<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998
Or
[ ] Transition Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the transition period from to
----- -----
COMMISSION FILE NO. 1-13394
CHASE INDUSTRIES INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 51-0328047
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
14212 COUNTY ROAD M-50, MONTPELIER, OHIO 43543
(Address of principal executive offices, including Zip Code)
Registrant's telephone number, including area code: (419) 485-3193
Not Applicable
(Former name, former address and former fiscal year, if changed
since last report)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES [X] NO [ ]
<TABLE>
<S> <C>
NUMBER OF SHARES OF COMMON STOCK OUTSTANDING AS OF NOVEMBER 12, 1998........................9,083,077
NUMBER OF SHARES OF NONVOTING COMMON STOCK OUTSTANDING AS OF NOVEMBER 12, 1998..............6,150,118*
</TABLE>
- - -----------
* The Registrant's Nonvoting Common Stock is convertible, on a
share-for-share basis, into Common Stock at the option of the holder.
================================================================================
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CHASE INDUSTRIES INC.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements Page
----
<S> <C>
Consolidated Balance Sheet as of September 30, 1998
and December 31, 1997.............................................................. 3
Consolidated Statement of Income for the three and nine months ended
September 30, 1998 and 1997........................................................ 4
Consolidated Statement of Cash Flows for the nine months ended
September 30, 1998 and 1997........................................................ 5
Notes to Consolidated Financial Statements................................................... 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................................................. 11
PART II. OTHER INFORMATION
Item 1. Legal Proceedings........................................................................... 22
Item 5. Other Information........................................................................... 23
Item 6. Exhibits and Reports on Form 8-K............................................................ 24
Signature................................................................................... 25
</TABLE>
2
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CHASE INDUSTRIES INC.
CONSOLIDATED BALANCE SHEET
(UNAUDITED; IN THOUSANDS, EXCEPT SHARE INFORMATION)
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
-------------- --------------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 1,158 $ 924
Receivables, net of allowance for doubtful accounts and
claims of $1,304 and $1,286 in 1998 and 1997, respectively 40,273 42,368
Inventories 54,420 63,688
Prepaid expenses 760 922
Deferred income taxes 2,520 2,509
-------------- --------------
Total current assets 99,131 110,411
Property, plant and equipment, net 94,127 94,162
Other assets 5,036 4,928
-------------- --------------
Total assets $ 198,294 $ 209,501
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 25,164 $ 37,244
Accrued compensation and benefits 6,660 6,651
Accrued income taxes 1,218 --
Other accrued liabilities 5,632 6,425
Current portion of long-term debt 149 141
-------------- --------------
Total current liabilities 38,823 50,461
Long-term debt 31,374 48,068
Deferred income taxes 13,987 12,259
-------------- --------------
Total liabilities 84,184 110,788
-------------- --------------
Commitments and contingencies -- --
-------------- --------------
Stockholders' equity:
Common stock, $.01 par value, 36,310,000 and 25,000,000
shares authorized in 1998 and 1997, respectively,
9,083,077 and 6,002,046 shares issued and outstanding
in 1998 and 1997, respectively 91 60
Nonvoting common stock, $.01 par value, 12,300,000 and
5,000,000 shares authorized in 1998 and 1997, respectively;
6,150,118 and 4,100,079 shares issued and outstanding
in 1998 and 1997, respectively 62 41
Additional paid-in capital 31,490 30,597
Retained earnings 82,467 68,015
-------------- --------------
Total stockholders' equity 114,110 98,713
-------------- --------------
Total liabilities and stockholders' equity $ 198,294 $ 209,501
============== ==============
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
3
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CHASE INDUSTRIES INC.
CONSOLIDATED STATEMENT OF INCOME
(UNAUDITED; IN THOUSANDS, EXCEPT SHARE INFORMATION)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net sales $ 102,580 $ 116,215 $ 339,951 $ 371,369
Cost of goods sold (exclusive of depreciation
and amortization shown separately below) 89,474 100,173 291,187 319,220
Lower of cost-or-market writedown 1,000 3,424
------------- ------------- ------------- -------------
Gross profit 12,106 16,042 45,340 52,149
Selling, general and administrative expenses 4,155 3,752 11,387 11,639
Depreciation and amortization 2,734 2,455 8,038 7,324
------------- ------------- ------------- -------------
Operating income 5,217 9,835 25,915 33,186
Interest expense, net 779 1,195 2,605 3.708
------------- ------------- ------------- -------------
Income before income taxes 4,438 8,640 23,310 29,478
Provision for income taxes 1,686 3,286 8,858 11,204
------------- ------------- ------------- -------------
Net income $ 2,752 $ 5,354 $ 14,452 $ 18,274
============= ============= ============= =============
Earnings per share*:
Basic $ .18 $ .35 $ .95 $ 1.21
============= ============= ============= =============
Diluted $ .18 $ .34 $ .93 $ 1.18
============= ============= ============= =============
</TABLE>
* Adjusted for the three-for-two stock split effective June 6, 1998.
The accompanying notes are an integral part of the consolidated
financial statements.
4
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CHASE INDUSTRIES INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED; IN THOUSANDS)
<TABLE>
<CAPTION>
Nine Months Ended Sept 30,
1998 1997
------------- -------------
<S> <C> <C>
Operating activities:
Net income $ 14,452 $ 18,274
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 8,038 7,324
Deferred income tax expense 1,717 664
Lower of cost-or-market writedown 3,424
Changes in assets and liabilities:
Decrease (increase) in receivables 2,095 (12,528)
Decrease (increase) in inventories 5,844 (997)
(Decrease) in accounts payable (12,080) (2,444)
Increase in accrued liabilities 434 29
Other, net (422) 1,829
------------- -------------
Net cash provided by operating activities 23,502 12,151
------------- -------------
Investing activities:
Expenditures for property, plant and equipment (9,527) (10,889)
------------- -------------
Net cash (used in) investing activities (9,527) (10,889)
------------- -------------
Financing activities:
Revolving credit facility borrowings (repayments), net (3,578) 15,137
Equipment financing 2,000 --
Principal payments on long-term debt (13,108) (25,100)
Issuance of common stock - options exercised 945 545
------------- -------------
Net cash (used in) financing activities (13,741) (9,418)
------------- -------------
Net increase (decrease) in cash and cash equivalents 234 (8,156)
Cash and cash equivalents, beginning of period 924 9,763
------------- -------------
Cash and cash equivalents, end of period $ 1,158 $ 1,607
============= =============
Supplemental disclosures:
Interest and bank fees paid $ 1,442 $ 2,357
============= =============
Income taxes paid $ 5,563 $ 10,865
============= =============
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
5
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CHASE INDUSTRIES INC.
1. SIGNIFICANT ACCOUNTING POLICIES:
PRINCIPLES OF CONSOLIDATION AND INTERIM FINANCIAL INFORMATION
The consolidated balance sheet as of September 30, 1998, and December
31, 1997, the consolidated statement of income for the three and nine months
ended September 30, 1998 and 1997, and the consolidated statement of cash flows
for the nine months ended September 30, 1998 and 1997, include the accounts of
Chase Industries Inc. (the "Company"), a Delaware corporation, and its
wholly-owned subsidiaries, Chase Brass & Copper Company, Inc. ("CBCC"), a
Delaware corporation, Leavitt Tube Company, Inc. ("Leavitt"), a Delaware
corporation, and Holco Corporation ("Holco"), an Illinois corporation and
wholly-owned subsidiary of Leavitt.
The accompanying financial statements have been prepared in accordance
with instructions to Form 10-Q and do not include all the information and
footnote disclosures required by generally accepted accounting principles. The
financial information for September 30, 1998 and 1997, included herein is
unaudited and, in the opinion of management, reflects all adjustments necessary,
consisting only of normal recurring adjustments, for a fair presentation of such
financial information.
The results of operations for the three and nine months ended September
30, 1998, are not necessarily indicative of the results of operations that may
be expected for the year ended December 31, 1998. This quarterly report on Form
10-Q should be read in conjunction with the annual financial statements included
in the Company's Annual Report on Form 10-K dated March 20, 1998.
On August 30, 1996, the Company acquired, through Leavitt, the assets
and operations of the steel tube division of UNR Industries, Inc., including all
the outstanding stock of Holco (the "Leavitt Acquisition"). Upon consummation of
the Leavitt Acquisition, Leavitt continued operations in the manufacture and
sale of structural and mechanical steel tubing. The net purchase price was
approximately $91.7 million after post-closing adjustments, of which $62 million
was financed with the Bank Credit Facility (as hereinafter defined) and the
remainder with cash. The Leavitt Acquisition was accounted for as a purchase.
On August 24, 1990, the Company acquired, through CBCC, the assets and
operations of a Delaware corporation formerly named Chase Brass & Copper
Company, Incorporated ("Old Chase"), pursuant to the Asset Purchase Agreement
("CBCC Purchase Agreement") dated May 10, 1990, by and between the Company,
CBCC, Old Chase, BP Exploration (Alaska) Inc. ("BPE") and The Standard Oil
Company (the "CBCC Acquisition"). BPE and The Standard Oil Company (collectively
referred to as "BP") own all of the stock of Old Chase. The CBCC Acquisition was
accounted for as a purchase.
6
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CHASE INDUSTRIES INC.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENT
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information," which is effective for years beginning
after December 15, 1997. The Company is assessing the impact on its financial
statement disclosures.
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities," (SFAS 133), which is effective for fiscal
years beginning after June 15, 1999. The new standard requires companies to
record derivatives on the balance sheet as assets or liabilities, measured at
fair value. Management of the Company believes SFAS 133 will not have a material
effect on its financial position or results of operations.
2. INVENTORIES:
Inventories are stated at the lower of cost-or-market, with cost
determined on the last-in, first-out (LIFO) basis. Inventories have been written
down to lower of cost-or-market and such amounts are considered cost for
subsequent years. During third quarter 1998, the Company incurred a non-cash
inventory writedown totaling $1 million due to decreasing flat-rolled steel
prices. Also, during second quarter 1998, the Company recorded a non-cash
inventory writedown totaling $2.4 million. The second quarter lower of
cost-or-market writedown was caused by the June 1, 1998, 10 cent-per-pound
reduction in the brass metal price.
If the first-in, first-out (FIFO) method for determining cost had been
used, inventories would have been approximately $1.6 million lower and $3.0
million higher at September 30, 1998, and December 31, 1997, respectively.
Inventories consisted of the following (in thousands):
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- -------------
<S> <C> <C>
Raw materials $ 23,860 $ 22,891
Work in process 9,102 12,631
Finished goods 21,989 29,369
------------- -------------
54,951 64,891
Tolling metal due customers (531) (1,203)
------------- -------------
$ 54,420 $ 63,688
============= =============
</TABLE>
7
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CHASE INDUSTRIES INC.
3. COMMON STOCK AND EARNINGS PER SHARE:
The Company's Board of Directors declared, and the stockholders
approved, a three-for-two stock split for shareholders of record as of June 6,
1998. The Company's issued shares increased from approximately 10 million to
approximately 15 million shares. Fractional shares resulting from the stock
split were paid in cash, without interest. In conjunction with the stock split,
the Company's Restated Certificate of Incorporation was amended by stockholder
vote to increase the number of authorized shares from 25 million to 36.31
million for Common Stock and from 5 million to 12.3 million for Non-Voting
Common Stock.
The following is a reconciliation of the denominator used in the
computation of basic and diluted earnings per share, adjusted for the
three-for-two stock split effective June 6, 1998. Average shares are as follows:
<TABLE>
<CAPTION>
Three Months Ended September 30,
----------------------------------------------------
1998 1997
------------------------ ------------------------
Shares EPS Shares EPS
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Basic 15,232,908 $ .18 15,147,725 $ .35
Stock options 312,381 -- 388,361 (.01)
---------- ---------- ---------- ----------
Diluted 15,545,289 $ .18 15,536,086 $ .34
========== ========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
Nine Months Ended September 30,
----------------------------------------------------
1998 1997
------------------------- ------------------------
Shares EPS Shares EPS
---------- ----------- ---------- ----------
<S> <C> <C> <C> <C>
Basic 15,209,719 $ .95 15,137,539 $ 1.21
Stock options 376,602 (.02) 328,306 (.03)
---------- ----------- ---------- ----------
Diluted 15,586,321 $ .93 15,465,845 $ 1.18
========== ========== ========== ==========
</TABLE>
All shares of Common Stock and Nonvoting Common Stock are identical,
except that holders of Nonvoting Common Stock have no voting rights. Shares of
Nonvoting Common Stock may be converted, at the option of the holder, into
Common Stock on a share-for-share basis, except to the extent that the holder of
Nonvoting Common Stock is restricted from obtaining certain ownership levels in
the Company pursuant to the Small Business Investment Act of 1958 and the Bank
Holding Company Act of 1956.
At September 30, 1998, and December 31, 1997, the Company had no
preferred stock issued or outstanding. In conjunction with the initial public
offering in November 1994, the Company authorized 1,000,000 shares of preferred
stock, none of which has been issued. The preferences and rights of such
preferred stock may be determined by the Board of Directors at any time prior to
issuance.
8
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CHASE INDUSTRIES INC.
4. COMMITMENTS AND CONTINGENCIES:
Both of CBCC and Leavitt are subject to certain contingent
environmental liabilities. Because the development of any required remediation
plans with respect to such environmental conditions have not been completed, the
Company currently is unable to estimate with any degree of certainty the amount
of cleanup costs associated therewith. However, it is reasonably possible that
the cleanup costs associated with these environmental conditions may be material
and, in the event CBCC or Leavitt, as applicable, were determined to be solely
responsible or liable for site cleanup activities (due to the inability or
unwillingness of other responsible parties to perform or pay for such
activities), such expenditures could have a material adverse effect on the
Company's earnings and financial condition.
The Company does not believe that it will be required to make material
expenditures with respect to the environmental conditions at Leavitt's
facilities, or that the cleanup costs or other liabilities associated with such
conditions will have a material adverse effect on the Company's financial
condition, results of operations or liquidity.
With respect to CBCC's facility, in connection with the CBCC
Acquisition, the Company and BP entered into a remediation agreement (the
"Remediation Agreement"). Under the terms of the Remediation Agreement, BP is
responsible for certain remediation activities attributable to environmental
releases which occurred prior to the CBCC Acquisition at CBCC's manufacturing
facility. BP also is obligated under the CBCC Purchase Agreement to indemnify
the Company for liabilities arising out of certain environmental conditions that
existed as of the CBCC Acquisition date. BP has performed certain activities in
this regard and has acknowledged liability for certain releases of regulated
substances into the environment which occurred prior to the CBCC Acquisition.
Preliminary studies conducted immediately prior to the CBCC Acquisition
indicated that the site upon which CBCC's manufacturing facility is located has
been contaminated with certain volatile organic compounds, including
trichlorethylene, as well as total petroleum hydrocarbons and certain metals
from historical operating practices. Interim remediation for a portion of the
site relating to five sludge lagoons has been substantially completed at a
projected cost of approximately $1 million, which was recorded in third quarter
1998. Under the terms of the Remediation Agreement, BP is required to fund the
costs of remediating the sludge lagoons. Accordingly, the Company recorded a
corresponding $1 million receivable from BP.
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CHASE INDUSTRIES INC.
Although BP has acknowledged its contractual obligation to fund certain
investigatory and cleanup activities related to site contamination attributable
to Old Chase's operations, as described below BP and CBCC currently are involved
in litigation regarding, among other things, BP's obligations under the
Remediation Agreement. If BP fails to fulfill its obligations under the
Remediation Agreement to fund remediation activities at CBCC's manufacturing
facility, CBCC will be required to fund these activities. However, to the extent
CBCC is required to fund cleanup costs related to the remediation of
contamination at its manufacturing facility, the Company believes it would be
able to fund these costs with cash on hand and borrowings under its existing
Bank Credit Facility. Therefore, the Company does not believe that funding these
remediation activities will have a material adverse effect on the Company's
financial condition, results of operations or liquidity. Based on the status of
remediation activities, other than the approximately $1 million liability
established in third quarter for sludge lagoon activities as described above, no
reserves have been established regarding the aforementioned matters.
Additionally, the Company expects no material impact on its financial position,
results of operations or liquidity as a result of the existence of any other
environmental conditions related to CBCC.
CBCC and/or other entities named "Chase Brass & Copper Co." (which may
include Old Chase or divisions of Old Chase) have been named by governmental
agencies and/or private parties as a potentially responsible party ("PRP") under
the Comprehensive Environmental Response, Compensation and Liability Act of 1980
("CERCLA") and/or state laws with respect to four sites (and possibly a fifth
site). The Company believes that CBCC has no liability for the cleanup costs
related to these sites because (a) such liability is attributable to an entity
that had the same or similar name to that of CBCC, such as a division or
subsidiary of BP (other than the brass rod division of Old Chase), or (b) such
liability arose from acts that occurred prior to the CBCC Acquisition and,
therefore, BP retained such liability under the CBCC Purchase Agreement and is
contractually obligated to indemnify the Company for such liabilities. To the
extent CBCC incurs any cleanup costs with respect to these sites, it intends to
enforce its rights under the CBCC Purchase Agreement to recover such amounts
from BP.
On January 7, 1998, a lawsuit entitled Ken-Chas Reserve Company and BP
Exploration (Alaska) Inc. and The Standard Oil Company v. Chase Industries Inc.
and Chase Brass & Copper Company, Inc. was filed in the Court of Common Pleas in
Cuyahoga County, Ohio (the "Complaint"). In the Complaint, plaintiffs seek
declaratory judgement regarding the calculation of interest payable under the
$20 million promissory note issued to BP in connection with the CBCC Acquisition
(the "BP Note"). Under the BP Note a contingent interest payment was payable
August 24, 1996, calculated pursuant to a formula based on the Company's "EBDIT"
(defined in the BP Note as earnings before depreciation, interest and taxes, as
determined in accordance with GAAP) for years 1990 through 1995. In calculating
the interest payable August 24, 1996, the Company followed the express terms of
the BP Note and, accordingly, deducted amortization from earnings for the
purposes of the interest calculation. In calculating the interest payable on
August 24, 1996, in accordance with the express terms of the BP Note, the
interest payable was $254,748, which the Company offset against the receivable
from BP. Plaintiffs allege that, notwithstanding the express terms of the BP
Note, the term "EBDIT" should be interpreted to refer to earnings before
depreciation, interest, taxes and amortization and, based on such
interpretation, allege that the contingent interest payable under the BP Note in
August 1996 should have been $5,833,811.
In addition, under the BP Note, interest is payable August 24 of each
year from and after August 24, 1996, until the BP Note matures on August 24,
1999. The interest due and payable on each of August 24, 1997 and 1998, was
$1,856,000, which amount the Company also offset against the receivable from
BP. Plaintiffs also seek money judgment against the Company for payment of
accrued interest under the BP Note.
Plaintiffs also have asserted that, as a result of the Company's
failure to pay interest previously due and payable under the BP Note, the
Company is in default under the BP Note and is seeking recovery of the $20
million principal amount of the BP Note. On April 6, 1998, the Company filed an
Answer and Counterclaim (the "Answer and Counterclaim") disputing the
allegations set forth in the Complaint and asserting a counterclaim seeking
recovery from BP of an unspecified amount of damages resulting from BP's breach
of representations, warranties and covenants contained in the CBCC Purchase
Agreement and amounts owed under the Remediation Agreement. The Answer and
Counterclaim also seeks to enforce a prior settlement agreement
10
<PAGE> 11
CHASE INDUSTRIES INC.
between the Company and BP regarding certain disputes under the CBCC Purchase
Agreement and the Remediation Agreement and seeks a declaratory judgement
confirming the Company's entitlement to offset amounts owed by BP and Old Chase
against interest payable under the BP Note and that no default has occurred
under the BP Note. On June 8, 1998, plaintiffs filed a Reply to Counterclaim in
response to the Answer and Counterclaim. In plaintiff's Reply to Counterclaim,
plaintiffs deny any breach by BP of any representations, warranties or covenants
contained in the CBCC Purchase agreement or the Remediation Agreement and deny
the existence of any prior settlement agreement reached between the Company and
BP regarding certain disputes under the CBCC Purchase Agreement and the
Remediation Agreement. Although the Company disputes the plaintiffs allegations,
the Company believes that, even if plaintiffs were to prevail in their positions
as set forth in the Complaint, the Company would be able to pay amounts due,
including the principal amount of the BP Note, utilizing cash on hand, offsets
of amounts owing from Old Chase and BP, and, if necessary, borrowings obtained
under the Company's existing Bank Credit Facility. Therefore, the Company
continues to classify the BP Note as long-term.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
The Company, through its wholly owned subsidiaries CBCC and Leavitt, is
a leading manufacturer of free-machining and forging brass rod and structural
and mechanical steel tubing. Chase Industries Inc. is traded on the New York
Stock Exchange under the symbol CSI.
STOCK SPLIT
The Company's Board of Directors declared a three-for-two stock split
for shareholders of record as of June 6, 1998. As a result of the stock split,
the Company's issued shares increased from approximately 10 million to
approximately 15 million shares. Fractional shares resulting from the stock
split were paid in cash, without interest.
CBCC
CBCC is an ISO 9002 certified manufacturer and supplier of
free-machining and forging brass rod in the United States and Canada. CBCC's net
sales represent gross sales of brass rod less sales discounts and freight
charges. The gross sales price of brass rod consists of a metal price charged to
customers ("Metal Selling Price") and a fabrication price as separate
components. Cost of goods sold includes the cost of brass scrap, which is the
principal raw material used in the manufacturing process and the primary
component of cost of goods sold, as well as the costs of labor, energy and other
materials and supplies used in fabricating the brass scrap into finished rod.
11
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CHASE INDUSTRIES INC.
Therefore, CBCC's profit levels depend primarily on the amount of finished rod
shipped, fabrication prices, and the difference between the metal price charged
to customers and CBCC's cost of brass scrap.
The principal raw material used in CBCC's manufacturing process is
brass scrap, approximately 80% of which is obtained from customers and 20% of
which is purchased from scrap dealers at prevailing free-market prices.
Free-market prices of brass scrap fluctuate based on the supply of and demand
for brass scrap and the price for copper and zinc (the major components of
brass), and generally are less than the price at which brass scrap is purchased
from customers ("Metal Buying Price").
The Metal Selling Price is determined at the time of shipment based on
the then-current Metal Buying Price and is not directly affected by fluctuations
in free-market brass scrap prices. As a result of this pricing structure,
increases and decreases in the Metal Selling Price will affect net sales levels
and gross profit as a percentage of sales, even in the absence of an increase or
decrease in shipments or the fabrication prices charged to customers, but will
have little impact on the Company's gross profit levels. However, the quantity
of free-market brass scrap purchased by CBCC and changes in the difference
between the free-market prices paid for brass scrap and the Metal Buying Price
will affect the Company's gross profit, even in the absence of an increase or a
decrease in shipments or net sales levels.
In addition to sales made under the pricing structure described above,
some sales are made on a tolling basis. In a tolling arrangement, the customer
consigns brass scrap to CBCC and is charged a fabrication price for processing
the brass scrap into finished rod. Tolling transactions reduce the Company's net
sales by the Metal Selling Price that otherwise would be charged to the customer
in a sale of finished brass rod and cost of goods sold by the Metal Buying Price
that otherwise would be paid to the customer. To a lesser extent, tolling
transactions also affect the Company's gross profit to the extent CBCC is unable
to take advantage of the pricing differential on brass scrap purchased and sold.
To partially offset the effect of tolling transactions on the Company's gross
profit, CBCC requires tolling customers to deliver 1.04 pounds of brass scrap in
exchange for each pound of finished rod shipped.
LEAVITT
Leavitt is a leading producer of structural and mechanical electric
resistance welded steel tubing in square, rectangular and round shapes in sizes
ranging from 1/2 inch to 10 inch squares and equivalent rectangles and 3/8 inch
to 12 3/4 inches in outer diameter for round sizes. Leavitt's financial
performance may be impacted by changes in the price it pays for flat-rolled
steel, the primary cost component of Leavitt's finished product, which is based
on the market conditions in the flat-rolled steel industry. Based on the
then-current market conditions in the steel tubing industry, Leavitt may or may
not pass the economic impact of steel price changes on to its customers through
changes in the selling price.
12
<PAGE> 13
CHASE INDUSTRIES INC.
RESULTS OF OPERATIONS
Three Months Ended September 30, 1998, Compared with Three Months Ended
September 30, 1997
Net sales decreased $13.6 million, or 12%, to $102.6 million in 1998.
The decline was the result of 25% lower brass Metal Selling Prices and a decline
in steel tubing shipments. Demand remains strong for brass rod and the Company
experienced record shipments in third quarter 1998. The brass rod market was
driven by ongoing demand in the industry's largest end use market, construction
and remodeling, as new housing starts spur sales of plumbing fittings and
fixtures.
Third quarter gross profit was adversely affected by a $1.0 million
non-cash inventory writedown, which is equivalent to $.6 million after tax and 4
cents per diluted share. The declining flat-rolled steel prices and competitive
steel tubing pricing pressures have caused customers to delay purchases in
anticipation of yet lower tubing prices. Despite record brass rod shipments,
overall profitability was unfavorably affected by lower unit profit margins.
Fabrication prices decreased due to competitive pressures in the market. Margins
also decreased due to the decline in the profitability of brass purchased on the
open market.
As a result of the above factors, gross profit decreased $3.9 million,
or 25%, to $12.1 million in third quarter 1998 compared with 1997.
Selling, general and administrative expenses increased $403,000, or
11%, to $4.16 million and depreciation and amortization increased $279,000, or
11%, to $2.7 million in third quarter 1998. Selling, general and administrative
expenses increased primarily due to due diligence costs related to investigating
potential acquisitions that were not consummated.
As a result of the above factors, operating income decreased $4.6
million, or 47%, to $5.2 million in third quarter 1998 compared with 1997.
Net interest expense decreased $416,000, or 35%, to $779,000 in third
quarter 1998, primarily as a result of prepayments of Leavitt Acquisition debt.
Based on the above factors, net income decreased $2.6 million, or 49%,
to $2.8 million. Basic earnings per share decreased to $.18 in third quarter
1998 compared with $.35 in third quarter 1997. Diluted earnings per share was
$.18 in third quarter 1998 compared with $.34 in third quarter 1997. The per
share amounts have been adjusted for the three-for-two stock split effective
June 6, 1998.
13
<PAGE> 14
CHASE INDUSTRIES INC.
Nine Months Ended September 30, 1998, Compared with Nine Months Ended
September 30, 1997
Net sales decreased $31.4 million, or 8%, to $340.0 million in 1998
primarily due to lower brass Metal Selling Prices.
Gross profit for the nine months ended September 30, 1998, was
adversely affected by the $3.4 million non-cash inventory writedown, which is
equivalent to $2.1 million after tax and 14 cents per diluted share. During
second quarter 1998, the Company recorded 2.4 million of the non-cash inventory
writedown which was caused by lower Metal Selling Prices. Since December 1997,
the cumulative reduction in the Metal Selling Price totals 25 cents per pound,
or 25%. The current Metal Selling Price is the lowest since 1988, and management
believes the lower price will encourage demand for brass products.
Additionally, lower margins on steel tubing sales, lower contributions
from reduced free market brass scrap purchases as well as lower margins on brass
purchased on the open market also adversely impacted results for the nine months
ended September 30, 1998.
As a result of the above factors, gross profit decreased $6.8 million,
or 13%, to $45.3 million for the nine months ended September 30, 1998, compared
with 1997.
Selling, general and administrative expenses decreased $252,000, or 2%,
to $11.4 million and depreciation and amortization increased $714,000, or 10%,
to $8.0 million for the nine months ended September 30, 1998.
As a result of the above factors, operating income decreased $7.3
million, or 22%, to $25.9 million for the nine months ended September 30, 1998,
compared with 1997.
Net interest expense decreased $1.1 million, or 30%, to $2.6 million
for the nine months ended September 30, 1998, primarily as a result of
prepayments of Leavitt Acquisition debt.
Based on the above factors, net income decreased $3.8 million, or 21%,
to $14.5 million. Basic earnings per share decreased to $.95 for the nine months
ended September 30, 1998, compared with $1.21 in 1997. Diluted earnings per
share was $.93 for the nine months ended September 30, 1998, compared with $1.18
in 1997.
LIQUIDITY AND CAPITAL RESOURCES
General
At September 30, 1998, cash and cash equivalents totaled $1.2 million
compared with $924,000 at year end 1997. Total debt at September 30, 1998, was
$31.5 million compared with $48.2 million at year end 1997. All Leavitt
Acquisition debt payments originally due through April 2001 had been prepaid as
of September 30, 1998.
14
<PAGE> 15
CHASE INDUSTRIES INC.
Working Capital
At September 30, 1998, working capital was $60.3 million which was
flat with $60.0 million at December 31, 1997.
The Company's current ratio was 2.55 at September 30, 1998, compared to
2.19 at December 31, 1997.
Cash Flow Provided by Operating Activities
For the nine months ended September 30, 1998, net cash provided by
operating activities was $23.5 million, which included net income of $14.5
million and depreciation and amortization of $8.0 million
For the nine months ended September 30, 1997, net cash provided by
operating activities was $12.2 million, which included net income of $18.3
million and depreciation and amortization of $7.3 million, partially offset by
an increase in working capital, excluding cash, debt and deferred income taxes,
of $15.5 million.
Cash Flow Used in Investing Activities
Capital expenditures were $9.5 million for the nine months ended
September 30, 1998, and $10.9 million for the nine months ended September 30,
1997.
Cash Flow Used in Financing Activities
Cash used in financing activities of $13.7 million for the nine months
ended September 30, 1998, consisted of the net repayments of long-term debt
totaling $16.7 million, proceeds of $2 million received in conjunction with the
lease of billet heating equipment and $945,000 from the issuance of common stock
for stock options exercised.
Financing activities during the nine months ended September 30, 1997,
included net repayments of long-term debt of $10 million partially offset by
$545,000 from the issuance of common stock for stock options exercised.
15
<PAGE> 16
CHASE INDUSTRIES INC.
Capital Resources
In 1996, the Company launched a capital project referred to as "Project
400." The project is designed to increase CBCC's foundry, extrusion system and
finishing capabilities, with an ultimate goal of increasing finished brass rod
production capability by one-third to approximately 400 million pounds annually.
The first phase of the project included the installation of three new billet
heaters in fourth quarter 1997 which were fully operational by the end of first
quarter 1998.
In second quarter 1998, the Company announced Phase II of Project 400,
which is a multi-year investment that includes construction of a new brass
foundry to enable the Company to provide customers with multiple alloys. Casting
equipment having a lead time of approximately one year was ordered in July 1998
for the new foundry. It is anticipated that capital projects will be paid for
with cash flow provided by operating activities and the Bank Credit Facility, as
necessary.
Bank Credit Facility
The Company's current bank credit facility (as amended, the "Bank
Credit Facility"), which is agented by PNC Bank, National Association, was
entered into in August 1996 in connection with the Leavitt Acquisition. The Bank
Credit Facility includes a $60 million term loan ("Term Loan") and a $40 million
revolving credit facility ("Revolving Credit Facility"). The Company prepaid $13
million on the Term Loan in 1998, $30 million in 1997 and $10 million in 1996,
including all amounts originally due through April 2001. The remaining balance
on the Term Loan is payable in quarterly installments in amounts ranging from
$2,975,000 in July 2001 to $1,025,000 due January 2002. The total borrowing
capacity under the Revolving Credit Facility is determined monthly by a formula
based on levels of inventory and accounts receivable, up to a maximum of $40
million. The Revolving Credit Facility commitment expires August 30, 2001, and
the Company can request a one-year extension of the expiration date at any time.
Advances under the Bank Credit Facility bear interest at alternative
variable rates based on certain percentages, as provided in the agreement, in
excess of the lending bank's prime rate, the Federal funds rate (Revolving
Credit Facility advances only) or LIBOR, with interest payable quarterly or as
of the end of each LIBOR borrowing period, whichever is shorter.
The Bank Credit Facility contains certain covenants that, among other
things, limit the Company's ability to incur additional debt or pay dividends.
The covenants also require the Company to maintain a minimum interest coverage
ratio and level of net worth and restrict the Company from exceeding a maximum
ratio of debt to cash flow from operations. The Bank Credit Facility also
requires the Company to maintain CBCC and Leavitt as wholly-owned subsidiaries.
16
<PAGE> 17
CHASE INDUSTRIES INC.
As of September 30, 1998, $7.0 million was outstanding under the Term
Loan and $4.0 million was outstanding under the Revolving Credit Facility. Total
availability under the Revolving Credit Facility was $36.0 million.
BP Note
In connection with the CBCC Acquisition, the Company issued a
promissory note to Old Chase in the original principal amount of $20.0 million
(the "BP Note"). The BP Note was recorded at the CBCC Acquisition date at a
discount using a 10.4% effective interest rate. The BP Note initially was
scheduled to mature in August 1996, and the Company, at its option, extended the
maturity date to August 1999, with interest payable annually from August 1996
through maturity at 9.28%. The BP Note contained a contingent interest payment
based upon average Company earnings (as defined in the BP Note) for the years
ended December 31, 1990 through 1995. The contingent interest, totaling $254,000
and due August 1996, and the annual interest of $1,856,000 due each of August
1997 and August 1998, were offset against the receivable from BP. See Part I.
Item 1. Financial Statements, Note 4 of Notes to Consolidated Financial
Statements and Part II. Item 1. Legal Proceedings.
IMPACT OF THE YEAR 2000 ISSUE
Year 2000 issues are due to computer software being written using two
digits rather than four to define a specific fiscal or calendar year. As a
result, date-sensing software may recognize "00" as the year 1900 rather than
the year 2000. This could result in a system failure or miscalculations causing
disruptions of operations or inability to engage in normal business activities.
Based on the Company's assessments to date of its Year 2000 risks and
for other business purposes as well, CBCC implemented modifications to its
management information systems in years 1995 through 1997, including the
conversion of its management information processing software to new software.
The Company believes that the new management information processing software is
not subject to Year 2000 programming issues, utilizing a minimum of four digit
fields, and therefore is Year 2000 compliant. The cost of this
upgrade/conversion has been incurred and was funded with internal funds.
Testing of the software for Year 2000 compliance is in process and will be
completed prior to year end 1998.
Leavitt's management information systems are not currently Year 2000
compliant. For this and other business reasons, Leavitt is in the process of
converting to new software, which has been represented as Year 2000 compliant
and which management believes also will assist in improved management of the
business. Substantial conversion tasks have been completed. The capital
expenditures for the system implementation are projected to be approximately $2
million, and it
17
<PAGE> 18
CHASE INDUSTRIES INC.
is expected that the upgrade to the new software will be completed in second
quarter 1999. This project is being funded from internal funds, and a
substantial portion of the projected expenditures has been spent or committed.
Testing of the software for Year 2000 compliance will occur as the systems are
implemented.
The Company also utilizes software and systems in its internal
manufacturing processes and instrumental control functions, which may or may not
be Year 2000 compliant. The Company currently is evaluating these potential
issues and expects to complete its evaluation in first quarter 1999.
The Company is in the process of assessing its vulnerability to Year 2000
failures on the part of its suppliers, vendors and customers and will be
surveying major suppliers, vendors and customers to determine their
vulnerability of Year 2000 failures, including assessing the potential impact of
any such failures on the Company.
The Company believes that its new management information systems are
or, in the case of Leavitt, will be by year end 1999, Year 2000 compliant.
Although the Company's evaluation of operating systems in its internal
manufacturing processes and instrumental control functions is not yet complete,
the Company expects to bring those systems into Year 2000 compliance, if they
are not already year 2000 compliant, by year end 1999. Consequently, the Company
has not established contingency plans to deal with Year 2000 issues. However, if
this assessment changes, the Company will establish contingency plans as deemed
necessary.
The statements set forth herein regarding the Year 2000 compliance
capabilities of the Company's systems, as well as future estimated expenditures
necessary to cause Year 2000 compliance by the Company's systems, are forward
looking and are based on evaluations by Company personnel and independent
consultants engaged by the Company. Actual effects on the Company of Year 2000
compliance issues, as well as costs that may be incurred by the Company to
address Year 2000 compliance issues, may differ materially from those currently
anticipated if the Company's evaluation of its systems is incorrect.
Furthermore, in the event any of the foregoing contingencies occurs, the
operations at CBCC and/or Leavitt could be adversely affected until such Year
2000 compliance issues are corrected by the Company and/or its vendors and
suppliers, as applicable. In addition, although the Company has not yet been
made aware of any Year 2000 compliance issues with any of its material
suppliers, vendors or customers, or with any internal manufacturing process and
instrumental control functions, because the Company has not yet completed its
evaluation, the Company cannot yet finally determine whether or to what extent
potential non-compliance may adversely affect the operational ability of the
Company or its results of operations.
18
<PAGE> 19
CHASE INDUSTRIES INC.
CONTINGENCIES - ENVIRONMENTAL MATTERS
CBCC. In connection with the CBCC Acquisition, the Company and BP
entered into a remediation agreement (the "Remediation Agreement"). Under the
terms of the Remediation Agreement, BP is responsible for certain remediation
activities attributable to environmental releases which occurred prior to the
CBCC Acquisition at CBCC's manufacturing facility and the construction of a
waste water treatment plant to enable CBCC to comply with its waste water
discharge permit (the "Permit"). BP also is obligated under the CBCC Purchase
Agreement to indemnify the Company for liabilities arising out of certain
environmental conditions that existed as of the CBCC Acquisition date. BP has
performed certain activities in this regard and has acknowledged liability for
certain releases of regulated substances into the environment which occurred
prior to the CBCC Acquisition.
While CBCC's waste water treatment plant has been in operation since
May 1993, CBCC is still experiencing occasional exceedances to certain
limitations contained in the Permit, resulting in violations of the Clean Water
Act. The Ohio Environmental Protection Agency ("Ohio EPA") is kept apprised as
to the status of activities concerning the elimination of exceedances and has
not initiated any enforcement action against CBCC for prior exceedances, but has
indicated that it may do so if exceedances of the Permit limits continue. In
early 1997 CBCC identified certain conditions it believed to be contributing to
the Permit limit exceedances and undertook corrective measures that have reduced
the Permit limit exceedances. Although certain Permit limit exceedances are
still being experienced on occasion, precluding CBCC's routine compliance with
the Permit, CBCC has identified certain additional conditions that may be
contributing to the exceedances and is actively working to correct these
conditions.
CBCC and/or other entities named "Chase Brass & Copper Co." (which may
include Old Chase or divisions of Old Chase) have been named by governmental
agencies and/or private parties as a potentially responsible party ("PRP") under
the Comprehensive Environmental Response, Compensation and Liability Act of 1980
("CERCLA") and/or state laws with respect to four sites (and possibly a fifth
site). The Company believes that CBCC has no liability for the cleanup costs
related to these sites because (a) such liability is attributable to an entity
that had the same or similar name to that of CBCC, such as a division or
subsidiary of BP (other than the brass rod division of Old Chase), or (b) such
liability arose from acts that occurred prior to the CBCC Acquisition and,
therefore, BP retained such liability under the CBCC Purchase Agreement and is
contractually obligated to indemnify the Company for such liabilities. To the
extent CBCC incurs any cleanup costs with respect to these sites, it intends to
enforce its rights under the CBCC Purchase Agreement to recover such amounts
from BP.
19
<PAGE> 20
CHASE INDUSTRIES INC.
Preliminary studies conducted immediately prior to the CBCC Acquisition
indicated that the site upon which CBCC's manufacturing facility is located has
been contaminated with certain volatile organic compounds, including
trichlorethylene, as well as total petroleum hydrocarbons and certain metals
from historical operating practices. BP conducted initial site investigation
activities in an effort to determine the extent of contamination and appropriate
cleanup methods. After reviewing the results of that investigation, CBCC
determined that additional sampling was necessary to more fully delineate the
extent and magnitude of contamination, to establish appropriate cleanup
standards and to identify available remedial methods and potential regulatory
constraints related to specific remedial methodologies. CBCC has substantially
completed the additional sampling that it believes is necessary.
Based on the aggregate sampling results, interim remediation for a
portion of the site relating to five sludge lagoons has been substantially
completed at a projected cost of approximately $1 million, which was recorded in
third quarter 1998. Under the terms of the Remediation Agreement, BP is required
to fund the costs of remediating the sludge lagoons. Accordingly, the Company
recorded a corresponding $1 million receivable from BP.
The results of the initial sampling conducted by BP, the additional
sampling conducted by CBCC, and input from the Ohio EPA are being used to
develop a comprehensive remediation plan for the remainder of the site. CBCC
anticipates completing the evaluation of data, performance of the risk analysis,
and preparation of a draft Remediation Action Plan (the "RAP") in first half of
1999. Prior to the finalization of the RAP, and subsequent execution, the RAP
draft and cost estimates will be provided to BP and reviewed with the Ohio EPA.
The investigation has been conducted on a voluntary basis with the concurrence
of the Ohio EPA, and the Company expects future remediation activities will be
conducted on the same basis.
Because the development of a comprehensive RAP for this site is not yet
complete, the Company presently is unable to estimate with any degree of
certainty the amount of cleanup costs associated with execution of RAP, although
such costs may be material. Although BP has acknowledged its contractual
obligation to fund certain investigatory and cleanup activities related to site
contamination attributable to Old Chase's operations, as described in Note 4 of
Notes to Consolidated Financial Statements in Part I., Item 1., and in Part II.,
Item 1. Legal Proceedings of this report, BP and CBCC currently are involved in
litigation regarding, among other things, BP's obligations under the Remediation
Agreement. If BP fails to fulfill its obligations under the Remediation
Agreement to fund remediation activities at CBCC's manufacturing facility, CBCC
will be required to fund these activities. However, to the extent CBCC is
required to fund cleanup costs related to the remediation of contamination at
its manufacturing facility, the Company believes it would be able to fund these
costs with cash on hand and borrowings under its existing Bank Credit Facility.
Therefore, the Company does not believe that funding these remediation
activities will have a material adverse effect on the Company's financial
condition, results of operations or liquidity. Based on the status of
remediation activities, other than the approximately
20
<PAGE> 21
CHASE INDUSTRIES INC.
$1 million liability established in third quarter for sludge lagoon activities
as described above, no reserves have been established regarding the
aforementioned matters. Additionally, the Company expects no material impact on
its financial position, results of operations or liquidity as a result of the
existence of any other environmental conditions related to CBCC.
To the extent CBCC incurs cleanup costs with respect to its Montpelier,
Ohio site, it intends to enforce its rights under the CBCC Purchase Agreement
and/or Remediation Agreement to recover such amounts from BP. In the event the
Company is entitled to recovery from BP pursuant to the Remediation Agreement,
the CBCC Purchase Agreement, or otherwise, but is unable to collect such amounts
from BP, the Company may elect to offset the amounts of such recoveries against
amounts payable under the BP Note to the extent it legally is entitled to do so.
As of September 30, 1998, the Company has offset approximately $3.96 million
payable as interest under the BP Note against amounts owed by BP and Old Chase
under the CBCC Purchase Agreement and the Remediation Agreement.
Leavitt. Prior to the closing of the Leavitt Acquisition, five
underground storage tanks ("USTs") were removed from Leavitt's facility in
Hammond, Indiana. Prior to removal, one or more of the USTs released petroleum
and other chemical constituents into the environment. Some contamination of
groundwater and soil at the Hammond facility remains in place. Prior to the
Leavitt Acquisition, Old Leavitt had conducted sampling and had requested the
Indiana Department of Environmental Management ("IDEM") to close the UST removal
project. The IDEM has not yet issued a "closure" letter and, in February 1997,
notified Leavitt that additional groundwater sampling will be required prior to
the IDEM considering closure. Additional groundwater sampling was conducted in
fourth quarter 1997, and the test results were submitted to the IDEM for review.
Based on these test results, which indicated the continued presence in the
groundwater of certain contaminants, the IDEM has not agreed to issue a
"closure" letter. Leavitt has engaged an independent consultant to review the
sampling data and provide a recommendation as to further action.
Pending receipt of the consultant's recommendation and further
direction from the IDEM, the Company currently is unable to determine what, if
any, remedial activities may be required at the Hammond facility. Although the
cleanup costs associated with the environmental conditions at the Hammond
facility may be material, based on the results of the 1997 sampling the Company
believes that the probability that Leavitt would be required to make material
expenditures relating to site cleanup at the Hammond facility appears to be
remote. Therefore, the Company has not made any specific accrual for costs
related to investigation or cleanup at the Hammond facility. To the extent the
Company or Leavitt incurs a liability with respect to site cleanup at the
Hammond facility, UNR Industries, Inc., is contractually obligated to indemnify
Leavitt for 90% of losses related to certain environmental conditions, including
costs incurred with respect to contaminants released at Leavitt's properties
(including the Hammond facility) prior to the Leavitt Acquisition, to the extent
such losses exceed $400,000 in the aggregate. In addition, to the extent
21
<PAGE> 22
CHASE INDUSTRIES INC.
the contamination at the Hammond facility is attributed to actions of prior
owners, the Company may be entitled to recover from prior owners costs incurred
by the Company at the Hammond site. The Hammond operations were relocated to
Chicago in September 1997, and no manufacturing activities currently are
conducted at the Hammond location.
The statements set forth herein regarding anticipated expenditures for
environmental matters are forward looking, are based on sampling results
currently available to the Company, as well as certain assumptions regarding
applicable cleanup standards and methodologies. Actual costs required to be
expended by the Company with respect to such matters may differ materially from
current expectations depending on the final resolution of known uncertainties,
including finalization of a comprehensive RAP for CBCC's entire site, acceptance
by applicable governmental agencies of proposed cleanup standards for the
remainder of CBCC's site, discovery of additional contaminants during
remediation, any change in CBCC's proposed use of its property which affects any
applicable cleanup standard and, with respect to Leavitt, the results of any
additional sampling that may be necessary or required at the Hammond, Indiana,
property and any remediation activities as may be required by the IDEM at such
site.
CONTINGENCIES - LEGAL PROCEEDINGS
As discussed in Note 4 of Notes To Consolidated Financial Statements
and Part II., Item 1. Legal Proceedings, the Company and CBCC are defendants in
a lawsuit regarding amounts payable under the BP Note. As discussed therein, the
Company disputes the allegations made in the lawsuit, but believes that, even if
the plaintiffs were to prevail in their positions, the Company would be able to
pay amounts due, including the principal amount of the BP Note, utilizing cash
on hand, offsets of amounts owing from Old Chase and BP, and, if necessary,
borrowings obtained under the Company's existing Bank Credit Facility.
Therefore, the Company continues to classify the BP Note as long-term, and
believes that judgement against the Company and CBCC would not have a material
adverse effect on the Company's financial condition, results of operations or
liquidity.
SAFE HARBOR
Management uses estimates and assumptions in discussing future
operations of the Company and conditions in the industries in which it operates.
Such forecasts made by the Company, including forecasts regarding demand for the
Company's products, are forward looking and are subject to risks and
uncertainties which could cause actual results to differ materially from
historical results or those anticipated. Actual results will be affected by
general economic and industry conditions in the end-use markets for the
Company's products, as well as the impact of competitive products and pricing,
including without limitation the impact of imports. The end-use markets for
CBCC's products include primarily construction and remodeling, industrial
machinery and equipment, electronics and transportation, while the end-use
markets for Leavitt's products
22
<PAGE> 23
CHASE INDUSTRIES INC.
include primarily non-residential construction, agriculture and consumer
durables. Foreign economic activity and the relationship of the U.S. dollar to
other currencies also affect import levels and exports of U.S. manufactured
products containing parts made from brass rod and steel tubing. The Company's
shipments also will be affected by its ability to maintain manufacturing
operations at its current levels without significant interruption.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On June 8, 1998, plaintiffs in the lawsuit styled Ken-Chas Reserve
Company, BP Exploration (Alaska) Inc. and The Standard Oil Company v. Chase
Industries Inc. and Chase Brass & Copper Company, Inc., filed a Reply to
Counterclaim in response to the Company and CBCC's Answer and Counterclaim
(which Answer and Counterclaim was filed by the Company and CBCC on April 6,
1998). In plaintiff's Reply to Counterclaim, plaintiffs deny any breach by BP of
any representations, warranties or covenants contained in the CBCC Purchase
Agreement or the Remediation Agreement and deny the existence of any prior
settlement agreement reached between the Company and BP regarding certain
disputes under the CBCC Purchase Agreement and the Remediation Agreement.
Additional information regarding this lawsuit is included in Note 4 of Notes to
Consolidated Financial Statements included in Part I., Item 1. of this report
and in part II., Item 1. Legal Proceedings contained the Company's quarterly
report on Form 10-Q for the quarter ended June 30, 1998.
ITEM 5. OTHER INFORMATION
Because of a recent change to Rule 14a-4(c)(1) promulgated under the
Securities and Exchange Act of 1934, as amended (the "Exchange Act"), the
Company's management will have discretionary authority with respect to proxies
submitted to the 1999 Annual Meeting of Stockholders on any matter which the
Company does not receive notice of by March 15, 1999. This rule change does not
affect the deadline set forth in Rule 14a-8 promulgated under the Exchange Act
for including a shareholder proposal in the Board of Directors' solicitation of
proxies, and a shareholder proposal must be received by the Company, Attention:
Corporate Secretary, at the address set forth on the front page of this Form
10-Q no later than December 26, 1998, in order to be included in the Board of
Directors' solicitation of proxies.
23
<PAGE> 24
CHASE INDUSTRIES INC.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. EXHIBITS
3.1 Restated Certificate of Incorporation of the Company
(incorporated by reference to Exhibit 3.1 to the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30,
1998).
3.2 Certificate of First Amendment to the Company's Restated
Certificate of Incorporation (incorporated by reference to
Exhibit 3.2 to the Company's Current Report on Form 8-K dated
May 14, 1997) and Certificate of Second Amendment to the
Company's Restated Certificate of Incorporation (incorporated
by reference to Exhibit 3.2 to the Company's Current Report on
Form 8-K dated May 26, 1998).
3.3 By-Laws of the Company (incorporated by reference to Exhibit
3.2 to the Company's Registration Statement on Form S-1 as
filed with the Securities and Exchange Commission on November
3, 1994, Registration No. 33-83178).
4.1 Specimen Common Stock Certificate (incorporated by reference
to Exhibit 4.1 to the Company's Registration Statement on Form
S-1 as filed with the Securities and Exchange Commission on
November 3, 1994, Registration No. 33-83178).
4.2 Exchange Agreement dated November 4, 1994, between the Company
and Citicorp Venture Capital Ltd. ("CVC") (incorporated by
reference to Exhibit 4.4 to the Company's Registration
Statement on Form S-8 dated December 9, 1994, Registration No.
33-87278).
4.3 Voting Agreement dated November 4, 1994, between the Company,
CVC and Martin V. Alonzo ("Mr. Alonzo") (incorporated by
reference to Exhibit 4.5 to the Company's Registration
Statement on Form S-8 dated December 9, 1994, Registration No.
33-87278).
+27 Financial Data Schedules (EDGAR filing only).
-------------
+ Filed herewith
B. REPORTS ON FORM 8-K
None.
24
<PAGE> 25
CHASE INDUSTRIES INC.
S I G N A T U R E
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned hereto duly authorized.
CHASE INDUSTRIES INC.
Date: November 12, 1998 By: /S/ MICHAEL T. SEGRAVES
-------------------------------
Michael T. Segraves
Vice President
Chief Financial Officer
(duly authorized officer and
Principal Financial Officer)
25
<PAGE> 26
CHASE INDUSTRIES INC.
<TABLE>
<CAPTION>
Exhibit Sequentially
No. Description of Exhibits Numbered Page
- - ------- ----------------------- -------------
<S> <C> <C>
3.1 Restated Certificate of Incorporation of the Company (incorporated by
reference to Exhibit 3.1 to the Company's Quarterly Report on Form 10-Q
for the quarter ended June 30, 1998).
3.2 Certificate of First Amendment to the Company's Restated Certificate of
Incorporation (incorporated by reference to Exhibit 3.2 to the
Company's Current Report on Form 8-K dated May 14, 1997) and
Certificate of Second Amendment to the Company's Restated Certificate
of Incorporation (incorporated by reference to Exhibit 3.2 to the
Company's Current Report on Form 8-K dated May 26, 1998).
3.3 By-Laws of the Company (incorporated by reference to Exhibit 3.2 to the
Company's Registration Statement on Form S-1 as filed with the
Securities and Exchange Commission on November 3, 1994, Registration
No. 33-83178).
4.1 Specimen Common Stock Certificate (incorporated by reference to Exhibit
4.1 to the Company's Registration Statement on Form S-1 as filed with
the Securities and Exchange Commission on November 3, 1994,
Registration No. 33-83178).
4.2 Exchange Agreement dated November 4, 1994, between the Company and
Citicorp Venture Capital Ltd. ("CVC") (incorporated by reference to
Exhibit 4.4 to the Company's Registration Statement on Form S-8 dated
December 9, 1994, Registration No. 33-87278).
4.3 Voting Agreement dated November 4, 1994, between the Company, CVC and
Martin V. Alonzo ("Mr. Alonzo") (incorporated by reference to Exhibit
4.5 to the Company's Registration Statement on Form S-8 dated December
9, 1994, Registration No. 33-87278).
+27 Financial Data Schedules (EDGAR filing only).
</TABLE>
- - -------------
+ Filed herewith
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JUL-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 1,158
<SECURITIES> 0
<RECEIVABLES> 40,273
<ALLOWANCES> 1,304
<INVENTORY> 54,420
<CURRENT-ASSETS> 99,131
<PP&E> 94,127
<DEPRECIATION> 0
<TOTAL-ASSETS> 198,294
<CURRENT-LIABILITIES> 38,823
<BONDS> 0
0
0
<COMMON> 153
<OTHER-SE> 113,957
<TOTAL-LIABILITY-AND-EQUITY> 198,294
<SALES> 102,580
<TOTAL-REVENUES> 102,580
<CGS> 89,474
<TOTAL-COSTS> 93,208
<OTHER-EXPENSES> 4,155
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 779
<INCOME-PRETAX> 4,438
<INCOME-TAX> 1,686
<INCOME-CONTINUING> 2,752
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,752
<EPS-PRIMARY> .18
<EPS-DILUTED> .18
</TABLE>
