<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, 1999
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)
<TABLE>
<CAPTION>
DELAWARE 51-0328047
<S> <C>
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
</TABLE>
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 9, 1999.............9,084,877
NUMBER OF SHARES OF NONVOTING COMMON STOCK OUTSTANDING AS OF NOVEMBER 9, 1999...6,150,118*
</TABLE>
- -----------
* The Registrant's Nonvoting Common Stock is convertible, on a
share-for-share basis, into Common Stock.
================================================================================
<PAGE> 2
CHASE INDUSTRIES INC.
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Page
----
<S> <C>
Item 1. Financial Statements (Unaudited):
Consolidated Balance Sheet as of September 30, 1999
and December 31, 1998.................................................................3
Consolidated Statement of Income for the Three and Nine Months Ended
September 30, 1999 and 1998...........................................................4
Consolidated Statement of Cash Flows for the Nine Months Ended
September 30, 1999 and 1998...........................................................5
Notes to Consolidated Financial Statements.....................................................6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.....................................................................14
</TABLE>
PART II. OTHER INFORMATION
<TABLE>
<S> <C>
Item 1. Legal Proceedings.............................................................................25
Item 6. Exhibits and Reports on Form 8-K..............................................................25
Signature.....................................................................................27
</TABLE>
2
<PAGE> 3
CHASE INDUSTRIES INC.
CONSOLIDATED BALANCE SHEET
(UNAUDITED; IN THOUSANDS, EXCEPT SHARE INFORMATION)
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
------------------- -------------------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 11,252 $ 9,200
Receivables, net of allowance for doubtful accounts and claims of $1,212
and $1,060 in 1999 and 1998, respectively 37,388 30,180
Inventories 42,264 65,776
Prepaid expenses 942 698
Deferred income taxes 5,922 4,982
------------- -------------
Total current assets 97,768 110,836
Property, plant and equipment, net 111,416 97,152
Other assets 7,012 4,816
------------- -------------
Total assets $ 216,196 $ 212,804
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 31,759 $ 41,399
Accrued compensation and benefits 7,343 7,017
Accrued income taxes 1,062 2,196
Other accrued liabilities 5,012 5,401
Current portion of long-term debt 160 152
------------- -------------
Total current liabilities 45,336 56,165
Long-term debt 27,214 27,339
Deferred income taxes 14,454 13,880
------------- -------------
Total liabilities 87,004 97,384
------------- -------------
Commitments and contingencies -- --
------------- -------------
Stockholders' equity:
Common stock, $.01 par value, 36,310,000 shares authorized; 9,084,877 and
9,083,452 shares issued and outstanding in 1999 and 1998, respectively 91 91
Nonvoting common stock, $.01 par value, 12,300,000 shares authorized;
6,150,118 shares issued and outstanding in 1999 and 1998 61 61
Additional paid-in capital 31,504 31,493
Retained earnings 97,536 83,775
------------- -------------
Total stockholders' equity 129,192 115,420
------------- -------------
Total liabilities and stockholders' equity $ 216,196 $ 212,804
============= =============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
3
<PAGE> 4
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,
1999 1998 1999 1998
------- ------- -------- --------
<S> <C> <C> <C> <C>
Net sales $ 94,461 $102,580 $295,906 $339,951
Cost of goods sold (exclusive of depreciation and
amortization shown separately below) 79,763 89,474 248,906 291,187
Lower of cost-or-market inventory writedowns -- 1,000 1,800 3,424
-------- -------- -------- --------
Gross profit 14,698 12,106 45,200 45,340
Selling, general and administrative expenses 4,740 4,155 13,442 11,387
Depreciation and amortization 2,979 2,734 8,676 8,038
-------- -------- -------- --------
Operating income 6,979 5,217 23,082 25,915
Interest expense, net
56 779 886 2,605
-------- -------- -------- --------
Income before income taxes 6,923 4,438 22,196 23,310
Provision for income taxes 2,631 1,686 8,435 8,858
-------- -------- -------- --------
Net income $ 4,292 $ 2,752 $ 13,761 $ 14,452
======== ======== ======== ========
Earnings per share:
Basic $ 0.28 $ 0.18 $ 0.90 $ 0.95
======== ======== ======== ========
Diluted $ 0.28 $ 0.18 $ 0.90 $ 0.93
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
4
<PAGE> 5
CHASE INDUSTRIES INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED; IN THOUSANDS)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
1999 1998
------------- -------------
<S> <C> <C>
Operating activities:
$ 13,761 $ 14,452
Net income
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 8,676 8,038
Deferred income tax (benefit) expense (366) 1,717
Lower of cost-or-market inventory writedowns 1,800 3,424
Changes in assets and liabilities:
(Increase) decrease in receivables (7,208) 2,095
Decrease in inventories 21,712 5,844
(Decrease) in accounts payable (9,640) (12,080)
(Decrease) increase in accrued liabilities (1,197) 434
Other, net (2,916) (422)
----------- -----------
Net cash provided by operating activities 24,622 23,502
----------- -----------
Investing activities:
Expenditures for property, plant and equipment (22,464) (9,527)
----------- -----------
Net cash (used in) investing activities (22,464) (9,527)
----------- -----------
Financing activities:
Revolving credit facility repayments, net -- (3,578)
Equipment financing -- 2,000
Principal payments on long-term debt (117) (13,108)
Issuance of common stock - options exercised 11 945
----------- -----------
Net cash (used in) financing activities (106) (13,741)
----------- -----------
Net increase in cash and cash equivalents 2,052 234
Cash and cash equivalents, beginning of period 9,200 924
----------- -----------
Cash and cash equivalents, end of period $ 11,252 $ 1,158
=========== ===========
Supplemental disclosures:
Interest and bank fees paid $ 443 $ 1,442
=========== ===========
Income taxes paid $ 9,875 $ 5,563
=========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
5
<PAGE> 6
CHASE INDUSTRIES INC.
1. SIGNIFICANT ACCOUNTING POLICIES:
PRINCIPLES OF CONSOLIDATION AND INTERIM FINANCIAL INFORMATION
The consolidated balance sheet as of September 30, 1999, and December 31,
1998, the consolidated statement of income for the three and nine months ended
September 30, 1999 and 1998, and the consolidated statement of cash flows for
the nine months ended September 30, 1999 and 1998, 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 for 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, 1999 and 1998, included herein is unaudited and,
in the opinion of management, reflects all adjustments necessary for a fair
presentation of such financial information.
The results of operations for the three and nine months ended September 30,
1999, are not necessarily indicative of the results of operations that may be
expected for the year ended December 31, 1999. 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 for the year ended December 31,
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 and structural pipe. 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 the stock of Old Chase. The CBCC Acquisition was
accounted for as a purchase.
6
<PAGE> 7
CHASE INDUSTRIES INC.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board (the "FASB") issued
Statement of Financial Accounting Standard No. 133, "Accounting for Derivative
Instruments and Hedging Activities," ("SFAS 133"), which was originally
effective for years beginning after June 15, 1999. In June 1999, the FASB issued
Statement of Financial Accounting Standard No. 137 delaying the effective date
of SFAS 133 by one year. 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. In prior periods inventories have been
written down to lower of cost-or-market and such amounts are considered cost for
subsequent years. During first quarter 1999, the Company recorded a non-cash
inventory writedown of $1.8 million. This writedown was due to decreasing
flat-rolled steel prices. During 1998, the Company recorded non-cash inventory
writedowns due to decreasing flat-rolled steel prices and reductions in the
brass metal price.
If the first-in, first out (FIFO) method for determining cost had been
used, inventories would have been approximately $2.0 million and $1.7 million
lower at September 30, 1999, and December 31, 1998, respectively. Inventories
consisted of the following (in thousands):
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
------------- -------------
<S> <C> <C>
Raw materials $ 18,307 $ 33,657
Work in progress 6,897 10,174
Finished goods 18,006 22,383
------------- -------------
43,210 66,214
Tolling metal due customers (946) (438)
------------- -------------
$ 42,264 $ 65,776
============= =============
</TABLE>
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. As a
result of the split, 5,075,996 additional shares were issued and Additional
Paid-in Capital was reduced by $51,000. Fractional shares resulting from the
stock split were paid in cash, without interest. All references in the
accompanying financial statements to the number of shares and per share amounts
have been restated to reflect the stock split. 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
36,310,000 for Common Stock and from 5 million to 12.3 million for Nonvoting
Common Stock.
7
<PAGE> 8
CHASE INDUSTRIES INC.
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,
--------------------------------
1999 1998
---- ----
Shares EPS Shares EPS
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Basic 15,234,490 $ 0.28 15,232,908 $ 0.18
Stock options 89,935 -- 312,381 --
---------- ---------- ---------- ----------
Diluted 15,324,425 $ 0.28 15,545,289 $ 0.18
========== ========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
Nine Months Ended September 30,
-------------------------------
1999 1998
---- ----
Shares EPS Shares EPS
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Basic 15,234,217 $ 0.90 15,209,719 $ 0.95
Stock options 102,350 -- 376,602 (0.02)
---------- ---------- ---------- ----------
Diluted 15,336,567 $ 0.90 15,586,321 $ 0.93
========== ========== ========== ==========
</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
the 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, 1999, and December 31, 1998, 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.
4. COMMITMENTS AND CONTINGENCIES:
Both CBCC and Leavitt are subject to certain contingent environmental
liabilities. Because the development of final remediation plans with respect to
such environmental conditions has not been completed, the Company currently is
unable to estimate with any degree of certainty the total amount or range of
amounts of cleanup costs associated therewith. However, it is reasonably
possible that such costs may be material.
8
<PAGE> 9
CHASE INDUSTRIES INC.
CBCC. 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 ("VOC's")
as well as total petroleum hydrocarbons and certain metals from historical
operating practices. 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.
Interim remedial actions for a portion of CBCC's site were initiated in
second quarter 1999 with completion anticipated during first quarter 2000. Costs
for the project originally were estimated at $3.1 million and were recorded in
second quarter 1999. Based on BP's obligations under the Remediation Agreement
and the CBCC Purchase Agreement, the Company also recorded a corresponding $3.1
million receivable from BP in second quarter 1999. However, the results of
sampling conducted in third quarter 1999 as part of these interim remedial
actions indicate the presence of VOC's that were not covered by the initial
scope of the interim actions. CBCC is conducting additional sampling to complete
the delineation of contamination in those areas. The results of this additional
sampling will be used to determine appropriate cleanup standards, evaluate
available remedial options and develop modifications to these interim
remediation activities. Until these actions are completed, the Company cannot
estimate with any degree of certainty the amount of cleanup costs associated
with the implementation of these interim remedial activities. Therefore, no
additional costs for these interim remedial activities were recorded in third
quarter 1999.
Although BP has acknowledged its contractual obligation to fund certain
investigatory and cleanup activities related to site contamination attributable
to Old Chase's operations and has performed certain activities in this regard,
as discussed below BP and CBCC currently are involved in litigation regarding,
among other things, BP's obligations under the Remediation Agreement and the
CBCC Purchase Agreement. To the extent CBCC funds cleanup costs related to the
remediation of contamination at its manufacturing facility, the Company believes
that 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 effect on the
Company's financial condition, results of operations or liquidity. Additionally,
the Company expects no material impact on its financial condition, results of
operations or liquidity as a result of the existence of any other environmental
conditions related to CBCC.
The Company notified BP in third quarter 1999 that amounts payable by the
Company under the $20 million promissory note issued to BP in connection with
the CBCC Acquisition (the "BP Note"), which matured August 24, 1999, were being
offset against damages incurred by the Company, including cleanup costs incurred
by CBCC, as a result of, among other things, the environmental condition of
CBCC's site. To the extent CBCC has incurred, or incurs future cleanup costs
with respect to the investigatory and remedial activities at its site, the
Company intends to enforce its rights under the CBCC Purchase Agreement and/or
Remediation Agreement to recover such amounts from BP to the extent such costs
exceed amounts recouped as a result of the offset against the BP Note. The
amounts the Company has claimed are owed by BP to the Company are described in
the Answer and Counterclaim discussed below.
9
<PAGE> 10
CHASE INDUSTRIES INC.
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 a
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. BP has
been notified and assumed the defense of these matters. 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. In the
event the Company is entitled to recover any such costs from BP, pursuant to the
CBCC Purchase Agreement or otherwise, the Company may elect to offset the
amounts of such recoveries against amounts payable under the $20 million BP
Note. Additional information regarding the matters described in this paragraph
is contained in Part I., Item 3 Legal Proceedings of the Company's Annual Report
on Form 10-K for the year ended December 31, 1998.
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 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 on 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 $254,746, 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 was payable on August 24 of each
year from and after August 24, 1996, until the BP Note matured on August 24,
1999. The interest due and payable on each of August 24, 1999, 1998 and 1997,
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 due and payable under the BP Note, the Company was in default under
the BP Note and seek 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
10
<PAGE> 11
CHASE INDUSTRIES INC.
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
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 amounts payable under the BP Note. On June 8, 1998, plaintiffs filed a
Reply to Counterclaim in response to the Answer and Counterclaim. In plaintiffs'
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. As of the August 24, 1999, due date of
the BP Note, the Company offset accrued and unpaid interest and the full
principal balance of the BP Note against the receivable from BP and other
amounts claimed by the Company to be owed by BP to the Company as a result of
BP's breach of the CBCC Purchase Agreement and the Remediation Agreement.
However, for financial statement reporting purposes, pursuant to Statement of
Financial Accounting Standard No. 125, "Accounting for Transfers and Servicing
of Financial Assets and Extinguishment of Liabilities," ("SFAS 125"), the
Company continues to record the full principal balance of the BP Note as a
liability. SFAS 125 requires that in order to extinguish a liability, the debtor
must be legally released from the obligation by either the creditor or
judicially. As the BP Note is subject to determination in litigation, the
Company has maintained the debt on its books and continues to accrue interest at
9.28%. The amount of the BP Note continues to be classified as long-term by the
Company.
Discovery is proceeding in this case, and it currently is scheduled for
trial in September 2000.
Leavitt. Prior to the Leavitt Acquisition, five underground storage tanks
("UST's") were removed from Leavitt's facility in Hammond, Indiana. Prior to
removal, one or more of the UST's released petroleum and other chemical
constituents into the environment. Some contamination of groundwater and soil at
the Hammond facility remains in place. Leavitt has submitted a request to the
Indiana Department of Environmental Management ("IDEM") for guidance in
addressing the environmental conditions at the Hammond facility. Although the
cleanup costs associated with this matter may be material, based on the results
of sampling conducted in 1997 and discussions with independent consultants and
the IDEM, 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.
The Hammond operations were relocated to Chicago in September 1997, and no
operating activities currently are conducted at the Hammond location.
11
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CHASE INDUSTRIES INC.
5. BUSINESS SEGMENTS:
The Company has two business segments. One, brass products, is engaged in
the manufacture and sale of free-machining and forging brass rod; the second,
steel products, manufactures and sells structural and mechanical steel tubing
and structural pipe.
The brass products segment, employing more than 300 people at its
Montpelier, Ohio, plant, is an ISO 9002 certified manufacturer and supplier of
free-machining and forging brass rod in the United States and Canada. Its
diverse customer base of more than 250 companies uses the "Blue Dot" trademark
rod to produce a variety of products, such as plumbing fixtures, heating and air
conditioning components, industrial valves, automotive parts and numerous
hardware components.
The steel products segment is a leading producer of structural and
mechanical steel tubing and structural pipe with two plants in Chicago,
Illinois, and one plant in Jackson, Mississippi, employing approximately 400
people. Structural steel tubing is used in non-residential construction, farm
equipment and other commercial applications. The mechanical steel tubing is used
in a broad range of consumer and commercial products, including furniture and
fixtures, lawn-care products, storage racks, exercise equipment, bicycles and
machine tools. Structural pipe is used for handrails, scaffolding and
communications towers.
12
<PAGE> 13
CHASE INDUSTRIES INC.
Income and expenses not allocated to business segments include certain
corporate expenses, interest expense and interest income. There are no
intersegment sales. The business segment information is prepared consistent with
the accounting policies outlined in Note 1, Significant Accounting Policies,
except for income taxes which are recorded at the corporate level. Summarized
segment information is as follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended September 30,
--------------------------------
1999 1998
---------- ----------
<S> <C> <C>
Net sales:
Brass products $ 65,485 $ 68,207
Steel products 28,976 34,373
Corporate -- --
--------- ---------
Total net sales $ 94,461 $ 102,580
========= =========
Operating income:
Brass products $ 7,252 $ 5,771
Steel products 372 (254)
Corporate (645) (300)
--------- ---------
Total operating income $ 6,979 $ 5,217
========= =========
Selected non-cash charges included in operating income
Lower of cost-or-market inventory writedown:
Brass products $ -- $ --
Steel products -- 1,000
--------- ---------
Total lower of cost-or-market inventory writedown $ -- $ 1,000
========= =========
</TABLE>
<TABLE>
<CAPTION>
Nine Months Ended September 30,
-------------------------------
1999 1998
---------- ---------
<S> <C> <C>
Net sales:
Brass products $ 202,747 $ 224,847
Steel products 93,159 115,104
Corporate -- --
--------- ---------
Total net sales $ 295,906 $ 339,951
========= =========
Operating income:
Brass products $ 24,428 $ 22,562
Steel products (131) 3,823
Corporate (1,215) (470)
--------- ---------
Total operating income $ 23,082 $ 25,915
========= =========
Selected non-cash charges included in operating income
Lower of cost-or-market inventory writedowns:
Brass products $ -- $ 2,424
Steel products -- 1,000
--------- ---------
Total lower of cost-or-market inventory writedowns $ 1,800 $ 3,424
========= =========
</TABLE>
13
<PAGE> 14
CHASE INDUSTRIES INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
Operations
The Company has two business segments, the brass products segment operated
by CBCC and the steel products segment operated by Leavitt. The Company is a
leading manufacturer of free-machining and forging brass rod and structural and
mechanical steel tubing and structural pipe.
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 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. 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.
CBCC obtains approximately 80% of the brass scrap used in its operations
from its customers through purchase and tolling arrangements. The metal price
charged to customers (the "Metal Selling Price") had been four cents per pound
higher than the price at which brass scrap is purchased from customers (the
"Metal Buying Price") since December 1994. In December 1997, the difference was
increased to five cents per pound, and in January 1999 the difference was
increased to seven cents per pound. The difference between the Metal Selling
Price and the Metal Buying Price was increased to eight cents per pound in
September 1999. CBCC also purchases approximately 20% of its brass scrap 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 prices
for copper and zinc (the major components of brass), and generally are less than
the Metal Buying Price. Since 1990, free-market prices, as compared to Metal
Buying Prices, have been favorable to CBCC by historical standards and the
supply of brass scrap in the United States has increased in excess of demand as
a result of increased imports of brass rod. Although the increased supply of
brass scrap has resulted in continued favorable free-market scrap prices through
September 1999, there can be no assurance that such discounts will continue.
Decreasing imports of brass rod and increasing demand for brass scrap could
cause free-market brass scrap prices to increase, and increased pressure from
customers to purchase brass scrap directly from them at the Metal Buying Price
could reduce CBCC's ability to take advantage of free-market discounts.
As noted above, CBCC's pricing structure consists of the Metal Selling
Price and the fabrication price as separate components. 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
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CHASE INDUSTRIES INC.
impact on 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 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, where the customer consigns brass scrap to
CBCC and is charged a fabrication price for processing the brass scrap into
finished rod. Tolling transactions affect net sales by the Metal Selling Price
that otherwise would be charged to the customer in a sale of finished brass rod.
To a lesser extent, tolling transactions also affect 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
gross profit, CBCC requires tolling customers to deliver additional 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, based on the
market conditions in the domestic and the international flat-rolled steel
industry. Based on the then-current market conditions in the steel tubing
industry and the level of capacity utilization, Leavitt may or may not be able
to pass the economic impact of steel price changes on to its customers through
changes in the selling price. The steel tubing industry is highly fragmented and
suppliers may reduce prices or fail to increase prices as a result of
flat-rolled steel price increases, depending on their individual financial and
operational motivation.
RESULTS OF OPERATIONS
Three Months Ended September 30, 1999, Compared with Three Months Ended
September 30, 1998
Net sales decreased $8.1 million, or 7.9%, to $94.5 million in third
quarter 1999 from $102.6 million in third quarter 1998. The decrease was due to
lower steel tubing prices and shipments. Steel tubing prices decreased along
with flat-rolled steel prices, which were affected by lower-priced foreign
imports.
There were no inventory writedowns recorded in third quarter 1999. The
Company recorded a non-cash lower of cost-or-market inventory writedown of $1.0
million in third quarter 1998. The writedown was caused by decreasing
flat-rolled steel prices.
Gross profit, excluding the lower of cost-or-market inventory writedown in
third quarter 1998, increased $1.6 million, or 12.2%, to $14.7 million in third
quarter 1999 from $13.1 million in third quarter 1998. With near record brass
rod shipments, overall profitability was favorably affected by improved unit
profit margins. Margins improved because of the 1999 increases in the difference
between the Metal Selling Price and the Metal Buying Price and improved
profitability of brass purchased on the open market. Partially offsetting the
increase were lower steel tube shipments and reduced steel tubing margins, which
were due to declining flat-rolled steel prices and competitive steel tubing
price pressures.
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CHASE INDUSTRIES INC.
Selling, general and administrative ("SG&A") expenses increased $0.5
million, or 11.9%, to $4.7 million in third quarter 1999 from $4.2 million in
third quarter 1998. The increase primarily was due to higher consulting and
professional fees.
Depreciation and amortization increased $0.2 million, or 7.4%, to $2.9
million in third quarter 1999 from $2.7 million in third quarter 1998. The
increase was primarily the result of increased depreciation from 1998 capital
additions.
As a result of the above factors, operating income, excluding the lower of
cost-or-market inventory writedown, increased $0.8 million, or 12.9%, to $7.0
million for the three months ended September 30, 1999, compared with 1998.
Net interest expense decreased $0.7 million, or 87.5%, to $0.1 million in
third quarter 1999 from $0.8 million in third quarter 1998, primarily as a
result of the repayment of long-term debt, increased interest income resulting
from additional cash on hand and capitalizing $330,000 of interest expense on
the construction of the new CBCC brass foundry.
As a result of the above factors, net income increased $1.5 million, or
53.6%, to $4.3 million in third quarter 1999 from $2.8 million in third quarter
1998. Diluted earnings per share increased to $0.28 in third quarter 1999 from
$0.18 in third quarter 1998. Third quarter last year included a writedown of
inventory to the lower of cost-or-market totaling $0.6 million after taxes, or 4
cents per diluted share.
Nine Months Ended September 30, 1999, Compared with Nine Months Ended September
30, 1998
Net sales decreased $44.0 million, or 12.9%, to $295.9 million in 1999. Net
sales declined partially as a result of an 11% reduction in the average Metal
Selling Price for brass rod. The remaining decline in net sales was due to lower
steel tube shipments and declines in steel tube prices. Steel tubing shipments
decreased due to inventory reductions by the Steel Service Centers and due to
increased imports of tubing products and lower exports of agricultural and
construction equipment, which contain steel tubing, all of which resulted from
poor economic conditions in Asia and South America.
The Company recorded non-cash lower of cost-or-market inventory writedowns
totaling $1.8 million for the nine months ended September 30, 1999 and $3.4
million for the nine months ended September 30, 1998. The 1999 writedown, which
was recorded in first quarter, was due to the decreasing prices of flat-rolled
steel and steel tubing. The 1998 writedowns were caused by the June 1, 1998,
10-cent-per-pound reduction in the brass metal price and decreasing flat-rolled
prices in third quarter 1998.
Gross profit for the nine months ended September 30, 1999, excluding lower
of cost-or-market inventory writedowns, decreased $1.8 million, or 3.7%, to
$47.0 million from 1998. Gross profit was adversely affected by declining
flat-rolled steel prices and competitive steel tubing price pressures, which
have reduced steel tubing margins.
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CHASE INDUSTRIES INC.
SG&A expenses increased $2.1 million, or 18.6%, to $13.4 million for the
nine months ended September 30, 1999. The increase was due to higher consulting
and professional fees and one-time benefits recorded last year for workers'
compensation.
Depreciation and amortization increased $0.6 million, or 7.4%, to $8.7
million due to 1998 capital additions.
As a result of the above factors, operating income, excluding lower of
cost-or-market inventory writedowns, decreased $4.5 million, or 15.4%, to $24.9
million for the nine months ended September 30, 1999, compared with 1998.
Net interest expense decreased $1.7 million, or 65.4%, to $0.9 million in
third quarter 1999 from $2.6 million in third quarter 1998, primarily as a
result of the repayment of long-term debt and capitalizing $600,000 of interest
expense on the construction of the new CBCC brass foundry.
As a result of the above factors, net income, excluding lower of
cost-or-market inventory writedowns, decreased $1.7 million, or 10.2%, to $14.9
million for the nine months ended September 30, 1999. Diluted earnings per
share, excluding lower of cost-or-market inventory writedowns, decreased to
$0.97 per diluted share for the nine months ended September 30, 1999, compared
with $1.06 per diluted share in 1998. After the inventory writedowns, net income
was $13.8 million, or $0.90 per diluted share, a decrease of 4.8% from 1998.
LIQUIDITY AND CAPITAL RESOURCES
General
At September 30, 1999, cash and cash equivalents totaled $11.3 million
increasing from $9.2 million at year end 1998. Total debt at September 30, 1999,
was $27.4 million compared with $27.5 million at year end 1998.
Working Capital
At September 30, 1999, working capital was $52.4 million, a $2.3 million,
or 4.2%, decrease from $54.7 million at December 31, 1998. Increases in cash and
cash equivalents of $2.1 million, or 22.8%, and accounts receivable of $7.2
million, or 23.8%, and a decrease in accounts payable of $9.6 million, or 23.2%,
were offset by a decrease in inventory of $23.5 million, or 35.7%.
The decline in inventory and accounts payable was the result of timing of
metal purchases and management's efforts to reduce inventory levels. The
increase in accounts receivable was due primarily to an increase in net sales in
third quarter 1999 compared to fourth quarter 1998. The Company's shipments are
typically lower in December due to customer shutdowns.
The Company's current ratio was 2.16 at September 30, 1999, compared to
1.97 at December 31, 1998.
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CHASE INDUSTRIES INC.
Cash Flow Provided by Operating Activities
For the nine months ended September 30, 1999, net cash provided by
operating activities was $24.6 million, which included net income of $13.8
million and depreciation and amortization of $8.7 million. There was a decrease
in working capital, excluding cash, debt and deferred taxes, of $5.2 million
from December 31, 1998.
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. At September 30,
1998, working capital, excluding cash, debt and deferred taxes, was $56.8
million which was flat with $56.7 million at December 31, 1997.
Cash Flow (Used in) Investing Activities
Capital expenditures were $22.5 million for the nine months ended September
30, 1999, and $9.5 million for the nine months ended September 30, 1998. Capital
expenditures in 1999 primarily related to construction costs for the new CBCC
foundry discussed below. Capital expenditures in 1998 primarily included
installation costs for three new billet heaters and initial costs for the new
foundry.
Cash Flow (Used in) Financing Activities
Cash used in financing activities of $106,000 for the nine months ended
September 30, 1999, consisted primarily of principal payments on long-term debt.
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 $2.0 million received in conjunction with
the lease of billet heating equipment and $945,000 from the issuance of common
stock for stock options exercised.
Capital Resources
In 1996 the Company launched a capital project referred to as "Project
400." The project is designed to increase foundry, extrusion 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 was completed in early 1998 with the installation of three
new billet heaters that increased finished brass rod capacity by about 17
percent. The new billet heaters will also increase productivity and improve
quality. The total cost of the first phase of the project was approximately $12
million and was financed through a six-year operating lease.
In second quarter 1998, the Company announced Phase II of Project 400,
which was a $30 million multi-year investment to construct an additional brass
foundry enabling CBCC to increase casting capacity and to provide customers with
multiple alloys. New casting equipment has been primarily received and is being
installed and a new building is completed and is expected to be operational
during first quarter 2000. The Company anticipates that capital projects will be
paid for with cash flows provided by operating activities and the Bank Credit
Facility, as necessary.
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CHASE INDUSTRIES INC.
Bank Credit Facility
In connection with the Leavitt Acquisition, the Company entered into a
credit facility (the "Bank Credit Facility") of $100 million agented by PNC
Bank, National Association ("PNC Bank"). The Bank Credit Facility includes a $60
million term loan ("Term Loan") and a $40 million revolving credit facility
("Old 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 of $7 million 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 Old Revolving Credit Facility is determined monthly by a
formula based on levels of accounts receivable and inventory, up to a maximum of
$40 million. Effective September 8, 1999, the Company and PNC Bank agreed on an
amendment to the Bank Credit Facility which increased the revolving credit
facility (the "Revolving Credit Facility") by $10 million, to $50 million, and
eliminated the borrowing formula based on levels of accounts receivable and
inventory. 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 or LIBOR, with
interest payable quarterly or as of the end of each LIBOR borrowing period,
whichever is shorter. The weighted average interest rate on the Bank Credit
Facility was 5.9% and 5.7% at September 30, 1999, and December 31, 1998,
respectively.
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.
As of September 30, 1999, $7 million was outstanding under the Term Loan
and no amounts were outstanding under the Revolving Credit Facility. Total
availability under the Revolving Credit Facility was $50 million as of September
30, 1999.
BP Note
In connection with the CBCC Acquisition, the Company issued a promissory
note to Old Chase in the original principal amount of $20 million (the "BP
Note"). The BP Note initially matured in August 1996, and the Company, at its
option, extended the maturity date for three additional years to August 24,
1999, with interest payable annually at 9.28%. The BP Note contained a
contingent interest payment based upon average Company earnings (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 August 1997, 1998 and 1999, were offset against the receivable
from BP. As of the August 24, 1999 due date of the BP Note, the Company offset
the $1,856,000 in accrued and unpaid interest due August 24, 1999, and the full
principal balance of the BP Note against the receivable from BP and other
amounts claimed by the Company to be owed by BP to the Company as a result of
BP's breach of the CBCC Purchase Agreement and the Remediation
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CHASE INDUSTRIES INC.
Agreement. However, for financial statement reporting purposes, pursuant to
Statement of Financial Accounting Standard No. 125, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishment of Liabilities," ("SFAS
125"), the Company continues to record the full principal balance of the BP Note
as a liability. SFAS 125 requires that in order to extinguish a liability, the
debtor must be legally released from the obligation by either the creditor or
judicially. As the BP Note is subject to determination in litigation, the
Company has maintained the debt on its books and continues to accrue interest at
9.28%. The amount of the BP Note continues to be classified as long-term by the
Company.
IMPACT OF YEAR 2000
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 risk 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. In
1998, the Company conducted extensive testing of the software, including
transactions scheduled to occur after the beginning of 2000, and determined that
the software was not completely Year 2000 compliant. As a result, the software
vendor has issued an upgraded release of the software and this upgraded software
was installed in second quarter 1999 and is currently in use. The Company tested
the upgraded software, including transactions occurring in 2000 and beyond, and
believes that the upgraded software is Year 2000 compliant. Therefore, the
Company has not established Year 2000 contingency plans with respect to CBCC's
management information systems.
Leavitt's management information systems were not 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. The Company
projects capital expenditures for the systems implementation will be
approximately $2.5 million. Although substantial conversion tasks have been
completed, the entire conversion to the new enterprise-wide software will not be
complete by year end 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 new systems
are implemented. With internal programmers and an outside consultant, the
Company has substantially completed modifications to Leavitt's existing
management information systems to enable them to operate in 2000. Testing of the
modified software for Year 2000 compliance has occurred as each program was
implemented. Additional testing will be performed during the fourth quarter on
the entire Leavitt management information system, both new and old, to verify
Year 2000 compliance. The cost of these modifications has been less than
$50,000. The Company believes the modifications to Leavitt's existing software
currently underway will enable the software to operate in 2000 until conversion
to the new software is complete. Therefore, the Company has not established Year
2000 contingency plans with respect to Leavitt's management information system.
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The Company is in the process of assessing its vulnerability to Year 2000
failures on the part of its suppliers, vendors and customers and has surveyed
major suppliers, vendors and customers to determine their vulnerability to Year
2000 failures, including assessing the potential impact of any such failures on
the Company. Although the Company's survey results and assessment activities to
date have not identified any Year 2000 problems originating with its suppliers,
vendors or customers that the Company reasonably anticipates will have a
material effect on the Company, the Company cannot control the conduct of its
suppliers, vendors or customers and, therefore, cannot guarantee that Year 2000
problems originating with a supplier, vendor or customer will not occur. The
Company has not yet developed contingency plans in the event of a Year 2000
failure caused by a supplier or third party, but would do so if a specific
problem is identified. In some cases, especially with respect to its utility
vendors, alternative suppliers may not be available.
The Company also utilizes software and systems in its internal
manufacturing processes and instrumental control functions. The Company has
conducted evaluations of operating systems in its internal manufacturing
processes and instrumental control functions and 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 with respect to these processes and functions.
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 the 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 or current
efforts described above to address systems that are not Year 2000 compliant are
not completed by the end of 1999 or are not successful in permitting these
systems to operate in 2000. 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.
CONTINGENCIES - ENVIRONMENTAL MATTERS
As discussed in Note 4 of Notes to Consolidated Financial Statements
included in Item 1., each of CBCC and Leavitt are subject to certain contingent
liabilities relating to environmental conditions at their respective facilities.
CBCC. After the CBCC Acquisition, BP conducted initial site investigation
activities at CBCC's manufacturing facility 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. In
1998, CBCC substantially concluded the additional sampling that it believed was
necessary at that time.
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CHASE INDUSTRIES INC.
Based on the aggregate sampling results, CBCC completed an interim
remediation for a portion of the site in 1998 and initiated additional interim
remedial actions for other portions of the site in second quarter 1999. The
results of sampling conducted as part of these interim remedial actions
initiated in 1999 indicate the presence of VOC's that were not covered by the
initial scope of these interim actions. CBCC is conducting additional sampling
of certain areas of the site on which the interim actions initiated in 1999 are
taking place to complete the delineation of contamination in those areas.
The results of the initial sampling conducted by BP, the additional
sampling conducted (and to be conducted) by CBCC and input from the Ohio EPA are
being (and will be) used to identify options for addressing the additional
contamination and to develop modifications to the current interim remedial
action plan and a comprehensive remediation plan for the entire site. Until the
completion of these additional interim and investigatory activities and the
development of a remedial plan for the site, the Company will be unable to
estimate with any degree of certainty the extent of contamination or the amount
of cleanup costs associated therewith.
Because the development of a comprehensive remediation action plan (the
"RAP") for CBCC's 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 the 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 discussed below under "Contingencies - Legal Proceedings" BP and
CBCC currently are involved in litigation regarding, among other things, BP's
obligations under the Remediation Agreement and the CBCC Purchase Agreement. To
the extent CBCC funds 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 effect on the Company's financial condition,
results of operations or liquidity. Additionally, the Company expects no
material impact on its financial condition, results of operations or liquidity
as a result of the existence of any other environmental conditions related to
CBCC.
The Company notified BP in third quarter 1999 that amounts payable by the
Company under the BP Note, which matured August 24, 1999, were being offset
against damages incurred by the Company, including cleanup costs incurred by
CBCC, as a result of, among other things, the environmental condition of CBCC's
site. To the extent CBCC incurs future cleanup costs with respect to the
investigatory and remedial activities at its site, the Company intends to
enforce its rights under the CBCC Purchase Agreement and/or the Remediation
Agreement to recover such amounts from BP to the extent such costs exceed
amounts recouped as a result of the offset against the BP Note. The amounts the
Company has claimed are owed by BP to the Company are described in the Answer
and Counterclaim discussed in Note 4 of Notes to Consolidated Financial
Statements, included in Part I, Item 1.
Leavitt. Prior to the Leavitt Acquisition, five underground storage
tanks ("UST's") were removed from Leavitt's facility in Hammond, Indiana. Prior
to removal, one or more of the UST's 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
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CHASE INDUSTRIES INC.
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. The sampling results,
which indicated the continued presence in the groundwater of certain
contaminants, were submitted to the IDEM for review. Based on these test
results, the IDEM has indicated that it would not yet issue a "closure" letter.
Leavitt has engaged an independent consultant to evaluate appropriate
actions to be taken with regard to the groundwater at Hammond in order to
receive a closure letter from the IDEM. The consultant completed its review and
analysis of the Hammond facility and recommended additional on-site
investigation and further discussions with the IDEM. The consultant's
recommendations have been forwarded to the IDEM, and Leavitt is in discussions
with the IDEM to determine appropriate actions to be taken. Until these actions
are determined and carried out, the Company will be 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 and
discussions with the IDEM 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, ROHN Industries, Inc. (formerly 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 (approximately $140,000 have been incurred for
various matters). In addition, to the extent 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.
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CHASE INDUSTRIES INC.
CONTINGENCIES - LEGAL PROCEEDINGS
As discussed in Note 4 of Notes to Consolidated Financial Statements
included in Part I, Item 1. and as referred to in 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
believes that judgement against the Company and CBCC would not have a material
effect on the Company's financial condition, results of operations or liquidity.
As of the August 24, 1999 due date of the BP Note, the Company offset accrued
and unpaid interest and the full principal balance of the BP Note against the
receivable from BP and other amounts claimed by the Company to be owed by BP to
the Company as a result of BP's breach of the CBCC Purchase Agreement and the
Remediation Agreement. However, for financial statement reporting purposes,
pursuant to Statement of Financial Accounting Standard No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishment of Liabilities,"
("SFAS 125"), the Company continues to record the full principal balance of the
BP Note as a liability. SFAS 125 requires that in order to extinguish a
liability, the debtor must be legally released from the obligation by either the
creditor or judicially. As the BP Note is subject to determination in
litigation, the Company has maintained the debt on its books and continues to
accrue interest at 9.28%. The amount of the BP Note continues to be classified
as long-term by the Company.
SAFE HARBOR
This document contains forward looking statements regarding the operations
of the Company and the industries in which it operates. These statements are
identified by the use of words such as "believe," "expects," "anticipates,"
"will," "should" and other words referring to events to occur in the future.
Management uses estimates and assumptions in forming the basis for such forward
looking statements. Such estimates and assumptions, including forecasts
regarding demand and pricing for the Company's products, are subject to risks
and uncertainties which could cause actual results to differ materially from
historical results or those anticipated, as described in forward looking
statements. 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. 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 tube. The
Company's shipments also will be affected by its ability to maintain
manufacturing operations at its current levels without significant interruption.
24
<PAGE> 25
CHASE INDUSTRIES INC.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is involved in certain claims and litigation as described in
Note 4 of Notes to Consolidated Financial Statements included in Item 1 of this
report and in Part I, Item 3. Legal Proceedings contained in the Company's
Annual Report on Form 10-K for the year ended December 31, 1998.
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), as amended by the 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).
3.2 - 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
25
<PAGE> 26
CHASE INDUSTRIES INC.
<TABLE>
<S> <C>
Registration Statement on Form S-8 dated December 9, 1994,
Registration No. 33-87278).
+27 - Financial Data Schedule (EDGAR filing only).
</TABLE>
- --------------
+ Filed herewith
(b) REPORTS ON FORM 8-K
No Current Report on Form 8-K was filed by the Company during the
third quarter of 1999.
26
<PAGE> 27
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, 1999 By: /S/ MICHAEL T. SEGRAVES
------------------------
Michael T. Segraves
Vice President
Chief Financial Officer
(duly authorized officer and
Principal Financial Officer)
27
<PAGE> 28
CHASE INDUSTRIES INC.
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
No. Description of Exhibits
- ------- -----------------------
<S> <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), as amended by the 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).
3.2 - 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,
No. 33-87278).
+27 - Financial Data Schedule (EDGAR filing only).
</TABLE>
- --------------
+ Filed herewith
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 11,252
<SECURITIES> 0
<RECEIVABLES> 38,600
<ALLOWANCES> 1,212
<INVENTORY> 42,264
<CURRENT-ASSETS> 97,768
<PP&E> 157,635
<DEPRECIATION> 46,219
<TOTAL-ASSETS> 216,196
<CURRENT-LIABILITIES> 45,336
<BONDS> 0
0
0
<COMMON> 152
<OTHER-SE> 129,040
<TOTAL-LIABILITY-AND-EQUITY> 216,196
<SALES> 295,906
<TOTAL-REVENUES> 295,906
<CGS> 248,906
<TOTAL-COSTS> 250,706
<OTHER-EXPENSES> 22,118
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 886
<INCOME-PRETAX> 22,196
<INCOME-TAX> 8,435
<INCOME-CONTINUING> 13,761
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 13,761
<EPS-BASIC> 0.90
<EPS-DILUTED> 0.90
</TABLE>
