwas $18.9 million (net of cash acquired).

 

InDecember 2009, we acquired the full range of ServiWrap® pipelineprotection products (“ServiWrap”) from Grace Construction Products Limited, aUK based unit of W.R. Grace & Co. (the “Seller”).  ServiWrap / ServiShield® anti-corrosionsystems provide protection for new and refurbished oil, gas and water pipelinesin projects around the world.  Theacquisition of ServiWrap will complement the portfolio of our pipelineprotection tapes, coatings and accessories and will extend our global customerbase.  The total purchase price for thisacquisition was £5.98 million (approximately US $9.7 million at the time ofacquisition).  The purchase was fundedthrough a combination of cash on hand and a term loan in the amount of $7.0million from RBS Citizens.

 

Theassets acquired by us include product lines, manufacturing equipment andcertain intellectual property rights. Beginning on the date of the acquisition through no later than September 30,2010, the Seller will manufacture the ServiWrap products for exclusive supplyto us, while we transition production to our own facility in the UK.   The effective date for this acquisition was December 18,2009, and the results of this acquisition have been included in our financialstatements since that date.

 

**Overview**

 

Continuingwith some of the positive trends observed in the first quarter of our currentfiscal year and also benefitting from the results of recent acquisitions, ouroverall performance in both the quarter and year to date periods has exceededthe prior year results.  Revenue for theSpecialized Manufacturing segment increased over last year primarily due to newsales from C.I.M. and ServiWrap, which were acquired in September andDecember, respectively, and increased sales from our HumiSeal electroniccoatings.   The increased revenues infiscal 2010 were partially offset by decreased demand in the wire &cable and transportation product markets. During the remainder of the fiscal year, we will continue to integrateC.I.M. and ServiWrap in order to maximize our existing resources and continueour product and marketing development efforts for all of our product lines inorder to seize new business opportunities. Additional pressure on profit margins can be expected with increasingraw material and energy costs.

 

OurElectronic Manufacturing Services segment has benefited from increased demandfrom existing customers as the increased bookings has led to higher revenuesand profits in both the quarter and year to date periods compared to the prioryear periods.  The current demand forthis segment’s product and service offerings continues to be strong as ourbacklog of customer orders totaled $9.8 million as of February 28, 2010compared to $6.5 million as of August 31, 2009.  For the remainder of fiscal 2010, 

 

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managementcontinues to focus on maximizing production efficiencies, closely monitoringour key customers’ requirements, and new customer acquisitions.

 

Duringthe quarter we closed our Taunton, MA and Albany, NY offices and ceasedoperations at our Paterson, NJ plant, as part of our ongoing consolidationplan.  Over the remainder of 2010, wewill perform the necessary building and equipment improvements required tointegrate the ServiWrap product lines into our facility in Rye, East Sussex,England.

 

TheCompany has two reportable segments summarized below:

 
| **Segment**                        | ** ** | **Product Lines**                                                                                                                              | ** ** | **Manufacturing Focus and Products**                                                                                                                                                                                                                                                                                                                                                                                                                                    |
|------------------------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| Specialized  Manufacturing         |       | ·  Wire and Cable

·  Electronic Coatings

·  Pipeline &  Construction

·  Specialty Products |       | Produces  protective coatings and tape products including insulating and conducting  materials for wire and cable manufacturers, fluid applied coating and lining  systems for use in the water and wastewater industry, protective coatings for  pipeline applications, moisture protective coatings for electronics, high  performance polymeric asphalt additives, and expansion and control joint  systems for use in the transportation and architectural markets. |
|                               |       |                                                                                                                                           |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| Electronic  Manufacturing Services |       | ·  Contract Electronic  Manufacturing Services                                                                                       |       | Provides  assembly and turnkey contract manufacturing services including printed  circuit board and electromechanical assembly services to the electronics  industry operating principally in the United States.                                                                                                                                                                                                                                                        |

 

**Results of Operations**

 

***Revenues and Operating Profit by Segment are asfollows (dollars in thousands)***

 
| ** **                           | ** ** | **Three  Months Ended February 28,** | ** ** | **Six  Months Ended February 28,** | ** ** |
|--------------------------------------|------------|--------------------------------------|------------|------------------------------------|------------|
| ** **                           | ** ** | **2010**                             | ** ** | ** **                         | ** ** | **2009** | ** ** | ** ** | ** ** | **2010** | ** ** | ** ** | ** ** | **2009** | ** ** | ** ** | ** ** |
| **Revenues from external customers** |       |                                 |       |                               |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Specialized Manufacturing            |       | $                                    | 25,763     |                               | 82         | % | $ | 18,963 |   | 82 | % | $ | 50,027 |   | 83 | % | $ | 45,671 |   | 84 | % |
| Electronic Manufacturing Services    |       | 5,626                                |       | 18                                 | %          | 4,041 |   | 18 | % | 10,093 |   | 17 | % | 8,402 |   | 16 | % |
| Total                                |       | $                                    | 31,389     |                               |       |   | $ | 23,004 |   |   |   | $ | 60,120 |   |   |   | $ | 54,073 |   |   |   |
|                                 |       |                                 |       |                               |       |   |   |   |   |   |   |   |   |   |   |   |   |
|                                 |       |                                 |       |                               |       |   |   |   |   |   |   |   |   |   |   |   |   |
| **Income before income taxes**       |       |                                 |       |                               |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Specialized Manufacturing            |       | $                                    | 3,266      |                               | 13         | % | $ | 1,429 |   | 8 | % | $ | 7,642 |   | 15 | % | $ | 6,352 |   | 14 | % |
| Electronic Manufacturing Services    |       | 719                                  |       | 13                                 | %          | 397 |   | 10 | % | 1,174 |   | 12 | % | 722 |   | 9 | % |
| Total for reportable segments        |       | 3,985                                |       | 13                                 | %          | 1,826 |   | 8 | % | 8,816 |   | 15 | % | 7,074 |   | 13 | % |
| Corporate and Common Costs           |       | (1,404                               | )          |                               |       | (1,105 | ) |   |   | (2,865 | ) |   |   | (2,765 | ) |   |   |
| Total                                |       | $                                    | 2,581      |                               | 8          | % | $ | 721 |   | 3 | % | $ | 5,951 |   | 10 | % | $ | 4,309 |   | 8 | % |

 

***Total Revenues***

 

Totalrevenues increased $8,385,000 or 36% to $31,389,000 for the quarter ended February 28,2010 compared to $23,004,000 in the same quarter of the prior year.  Total revenues increased $6,047,000 or 11% to$60,120,000 in the fiscal year to date period compared to $54,073,000 in thesame period in fiscal 2009.

 

Revenuesin our Specialized Manufacturing segment increased $6,800,000 and $4,356,000,in the current quarter and year to date periods, respectively.    The increase in revenues compared to the prioryear periods is primarily due to the following for the current quarter and yearto date periods, respectively: (a) the inclusion of sales of $3,329,000and $5,512,000 from C.I.M. which we acquired in September 2009; (b) increasedsales of $2,061,000 and $2,594,000 in the Electronic Coatings product lines; (c) increased

 

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salesof $1,088,000 and $281,000 in the Pipeline and Construction product line; and (d) increasedsales of $1,905,000 this fiscal quarter from ServiWrap which was acquired inthe beginning of the quarter.  Theseincreases in revenues were partially offset by decreased sales in the currentquarter and year to date periods, respectively of $879,000 and $3,583,000 inthe Wire & Cable product line primarily due to decreased demand in theenergy and communications markets, and decreased sales of $1,414,000 and$1,996,000 in the transportation market.

 

Revenuesfrom our Electronic Manufacturing Services segment increased $1,585,000 and$1,691,000 in the current quarter and year to date periods, respectively,compared to the prior year periods.  Thehigher sales reflect increased demand and order activity from existingcustomers.

 

***Cost of Products and Services Sold***

 

Costof products and services sold increased $4,010,000 or 23% to $21,650,000 forthe quarter ended February 28, 2010 compared to $17,640,000 in the prioryear quarter.  Cost of products and servicessold increased $1,205,000 or 3% to $40,404,000 in the fiscal year to dateperiod compared to $39,199,000 in the same period in fiscal 2009.

 

Costof products and services sold in our Specialized Manufacturing segment were$17,102,000 and $32,142,000 in the current quarter and year to date periods,respectively compared to $14,279,000 and $32,117,000 in the comparable periodsin the prior year.  Cost of products andservices sold in our Electronic Manufacturing Services segment were $4,548,000and $8,262,000 in the current quarter and year to date periods compared to$3,361,000 and $7,082,000 in the comparable periods in fiscal 2009.

 

Thefollowing table summarizes the relative percentages of revenues for costs ofproducts and services sold for our reporting segments:

 
| ** **                         | ** ** | **Three  Months Ended February 28,** | ** ** | **Six  Months Ended February 28,** | ** ** |
|------------------------------------|------------|--------------------------------------|------------|------------------------------------|------------|
| ** **                         | ** ** | **2010**                             | ** ** | **2009**                           | ** ** | **2010** | ** ** | **2009** | ** ** |
| Specialized  Manufacturing         |       | 66                                   | %          | 75                                 | %          | 64 | % | 70 | % |
| Electronic  Manufacturing Services |       | 81                                   | %          | 83                                 | %          | 82 | % | 84 | % |
| **Total**                          |       | 69                                   | %          | 77                                 | %          | 67 | % | 72 | % |

 

Asa percentage of revenues, cost of products and services sold in our SpecializedManufacturing segment decreased primarily due to increased sales of highermargin products, management’s ability to leverage its fixed overhead costs on ahigher revenue base, and the favorable impact of ongoing cost reductionefforts.

 

Asa percentage of revenues, cost of products and services sold in our ElectronicManufacturing Services segment decreased as a result of cost savingsinitiatives that were implemented over the past year coupled with scrutiny onraw material purchases which helped stabilize margins.

 

***Selling, General and Administrative Expenses***

 

Selling,general and administrative expenses increased $2,077,000 or 43% to $6,924,000for the quarter ended February 28, 2010 compared to $4,847,000 in theprior year quarter.    Selling, generaland administrative expenses increased $2,700,000 or 25% to $13,581,000 in thefiscal year to date period compared to $10,881,000 in the same period in fiscal2009.

 

Theincrease in the current quarter and year to date period over the prior yearperiods is primarily attributable to the incremental selling, general andadministrative expenses from the C.I.M. and ServiWrap acquisitions, includingyear to date acquisition costs of $401,000. Additionally, increased revenues for the current quarter and year todate periods compared to the prior year periods have led to increased salescommissions and other selling related expenses. These increases were partially offset by our continued emphasis oncontrolling costs, including reduced travel and external consulting costs.

 

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***Interest Expense***

 

Interestexpense increased $95,000 to $100,000 for the quarter ended February 28,2010 compared to $5,000 in the prior year quarter.  Interest expense increased $149,000 to$159,000 for the fiscal year to date period compared to $10,000 in the sameperiod in fiscal 2009.  The increase ininterest expense in both the current quarter and year to date period is adirect result of the $10 million term note and $3 million promissory notesrelated to the acquisition of C.I.M., and the $7.0 million term loan agreementrelated to the acquisition of ServiWrap.

 

***Other Income (Expense)***

 

Otherexpense was $134,000, a decrease of $343,000 or 164% for the quarter ended February 28,2010 compared to other income of $209,000 in the prior year quarter.  Other expense was $25,000, a decrease of$351,000 or 108% for the fiscal year to date period compared to other income of$326,000 in the same period in fiscal 2009.  Other income primarily includes bank interestand foreign exchange gains (losses) caused by changes in exchange rates ontransactions or balances denominated in currencies other than the functionalcurrency of our subsidiaries.  Thedecrease in other income (expense) in both the quarter and year to date periodcompared to the prior year is primarily due to foreign exchange losses causedby the weakening of both the sterling and the euro.  Additionally, we no longer receive rentalincome on previously owned real property sold in June 2009.

 

***Net Income***

 

Netincome increased $1,172,000 or 258% to $1,626,000 in the quarter ended February 28,2010 compared to $454,000 in the prior year quarter.  Net income increased $1,035,000 or 38% to$3,749,000 for the fiscal year to date period ended February 28, 2010compared to $2,714,000 in the same period in fiscal 2009.   The increase in net income in both thecurrent quarter and year to date periods is primarily a result of additionalrevenue discussed previously.

 

****Liquidity and Sources of Capital****

 

Ouroverall cash balance decreased $8,310,000 to $3,333,000 at February 28,2010 from $11,643,000 at August 31, 2009. Generally, we manage our borrowings and payments under our revolvingline of credit in order to maintain a low cash balance.  The higher cash balance at August 31,2009 was a result of cash flow generated from operations being held for theC.I.M. acquisition which closed in September 2009 and the acquisition ofServiWrap which closed in December 2009. We will continue to review our current cash balances denominated inforeign currency in light of current tax guidelines, working capitalrequirements, infrastructure improvements and potential acquisitions.

 

Cashflow provided by operations was $1,062,000 in the first six months of fiscalyear 2010 compared to $5,739,000 in the prior year period.  Cash providedby operations during the first half of fiscal 2010 was primarily due tooperating income and increased accounts payable offset by increased accounts receivable,inventory and prepaid expenses and other assets.

 

Theratio of current assets to current liabilities was 2.3 as of February 28,2010 compared to 3.2 as of August 31, 2009.  The decrease in our current ratio at February 28,2010 was primarily attributable to the increase in the current portion oflong-term debt and decrease in cash used to finance the C.I.M. and ServiWrapacquisitions along with increases in accounts payable.  This was partially offset by increases inprepaid expenses, accounts receivable and inventory coupled with a decrease inaccrued payroll and other compensation.

 

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Cashflow used in investing activities of $27,567,000 was primarily due to theacquisitions of C.I.M. and ServiWrap.

 

Cashflow provided by financing activities of $18,425,000 was primarily due to atotal of $17 million in term debt used to finance our acquisitions of C.I.M. andServiWrap.  Additionally, the increasedutilization of our existing line of credit was a result of enhanced workingcapital needs.   These were partiallyoffset by payments made on the acquisition loans and our line of creditarrangement, as well as our annual dividend.

 

OnOctober 15, 2009, we announced a cash dividend of $0.20 per share(totaling $1,759,000) to shareholders of record on October 31, 2009, whichwas paid on December 3, 2009.

 

Wecontinue to have long-term unsecured credit available up to $10 million at thebank’s base lending rate or, at the option of the Company, at the effective30-Day London Interbank Offered Rate (LIBOR) plus 1.25 percent.  As of February 28, 2010, the outstandingbalance and weighted average interest rate on this line of credit was $3.0million and 1.48%, respectively.

 

Asof March 31, 2010, we had $7.8 million in available credit under this lineof credit and plan to utilize this to help finance our cash needs, includingacquisitions, in fiscal 2010 and future periods.

 

Underthe terms of our line of credit, we must comply with certain debt covenantsrelated to (a) the ratio of total liabilities to tangible net worth and (b) theratio of operating cash flow to debt service on a rolling twelve monthbasis.  We were in compliance with ourdebt covenants as of February 28, 2010. The line of credit currently has a maturity date of March 31, 2011.

 

Weborrowed $10.0 million from Bank of America in September 2009 in order tofund our acquisition of C.I.M.  Thisborrowing involved an unsecured, three year term note (the “Term Note”) withinterest and principal payments due monthly. Interest is calculated at the applicable LIBOR rate plus a margin of1.75% per annum, with interest payments due on the last day of each month.  At February 28, 2010, the applicableinterest rate was 1.98% per annum.  Inaddition to monthly interest payments, we are repaying the principal in equalinstallments of $167,000 per month, beginning on September 30, 2009, andon the last day of each month thereafter, ending on August 31, 2012, whenwe will repay the remaining principal balance plus any interest then due.  The Term Note is subject to the same debtcovenants as our line of credit discussed above.  Prepayment of the Term Note is allowed at anytime during the term of the loan.

 

Aspart of the C.I.M. acquisition in September 2009, we also delivered$3,000,000 in non-negotiable promissory notes (the “Notes”) payable to fiveC.I.M. shareholders, who were the holders of all of the issued and outstandingshares of capital stock of C.I.M. as of the acquisition date.   The principal of the Notes will be paid inthree consecutive annual installments of $1,000,000 each, with the initialpayment due on September 4, 2010. Interest on the unpaid principal balance of the Notes is accruing at arate per annum equal to the applicable Federal rate, and will be paid annuallywith each principal payment.  At February 28,2010, the applicable interest rate was 0.72% per annum.

 

InDecember 2009, we borrowed $7.0 million from RBS Citizens in order to fundour acquisition of the ServiWrap product lines. This borrowing involved an unsecured, three year term note (the “TermLoan”) with interest and principal payments due monthly.  Interest is calculated at the applicableLIBOR rate plus a margin of 1.90% per annum, with interest payments due on thelast day of each month.  In addition tomonthly interest payments, we are repaying the principal in equal installmentsof $117,000 each, beginning on January 15, 2010, and on the 15th day ofeach month thereafter, ending on December 15, 2012, when we will repay theremaining principal balance plus any interest then due.  The Term Loan is subject to the same debtcovenants as our line of credit discussed above.  Prepayment of the Term Loan is allowed at anytime.  At February 28, 2010, theapplicable interest rate was 2.13% per annum.

 

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Tothe extent that interest rates increase in future periods, we will assess theimpact of these higher interest rates on the financial and cash flowprojections of our potential acquisitions.

 

Wehave no significant off balance sheet arrangements.

 

Wecurrently have several on-going capital projects as follows: (1) continuedrenovation of our facility (land and building) in Oxford, MA, purchased in2008, to provide capacity for storage needs and future growth; (2) continuedrenovation of our facility in O’Hara Township, PA in order to increaseproduction capacity and improve efficiencies for existing product lines as wellas provide space to integrate future acquisitions; and (3) building andequipment improvements needed in order to integrate ServiWrap into our facilityin Rye, East Sussex, England.  Machineryand equipment will be added as needed to increase capacity or enhance operatingefficiencies in our other manufacturing plants.

 

Wemay consider the acquisition of companies or other assets this year or infuture periods which are complementary to our business.  We believe that our existing resources,including our line of credit, together with cash generated from operations andadditional bank borrowings, will be sufficient to fund our cash flow requirementsthrough at least the next twelve months. However, there can be no assurances that additional financing will beavailable at favorable terms, if at all.

 

****ContractualObligations****

 

****Please refer to Item 7****“Management’s Discussion and Analysis of Financial Condition and Resultsof Operations” section****in our Form 10-Kfor the fiscal year ended August 31, 2009 for a complete discussion of ourcontractual obligations.  In addition tothose items reported for the fiscal year ended August 31, 2009, we enteredinto the following contractual cash obligations during the six months ended February 28,2010:****

 
| **Contractual Obligations** | ** ** | **Total** | ** ** | **Payments  Due  Less than 1 Year** | ** ** | **Payments  Due  1 - 3 Years** | ** ** | **Payments  Due  4 - 5 Years** | ** ** | **Payments  After 5 Years** | ** ** |
|-----------------------------|------------|-----------|------------|-------------------------------------|------------|--------------------------------|------------|--------------------------------|------------|-----------------------------|------------|
|                        |       |      |       |                                |       |                           |       |                           |       |                        |       |
| Long-term debt (1)          |       | $         | 18,933     |                                | $          | 4,400                          |       | $                              | 14,533     |                        | $          | — |   | $ | — |   |
| Operating leases (2)        |       | 4,751     |       | 426                                 |       | 1,029                          |       | 1,107                          |       | 2,189                       |       |
|                        |       |      |       |                                |       |                           |       |                           |       |                        |       |
| **Total**                   |       | $         | 23,684     |                                | $          | 4,826                          |       | $                              | 15,562     |                        | $          | 1,107 |   | $ | 2,189 |   |

 

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****(1)********         ********Includes the remaining payment obligations used to financeour acquisitions of C.I.M. and ServiWrap.****

****(2)********         ********Includes the new office lease in Westwood, MA and anamended and extended property lease in Winchester, MA for our existingElectronic Manufacturing Services business.****

 

**RecentlyIssued Accounting Standards**

 

InJune 2009, the Financial Accounting Standards Board’s (FASB) approved the “FASBAccounting Standards Codification” (“ASC” or the “Codification”) as the singlesource of authoritative nongovernmental U.S. GAAP.  The Codification does not change current U.S.GAAP, but is intended to simplify user access to all authoritative U.S. GAAP byproviding all the authoritative literature related to a particular topic in oneplace.  All existing accounting standarddocuments will be superseded and all other accounting literature not includedin the Codification will be considered nonauthoritative.  The Codification became effective for us inthe quarter ending November 30, 2009 and the adoption did not have aneffect on our consolidated financial position, results of operations or cashflows.

 

InDecember 2007, the FASB issued new guidance under ASC Topic 805, “Business Combinations” (“ASC 805”).  The new guidance under ASC 805 establishesprinciples and requirements for how an acquirer in a business combinationrecognizes and measures in its financial statements the identifiable 

 

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assetsacquired, the liabilities assumed and any noncontrolling interest in theacquiree; recognizes and measures the goodwill acquired in the businesscombination or a gain from a bargain purchase; expenses acquisition relatedcosts as incurred; and determines what information to disclose to enable usersof the financial statements to evaluate the nature and financial effects of thebusiness combination.  We adopted the newguidance under ASC 805 as of September 1, 2009, and our recentacquisitions of C.I.M. and ServiWrap were both accounted for under this standard.

 

InJune 2008, the FASB issued guidance within ASC Topic 260, Earnings Per Share (“ASC 260”), toclarify that unvested share-based payment awards with a right to receivenonforfeitable dividends are participating securities. The standardprovides guidance on how to allocate earnings to participating securities andcompute earnings per share using the two-class method.  We adopted theprovisions of this standard on September 1, 2009.

 

InDecember 2008, the FASB issued ASC Topic 715, “Compensation—Retirement Benefits” (“ASC 715”).  ASC 715 provides additional guidance on anemployer’s disclosures about plan assets of a defined benefit pension or otherpost-retirement plan enabling users of the financial statements to assess theinputs and valuation techniques used to develop fair value measurements of planassets at the annual reporting date.  The guidance requires more detaileddisclosures about the assets of a defined benefit pension or otherpost-retirement plan and is effective for fiscal years ending after December 15,2009. Since the guidance only requires enhanced disclosures,we do not expect theadoption of ASC 715 to have an impact on our consolidated financial positionand results of operations.

 

****CriticalAccounting Policies****

 

Our financial statements are prepared in accordancewith accounting principles generally accepted in the United States.  To apply these principles, we must makeestimates and judgments that affect our reported amounts of assets, liabilities,revenues and expenses, and related disclosure of contingent assets andliabilities.  In many instances, wereasonably could have used different accounting estimates and, in otherinstances, changes in the accounting estimates are reasonably likely to occurfrom period to period. Accordingly, actual results could differ significantlyfrom our estimates.  To the extent thatthere are material differences between these estimates and actual results, ourfinancial condition or results of operations will be affected.  We base our estimates and judgments onhistorical experience and other assumptions that we believe to be reasonable atthe time and under the circumstances, and we evaluate these estimates andjudgments on an ongoing basis.  We referto accounting estimates and judgments of this type as critical accountingpolicies, judgments, and estimates. Management believes there have been no material changes during the sixmonths ended February 28, 2010 to the critical accounting policiesreported in Item 7 “Management’s Discussion and Analysis of Financial Conditionand Results of Operations” section in our Form 10-K for the fiscal yearended August 31, 2009.

 

**Forward Looking Information**

 

Thepart of this Quarterly Report on Form 10-Q captioned “Management’sDiscussion and Analysis of Financial Condition and Results of Operations”contains certain forward-looking statements, which involve risks anduncertainties.  Forward-lookingstatements include, without limitation, statements as to our future operatingresults, future economic conditions and expectations or plans relating to theimplementation or realization of our strategic goals.  These statements are based on currentexpectations, estimates and projections about the industries in which weoperate, and the beliefs and assumptions made by management.  Readers should refer to the discussions under“Forward Looking Information” and “Risk Factors” contained in our Annual Reporton Form 10-K for the fiscal year ended August 31, 2009 concerningcertain factors that could cause our actual results to differ materially fromthe results anticipated in such forward-looking statements. These discussionsand Risk Factors are hereby incorporated by reference into this QuarterlyReport.

 

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**Item 3 - Quantitative and Qualitative Disclosures about Market Risk**

 

Welimit the amount of credit exposure to any one issuer.  At February 28, 2010, other than ourrestricted investments (which are restricted for use in a non qualifiedretirement savings plan for certain key employees and Directors), all of ourfunds were either in demand deposit accounts or investment instruments thatmeet high credit quality standards such as money market funds, governmentsecurities, or commercial paper.

 

Ourdomestic operations have limited currency exposure since substantially alltransactions are denominated in U.S. dollars. However, our European operationsare subject to currency exchange fluctuations. We continue to review our policies and procedures to reduce thisexposure while maintaining the benefit from these operations and sales to otherEuropean customers.  As of February 28,2010, we had cash balances in the United Kingdom for our HumiSeal Europe Ltdand Chase Protective Coatings Ltd divisions denominated primarily in poundssterling and equal to US $2,290,000 and cash balances in France for ourHumiSeal Europe SARL division denominated primarily in euros and equal to US$373,000.  We will continue to review ourcurrent cash balances denominated in foreign currency in light of current taxguidelines, working capital requirements, infrastructure improvements andpotential acquisitions.

 

Weincurred a foreign currency translation loss, net of tax, for the six monthsended February 28, 2010 in the amount of $944,000 related to our Europeanoperations which is recorded in other comprehensive income within our Statementof Stockholders’ Equity.  We do not haveor utilize any derivative financial instruments.

 

**Item 4 - Controls and Procedures**

 

*Evaluation of disclosure controls and procedures*

 

Wemaintain disclosure controls and procedures that are designed to ensure thatinformation required to be disclosed in our reports under the Securities ExchangeAct of 1934, as amended, is recorded, processed, summarized and reported withinthe time periods specified in the Commission’s rules and forms and thatsuch information is accumulated and communicated to our management, includingour Chief Executive Officer and Chief Financial Officer, as appropriate, toallow for timely decisions regarding required disclosure.  In designing and evaluating the disclosurecontrols and procedures, management recognizes that any controls andprocedures, no matter how well designed and operated, can provide onlyreasonable assurance of achieving the desired control objectives, andmanagement is required to apply its judgment in evaluating the cost-benefitrelationship of possible controls and procedures.

 

Wecarry out a variety of ongoing procedures, under the supervision and with theparticipation of our  management,including our Chief Executive Officer and Chief Financial Officer, to evaluatethe effectiveness of the design and operation of our disclosure controls and procedures.Based on the foregoing, our Chief Executive Officer and Chief Financial Officerconcluded that our disclosure controls and procedures were effective at areasonable assurance level as of the end of the period covered by this report.

 

*Changes in internal control over financial reporting*

 

There was no change in ourinternal control over financial reporting during our most recent fiscal quarterthat has materially affected, or is reasonably likely to materially affect, ourinternal control over financial reporting.

 

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**Part II – OTHER INFORMATION**

 

**Item 1 – Legal Proceedings**

 

We are one of over 100 defendants in a personal injury lawsuit, pendingin Ohio, which alleges personal injury from exposure to asbestos contained incertain Chase products.  The case is captioned Marie Lou Scott, Executrixof the Estate of James T. Scott v. A-Best Products, et al., No. 312901 inthe Court of Common Pleas for Cuyahoga County, Ohio.  The plaintiff in the case issued discoveryrequests to us in August 2005, to which we timely responded in September 2005. The trial had initially been scheduled to begin on April 30, 2007.  However, that date had been postponed and nonew trial date has been set.  As of February 2010,there have been no new developments as this Ohio lawsuit has been inactive withrespect to us.

 

Wewere named as one of the defendants in a complaint filed on June 25, 2009,in a lawsuit captioned Lois Jansen, Individually and as Special Administratorof the Estate of Thomas Jansen v. Beazer East, Inc., et al., No:09-CV-6248 in the Milwaukee County (Wisconsin) Circuit Court.  Theplaintiff alleges that her husband suffered and died from malignantmesothelioma resulting from exposure to asbestos in his workplace.  Theplaintiff has sued seven alleged manufacturers or distributors ofasbestos-containing products, including Royston Laboratories (formerly anindependent company and now a division of Chase Corporation).  We havefiled an answer to the claim denying the material allegations in thecomplaint.  The parties are currently engaged in discovery.

 

Inaddition to the matters described above, we are involved from time to time inlitigation incidental to the conduct of our business.  Although we do not expect that the outcome inany of these matters, individually or collectively, will have a materialadverse effect on our financial condition or results of operations, litigationis inherently unpredictable.  Therefore,judgments could be rendered or settlements entered, that could adversely affectour operating results or cash flows in a particular period.  We routinely assess all of our litigation andthreatened litigation as to the probability of ultimately incurring aliability, and record our best estimate of the ultimate loss in situationswhere we assess the likelihood of loss as probable.

 

**Item 1A – Risk Factors**

 

Pleaserefer to Item 1A in our Form 10-K for the fiscal year ended August 31,2009 for a discussion of the risk factors which could materially affect ourbusiness, financial condition or future results.

 

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**Item 4 - Submission of Matters to aVote of Security Holders**

 

Thefollowing matters were approved at our Annual Stockholders Meeting, which washeld on January 29, 2010.

 

Proposal1- For the election of nominees for the Board of Directors

 
| **Name of Director**  | ** ** | **In Favor** | ** ** | **Votes Withheld** | ** ** | **Broker Non-Votes** | ** ** |
|-----------------------|------------|--------------|------------|--------------------|------------|----------------------|------------|
| Adam P. Chase         |       | 5,862,162    |       | 744,028            |       | 1,698,391            |       |
| Peter R. Chase        |       | 6,040,614    |       | 565,576            |       | 1,698,391            |       |
| Mary Claire Chase     |       | 6,024,559    |       | 581,631            |       | 1,698,391            |       |
| J. Brooks Fenno       |       | 6,121,659    |       | 484,531            |       | 1,698,391            |       |
| Lewis P. Gack         |       | 6,103,607    |       | 502,583            |       | 1,698,391            |       |
| George M. Hughes      |       | 5,644,044    |       | 962,146            |       | 1,698,391            |       |
| Ronald Levy           |       | 6,023,507    |       | 582,683            |       | 1,698,391            |       |
| Thomas Wroe, Jr. |       | 6,105,496    |       | 500,694            |       | 1,698,391            |       |

 

Proposal2 – For the ratification of PricewaterhouseCoopers LLP as the corporation’sindependent registered public accounting firm for the fiscal year ending August 31,2010

 
| **In  Favor** | ** ** | **Votes  Against** | ** ** | **Abstentions** |
|---------------|------------|--------------------|------------|-----------------|
| 8,173,623     |       | 125,981            |       | 4,977           |

 

**Item 6 - Exhibits**

 
| **Exhibit  Number** | ** ** | **Description**                                                                                                            |
|---------------------|------------|----------------------------------------------------------------------------------------------------------------------------|
| 10.1                |       | Asset Purchase  Agreement, dated December 18, 2009 between Chase Corporation and Grace  Construction Products Limited |
| 10.2                |       | Term Loan Agreement,  dated December 15, 2009, between Chase Corporation and RBS Citizens                             |
| 31.1                |       | Certification of  principal executive officer pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002              |
| 31.2                |       | Certification of  principal financial officer pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002              |
| 32.1                |       | Certification of  principal executive officer pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002              |
| 32.2                |       | Certification of  principal financial officer pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002              |

 

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**SIGNATURES**

 

Pursuantto the requirements of the Securities Exchange Act of 1934, the Registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized.

 

 
|                       | **Chase  Corporation** |
|----------------------------|------------------------|
|                       |                   |   |
|                       |                   |   |
| Dated:  April 9, 2010 | By:                    | /s/  Peter R. Chase |
|                       |                   | Peter  R. Chase, |
|                       |                   | Chairman and Chief  Executive Officer |
|                       |                   |   |
|                       |                   |   |
| Dated:  April 9, 2010 | By:                    | /s/  Kenneth L. Dumas |
|                       |                   | Kenneth  L. Dumas |
|                       |                   | Chief Financial Officer  and Treasurer |

 

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