<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 JUNE 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)
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 JULY 30, 1999...................... 9,084,202
NUMBER OF SHARES OF NONVOTING COMMON STOCK OUTSTANDING AS OF JULY 30, 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
<TABLE>
PART I. FINANCIAL INFORMATION
<CAPTION>
Page
----
<S> <C>
Item 1. Financial Statements (Unaudited):
Consolidated Balance Sheet as of June 30, 1999
and December 31, 1998.............................................................. 3
Consolidated Statement of Income for the Three and Six Months Ended
June 30, 1999 and 1998............................................................. 4
Consolidated Statement of Cash Flows for the Six Months Ended
June 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
PART II. OTHER INFORMATION
Item 1. Legal Proceedings........................................................................... 25
Item 4. Submission of Matters to a Vote of Security Holders......................................... 25
Item 6. Exhibits and Reports on Form 8-K............................................................ 25
Signature................................................................................... 27
</TABLE>
<PAGE> 3
CHASE INDUSTRIES INC.
CONSOLIDATED BALANCE SHEET
(UNAUDITED; IN THOUSANDS, EXCEPT SHARE INFORMATION)
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
-------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 17,537 $ 9,200
Receivables, net of allowance for doubtful accounts and
claims of $1,146 and $1,060 in 1999 and 1998, respectively 33,622 30,180
Inventories 40,497 65,776
Prepaid expenses 964 698
Deferred income taxes 5,831 4,982
-------- --------
Total current assets 98,451 110,836
Property, plant and equipment, net 103,681 97,152
Other assets 7,357 4,816
-------- --------
Total assets $209,489 $212,804
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 28,691 $ 41,399
Accrued compensation and benefits 6,738 7,017
Accrued income taxes 1,273 2,196
Other accrued liabilities 6,222 5,401
Current portion of long-term debt 160 152
-------- --------
Total current liabilities 43,084 56,165
Long-term debt 27,214 27,339
Deferred income taxes 14,296 13,880
-------- --------
Total liabilities 84,594 97,384
-------- --------
Commitments and contingencies -- --
-------- --------
Stockholders' equity:
Common stock, $.01 par value, 36,310,000 shares authorized; 9,084,202 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 31,499 31,493
Retained earnings 93,244 83,775
-------- --------
Total stockholders' equity 124,895 115,420
-------- --------
Total liabilities and stockholders' equity $209,489 $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 Six Months Ended
June 30, June 30,
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net sales $ 97,577 $112,253 $201,445 $237,371
Cost of goods sold (exclusive of depreciation
and amortization shown separately below) 81,783 95,072 169,143 201,713
Lower of cost-or-market inventory writedowns -- 2,424 1,800 2,424
-------- -------- -------- --------
Gross profit 15,794 14,757 30,502 33,234
Selling, general and administrative expenses 4,443 3,623 8,702 7,232
Depreciation and amortization 2,880 2,674 5,697 5,304
-------- -------- -------- --------
Operating income 8,471 8,460 16,103 20,698
Interest expense, net 314 845 830 1,826
-------- -------- -------- --------
Income before income taxes 8,157 7,615 15,273 18,872
Provision for income taxes 3,100 2,894 5,804 7,172
-------- -------- -------- --------
Net income $ 5,057 $ 4,721 $ 9,469 $ 11,700
======== ======== ======== ========
Earnings per share:
Basic $ 0.33 $ 0.31 $ 0.62 $ 0.77
======== ======== ======== ========
Diluted $ 0.33 $ 0.30 $ 0.62 $ 0.75
======== ======== ======== ========
</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>
Six Months Ended June 30,
1999 1998
-------- ---------
<S> <C> <C>
Operating activities:
Net income $ 9,469 $ 11,700
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 5,697 5,304
Deferred income tax (benefit) expense (433) 591
Lower of cost-or-market inventory writedowns 1,800 2,424
Changes in assets and liabilities:
(Increase) decrease in receivables (3,442) 690
Decrease (increase) in inventories 23,479 (1,470)
(Decrease) in accounts payable (12,708) (12,501)
(Decrease) increase in accrued liabilities (381) 1,379
Other, net (3,124) 189
-------- --------
Net cash provided by operating activities 20,357 8,306
-------- --------
Investing activities:
Expenditures for property, plant and equipment (11,909) (6,143)
-------- --------
Net cash (used in) investing activities (11,909) (6,143)
-------- --------
Financing activities:
Revolving credit facility borrowings, net -- 926
Equipment financing -- 2,000
Principal payments on long-term debt (117) (5,108)
Issuance of common stock - options exercised 6 930
-------- --------
Net cash (used in) financing activities (111) (1,252)
-------- --------
Net increase in cash and cash equivalents 8,337 911
Cash and cash equivalents, beginning of period 9,200 924
-------- --------
Cash and cash equivalents, end of period $ 17,537 $ 1,835
======== ========
Supplemental disclosures:
Interest and bank fees paid $ 321 $ 1,095
======== ========
Income taxes paid $ 7,159 $ 4,561
======== ========
</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 June 30, 1999, and December 31,
1998, the consolidated statement of income for the three and six months ended
June 30, 1999 and 1998, and the consolidated statement of cash flows for the six
months ended June 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 June 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 six months ended June 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 Standards 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 has issued Statement of Financial Accounting Standards 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 second quarter 1998, the Company
recorded a non-cash inventory writedown of $2.4 million. The 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 $2.7 million and $1.7 million
lower at June 30, 1999, and December 31, 1998, respectively. Inventories
consisted of the following (in thousands):
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
-------- ------------
<S> <C> <C>
Raw materials $ 14,686 $ 33,657
Work in progress 6,605 10,174
Finished goods 19,801 22,383
-------- --------
41,092 66,214
Tolling metal due customers (595) (438)
-------- --------
$ 40,497 $ 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
------------------------------------------------
June 30, 1999 June 30, 1998
---------------------- ----------------------
Shares EPS Shares EPS
---------- -------- ---------- --------
<S> <C> <C> <C> <C>
Basic 15,234,260 $ 0.33 15,223,213 $ 0.31
Stock options 92,238 -- 475,021 (0.01)
---------- -------- ---------- --------
Diluted 15,326,498 $ 0.33 15,698,234 $ 0.30
========== ======== ========== ========
</TABLE>
<TABLE>
<CAPTION>
Six Months Ended
------------------------------------------------
June 30, 1999 June 30, 1998
---------------------- ----------------------
Shares EPS Shares EPS
---------- -------- ---------- --------
<S> <C> <C> <C> <C>
Basic 15,234,078 $ 0.62 15,197,915 $ 0.77
Stock options 108,062 -- 414,256 (0.02)
---------- -------- ---------- --------
Diluted 15,342,140 $ 0.62 15,612,171 $ 0.75
========== ======== ========== ========
</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 June 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 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.
Based on the aggregate sampling results currently available with
respect to CBCC's site, interim remedial actions for a portion of the site were
initiated in second quarter 1999 with completion anticipated prior to year end.
Costs for the project presently are estimated at $3.1 million, which 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.
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.
To the extent CBCC has incurred, or incurs future, cleanup costs with
respect to 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. In the event the Company
is entitled to recover from BP pursuant to the Remediation Agreement, the CBCC
Purchase Agreement or otherwise, the Company may elect to offset the amounts of
such recoveries against amounts payable under the $20 million promissory note
issued to BP in connection with the CBCC Acquisition (the "BP Note").
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
9
<PAGE> 10
CHASE INDUSTRIES INC.
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 is payable on 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, 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 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 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
10
<PAGE> 11
CHASE INDUSTRIES INC.
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.
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. Although the cleanup costs associated
with the environmental conditions at the Hammond facility may be material, based
on the results of sampling conducted in 1997 and discussions with the Indiana
Department of Environmental Management, 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.
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
11
<PAGE> 12
CHASE INDUSTRIES INC.
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
-------------------------------
June 30, 1999 June 30, 1998
------------- -------------
<S> <C> <C>
Net sales:
Brass Products $ 65,700 $ 74,631
Steel Products 31,877 37,622
Corporate -- --
---------- ----------
Total net sales $ 97,577 $ 112,253
========== ==========
Operating income:
Brass Products $ 8,057 $ 7,211
Steel Products 819 1,389
Corporate (405) (140)
---------- ----------
Total operating income $ 8,471 $ 8,460
========== ==========
Selected non-cash charges included in operating income
Lower of cost-or-market inventory writedown:
Brass Products $ -- $ 2,424
Steel Products -- --
Corporate -- --
---------- ----------
Total lower of cost-or-market inventory writedown $ -- $ 2,424
========== ==========
</TABLE>
<TABLE>
<CAPTION>
Six Months Ended
-------------------------------
June 30, 1999 June 30, 1998
------------- -------------
<S> <C> <C>
Net sales:
Brass Products $ 137,262 $ 156,639
Steel Products 64,183 80,732
Corporate -- --
---------- ----------
Total net sales $ 201,445 $ 237,371
========== ==========
Operating income:
Brass Products $ 17,176 $ 16,791
Steel Products (503) 4,077
Corporate (570) (170)
---------- ----------
Total operating income $ 16,103 $ 20,698
========== ==========
Selected non-cash charges included in operating income
Lower of cost-or-market inventory writedowns:
Brass Products $ -- $ 2,424
Steel Products 1,800 --
Corporate -- --
---------- ----------
Total lower of cost-or-market inventory writedowns $ 1,800 $ 2,424
========== ==========
</TABLE>
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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. 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 June 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 impact on
gross profit levels. However, the quantity of free-market brass scrap
14
<PAGE> 15
CHASE INDUSTRIES INC.
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 June 30, 1999, Compared with Three Months Ended June 30, 1998
Net sales decreased $14.7 million, or 13.1%, to $97.6 million in second
quarter 1999 from $112.3 million in second quarter 1998. The decrease was due to
lower metal prices and shipments. Net sales declined due to a 12% reduction in
the average Metal Selling Price for brass rod from second quarter 1998 as well
as lower steel tube prices. Steel tubing prices declined primarily due to the
substantial increase in low-priced imported steel.
The Company recorded a non-cash lower of cost-or-market inventory
writedown of $2.4 million in second quarter 1998. The writedown was caused by
decreasing Metal Selling Prices for brass rod.
Gross profit, excluding the lower of cost-or-market inventory writedown
in second quarter 1998, decreased $1.4 million, or 8.1%, to $15.8 million in
second quarter 1999 from $17.2 million in second quarter 1998. The decrease in
gross profit was due primarily to declining flat-rolled steel prices and
competitive steel tubing price pressures, which have reduced steel tubing
margins.
15
<PAGE> 16
CHASE INDUSTRIES INC.
Selling, general and administrative ("SG&A") expenses increased $0.8
million, or 22.6%, to $4.4 million in second quarter 1999 from $3.6 million in
second quarter 1998. The increase was due to one-time benefits recorded last
year for workers' compensation and the timing of professional fees.
Depreciation and amortization increased $0.2 million, or 7.7%, to $2.9
million in second quarter 1999 from $2.7 million in second quarter 1998. The
increase was primarily the result of increased depreciation from 1998 capital
additions.
As a result of the above factors, operating income of $8.5 million in
second quarter 1999 was flat with second quarter 1998.
Net interest expense decreased $0.5 million, or 62.8%, to $0.3 million
in second quarter 1999 from $0.8 million in second quarter 1998, primarily as a
result of the repayment of long-term debt over the twelve months ending June 30,
1999, totaling $16.7 million.
As a result of the above factors, net income increased $0.3 million, or
7.1%, to $5.1 million in second quarter 1999 from $4.7 million in second quarter
1998. Diluted earnings per share increased to $0.33 in second quarter 1999 from
$0.30 in second quarter 1998. Second quarter last year included a writedown of
inventory to the lower of cost-or-market totaling $1.5 million after taxes, or
10 cents per diluted share.
Six Months Ended June 30, 1999, Compared with Six Months Ended June 30, 1998
Net sales decreased $35.9 million, or 15.1%, to $201.4 million in 1999.
Net sales declined partially as a result of a 16% reduction in the average Metal
Selling Price for brass rod from first half 1998. 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 lower demand from agricultural and
construction equipment manufacturers and due to inventory reductions by the
Steel Service Centers.
The Company recorded non-cash lower of cost-or-market inventory
writedowns totaling $1.8 million for the six months ended June 30, 1999 and $2.4
million for the six months ended June 30, 1998. The 1999 writedown was due to
the decreasing prices of flat-rolled steel and steel tubing. The 1998 writedown
was discussed above.
Gross profit for the six months ended June 30, 1999, excluding lower of
cost-or-market inventory writedowns, decreased $3.4 million, or 9.4%, to $32.3
million from 1998. Gross profit was adversely effected by declining flat-rolled
steel prices and competitive steel tubing price pressures, which have reduced
steel tubing margins.
SG&A expenses increased $1.5 million, or 20.3%, to $8.7 million for the
six months ended June 30, 1999. The increase was partly due to higher due
diligence costs related to investigating potential acquisitions that were not
consummated. Also, the increase was due to one-time benefits recorded last year
for workers' compensation and the timing of professional fees.
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CHASE INDUSTRIES INC.
Depreciation and amortization increased $0.4 million, or 7.4%, to $5.7
million due to 1998 capital additions.
As a result of the above factors, operating income, excluding lower of
cost-or-market inventory writedowns, decreased $5.2 million, or 22.6%, to $17.9
million for the six months ended June 30, 1999, compared with 1998.
Net interest expense decreased $1.0 million, or 54.6%, to $0.8 million
in second quarter 1999 from $1.8 million in second quarter 1998, primarily as a
result of the repayment of long-term debt over the twelve months ending June 30,
1999, totaling $16.7 million.
As a result of the above factors, net income excluding lower of
cost-or-market inventory writedowns decreased $2.6 million, or 19.8%, to $10.6
million for the six months ended June 30, 1999. Diluted earnings per share,
excluding lower of cost-or-market inventory writedowns, decreased to $0.69 per
diluted share for the six months ended June 30, 1999, compared with $0.85 per
diluted share in 1998. After the inventory writedowns, net income was $9.5
million, or $0.62 per diluted share, a decrease of 19.1% from 1998.
LIQUIDITY AND CAPITAL RESOURCES
General
At June 30, 1999, cash and cash equivalents totaled $17.5 million
increasing from $9.2 million at year end 1998. Total debt at June 30, 1999, was
$27.4 million compared with $27.5 million at year end 1998.
Working Capital
At June 30, 1999, working capital was $55.4 million, a $0.7 million, or
1.3%, increase from $54.7 million at December 31, 1998. A decrease in inventory
of $25.3 million, or 38.4%, was offset by increases in cash and cash equivalents
of $8.3 million, or 90.6%, and accounts receivable of $3.4 million, or 11.4%,
and decreases in accounts payable of $12.7 million, or 30.7%.
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
second 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 2.29 at June 30, 1999, compared to 1.97
at December 31, 1998.
17
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CHASE INDUSTRIES INC.
Cash Flow Provided by Operating Activities
For the six months ended June 30, 1999, net cash provided by operating
activities was $20.4 million, which included net income of $9.5 million and
depreciation and amortization of $5.7 million. There was a decrease in working
capital, excluding cash, debt and deferred taxes, of $8.5 million.
For the six months ended June 30, 1998, net cash provided by operating
activities was $8.3 million, which included net income of $11.7 million and
depreciation and amortization of $5.3 million, partially offset by an increase
in working capital, excluding cash, debt and deferred taxes, of $9.5 million.
Cash Flow (Used in) Investing Activities
Capital expenditures were $11.9 million for the six months ended June
30, 1999, and $6.1 million for the six months ended June 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.
Cash Flow (Used in) Financing Activities
Cash used in financing activities of $111,000 for the six months ended
June 30, 1999, consisted primarily of principal payments on long-term debt.
Cash used in financing activities of $1.3 million for the six months
ended June 30, 1998, consisted of the net repayments of long-term debt totaling
$4.2 million, proceeds of $2.0 million received in conjunction with the lease of
billet heating equipment and $930,000 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 is 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 ordered and a new building is
under construction 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
("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 Revolving Credit Facility is determined monthly by a formula
based on levels of accounts receivable and inventory, 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 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 5.4% and 5.7% at June 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 June 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 $40 million as of June 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
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 and 1998, were offset against the receivable from BP. The Company
continues to classify the BP Note as long-term because, if necessary, it has the
ability to repay the amount on a long-term basis with borrowings obtained under
the Bank Credit Facility.
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CHASE INDUSTRIES INC.
IMPACT OF THE 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 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. 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 may not be complete by year end 1999. The Company
currently is evaluating the feasibility and cost of contingency plans, including
modifications to Leavitt's existing management information systems to enable
them to operate in 2000 or interface with the new system until the conversion is
complete. 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. The Company has
evaluated these systems, developed plans to upgrade non-compliant systems, and
expects to complete these plans by the end of third 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 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.
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CHASE INDUSTRIES INC.
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 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.
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 Statement
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. CBCC has substantially concluded the additional
sampling that it believes is necessary.
Based on the aggregate sampling results, CBCC completed an interim
remediation for a portion of the site in 1998 and has initiated additional
interim remedial actions for other portions of the site in 1999. In connection
with these current activities, CBCC is conducting additional sampling of certain
areas of the site on which the interim actions are taking place.
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CHASE INDUSTRIES INC.
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 develop a comprehensive remediation plan for the
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. The costs of the 1999
interim actions presently are estimated at $3.1 million, which was 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.
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 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.
To the extent CBCC has incurred, and incurs future, cleanup costs with
respect to 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. In the event the Company
is entitled to recover from BP pursuant to the Remediation Agreement, the CBCC
Purchase Agreement or otherwise, the Company may elect to offset the amounts of
such recoveries from BP and prior offsets against amounts owing under the $20
million BP Note.
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 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.
22
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CHASE INDUSTRIES INC.
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.
CONTINGENCIES - LEGAL PROCEEDINGS
As discussed in Note 4 of Notes to Consolidated Financial Statements
included in 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 continues to classify the
BP Note as long-term, and believes that judgement against the
23
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CHASE INDUSTRIES INC.
Company and CBCC would not have a material effect on the Company's financial
condition, results of operations or liquidity.
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
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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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of Stockholders of the Company was held on May 25,
1999, for the purpose of electing a board of directors, ratifying the
appointment of independent accountants and transacting such other business as
properly came before the meeting. Proxies for the meeting were solicited
pursuant to Section 14(a) of the Securities Exchange Act of 1934 and there was
no solicitation in opposition to management's solicitations.
All of management's nominees for directors as listed in the Proxy
Statement dated April 2, 1999, were elected with the following vote:
<TABLE>
<CAPTION>
Shares Voted "For" Shares "Withheld" Broker Non-Votes
------------------ ----------------- ----------------
<S> <C> <C> <C>
Martin V. Alonzo 7,275,729 16,036 -0-
Raymond E. Cartledge 7,275,954 15,811 -0-
Charles E. Corpening 7,274,604 17,161 -0-
Donald J. Donahue 7,275,854 15,911 -0-
John R. Kennedy 7,275,854 15,911 -0-
Thomas F. McWilliams 7,274,154 17,611 -0-
William R. Toller 7,275,104 16,661 -0-
</TABLE>
The appointment of PricewaterhouseCoopers LLP as independent
accountants was ratified by the following vote:
<TABLE>
<CAPTION>
Share Voted "For" Shares Voted "Against" Shares Abstaining Broker Non-Votes
----------------- ---------------------- ----------------- ----------------
<S> <C> <C> <C>
7,281,416 7,299 3,050 -0-
</TABLE>
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
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CHASE INDUSTRIES INC.
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, Registration No. 33-87278).
+27 -- Financial Data Schedule (EDGAR filing only).
- -------------
+ Filed herewith
(b) REPORTS ON FORM 8-K
No Current Report on Form 8-K was filed by the Company during the
second 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: August 4, 1999 By: /s/ MICHAEL T. SEGRAVES
--------------------------------
Michael T. Segraves
Vice President
Chief Financial Officer
(duly authorized officer and
Principal Financial Officer)
27
<PAGE> 28
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
No. Description
------- -----------
<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), 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, Registration 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> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> APR-01-1999
<PERIOD-END> JUN-30-1999<F1>
<CASH> 17,537
<SECURITIES> 0
<RECEIVABLES> 34,768
<ALLOWANCES> 1,146
<INVENTORY> 40,497
<CURRENT-ASSETS> 98,451
<PP&E> 103,681
<DEPRECIATION> 0
<TOTAL-ASSETS> 209,489
<CURRENT-LIABILITIES> 43,084
<BONDS> 0
0
0
<COMMON> 152
<OTHER-SE> 124,743
<TOTAL-LIABILITY-AND-EQUITY> 209,489
<SALES> 97,577
<TOTAL-REVENUES> 97,577
<CGS> 81,783
<TOTAL-COSTS> 81,783
<OTHER-EXPENSES> 7,323
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 314
<INCOME-PRETAX> 8,157
<INCOME-TAX> 3,100
<INCOME-CONTINUING> 5,057
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,057
<EPS-BASIC> 0.33
<EPS-DILUTED> 0.33
<FN>
<F1>Chase Industries Inc. quarterly report on Form 10-Q for the period ended June
30, 1999.
</FN>
</TABLE>
