Results of Operations

Revenues and Operating Profit by Segment are as follows (dollars in thousands)

* Includes loss on impairment of goodwill of $579,000

Total Revenues

Total revenues for fiscal 2004 increased $12.5 million or 17% to $87.1 million from $74.6 million in the prior year. The increase in revenues for the Company's Specialized Manufacturing segment is primarily due to the following: (a) the acquisition of Paper Tyger; (b) Chase Facile's Paterson facility has been fully integrated with a full year of production and has bolstered revenues through sales in CATV and Insulfab and contributed additional revenues in fiscal 2004 as it was included in Chase Corporation's results for only six months in fiscal 2003; (c) strong demand has resulted in increased sales of Chase BLH ₂ OCK®; (d) demand internationally for HumiSeal® products has increased; and (e) the Specialized

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Manufacturing segment's product lines have continued to improve and become more diversified. These increases in Specialized Manufacturing were offset by a decrease of approximately $1.0 million in revenues from the Company's Canadian operation as it was reorganized in fiscal 2004. Additionally, increased demand internationally in Europe and Asia Pacific caused royalty revenues to increase $259,000 or 28% to $1,196,000 in fiscal 2004 compared to $937,000 in fiscal 2003.

Revenues in the Company's Electronic Manufacturing Services segment were flat in fiscal 2004 compared to fiscal 2003. However, this segment's revenues were negatively affected by the December 2003 sale of Sunburst, which accounted for $8.8 million in revenues in fiscal 2003 compared to $2.5 million in the current fiscal year (Sunburst revenues were included for only three months of fiscal year 2004 prior to being sold). The shortfall caused by the sale of Sunburst was offset by an increase in revenues of $6.0 million from the Company's Chase EMS division, which is also part of the Electronic Manufacturing Services segment. The increase in Chase EMS sales was predominantly due to the strengthening of the hi-tech market, which continues to rebound from the economic downturn suffered in 2001 and 2002, and greater demand for specialized turnkey production from its existing and new customers.

Export sales from continuing domestic operations to unaffiliated third parties were $8,964,000, $5,459,000, and $4,504,000 for the years ended August 31, 2004, 2003 and 2002, respectively. The change in export sales was due to the general improvement of the global economy. A license and royalty arrangement entered into in 2002, with a manufacturer in the Far East, caused a reduction in export sales in 2002 and corresponding increase to royalty income as certain customers who were purchasing directly from the Company in the United States began purchasing from the Company's new licensee. The Company does not anticipate any material change to export sales during fiscal 2005

Total revenues for fiscal 2003 increased $5.3 million or 8% to $74.6 million from $69.3 million in the prior fiscal year. The increase in revenues was primarily a result of sales generated by the Company's acquisitions of Tapecoat (acquired in fiscal 2002) and Chase Facile (acquired in fiscal 2003). Fiscal 2003 Specialized Manufacturing revenues increased over the previous year as this segment continued to benefit from the asset purchase of the Tapecoat division as well as seven months of sales activity generated by the February 2003 acquisition of Chase Facile.

Cost of Products and Services Sold

In fiscal 2004, cost of products and services sold increased $10.1 million or 20% to $61.7 million compared to $51.6 million in the prior fiscal year. The majority of the dollar value increase was a direct result of increased revenues in fiscal 2004. As a percentage of revenues, cost of products and services sold increased to 71% in fiscal 2004 compared to 69% in fiscal 2003. This percentage increase was primarily due to the Company's Specialized Manufacturing segment which experienced increased pricing pressure on raw material costs in fiscal 2004 coupled with increased sales of lower margin products. Additionally, sales related to the Paper Tyger product line have lower margins compared to some of the Company's other divisions due to the higher cost of raw materials used in Paper Tyger products. Fiscal 2004 included nine months of Paper Tyger compared to no sales activity in fiscal 2003, which was prior to the acquisition.

In fiscal 2003, cost of products and services sold increased $2.4 million or 5% to $51.6 million compared to $49.2 million in the prior year period. The dollar value increase was a direct result of increased revenues in fiscal 2003. As a percentage of revenues, cost of products and services sold decreased to 69% in fiscal 2003 compared to 71% in fiscal 2002, primarily due to increased revenues from the Company's Tapecoat and Chase Facile's divisions. Fiscal 2003 included a full year of Tapecoat and seven months of Chase Facile's operations compared to four months and no activity for Tapecoat and Chase Facile, respectively, in fiscal 2002. These two divisions, which are in the Specialized Manufacturing segment, sell products with higher margins compared to the Company's Electronic Manufacturing Services segment. Accordingly, there were more sales of these higher margin products in fiscal 2003.

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Selling, General and Administrative Expenses

Selling, general and administrative expenses increased $1.3 million or 9% to $15.9 million in fiscal 2004 compared to $14.6 million in fiscal 2003, and increased $1.3 million or 9% to $14.6 million in fiscal 2003 compared to $13.3 million in fiscal 2002. As a percent of revenues, selling, general and administrative expenses decreased in fiscal 2004 to 18% compared to 19% in fiscal 2003 and 2002. The increase in fiscal 2004 and 2003 relates primarily to salary and benefits, including health care costs; information technology and telecommunication costs; higher public company expenses, including accounting and legal fees; and costs associated with the Paper Tyger sales office, which was acquired in fiscal 2004. Additionally, selling expenses are higher in the current fiscal year due to a proportionate increase in commissions associated with the increase in revenues. The Company has also invested in certain personnel that it believes are required to support continued growth in future periods.

Bad debt expense, net of recoveries, decreased $97,000 to $397,000 in fiscal 2004 compared to $494,000 in fiscal 2003. The decrease in 2004 is a result of the financial difficulties of a long standing customer in the Company's Specialized Manufacturing segment whose receivable balance was written off in fiscal 2003.

Loss on Impairment of Goodwill

As discussed in the notes of the Company's consolidated financial statements, in fiscal year 2004, the Company recorded a $579,000 charge related to the impairment of goodwill in connection with its sale of Sunburst. Goodwill related to Sunburst, having a pre-impairment book value of $1,412,000, was written down to its fair value of $833,000, which was realized upon the December 10, 2003 sale of Sunburst. The impairment was recorded in the Company's first fiscal quarter ended November 30, 2003 while the effective date of the sale of Sunburst for accounting purposes was December 1, 2003 in the second fiscal quarter ended February 29, 2004.

Interest Expense

Interest expense was $346,000 in fiscal 2004 compared to $381,000 and $517,000 in fiscal 2003 and 2002, respectively. The change in interest expense is a direct result of the Company's ability to reduce overall debt balances through principal payments from operating cash flow offset by increases in the Company's outstanding debt as a result of: (a) the repurchase of common stock (b) the acquisition of Paper Tyger and (c) the acquisition of manufacturing equipment located in Taylorsville, North Carolina. The Company's debt will continue to be paid down through operating cash flow in fiscal 2005. The Company continues to receive the benefits from favorable borrowing rates from its financial institutions.

Other Income (Expense)

Other income (expense) in fiscal year 2004 includes $151,000 of foreign currency translation loss which was realized upon the closing of the Company's Canadian facility offset by $107,000 ($11,900 per month) related to rental income on property (building and land) owned by the Company and leased to Sunburst under a 36-month rental agreement entered into in conjunction with the Company's sale of Sunburst.

Income Taxes

The effective tax rate for fiscal 2004 was 40.0% compared to 33.3% and 31.5% in fiscal 2003 and 2002, respectively. In all three years, the Company has received the benefit of strong export sales and foreign tax credits. In fiscal 2004, the sale of Sunburst created a capital loss carryforward for income tax purposes of approximately $2.3 million. This capital loss expires in 2008 and will be used to offset capital gains generated by the Company in future periods. As of August 31, 2004, management has concluded that it is more likely than not that the Company will not realize the benefit of this capital loss carryforward and thus the deferred tax asset has been offset by a full valuation allowance.

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Accordingly, the Company's annual fiscal 2004 effective income tax rate reflects this valuation allowance as well as less favorable state income tax rates in the form of a higher effective tax rate compared to prior fiscal years.

Income Before Minority Interest

Income before minority interest decreased 4% in fiscal 2004 compared to prior year. Income before minority interest increased 22% in fiscal 2003 compared to fiscal 2002. Excluding the $579,000 loss on impairment of goodwill related to Sunburst, which was recorded in the first quarter of fiscal 2004, income before minority interest increased 7% for the fiscal year 2004 compared to the prior year. This increase was a direct result of increased revenues offset by continued pressure on profit margins and additional selling, general and administrative expenses as discussed above.

Income (Loss) from Unconsolidated Joint Venture

The income (loss) from unconsolidated joint venture relates to a 42% equity position in the Stewart Group, Inc. ("SGI"), located in Toronto, Canada. In fiscal 1995, the Company formed a joint venture, SGI with The Stewart Group, Ltd. of Canada, to produce various products for the fiber optic cable market. The business focus is geared toward the telecommunication's market, which the Company anticipates will continue to be a soft economic market in fiscal 2005.

In accordance with the Company's accounting policies, the carrying value of this investment in joint venture asset is reviewed periodically to determine if an impairment exists. In fiscal year 2004, an impairment of $500,000 related to the Company's investment in SGI was recorded due to changes in SGI's projected future cash flows due to the expected future loss of a key customer. This impairment charge was determined based upon an updated understanding of SGI's businesses through discussions with SGI's majority shareholder as well as an analysis of SGI's projected future cash flows.

Net Income

Net income in fiscal 2004 decreased 12% compared to the prior fiscal year. Net income increased 18% in fiscal 2003 compared to fiscal 2002. The decrease in net income in the current fiscal year is a direct result of the three significant charges recorded in fiscal 2004 all of which are discussed above (a) the impairment of the Company's investment in unconsolidated joint venture, SGI, of $500,000 (b) the impairment of goodwill related to Sunburst of $579,000, and (c) the after tax losses of the Company's Canadian operations, which were approximately $498,000 in fiscal 2004 compared to $230,000 in fiscal 2003. Included in the fiscal year loss for the Canadian operations was approximately $300,000 in costs related to employee severance, stay bonuses, accelerated depreciation on certain manufacturing equipment, one time buy out of the building lease commitment, realization of unrealized foreign currency translation adjustments, and other shut down costs. The charges discussed above had a negative effect of approximately $1,347,000 on the Company's net income in fiscal year 2004. These decreases in net income were partially offset by increases in net income due to higher revenues in fiscal 2004 compared to fiscal 2003.

Fiscal 2003 earnings were primarily affected by increased revenues as a result of acquisitions in the Company's Tapecoat division and Chase Facile operating facility. Chase Facile is part of the Company's Coating & Laminating division and along with Tapecoat are both part of the Specialized Manufacturing segment. The margin on the increased revenues generated from the Specialized Manufacturing segment was higher when compared to the Company's Electronic Manufacturing Services segment.

Liquidity and Sources of Capital

The Company's cash balances increased $1,239,000 to $1,406,000 at August 31, 2004 from $167,000 at August 31, 2003. Generally, the Company manages its borrowings and payments under its revolving line of credit in order to maintain a low cash balance. The relatively high cash balance at August 31, 2004 was primarily the result of the timing

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of year end cash collections that had not yet been used by the Company to pay down its revolving line of credit. Consequently, the increase in cash at August 31, 2004 as compared to August 31, 2003 was offset by a corresponding increase in the balance of the Company's line of credit as of August 31, 2004.

Cash flow provided by operations was $5,518,000 in fiscal 2004 compared to $7,768,000 and $8,884,000 during fiscal 2003 and 2002, respectively. Cash provided by operations during fiscal 2004 was primarily due to operating income offset by increased inventory and accounts receivable balances which were higher as a direct result of increased sales volume in fiscal 2004. Additionally, there were two significant non-cash charges related to the loss on impairment of an unconsolidated joint venture, SGI, and impairment of goodwill related to Sunburst.

The ratio of current assets to current liabilities was 2.3 as of August 31, 2004 compared to 1.9 as of August 31, 2003 and 1.8 as of August 31, 2002. The increase of the Company's current ratio is primarily attributable to a higher cash balance as of August 31, 2004 combined with the elimination of notes payable to bank which related to Sunburst and Chase Canada.

Cash flow used in investing activities was primarily due to the acquisition of the Paper Tyger business for $702,000, and purchases of property, plant and equipment of $3,191,000, offset by a decrease in the cash surrender value of life insurance policies as a result of cash payments received on Company owned policies.

Cash flow provided by financing activities was primarily due to cash received from (a) new debt agreements entered into which helped finance the purchase of manufacturing equipment for the Company's Taylorsville, North Carolina plant, the Paper Tyger acquisition, and cash paid for the repurchase of common stock from the Edward L. Chase Revocable Trust (the "Trust"), and (b) proceeds from exercise of common stock options. This was offset by payments on long-term debt and dividends paid.

On December 3, 2003, the Company paid a cash dividend totaling approximately $1,255,000 on its common stock. The cash dividend of $0.31 per share was paid to shareholders of record on October 31, 2003.

In December 2003, concurrent with its sale of Sunburst, the Company purchased 250,000 shares of common stock held by the Trust for $3,255,000.

In December 2003, the Company acquired the assets of Paper Tyger for $702,000 with additional contingent payments to be made by the Company if certain revenue and product margin targets are met with respect to the Paper Tyger products over the next three years.

In December 2003, the Company increased its total available credit under its credit facility with its primary bank from a maximum of $6 million to $7 million. The Company continues to have long-term unsecured credit available up to a maximum amount of $7 million at the bank's base lending rate or, at the option of the Company, at the effective London Interbank Offered Rate (LIBOR) or "Eurodollar rate" plus 1.5 percent, or at the effective 30-day LIBOR rate plus 1.75 percent. The weighted average interest rate of outstanding balance on this credit facility was 3.32% at August 31, 2004. The Company had $3.7 million in available credit at August 31, 2004 under this credit facility and plans to use this availability to help finance its cash needs in fiscal 2005. This long-term unsecured credit facility is included in scheduled principal payments at its maturity (March 2006) although it is intended that it will continue to be renewed. As of October 31, 2004, the Company had $2.9 million in available credit under this credit facility.

Under the terms of the Company's credit facility, the Company must comply with certain debt covenants related to (a) the ratio of total liabilities to tangible net worth and (b) the ratio of operating cash flow to debt service on a rolling twelve month basis. The Company was in compliance with its debt covenants as of August 31, 2004.

In January 2004, the Company purchased manufacturing equipment totaling $2,460,000. The Company utilized this manufacturing equipment to begin manufacturing operations at a newly leased facility in Taylorsville, North Carolina.

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In January 2004, to finance the purchase of the above manufacturing equipment, the Company entered into a loan agreement in the amount of $2.3 million with Citizen's Bank of Massachusetts. The interest rate on the loan is either (i) the Prime Rate or (ii) the LIBOR plus applicable margin as defined in the loan agreement. The Company may elect either interest rate option upon any interest payment date during the term of the loan. The Company is required to make monthly interest payments plus quarterly principal payments in the amount of $143,750 each quarter beginning in April 2004. The loan matures on January 8, 2008 and may be prepaid at any time during the term of the loan.

On August 31, 2004, the Board of Directors and, separately, the Audit Committee of the Company approved the amendment of the 1995 restricted stock agreement between the Company and Mr. Peter R. Chase, the Company's CEO and President, to among other things, permit Mr. Chase the right to tender a portion of his 250,000 restricted shares ("Shares") (valued at fair market value on the vesting date) to the Company to satisfy the minimum tax withholding obligations of the Company with respect to the vesting of the Shares. The Company's minimum tax withholding obligation for Mr. Chase upon the vesting of the shares was equal to approximately 31.5% of the fair market value of the shares on the vesting date.

The 250,000 Shares held by Mr. Chase vested subsequent to the 2004 fiscal year end on September 6, 2004. Mr. Chase tendered 79,375 shares to the Company on September 6, 2004 in satisfaction of the approximately $1.3 million minimum withholding obligation with respect to the vesting of the Shares, which was paid by the Company in cash.

On October 18, 2004, the Company announced a cash dividend of $0.35 per share (totaling approximately $1,314,000) to shareholders of record on October 29, 2004 and payable on December 1, 2004.

To the extent that interest rates increase in future periods, the Company will assess the impact of these higher interest rates on the Company's financial and cash flow projections of its potential acquisitions.

The Company does not have any significant off balance sheet arrangements.

The Company has no significant capital commitments in fiscal 2005 but plans on adding additional machinery and equipment as needed to increase capacity or to enhance operating efficiencies in its manufacturing plants. Additionally, the Company may consider the acquisitions of companies or other assets in fiscal 2005, which are complementary to its business. The Company believes that its existing resources, including its credit facility, together with cash generated from operations and additional bank borrowings, will be sufficient to fund its cash flow requirements through at least the next twelve months. However, there can be no assurances that such financing will be available at favorable terms, if at all.

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Recently Issued Accounting Standards

On March 31, 2004, the Financial Accounting Standards Board (FASB) issued an exposure draft No. 1102-100, Proposed Statement of Financial Accounting Standards-Share-Based Payment , effective for fiscal periods beginning after December 15, 2004. This exposure draft outlines a methodology for the accounting treatment of stock options and certain other share-based payments. It requires these payments to be recorded as an operating expense. The exposure draft is proposed to supercede SFAS 123, which allowed for footnote disclosure of this expense. Currently, the Company uses the Black-Scholes model to calculate the proforma option expense for footnote disclosure only. The Company's proforma expense calculated for this disclosure was $868,301, $1,240,545, and $1,244,443 for the years ended August 31, 2004, 2003, and 2002, respectively. The Company is currently evaluating its share-based employee compensation programs and the impact of this proposed pronouncement on its consolidated financial statements.

In March 2004, the Emerging Issues Task Force (EITF) reached a consensus on EITF Issue No. 03-6, Participating Securities and the Two-Class Method under FASB Statement No. 128, Earnings per Share . EITF Issue No. 03-6 clarifies what constitutes a participating security and provides further guidance in applying the two-class method of calculating earnings per share. The consensuses reached by the Task Force on EITF Issue No. 03-6 were ratified by the FASB on March 31, 2004, and are effective for reporting periods beginning after March 31, 2004. The Company has reviewed the issue and concluded that it has no participating securities as defined by EITF Issue No. 03-6.

In December 2003, the FASB issued Interpretation No. 46 (revised December 2003), Consolidation of Variable Interest Entities . This interpretation of Accounting Research Bulletin No. 51, Consolidated Financial Statements , addresses consolidation by business enterprises of certain variable interest entities. This interpretation explains how to identify variable interest entities and how an enterprise assesses its interests in a variable interest entity to decide whether to consolidate that entity. It requires existing unconsolidated variable interest entities to be consolidated by their primary beneficiaries if the entities do not effectively disperse risks among parties involved. Variable interest entities that effectively disperse risks will not be consolidated unless a single party holds an interest or combination of interests that effectively recombines risks that were previously dispersed.

An enterprise that consolidates a variable interest entity is the primary beneficiary of the variable interest entity. The primary beneficiary of a variable interest entity is the party that absorbs a majority of the entity's expected losses, receives a majority of its expected residual returns, or both, as a result of holding variable interests, which are the ownership, contractual, or other monetary interests in an entity that change with changes in the fair value of the entity's net assets excluding variable interests. This interpretation requires the primary beneficiary of a variable interest entity, and an enterprise that holds significant variable interests in a variable interest entity but is not the primary beneficiary, to make certain disclosures about the variable interest entity.

Application of this interpretation is required in financial statements of public entities that have interests in variable interest entities or potential variable interest entities commonly referred to as special-purpose entities for periods ending after December 15, 2003. Application by public entities (other than small business issuers) for all other types of entities is required in financial statements for periods ending after March 15, 2004. The adoption of this pronouncement did not have any impact on the consolidated financial statements.

In December 2003, the FASB revised SFAS No. 132, Employers Disclosures about Pensions and Other Post-Retirement Benefits . The revised standard requires new disclosures in addition to those required by the original standard about the assets, obligations, cash flows and net periodic benefit costs of defined benefit pension plans and other defined benefit post-retirement plans. SFAS No. 132R is effective for financial statements with fiscal years ending after December 15, 2003. Disclosure of the estimated future benefit payments is effective for fiscal years ending after June 14, 2004. See Note 10 for disclosures regarding the Company's defined benefit pension plans.

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In March 2004, the EITF reached a consensus on the remaining portions of EITF 03-01, The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments with an effective date of June 15, 2004. EITF 03-01 provides new disclosure requirements for other-than-temporary impairments on debt and equity investments. Investors are required to disclose quantitative information about: (i) the aggregate amount of unrealized losses, and (ii) the aggregate related fair values of investments with unrealized losses, segregated into time periods during which the investment has been in an unrealized loss position of less than 12 months and greater than 12 months. In addition, investors are required to disclose the qualitative information that supports their conclusion that the impairments noted in the qualitative disclosure are not other-than temporary. The adoption of this statement did not have an impact on the Company s consolidated financial statements.

In September 2004, the EITF reached a consensus on EITF Issue No. 04-10, Applying Paragraph 19 of FAS 131 in Determining Whether to Aggregate Operating Segments That Do Not Meet the Quantitative Thresholds. The consensus states that operating segments that do not meet the quantitative thresholds can be aggregated only if aggregation is consistent with the objective and basic principles of SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information , the segments have similar economic characteristics, and the segments share a majority of the aggregation criteria (a)-(e) listed in paragraph 17 of SFAS 131. The effective date of the consensus in this Issue is for fiscal years ending after October 13, 2004. The Company believes that there will not be a material impact to the adoptions of this EITF issue.

Critical Accounting Policies, Judgments, and Estimates

The U.S. Securities and Exchange Commission ("SEC") requires companies to provide additional disclosure and commentary on their most critical accounting policies. The SEC has defined the most critical accounting policies as the ones that are most important to the portrayal of a company's financial condition and operating results, and require management to make its most significant estimates and judgments in the preparation of its consolidated financial statements. The Company's critical accounting policies are described below.

Accounts Receivable

The Company evaluates the collectibility of accounts receivable balances based on a combination of factors. In cases where the Company is aware of circumstances that may impair a specific customer's ability to meet its financial obligations to it, a specific allowance against amounts due to the Company is recorded, and thereby reduces the net recognized receivable to the amount the Company reasonably believes will be collected. For all other customers, the Company recognizes allowances for doubtful accounts based on the length of time the receivables are past due, industry and geographic concentrations, the current business environment and its historical experience. If the financial condition of the Company's customers deteriorates or if economic conditions worsen, additional allowances may be required in the future, which could have an adverse impact on the future operating results of the Company.

Inventories

The Company values inventory at the lower of cost or market using the first-in, first-out (FIFO) method. Management assesses the recoverability of inventory based on types and levels of inventory held, forecasted demand and changes in technology. These assessments require management judgments and estimates, and valuation adjustments for excess and obsolete inventory may be recorded based on these assessments. The Company estimates excess and obsolescence exposures based upon assumptions about future demand, product transitions, and market conditions and records reserves to reduce inventories to their estimated net realizable value. The failure to accurately forecast demand may lead to additional excess an obsolete inventory and future charges.

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Investment in Joint Venture

The Company has an investment in a joint venture related to an area of the Company's strategic focus. The Company accounts for this investment using the equity method of accounting. In assessing the recoverability of this investment, the Company must make certain assumptions and judgments based on changes in the Company's overall business strategy, the financial condition of the joint venture, market conditions and the industry and economic environment in which the entity operates. Adverse changes in market conditions or poor operating results of the joint venture could result in losses or an inability to recover the carrying value of the investment, thereby requiring an impairment charge in the future. (See notes to consolidated financial statements)

Goodwill, Intangible Assets, and Other Long-Lived Assets

Long-lived assets consist of goodwill, identifiable intangible assets, trademarks, patents and agreements and property, plant, and equipment. Intangible assets and property, plant, and equipment, excluding goodwill, are amortized using the straight-line method over their estimated useful life. The Company reviews long-lived assets and all intangible assets for impairment whenever events or changes in circumstances indicate the carrying amount of such assets may not be recoverable. Goodwill is also reviewed at least annually for impairment. Factors which the Company considers important and that could trigger an impairment review include significant underperformance relative to expected historical or projected future operating results, and significant negative industry or economic trends. The Company determines whether an impairment has occurred based on gross expected future cash flows, and measures the amount of the impairment based on the related future discounted cash flows. The cash flow estimates used to determine impairment, if any, contain management's best estimates, using appropriate and customary assumptions and projections at the time. (See notes to consolidated financial statements)

The estimates of expected cash flows require the Company to make significant judgments regarding future periods that are subject to some factors outside of the Company's control. Changes in these estimates can result in significant revisions to the carrying value of these assets and may result in material charges to the results of operations.

Revenue Recognition

The Company recognizes revenue at the time of shipment which is typically when persuasive evidence of an arrangement exists, performance of its obligation is complete, its price to the buyer is fixed or determinable, and the Company is reasonably assured of collecting. If a loss is anticipated on any contract, a provision for the entire loss is made immediately. Revenue recognition involves judgments and assessments of expected returns, and the likelihood of nonpayment due to insolvent customers. The Company analyzes various factors, including a review of specific transactions, historical experience, creditworthiness of customers and current market and economic conditions in determining when to recognize revenue. Changes in judgments on these factors could impact the timing and amount of revenue recognized with a resulting impact on the timing and amount of associated income. Commissions are recognized based on commission statements received from the manufacturers represented. Royalty revenue is recognized based on licensee production statements received from the authorized manufacturers. Billed shipping and handling fees are recorded as sales revenue with the associated costs recorded as costs of products and services sold.

Deferred Income Taxes

The Company evaluates the need for a valuation allowance to reduce its deferred tax assets to the amount that is more likely than not to be realized. The Company has considered future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for a valuation allowance. Should the Company determine that it would not be able to realize all or part of its net deferred tax asset in the future, an adjustment to the deferred tax asset would be charged to income in the period such determination was made.

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Impact of Inflation

Inflation has not had a significant long-term impact on earnings. In the event of significant inflation, the Company's efforts to recover cost increases would be hampered as a result of the competitive nature of the industries in which it operates.

Forward-Looking Information

From time to time, the Company may publish, verbally or in written form, forward-looking statements relating to such matters as anticipated financial performance, business prospects, technological developments, new products, research and development activities and similar matters. In fact, this Form 10-K (or any other periodic reporting documents required by the 1934 Act) may contain forward-looking statements reflecting the current views of the Company concerning potential future events or developments. The Private Securities Litigation Reform Act of 1995 (the "Act") provides a "safe harbor" for forward-looking statements. In order to comply with the terms of the "safe harbor," the Company cautions investors that any forward-looking statements made by the Company are not guarantees of future performance and that a variety of factors could cause the Company's actual results and experience to differ materially from the anticipated results or other expectations expressed in the Company's forward-looking statements. The risks and uncertainties which may affect the operations, performance, development and results of the Company's business include, but are not limited to, the following: uncertainties relating to economic conditions; uncertainties relating to customer plans and commitments; the pricing and availability of equipment, materials and inventories; technological developments; performance issues with suppliers and subcontractors; economic growth; delays in testing of new products; rapid technology changes and the highly competitive environment in which the Company operates. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date the statement was made.

Risk Factors

The Company currently operates in a mature market where increases or decreases in market share could be significant. The Company's sales and net income are dependent on recurring sales from a consistent and established customer base. Organic growth opportunities are minimal; however, the Company has and will continue to use strategic acquisitions as a means to build and grow the business.

The Company's business strategy includes the pursuit of strategic acquisitions. From time to time, the Company engages in discussions with potential target companies concerning potential acquisitions. In executing its acquisition strategy, the Company may be unable to identify suitable acquisition candidates. In addition, the Company may face competition from other companies for acquisition candidates, making it more difficult to acquire suitable companies on favorable terms.