<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 MARCH 31, 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 APRIL 23, 1999...................... 9,084,052
NUMBER OF SHARES OF NONVOTING COMMON STOCK OUTSTANDING AS OF APRIL 23, 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>
<CAPTION>
PART I. FINANCIAL INFORMATION
Page
----
<S> <C> <C>
Item 1. Financial Statements (Unaudited):
Consolidated Balance Sheet as of March 31, 1999
and December 31, 1998.............................................................. 3
Consolidated Statement of Income for the Three Months Ended
March 31, 1999 and 1998............................................................ 4
Consolidated Statement of Cash Flows for the Three Months Ended
March 31, 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........................................................................... 24
Item 6. Exhibits and Reports on Form 8-K............................................................ 24
Signature................................................................................... 26
</TABLE>
<PAGE> 3
CHASE INDUSTRIES INC.
CONSOLIDATED BALANCE SHEET
(UNAUDITED; IN THOUSANDS, EXCEPT SHARE INFORMATION)
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
---------- ----------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 4,319 $ 9,200
Receivables, net of allowance for doubtful accounts and
claims of $1,120 and $1,060 in 1999 and 1998, respectively 37,378 30,180
Inventories 51,876 65,776
Prepaid expenses 1,028 698
Deferred income taxes 5,753 4,982
---------- ----------
Total current assets 100,354 110,836
Property, plant and equipment, net 99,882 97,152
Other assets 4,445 4,816
---------- ----------
Total assets $ 204,681 $ 212,804
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 26,934 $ 41,399
Accrued compensation and benefits 6,924 7,017
Accrued income taxes 4,567 2,196
Other accrued liabilities 4,912 5,401
Current portion of long-term debt 158 152
---------- ----------
Total current liabilities 43,495 56,165
Long-term debt 27,250 27,339
Deferred income taxes 14,099 13,880
---------- ----------
Total liabilities 84,844 97,384
---------- ----------
Commitments and contingencies -- --
---------- ----------
Stockholders' equity:
Common stock, $.01 par value, 36,310,000 shares authorized;
9,084,052 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 31,498 31,493
Retained earnings 88,187 83,775
---------- ----------
Total stockholders' equity 119,837 115,420
---------- ----------
Total liabilities and stockholders' equity $ 204,681 $ 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 March 31,
1999 1998
---------- ----------
<S> <C> <C>
Net sales $ 103,868 $ 125,118
Cost of goods sold (exclusive of depreciation
and amortization shown separately below) 87,360 106,641
Lower of cost-or-market inventory writedown 1,800 --
---------- ----------
Gross profit 14,708 18,477
Selling, general and administrative expenses 4,259 3,609
Depreciation and amortization 2,817 2,630
---------- ----------
Operating income 7,632 12,238
Interest expense, net 516 981
---------- ----------
Income before income taxes 7,116 11,257
Provision for income taxes 2,704 4,278
---------- ----------
Net income $ 4,412 $ 6,979
========== ==========
Earnings per share*:
Basic $ 0.29 $ 0.46
========== ==========
Diluted $ 0.29 $ 0.45
========== ==========
</TABLE>
* Adjusted for the three-for-two stock split effective June 6, 1998.
The accompanying notes are an integral part of the consolidated financial
statements.
4
<PAGE> 5
CHASE INDUSTRIES INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED; IN THOUSANDS)
<TABLE>
<CAPTION>
Three Months Ended March 31,
1999 1998
---------- ----------
<S> <C> <C>
Operating activities:
Net income $ 4,412 $ 6,979
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 2,817 2,630
Deferred income tax (benefit) expense (552) 384
Lower of cost-or-market inventory writedown 1,800 --
Changes in assets and liabilities:
(Increase) in receivables (7,198) (5,130)
Decrease in inventories 12,100 4,048
(Decrease) in accounts payable (14,465) (6,440)
Increase in accrued liabilities 1,789 3,275
Other, net (118) 164
---------- ----------
Net cash provided by operating activities 585 5,910
---------- ----------
Investing activities:
Expenditures for property, plant and equipment (5,388) (3,842)
---------- ----------
Net cash (used in) investing activities (5,388) (3,842)
---------- ----------
Financing activities:
Revolving credit loan (repayments), net -- (1,578)
Equipment financing -- 2,000
Principal payments on long-term debt (83) (76)
Issuance of common stock - options exercised 5 468
---------- ----------
Net cash (used in) provided by financing activities (78) 814
---------- ----------
Net (decrease) increase in cash and cash equivalents (4,881) 2,882
Cash and cash equivalents, beginning of period 9,200 924
---------- ----------
Cash and cash equivalents, end of period $ 4,319 $ 3,806
========== ==========
Supplemental disclosures:
Interest and bank fees paid $ 151 $ 640
========== ==========
Income taxes paid $ 885 $ 119
========== ==========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
5
<PAGE> 6
CHASE INDUSTRIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. SIGNIFICANT ACCOUNTING POLICIES:
PRINCIPLES OF CONSOLIDATION AND INTERIM FINANCIAL INFORMATION
The consolidated balance sheet as of March 31, 1999, and December 31,
1998, and the consolidated statements of income and cash flows for the three
months ended March 31, 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 March 31, 1999 and 1998, included herein is unaudited
and, in the opinion of management, reflects all adjustments necessary,
consisting only of recurring adjustments, for a fair presentation of such
financial information.
The results of operations for the three months ended March 31, 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. 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.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities," ("SFAS 133"), which is effective for years
beginning after June 15, 1999. The new standard requires companies to record
derivatives on the balance sheet as assets or liabilities, measured at fair
value. Management of the Company believes SFAS 133 will not have a material
effect on its financial position or results of operations.
2. INVENTORIES:
Inventories are stated at the lower of cost-or-market, with cost
determined on the last-in, first-out (LIFO) basis. Inventories have been
written down to lower of cost-or-market and such amounts are considered cost
for subsequent years. During 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.
If the first-in, first-out (FIFO) method for determining cost had been
used, inventories would have been approximately $1.7 million lower at March 31,
1999 and December 31, 1998. Inventories consisted of the following (in
thousands):
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
---------- ----------
<S> <C> <C>
Raw materials $ 26,951 $ 33,657
Work in progress 6,739 10,174
Finished goods 18,712 22,383
---------- ----------
52,402 66,214
Tolling metal due customers (526) (438)
---------- ----------
$ 51,876 $ 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.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The following is a reconciliation of the denominator used in the
computation of basic and diluted earnings per share. Average shares are as
follows:
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
1999 1998
---- ----
Shares EPS Shares EPS
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Basic 15,233,894 $ 0.29 15,172,353 $ 0.46
Stock options 122,654 -- 379,266 (0.01)
---------- ---------- ---------- ----------
Diluted 15,356,548 $ 0.29 15,551,619 $ 0.45
========== ========== ========== ==========
</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 March 31, 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 any required 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 amount or
range of amounts of cleanup costs associated therewith. However, it is
reasonably possible that the cleanup costs associated with these environmental
conditions may be material and, in the event CBCC or Leavitt, as applicable,
was determined to be solely responsible or liable for site cleanup activities
(due to the inability or unwillingness of other responsible parties to perform
or pay for such activities), such expenditures could have a material effect on
the Company's earnings and financial condition.
CBCC. With respect to CBCC's facility, in connection with the CBCC
Acquisition the Company and BP entered into a remediation agreement (the
"Remediation Agreement"). Under the terms of the Remediation Agreement, BP is
responsible for certain remediation activities attributable to environmental
releases which occurred prior to the CBCC Acquisition at CBCC's manufacturing
facility. BP also is obligated under the CBCC Purchase Agreement to indemnify
the Company for
8
<PAGE> 9
CHASE INDUSTRIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
liabilities arising out of certain environmental conditions that existed as of
the CBCC Acquisition date. BP has performed certain activities in this regard
and has acknowledged liability for certain releases of regulated substances
into the environment which occurred prior to the CBCC Acquisition.
Preliminary studies conducted immediately prior to the CBCC
Acquisition indicated that the site upon which CBCC's manufacturing facility is
located has been contaminated with certain volatile organic compounds as well
as total petroleum hydrocarbons and certain metals from historical operating
practices. BP conducted initial site investigation activities in an effort to
determine the extent of contamination and appropriate cleanup methods. After
reviewing the results of that investigation, CBCC determined that additional
sampling was necessary to more fully delineate the extent and magnitude of
contamination, to establish appropriate cleanup standards and to identify
available remedial methods and potential regulatory constraints related to
specific remedial methodologies. CBCC has substantially concluded the
additional sampling that it believes is necessary.
Based on the aggregate sampling results, interim remediation for a
portion of the site was completed in fourth quarter 1998 at a cost of
approximately $1 million, which was recorded in third quarter 1998. Under the
terms of the Remediation Agreement, BP is required to fund the remediation
costs. Accordingly, the Company recorded a corresponding $1 million receivable
from BP.
The Company anticipates undertaking additional remedial actions in
1999 and, in connection with these activities, conducting additional sampling
of certain areas of the site. 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 investigation has been conducted on a voluntary basis with the concurrence
of the Ohio EPA.
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 BP and CBCC
currently are involved in litigation regarding, among other things, BP's
obligations under the Remediation Agreement and the CBCC Purchase Agreement. If
BP fails to fulfill its obligations under the Remediation Agreement to fund
remediation activities at CBCC's manufacturing facility, CBCC will be required
to fund these activities. However, to the extent CBCC is required to fund
cleanup costs related to the remediation of contamination at its manufacturing
facility, the Company believes it would be able to fund these costs with cash
on hand and borrowings under its existing Bank Credit Facility. Therefore, the
Company does not believe that funding these remediation activities will have a
material effect on the Company's financial condition, results of operations or
liquidity. Based on the status of remediation activities, no reserves have been
established regarding the aforementioned matters. Additionally, the Company
expects
9
<PAGE> 10
CHASE INDUSTRIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
no material impact on its financial position, results of operations or
liquidity as a result of the existence of any other environmental conditions
related to CBCC.
To the extent CBCC 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 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
10
<PAGE> 11
CHASE INDUSTRIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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 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. 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,
11
<PAGE> 12
CHASE INDUSTRIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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 has completed its review
and analysis of the Hammond facility and has recommended additional on-site
investigation and further discussions with the IDEM. Until these actions are
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 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. 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.
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 farm equipment, non-residential
construction 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.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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.
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, 1999
-------------------------------------------------
BRASS STEEL
PRODUCTS PRODUCTS CORPORATE TOTAL
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net sales $ 71,562 $ 32,306 -- $ 103,868
========= ========= ========= =========
Operating income 9,119 (1,322) (165) 7,632
Interest expense, net -- -- 516 516
========= ========= ========= =========
Income before income taxes 9,119 (1,322) (681) 7,116
Selected non-cash charges included in operating income:
Lower of cost-or-market inventory writedown -- 1,800 -- 1,800
Depreciation and amortization 1,509 1,308 -- 2,817
Total assets 88,575 110,542 5,564 204,681
Capital expenditures 4,798 590 -- 5,388
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, 1998
-------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $ 82,008 $ 43,110 -- $ 125,118
========= ========= ========= =========
Operating income 9,579 2,689 (30) 12,238
Interest expense, net -- -- 981 981
========= ========= ========= =========
Income before income taxes 9,579 2,689 (1,011) 11,257
Selected non-cash charges included in operating income:
Depreciation and amortization 1,362 1,268 -- 2,630
Total assets 95,155 110,486 6,913 212,554
Capital expenditures 3,082 760 -- 3,842
</TABLE>
13
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CHASE INDUSTRIES INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
Stock Split
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.
Fractional shares resulting from the stock split were paid in cash, without
interest. All references to the number of shares and per share amounts have
been restated to reflect the stock split.
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 March 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.
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CHASE INDUSTRIES INC.
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
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
Overall
Net sales decreased $21.2 million, or 16.9%, to $103.9 million in
first quarter 1999 from $125.1 million in first quarter 1998. Net sales
declined partially as a result of a 14% reduction in the average Metal Selling
Price for brass rod from first quarter 1998. Also, net sales decreased due to
lower steel tubing shipments and reduced steel tubing prices.
Gross profit, excluding the lower of cost-or-market inventory
writedown, decreased $2.0 million, or 10.8%, to $16.5 million in first quarter
1999 from $18.5 million in first quarter 1998.
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CHASE INDUSTRIES INC.
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.
The Company recorded a non-cash lower of cost-or-market inventory
writedown of $1.8 million in first quarter 1999. The writedown to market was
due to the decreasing prices of flat-rolled steel and steel tubing.
Selling, general and administrative ("SG&A") expenses increased $0.7
million, or 19.4%, to $4.3 million in first quarter 1999 from $3.6 million in
first quarter 1998. The increase was partly due to higher due diligence costs
related to investigating potential acquisitions that were not consummated.
Depreciation and amortization increased $0.2 million, or 7.7%, to $2.8
million in first quarter 1999 from $2.6 million in first 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, decreased $2.8 million, or 23.0%,
to $9.4 million in first quarter 1999 from $12.2 million in first quarter 1998.
Net interest expense decreased $0.5 million, or 50.0%, to $0.5 million
in first quarter 1999 from $1.0 million in first quarter 1998, primarily as a
result of the repayment of long-term debt over the twelve months ending March
31, 1999, totaling $19.1 million.
As a result of the above factors, net income, excluding a lower of
cost-or-market inventory writedown, decreased $1.5 million, or 21.4%, to $5.5
million in first quarter 1999 from $7.0 million in first quarter 1998. Diluted
earnings per share, excluding a lower of cost-or-market inventory writedown,
decreased to $.36 in first quarter 1999 from $.45 in first quarter 1998. After
the inventory writedown, net income was $4.4 million, or $.29 per diluted
share, a decrease of 35.6% from first quarter 1998.
Brass Products Segment
Net sales in the brass products segment decreased $10.4 million, or
12.7%, to $71.6 million in first quarter 1999 from $82.0 million in first
quarter 1998. Despite record brass rod shipments, net sales declined due to a
14% reduction in the average Metal Selling Price for brass rod in first quarter
1999 compared to first quarter 1998. The current Metal Selling Price is the
lowest since 1987, and management believes the lower price will encourage
demand for brass rod.
Gross profit in the brass products segment increased $0.1 million, or
0.8%, to $12.8 million in first quarter 1999 from $12.7 million in first
quarter 1998.
SG&A expenses in the brass products segment increased $0.5 million, or
29.4%, to $2.2 million in first quarter 1999 from $1.7 million in first quarter
1998.
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CHASE INDUSTRIES INC.
Depreciation in the brass products segment increased $0.1 million, or
7.1%, to $1.5 million in first quarter 1999 from $1.4 million in first quarter
1998. The increase was primarily the result of increased depreciation from 1998
capital additions.
As a result of the above factors, operating income in the brass
products segment decreased $0.4 million, or 4.2%, to $9.1 million in first
quarter 1999 from $9.5 million in first quarter 1998.
Steel Products Segment
Net sales in the steel products segment decreased $10.8 million, or
25.1%, to $32.3 million in first quarter 1999 from $43.1 million in first
quarter 1998. Net sales decreased due to lower steel tubing shipments and
reduced steel tubing prices. Beginning in second quarter 1998, imports of
flat-rolled steel, Leavitt's raw material, increased substantially as a result
of poor economic conditions in Asia, Russia and South America. Tubing prices
moved lower with flat-rolled steel prices. Meanwhile, steel service centers,
expecting lower tubing prices, curtailed purchases waiting for the prices to
decline further. As this was happening, the agricultural equipment industry
usage of structural tubing declined due to lower agricultural prices and
reduced exports of agricultural products resulting from depressed economic
conditions in Asia and South America. These factors reduced Leavitt's shipments
in 1998 and first quarter 1999.
During first quarter 1999, the steel products segment recorded a
non-cash lower of cost-or-market inventory writedown of $1.8 million. This
writedown was due to decreasing prices of flat-rolled steel and steel tubing.
Gross profit, excluding a lower of cost-or-market writedown, decreased
$2.1 million, or 36.8%, to $3.6 million in first quarter 1999 from $5.7 million
in first quarter 1998. The decrease in gross profit was due to declining
flat-rolled steel prices and competitive steel tubing price pressures, which
have reduced steel tubing margins.
Depreciation and amortization in the steel products segment increased
slightly in first quarter 1999 as compared to first quarter 1998.
As a result of the above factors, operating income, excluding a lower
of cost-or-market inventory writedown, decreased $2.2 million, or 81.5%, to
$0.5 million in first quarter 1999 from $2.7 million in first quarter 1998.
After the inventory writedown, the operating loss was $1.3 million.
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CHASE INDUSTRIES INC.
LIQUIDITY AND CAPITAL RESOURCES
General
At March 31, 1999, cash and cash equivalents totaled $4.3 million
compared with $9.2 million at year end 1998. Total debt at March 31, 1999, was
$27.4 million compared with $27.5 million at year end 1998.
Working Capital
At March 31, 1999, working capital was $56.9 million, a $2.2 million,
or 4.0%, increase from $54.7 million at December 31, 1998. Decreases in cash
and cash equivalents of $4.9 million, or 53.1%, and inventory of $13.9 million,
or 21.1%, were offset by increases in accounts receivable of $7.2 million, or
23.9%, and accrued liabilities of $1.8 million, or 12.2%, and a decrease in
accounts payable of $14.5 million, or 34.9%.
The increase in accounts receivable and the decline in inventories
were due primarily to an increase in net sales of $10.4 million, or 11.1%, in
first quarter 1999 from fourth quarter 1998. The Company's shipments typically
are lower in December due to customer shutdowns.
The Company's current ratio was 2.31 at March 31, 1999, compared to
1.97 at December 31, 1998.
Cash Flow Provided by Operating Activities
For the three months ended March 31, 1999, net cash provided by
operating activities was $0.6 million, which included net income of $4.4
million and depreciation and amortization of $2.8 million, partially offset by
an increase in working capital, excluding cash, debt and deferred taxes, of
$6.3 million.
For the three months ended March 31, 1998, net cash provided by
operating activities was $5.9 million, which included net income of $7.0
million and depreciation and amortization of $2.6 million, partially offset by
an increase in working capital, excluding cash, debt and deferred taxes, of
$4.4 million.
Cash Flow (Used in) Investing Activities
Capital expenditures were $5.4 million for the three months ended
March 31, 1999, and $3.8 million for the three months ended March 31, 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.
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Cash Flow (Used in) Provided by Financing Activities
Cash used in financing activities was $78,000 for the three months
ended March 31, 1999.
Cash provided by financing activities of $814,000 for the three months
ended March 31, 1998, consisted of proceeds of $2.0 million received in
conjunction with the lease of billet heating equipment and $468,000 from the
issuance of common stock for stock options exercised, partially offset by net
repayments of long-term debt of $1.7 million.
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.
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 will 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
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CHASE INDUSTRIES INC.
LIBOR borrowing period, whichever is shorter. The weighted average interest
rate on the Bank Credit Facility was 5.4% and 5.7% at March 31, 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 March 31, 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.
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.
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 is in the process of being installed. The software vendor
represents the new release as Year 2000 compliant. As the new release is
installed and tested, transactions occurring in 2000 and beyond will again be
simulated. The installation is expected to be completed prior to the end of
third quarter 1999 and CBCC is not
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CHASE INDUSTRIES INC.
projected to incur a significant cost to complete the upgrade, as the upgraded
version of the software is included with CBCC's annual software maintenance
fee.
Leavitt's management information systems are not currently Year 2000
compliant. For this and other business reasons, Leavitt is in the process of
converting to new software, which has been represented as Year 2000 compliant
and which management believes also will assist in improved management of the
business. Substantial conversion tasks have been completed. The capital
expenditures for the systems implementation are projected to be approximately
$2.5 million, and it is expected that the upgrade to the new software will be
completed in third quarter 1999. This project is being funded from internal
funds, and a substantial portion of the projected expenditures has been spent
or committed. Testing of the software for Year 2000 compliance will occur as
the systems are implemented.
The Company also utilizes software and systems in its internal
manufacturing processes and instrumental control functions. 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. 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 believes that its new management information systems will
be Year 2000 compliant by year end 1999. 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. 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
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CHASE INDUSTRIES INC.
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. Based on the aggregate sampling results currently available with
respect to CBCC's site, interim remediation for a portion of the site has been
completed at a cost of approximately $1 million, which was recorded in third
quarter 1998. Under the terms of the Remediation Agreement, BP is required to
fund the remediation costs. Accordingly, the Company recorded a corresponding
$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. If BP fails to fulfill its obligations under the
Remediation Agreement to fund remediation activities at CBCC's manufacturing
facility, CBCC will be required to fund these activities. However, to the
extent CBCC is required to fund cleanup costs related to the remediation of
contamination at its manufacturing facility, the Company believes it would be
able to fund these costs with cash on hand and borrowings under its existing
Bank Credit Facility. Therefore, the Company does not believe that funding
these remediation activities will have a material effect on the Company's
financial condition, results of operations or liquidity. Based on the status of
remediation activities, no reserves have been established regarding the
aforementioned matters. Additionally, the Company expects no material impact on
its financial position, results of operations or liquidity as a result of the
existence of any other environmental conditions related to CBCC.
To the extent CBCC 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.
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CHASE INDUSTRIES INC.
Leavitt. Pending receipt of Leavitt's independent consultant's
recommendations and further direction from the IDEM, the Company currently is
unable to determine what, if any, remedial activities may be required at the
Hammond facility. Although the cleanup costs associated with the environmental
conditions at the Hammond facility may be material, based on the results of the
1997 sampling the Company believes that the probability that Leavitt would be
required to make material expenditures relating to site cleanup at the Hammond
facility appears to be remote. Therefore, the Company has not made any specific
accrual for costs related to investigation or cleanup at the Hammond facility.
To the extent the Company or Leavitt incurs a liability with respect to site
cleanup at the Hammond facility, 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., the Company and CBCC are defendants in a lawsuit regarding
amounts payable under the BP Note. As discussed therein, the Company disputes
the allegations made in the lawsuit, but believes that, even if the plaintiffs
were to prevail in their positions, the Company would be able to pay amounts
due, including the principal amount of the BP Note, utilizing cash on hand,
offsets of amounts owing from Old Chase and BP, and, if necessary, borrowings
obtained under the Company's existing Bank Credit Facility. Therefore, the
Company continues to classify the BP Note as long-term, and believes that
judgement against the Company and CBCC would not have a material effect on the
Company's financial condition, results of operations or liquidity.
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CHASE INDUSTRIES INC.
SAFE HARBOR
Management uses estimates and assumptions in discussing future
operations of the Company and conditions in the industries in which it
operates. Such forecasts made by the Company, including forecasts regarding
demand for the Company's products, are forward looking and are subject to risks
and uncertainties which could cause actual results to differ materially from
historical results or those anticipated. Actual results will be affected by
general economic and industry conditions in the end-use markets for the
Company's products, as well as by the impact of competitive products and
pricing, including without limitation the impact of imports. The end-use
markets for CBCC's products include primarily construction and remodeling,
industrial machinery and equipment, electronics and transportation; while the
end-use markets for Leavitt's products primarily include non-residential
construction, agriculture and consumer durables. Foreign economic activity and
the relationship of the U.S. dollar to other currencies also affect import
levels and exports of U.S. manufactured products containing parts made from
brass rod and steel tubing. The Company's shipments also will be affected by
its ability to maintain manufacturing operations at its current levels without
significant interruption.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
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).
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CHASE INDUSTRIES INC.
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
first quarter of 1999.
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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: April 28, 1999 By: /s/ MICHAEL T. SEGRAVES
---------------------------------
Michael T. Segraves
Vice President
Chief Financial Officer
(duly authorized officer and
Principal Financial Officer)
26
<PAGE> 27
CHASE INDUSTRIES INC.
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit Sequentially
No. Description of Exhibits Numbered Page
- ------- ----------------------- -------------
<S> <C> <C>
3.1 - Restated Certificate of Incorporation of the Company
(incorporated by reference to Exhibit 3.1 to the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30,
1998), 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> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 4,319
<SECURITIES> 0
<RECEIVABLES> 38,498
<ALLOWANCES> 1,120
<INVENTORY> 51,876
<CURRENT-ASSETS> 100,354
<PP&E> 99,882
<DEPRECIATION> 0
<TOTAL-ASSETS> 204,681
<CURRENT-LIABILITIES> 43,495
<BONDS> 0
0
0
<COMMON> 152
<OTHER-SE> 119,685
<TOTAL-LIABILITY-AND-EQUITY> 204,681
<SALES> 103,868
<TOTAL-REVENUES> 103,868
<CGS> 87,360
<TOTAL-COSTS> 89,160
<OTHER-EXPENSES> 7,076
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 516
<INCOME-PRETAX> 7,116
<INCOME-TAX> 2,704
<INCOME-CONTINUING> 4,412
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,412
<EPS-PRIMARY> 0.29
<EPS-DILUTED> 0.29
</TABLE>
