<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2000
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 [ ]
NUMBER OF SHARES OF COMMON STOCK OUTSTANDING AS OF
NOVEMBER 6, 2000..................................................9,135,427
NUMBER OF SHARES OF NONVOTING COMMON STOCK OUTSTANDING AS OF
NOVEMBER 6, 2000..................................................6,150,118*
----------------
* The Registrant's Nonvoting Common Stock is convertible, on a share-for-share
basis, into Common Stock.
===============================================================================
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CHASE INDUSTRIES INC.
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
Item 1. Financial Statements (Unaudited):
Consolidated Balance Sheet as of September 30, 2000
and December 31, 1999.............................................................. 3
Consolidated Statement of Income for the Three and Nine Months Ended
September 30, 2000 and 1999........................................................ 4
Consolidated Statement of Cash Flows for the Nine Months Ended
September 30, 2000 and 1999........................................................ 5
Notes to Consolidated Financial Statements................................................... 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations .................................................................. 16
PART II. OTHER INFORMATION
Item 1. Legal Proceedings........................................................................... 26
Item 6. Exhibits and Reports on Form 8-K............................................................ 27
Signature................................................................................... 29
</TABLE>
2
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CHASE INDUSTRIES INC.
CONSOLIDATED BALANCE SHEET
(UNAUDITED; IN THOUSANDS, EXCEPT SHARE INFORMATION)
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
------------- ------------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 6,339 $ 9,142
Receivables, net of allowance for doubtful accounts and
claims of $1,267 and $1,190 in 2000 and 1999, respectively 41,595 33,384
Inventories 49,233 45,230
Prepaid expenses 1,245 4,609
Deferred income taxes 3,845 3,341
-------- --------
Total current assets 102,257 95,706
Property, plant and equipment, net 125,816 121,058
Other assets 14,024 12,808
-------- --------
Total assets $242,097 $229,572
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 30,739 $ 31,588
Accrued compensation and benefits 7,608 8,167
Accrued income taxes 4,642 2,714
Other accrued liabilities 9,320 10,890
Current portion of long-term debt 172 163
-------- --------
Total current liabilities 52,481 53,522
Long-term debt 20,041 27,175
Deferred income taxes 20,436 14,829
-------- --------
Total liabilities 92,958 95,526
-------- --------
Commitments and contingencies -- --
-------- --------
Stockholders' equity:
Common stock, $.01 par value, 36,310,000 shares authorized; 9,127,927 and
9,084,877 shares issued and outstanding
in 2000 and 1999, respectively 92 91
Nonvoting common stock, $.01 par value, 12,300,000 shares
authorized; 6,150,118 shares issued and outstanding
in 2000 and 1999 61 61
Additional paid-in capital 31,827 31,504
Retained earnings 117,159 102,390
-------- --------
Total stockholders' equity 149,139 134,046
-------- --------
Total liabilities and stockholders' equity $242,097 $229,572
======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
3
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CHASE INDUSTRIES INC.
CONSOLIDATED STATEMENT OF INCOME
(UNAUDITED; IN THOUSANDS, EXCEPT SHARE INFORMATION)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net sales $ 96,361 $ 94,461 $312,578 $295,906
Cost of goods sold (exclusive of depreciation
and amortization shown separately below) 82,319 79,763 267,254 248,906
Lower of cost-or-market inventory writedown -- -- -- 1,800
-------- -------- -------- --------
Gross profit 14,042 14,698 45,324 45,200
Selling, general and administrative expenses 3,796 4,740 10,931 13,442
Depreciation and amortization 3,204 2,979 9,411 8,676
-------- -------- -------- --------
Operating income 7,042 6,979 24,982 23,082
Interest expense, net 330 56 1,161 886
-------- -------- -------- --------
Income before income taxes 6,712 6,923 23,821 22,196
Provision for income taxes 2,551 2,631 9,052 8,435
-------- -------- -------- --------
Net income $ 4,161 $ 4,292 $ 14,769 $ 13,761
======== ======== ======== ========
Earnings per share:
Basic $ 0.27 $ 0.28 $ 0.97 $ 0.90
======== ======== ======== ========
Diluted $ 0.27 $ 0.28 $ 0.96 $ 0.90
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
4
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CHASE INDUSTRIES INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED; IN THOUSANDS)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
2000 1999
-------- --------
<S> <C> <C>
Operating activities:
Net income $ 14,769 $ 13,761
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 9,411 8,676
Deferred income tax expense (benefit) 5,103 (366)
Lower of cost-or-market inventory writedown -- 1,800
Changes in assets and liabilities:
(Increase) in receivables (8,211) (7,208)
(Increase) decrease in inventories (4,003) 21,712
(Decrease) in accounts payable (849) (9,640)
(Decrease) in accrued liabilities (201) (1,197)
Other, net 1,673 (2,916)
-------- --------
Net cash provided by operating activities 17,692 24,622
-------- --------
Investing activities:
Expenditures for property, plant and equipment (13,693) (22,464)
-------- --------
Net cash (used in) investing activities (13,693) (22,464)
-------- --------
Financing activities:
Repayment of term loan (7,000) --
Principal payments on long-term debt (125) (117)
Issuance of common stock - options exercised 323 11
-------- --------
Net cash (used in) financing activities (6,802) (106)
-------- --------
Net (decrease) increase in cash and cash equivalents (2,803) 2,052
Cash and cash equivalents, beginning of period 9,142 9,200
-------- --------
Cash and cash equivalents, end of period $ 6,339 $ 11,252
======== ========
Supplemental disclosures:
Interest and bank fees paid $ 403 $ 443
======== ========
Income taxes paid $ 53 $ 9,875
======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
5
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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 September 30, 2000, and December
31, 1999, and the consolidated statements of income and cash flows for the
three and nine months ended September 30, 2000 and 1999, 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. All significant intercompany transactions
have been eliminated in consolidation.
The accompanying consolidated financial statements have been prepared
in accordance with instructions for Form 10-Q and do not include all the
information and footnote disclosures required by generally accepted accounting
principles. The financial information for September 30, 2000 and 1999, included
herein is unaudited and, in the opinion of management, reflects all adjustments
necessary for a fair presentation of such financial information.
The results of operations for the three and nine months ended
September 30, 2000, are not necessarily indicative of the results of operations
that may be expected for the year ending December 31, 2000. This quarterly
report on Form 10-Q should be read in conjunction with the annual consolidated
financial statements included in the Company's Annual Report on Form 10-K for
the year ended December 31, 1999.
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 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.
REVENUE RECOGNITION
Net sales represent gross sales of brass rod and steel tubing less
sales discounts and freight charges and are recorded at the time of shipment.
The gross sales price of brass rod consists of a metal price charged to the
customers and a fabrication price as separate components. In addition,
approximately 10% of pounds sold by CBCC are made on a "tolling"
6
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CHASE INDUSTRIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
basis, where the customer consigns brass scrap to CBCC and is only charged a
fabrication price for processing the brass scrap into finished rod. For tolling
sales, the brass metal value is not included in net sales or cost of goods
sold.
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 issued Statement of Accounting Standards No. 137 delaying the effective
date of SFAS 133 by one year. SFAS 133 was amended by Statement of Financial
Accounting Standards No. 138, "Accounting for Certain Derivative Instruments
and Certain Hedging Activities," ("SFAS 138"), which was issued in June 2000.
The new standards require companies to record derivatives on the balance sheet
as assets or liabilities, measured at fair value. Management of the Company
believes amended SFAS 133 will not have a material effect on its financial
position or results of operations.
In September 2000, the FASB issued Statement of Financial Accounting
Standards No. 140, "Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities," ("SFAS 140"). SFAS 140 replaces Statement
of Financial Accounting Standards No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishment of Liabilities," ("SFAS 125")
and is effective for transfers and servicing of financial assets and
extinguishments of liabilities occurring after March 31, 2001. Management of
the Company believes SFAS 140 will not have a material effect on its financial
position or results of operations.
In December 1999, the Securities and Exchange Commission ("SEC")
issued Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in
Financial Statements." SAB 101 provides guidance on applying generally accepted
accounting principles to revenue recognition issues in financial statements. In
June 2000, the SEC issued Staff Accounting Bulletin No. 101B ("SAB 101B"),
"Second Amendment: Revenue Recognition in Financial Statements." SAB 101B
delayed the implementation date of SAB 101 until no later than the fourth
fiscal quarter of 2000. The Company will adopt SAB 101 pursuant to SAB 101B
(including the recent Frequently Asked Questions and Answers document issued by
the SEC in October 2000) as required in fourth quarter 2000 and is evaluating
the effect that such adoption may have on its results of operations and
financial position.
At the September 2000 meeting, the Emerging Issues Task Force reached
final consensus on Issue 00-10, "Accounting for Shipping and Handling Revenues
and Costs," ("EITF 00-10"), which is effective in fourth quarter 2000 for the
Company. EITF 00-10 requires shipping and handling billed to customers to be
classified as revenue and requires shipping and handling costs to be classified
as cost of goods sold or disclosed separately in the income statement. In
fourth quarter 2000, the Company will be reclassifying shipping and handling
costs to cost of goods sold for all comparative financial statements presented
in order to comply with EITF 00-10.
7
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CHASE INDUSTRIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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 reduced 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 $2.3 million higher at
September 30, 2000, and $1.2 million lower at December 31, 1999. Inventories
consisted of the following (in thousands):
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
-------- --------
<S> <C> <C>
Raw materials $ 14,571 $ 12,091
Work in progress 13,221 11,462
Finished goods 23,123 22,552
-------- --------
50,915 46,105
Tolling metal due customers (1,682) (875)
-------- --------
$ 49,233 $ 45,230
======== ========
</TABLE>
3. COMMON STOCK AND EARNINGS PER SHARE:
The following is a reconciliation of the denominator used in the
computation of basic and diluted earnings per share. Average shares were as
follows:
<TABLE>
<CAPTION>
Three Months Ended September 30,
-----------------------------------
2000 1999
---- ----
Shares EPS Shares EPS
---------- ----- ---------- -----
<S> <C> <C> <C> <C>
Basic 15,276,258 $0.27 15,234,490 $0.28
Stock options 131,155 -- 89,935 --
---------- ----- ---------- -----
Diluted 15,407,413 $0.27 15,324,425 $0.28
========== ===== ========== =====
</TABLE>
<TABLE>
<CAPTION>
Nine Months Ended September 30,
-------------------------------
2000 1999
---- ----
Shares EPS Shares EPS
---------- ----- ---------- -----
<S> <C> <C> <C> <C>
Basic 15,256,419 $0.97 15,234,217 $0.90
Stock options 125,334 (0.01) 102,350 --
---------- ----- ---------- -----
Diluted 15,381,753 $0.96 15,336,567 $0.90
========== ===== ========== =====
</TABLE>
8
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CHASE INDUSTRIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
All shares of Common Stock and Nonvoting Common Stock are identical,
except that holders of Nonvoting Common Stock have no voting rights. Shares of
Nonvoting Common Stock may be converted, at the option of the holder, into
Common Stock on a share-for-share basis, except to the extent that the holder
of Nonvoting Common Stock is restricted from obtaining certain ownership levels
in the Company pursuant to the Small Business Investment Act of 1958 and the
Bank Holding Company Act of 1956.
At September 30, 2000, and December 31, 1999, 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. These contingent liabilities are described separately below.
CBCC. Preliminary studies conducted immediately prior to the CBCC
Acquisition indicated that certain areas of the site upon which CBCC's
manufacturing facility is located have been contaminated with certain volatile
organic compounds ("VOCs") 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. 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. 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.
CBCC has completed certain remedial actions at its site and is in the
process of conducting certain additional remedial actions for a portion of its
site. As of September 30, 2000, the estimated remaining costs for the
remediation activities currently being conducted, which CBCC expects to
complete in fourth quarter 2000, range from approximately $3.1 million to $5.2
million depending on the use of certain remediation methodologies, quantities
of material generated and disposal options that may be permitted and/or
available. CBCC also is in the process of developing a remediation plan for two
additional areas of its site, and expects to initiate remediation activities at
those areas in 2001. Based on preliminary cost estimates provided by CBCC's
independent environmental consultant, and subject to the development by the
consultant of a remediation plan for these areas of the site and the receipt of
bids for the remediation activities required under such plan, the Company
estimates the cost for this project will range from approximately $1.7 million
to $3.7 million.
9
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CHASE INDUSTRIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Based on currently available data and the current status of
remediation activities, the Company is unable to determine the most likely
estimated cost (within the ranges provided) for these projects. As a result,
based on the current cost estimates, in third quarter 2000 the Company
increased by $1.2 million its previously established reserve for costs
associated with these remediation activities, which increase was partially
offset by payments of remediation costs previously reserved against. The
resulting $4.8 million reserve amount is based on the low end of these ranges
in accordance with Financial Accounting Standards Board Interpretation No. 14,
"Reasonable Estimation of the Amount of a Loss." Based on BP's obligations
under the Remediation Agreement and the CBCC Purchase Agreement, the Company
also recorded in third quarter 2000 a corresponding $1.2 million addition to
the receivable from BP.
Based on currently available data, the Company believes that upon
completion of the remediation activities described above CBCC will have
substantially completed the remediation activities that the Company believes
are necessary to address contamination at CBCC's site. However, until the
completion of these remedial and associated investigatory activities and
receipt of approval from the Ohio Environmental Protection Agency (the "Ohio
EPA") of CBCC's activities to remediate this contamination, the Company cannot
be certain that further remediation activities will not be required at CBCC's
site.
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, the extent of BP's obligations under
the Remediation Agreement and the CBCC Purchase Agreement. BP has not yet
reimbursed CBCC for costs incurred by CBCC for the remediation activities
previously conducted by CBCC, and CBCC has funded these activities with cash
flows provided by operating activities and the Company's existing bank credit
facility (the "Bank Credit Facility"), as necessary. To the extent BP fails to
fund current and future remediation activities at CBCC's manufacturing
facility, CBCC also will be required to fund these activities. However, to the
extent CBCC is required to fund cleanup costs related to current and future
remediation activities 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, other than as described
above, no reserves have been established regarding the aforementioned matters.
Additionally, the Company expects no material impact on its financial
condition, results of operations or liquidity as a result of the existence of
any other environmental conditions related to CBCC.
The Company notified BP in third quarter 1999 that amounts payable by
the Company under the $20 million promissory note issued to BP in connection
with the CBCC Acquisition (the "BP Note"), which matured August 24, 1999, were
being offset against damages incurred by the Company (including environmental
investigation and remediation costs incurred by CBCC)
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CHASE INDUSTRIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
as a result of, among other things, the environmental condition of CBCC's site.
To the extent CBCC incurs future cleanup costs with respect to the
investigatory and remedial activities at its site, the Company intends to
enforce its rights under the CBCC Purchase Agreement and/or the Remediation
Agreement to recover such amounts from BP to the extent such costs exceed the
amount recouped as a result of prior offsets against 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. To the
extent CBCC incurs any cleanup costs with respect to these sites, it intends to
enforce its rights under the CBCC Purchase Agreement to recover such amounts
from BP.
On January 7, 1998, a lawsuit styled 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. In this complaint (as amended, the "Complaint"),
plaintiffs seek declaratory judgment 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
approximately $5.8 million.
In addition, under the BP Note interest was payable on August 24 of
each year from and after August 24, 1996, until the BP Note matured on August
24, 1999. The interest due and payable on each of August 24, 1998 and 1997, was
$1,856,000, which amount the Company also offset against the receivable from
BP. As of the August 24, 1999, due date of the BP Note, the Company also offset
accrued and unpaid interest of $1,856,000 due August 24, 1999, and the full
principal balance of the BP Note against the receivable from BP and other
amounts claimed by the Company to be owed by BP to the Company as a result of
BP's breaches of the CBCC Purchase Agreement and the Remediation Agreement. In
the Complaint, plaintiffs also seek
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CHASE INDUSTRIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
recovery of the $20 million principal amount of the BP Note plus interest
allegedly owing on the BP Note.
The Company disputes the allegations set forth in the Complaint and
has asserted a counterclaim seeking recovery from BP 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
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 judgment confirming the
Company's entitlement to offset and/or recoup amounts owed by BP and Old Chase
against amounts payable under the BP Note and that no default has occurred
under the BP Note.
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 available under the
Company's existing Bank Credit Facility.
This case originally was scheduled for trial in September 2000.
However, in December 1999 BP filed a motion to compel arbitration of all of the
Company's counterclaims. The basis for BP's motion was language in the
Remediation Agreement that provides that if BP had suggested modification to a
sampling or remediation plan proposed by the Company and the Company and BP
could not agree to BP's suggested modifications, then they would appoint an
independent expert to make recommendation with respect to BP's suggested
modifications. In filings with the trial court relating to this motion, BP
acknowledged that it has never disputed ultimate contractual financial
responsibility for remediating environmental problems at CBCC's site in
accordance with applicable law, and that the sole area of disagreement is the
appropriate scope or method of remedial actions. In August 2000, the trial court
partially granted BP's motion to compel arbitration, but limited the arbitration
to environmental matters. The trial court's order also stayed proceedings in the
litigation pending arbitration of the environmental issues. The Company believes
BP is not entitled to arbitration under the Remediation Agreement because it
failed to timely provide suggested modifications to CBCC's proposed remediation
plans and/or failed to timely demand arbitration in the legal proceedings,
thereby prejudicing CBCC and the Company. In addition, to the extent arbitration
is required, the Company believes that the arbitration should be limited to the
express terms of the Remediation Agreement rather than extended to all of the
Company's environmental claims. Therefore, in September 2000 the Company
appealed the court's order, requesting the appellate court to reverse the trial
court's order and remand the case for trial as to all issues or, in the
alternative, to reverse and remand for trial all issues other than BP's
suggested modifications to the remedial procedures for the area of CBCC's site
that currently are being conducted. In October 2000 BP filed a motion to dismiss
the Company's appeal. The appellate court has not ruled on BP's motion and this
appeal currently is pending.
Notwithstanding that the Company has offset amounts payable under the
BP Note as described above, for financial statement reporting purposes,
pursuant to SFAS 125 the Company continues to record the full principal balance
of the BP Note as a liability. SFAS 125 requires
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CHASE INDUSTRIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
that, in order to extinguish a liability, the debtor must be legally released
from the obligation by either the creditor or judicially. As the BP Note is
subject to determination in litigation, the Company has maintained the debt on
its books and continues to accrue interest at 9.28%. The 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 available under the Bank
Credit Facility.
Leavitt. Prior to the Leavitt Acquisition, five underground storage
tanks ("USTs") were removed from Leavitt's property in Hammond, Indiana. Prior
to removal, one or more of the USTs released petroleum and other chemical
constituents into the environment. Some contamination of groundwater and soil
at the Hammond property remains in place. The Indiana Department of
Environmental Management ("IDEM") has not yet issued a "closure" letter with
respect to the removal of these USTs, and in fourth quarter 1999 notified
Leavitt that additional groundwater sampling will be required prior to the IDEM
considering closure. Leavitt is conducting quarterly groundwater sampling and
submitting the results of the sampling to the IDEM for review and further
direction.
Until these actions are carried out, the Company will be unable to
determine what, if any, remedial activities may be required at the Hammond
property. Although the cleanup costs associated with the environmental
conditions at the Hammond property may be material, based on the results of
sampling conducted in 1997 and first and second quarter 2000 the Company
believes that the probability that Leavitt would be required to make material
expenditures relating to site cleanup at the Hammond property appears to be
remote. Therefore, the Company has not made any specific accrual for costs
related to investigation or cleanup at the Hammond property. 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, employing approximately 330 people
at its two plants in Chicago, Illinois, and one plant in Jackson, Mississippi.
Structural steel tubing is used in non-residential construction, farm equipment
and other commercial applications. The mechanical steel tubing is used in a
broad range of consumer and commercial products, including furniture and
fixtures,
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CHASE INDUSTRIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
lawn-care products, storage racks, exercise equipment, bicycles and
machine tools. Structural pipe is used for handrails, scaffolding and
communications towers.
Income and expenses not allocated to business segments include certain
corporate expenses, interest expense and interest income. There are no
intersegment sales. The business segment information is prepared consistent
with the accounting policies outlined in Note 1, Significant Accounting
Policies, except for income taxes which are recorded at the corporate level.
Summarized segment information is as follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended September 30,
--------------------------------
2000 1999
-------- --------
<S> <C> <C>
Net sales:
Brass products $ 68,717 $ 65,485
Steel products 27,644 28,976
-------- --------
Total net sales $ 96,361 $ 94,461
======== ========
Operating income:
Brass products $ 7,206 $ 7,252
Steel products (139) 372
Corporate (25) (645)
-------- --------
Total operating income $ 7,042 $ 6,979
======== ========
Selected non-cash charges included in operating income:
Lower of cost-or-market inventory writedown
Brass products $ -- $ --
Steel products -- --
-------- --------
Total lower of cost-or-market inventory writedown $ -- $ --
======== ========
Depreciation and amortization
Brass products $ 1,712 $ 1,601
Steel products 1,492 1,378
-------- --------
Total depreciation and amortization $ 3,204 $ 2,979
======== ========
</TABLE>
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CHASE INDUSTRIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
-------------------------------
2000 1999
--------- ---------
<S> <C> <C>
Net sales:
Brass products $ 221,523 $ 202,747
Steel products 91,055 93,159
--------- ---------
Total net sales $ 312,578 $ 295,906
========= =========
Operating income:
Brass products $ 26,110 $ 24,428
Steel products (1,038) (131)
Corporate (90) (1,215)
--------- ---------
Total operating income $ 24,982 $ 23,082
========= =========
Selected non-cash charges included in operating income:
Lower of cost-or-market inventory writedown
Brass products $ -- $ --
Steel products -- 1,800
--------- ---------
Total lower of cost-or-market inventory writedown $ -- $ 1,800
========= =========
Depreciation and amortization
Brass products $ 4,978 $ 4,669
Steel products 4,433 4,007
--------- ---------
Total depreciation and amortization $ 9,411 $ 8,676
========= =========
</TABLE>
15
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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 75% of the brass scrap used in its
operations from its customers through purchase and tolling arrangements. The
metal price charged to customers for finished brass rod (the "Metal Selling
Price") is higher than the price at which brass scrap is purchased from
customers (the "Metal Buying Price"). The difference was increased from four to
five cents per pound in December 1997, to seven cents per pound in January
1999, and to eight cents per pound in September 1999. CBCC also purchases
approximately 25% of its brass scrap from scrap dealers at prevailing
free-market prices. Free-market prices of brass scrap fluctuate based on the
supply of and demand for brass scrap and the prices for copper and zinc (the
major components of brass), and generally are less than the Metal Buying Price.
Since 1990, free-market prices, as compared to Metal Buying Prices, have been
favorable to CBCC by historical standards and the supply of brass scrap in the
United States has increased in excess of demand as a result of increased
imports of brass rod. Although the increased supply of brass scrap has resulted
in continued favorable free-market scrap prices through September 2000, 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
16
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CHASE INDUSTRIES INC.
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,
approximately 10% of pounds sold by CBCC 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 degree, tolling
transactions also affect gross profit to the extent CBCC is unable to take
advantage of the pricing differential on brass scrap purchased and sold. To
partially offset the effect of tolling transactions on gross profit, CBCC
requires tolling customers to deliver additional pounds of brass scrap in
exchange for each pound of finished rod shipped.
Leavitt. Leavitt is a leading producer of structural and mechanical
electric resistance welded steel tubing in square, rectangular and round shapes
in sizes ranging from 1/2 inch to 10 inch squares and equivalent rectangles and
3/8 inch to 12 3/4 inches in outer diameter for round sizes. Leavitt's
financial performance may be impacted by changes in the price it pays for
flat-rolled steel, the primary cost component of Leavitt's finished product,
based on the market conditions in the domestic and the international
flat-rolled steel industry. Based on the then-current market conditions in the
steel tubing industry and the level of capacity utilization, Leavitt may or may
not be able to pass the economic impact of steel price changes on to its
customers through changes in the selling price. The steel tubing industry is
highly fragmented and suppliers may reduce prices or fail to increase prices as
a result of flat-rolled steel price increases, depending on their individual
financial and operational motivation.
RESULTS OF OPERATIONS
Three Months Ended September 30, 2000, Compared with Three Months Ended
September 30, 1999
Net sales increased $1.9 million, or 2.0%, to $96.4 million in third
quarter 2000 from $94.5 million in third quarter 1999. Net sales at CBCC
increased by $3.2 million, or 4.9%, to $68.7 million. CBCC's net sales
increased mainly as a result of an 8% increase in the brass rod Metal Selling
Price. Partially offsetting this increase was a 1% reduction in brass rod
shipment pounds. Net sales at Leavitt decreased by $1.3 million, or 4.6%, to
$27.6 million. Leavitt's net sales decreased mainly as a result of a 10%
decline in steel tubing shipments. Partially offsetting this decrease was a 6%
increase in the selling prices of tubing.
Gross profit decreased $0.7 million, or 4.8%, from $14.7 million in
third quarter 1999 to $14.0 million in third quarter 2000. CBCC's gross profit
remained basically flat in third quarter 2000 compared with third quarter 1999.
Leavitt's gross profit declined due to lower steel tubing shipments and lower
unit margins. Despite the higher selling prices, flat-rolled steel prices
increased more than Leavitt was able to pass along to its customers due to
competitive pressures, thereby resulting in lower unit margins.
17
<PAGE> 18
CHASE INDUSTRIES INC.
Selling, general and administrative ("SG&A") expenses decreased $0.9
million, or 19.1%, to $3.8 million in third quarter 2000 from $4.7 million in
third quarter 1999. The decrease was due to reduced professional and consulting
expenses and lower management incentives which were partially offset by
increased legal fees.
Depreciation and amortization increased $0.2 million, or 6.7%, to $3.2
million in third quarter 2000 from $3.0 million in third quarter 1999. The
increase was primarily the result of depreciation on the new brass foundry.
As a result of the above factors, operating income of $7.0 million in
third quarter 2000 was basically flat with third quarter 1999. CBCC's operating
income for third quarter 2000 was flat with third quarter 1999. Leavitt's
operating income for third quarter 2000 decreased $0.5 million as compared with
third quarter 1999, primarily due to lower shipments and lower unit margins.
Corporate expenses declined by $0.6 million in third quarter 2000 from third
quarter 1999 due to lower professional and consulting expenses.
Net interest expense increased by $274,000 to $330,000 in third
quarter 2000 from third quarter 1999, primarily as a result of $209,000 less
capitalized interest expense on the brass rod extrusion and finishing expansion
in 2000 than on the new brass foundry in 1999 due to the stage of completion of
each project. Also, interest income decreased due to less cash on hand during
third quarter 2000 than third quarter 1999.
Income tax expense decreased $0.1 million, or 3.8%, to $2.5 million in
third quarter 2000 as a result of a decrease in income before income taxes. The
effective tax rates for 2000 and 1999 were 38%.
As a result of the above factors, net income decreased $0.1 million,
or 2.3%, to $4.2 million in third quarter 2000 from $4.3 million in third
quarter 1999. Diluted earnings per share decreased to $0.27 in third quarter
2000 from $0.28 in third quarter 1999.
Nine Months Ended September 30, 2000, Compared with Nine Months Ended September
30, 1999
Net sales increased $16.7 million, or 5.6%, to $312.6 million in 2000.
Net sales at CBCC increased by $18.8 million, or 9.3%, to $221.5 million.
CBCC's net sales increased mainly as a result of a 10% increase in the brass
rod Metal Selling Price. Augmenting this increase was a 1% improvement in brass
rod shipment pounds. Net sales at Leavitt decreased by $2.1 million, or 2.3%,
to $91.1 million. Leavitt's net sales decreased mainly as a result of a 9%
decline in steel tubing shipments. Partially offsetting this decrease was a 7%
increase in the selling prices of tubing.
There were no inventory writedowns recorded in 2000. The Company
recorded a non-cash lower of cost-or-market inventory writedown of $1.8 million
for the nine months ended September 30, 1999. The 1999 writedown was due to the
decreasing prices of flat-rolled steel and steel tubing.
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<PAGE> 19
CHASE INDUSTRIES INC.
Gross profit for the nine months ended September 30, 2000, excluding
the lower of cost-or-market inventory writedown for 1999, decreased $1.7
million, or 3.6%, to $45.3 million from 1999. With near record brass rod
shipments, CBCC's gross profit increased for the nine months ended September
30, 2000 compared to 1999. Unit margins improved because of the September 1999
increase in the difference between the Metal Selling Price and the Metal Buying
Price and improved profitability of brass purchased on the open market.
However, offsetting this improvement was Leavitt's gross profit decline which
was due to lower steel tubing shipments and lower unit margins. Despite the
higher selling prices, flat-rolled steel prices increased more than Leavitt was
able to pass along to its customers due to competitive pressures, thereby
resulting in lower unit margins.
SG&A expenses decreased $2.5 million, or 18.7%, to $10.9 million for
the nine months ended September 30, 2000. The decrease was due to reduced
professional and consulting expenses, lower management incentives and decreased
franchise taxes which were partially offset by increased legal fees in 2000.
Depreciation and amortization increased $0.7 million, or 8.0%, to $9.4
million due to the new brass foundry.
As a result of the above factors, operating income for the nine months
ended September 30, 2000, excluding the lower of cost-or-market inventory
writedown for 1999, was flat compared with 1999. CBCC's operating income
increased $1.7 million, or 7.0%, to $26.1 million for the nine months ended
September 30, 2000, primarily due to higher unit margins. Leavitt's operating
loss was $1.0 million for the nine months ended September 30, 2000, compared
with a $0.1 million operating loss in the prior year. Leavitt's operating loss
for the nine months ended September 30, 1999, included a $1.8 million lower of
cost-or-market inventory writedown. The decrease in Leavitt's operating results
for the nine months ended September 30, 2000, were primarily due to lower
shipments and lower unit margins. Corporate expenses declined by $1.1 million
for the nine months ended September 30, 2000, from the previous year due to
lower professional and consulting expenses.
Net interest expense for the nine months ended September 30, 2000,
increased $0.3 million, or 33%, to $1.2 million, as a result of $0.3 million
less capitalized interest expense on the brass rod extrusion and finishing
expansion in 2000 than on the new brass foundry in 1999 due to the stage of
completion of each project.
Income tax expense for the nine months ended September 30, 2000,
increased $0.7 million, or 8.3%, to $9.1 million as a result of an increase of
$1.6 million, or 7.2%, in income before income taxes. In first quarter 2000,
the Internal Revenue Service (the "IRS") completed an examination of the
federal income tax return filed by the Company for the year ended December 31,
1996. In July 2000, the Company received a refund in the amount of $1.1 million
from the IRS resulting from the treatment of settled issues for that year.
As a result of the above factors, net income increased $1.0 million,
or 7.2%, to $14.8 million in 2000 from $13.8 million in 1999. Diluted earnings
per share increased to $0.96 in 2000 from $0.90 in 1999.
19
<PAGE> 20
CHASE INDUSTRIES INC.
LIQUIDITY AND CAPITAL RESOURCES
General
At September 30, 2000, cash and cash equivalents totaled $6.3 million,
decreasing from $9.1 million at year end 1999. Total debt at September 30,
2000, was $20.2 million compared with $27.3 million at year end 1999.
Working Capital
At September 30, 2000, working capital was $49.8 million, a $7.6
million, or 18.0%, increase from $42.2 million at December 31, 1999. A decrease
in cash and cash equivalents of $2.8 million, or 30.8%, was offset by increases
in accounts receivable of $8.2 million, or 24.6%, and inventory of $4.0
million, or 8.8%, and a decrease in current liabilities of $1.0 million, or
1.9%.
The increase in accounts receivable was partially due to an 11%
increase in net sales from the month of December 1999 to the month of September
2000. The Company's December shipments are typically lower than other months
due to customer shutdowns in December. Additionally, the Company's accounts
receivable days outstanding increased from year end partially due to certain
customers electing to not take advantage of prompt payment discounting in 2000.
The increase in inventory was partially due to an increase in brass scrap due
to timing of purchases and the remaining increase was mainly due to
accumulating inventory in advance of maintenance outages planned for fourth
quarter 2000. The decrease in current liabilities was the result of the timing
of metal purchases and tax payments, payment of accrued environmental costs and
the completion of the new brass foundry project.
The Company's current ratio was 1.95 at September 30, 2000, compared
to 1.79 at December 31, 1999.
Cash Flow Provided by Operating Activities
For the nine months ended September 30, 2000, net cash provided
by operating activities was $17.7 million, which included net income of $14.8
million, depreciation and amortization of $9.4 million and deferred income tax
expense of $5.1 million. There was an increase in working capital, excluding
cash, debt and deferred taxes, of $9.9 million from December 31, 1999. Also,
the receivable from BP increased $1.7 million in the nine months ended
September 30, 2000.
For the nine months ended September 30, 1999, net cash provided by
operating activities was $24.6 million, which included net income of $13.8
million and depreciation and amortization of $8.7 million. There was a decrease
in working capital, excluding cash, debt and deferred taxes, of $5.2 million
from December 31, 1998.
20
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CHASE INDUSTRIES INC.
Cash Flow (Used in) Investing Activities
Capital expenditures were $13.7 million for the nine months ended
September 30, 2000, and $22.5 million for the nine months ended September 30,
1999. Capital expenditures in 2000 included the final installation and
equipment costs of the new CBCC foundry and capital equipment and construction
costs for Phase III of Project 400, totaling $7.0 million. Capital expenditures
in 1999 primarily related to construction and equipment costs for the new CBCC
foundry. Both capital projects are discussed in greater detail below.
Cash Flow (Used in) Financing Activities
Cash used in financing activities of $6.8 million for the nine months
ended September 30, 2000, consisted primarily of the repayment of the Term Loan
($7.0 million). The Term Loan was paid off in June 2000, three years ahead of
schedule.
Cash used in financing activities of $0.1 million for the nine months
ended September 30, 1999, consisted primarily of principal payments on
long-term debt.
Capital Resources
In 1996, CBCC 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 have increased productivity and improved
quality. The total cost of the first phase of the project was approximately $12
million and was financed through a six-year operating lease.
In second quarter 1998, the Company announced Phase II of Project 400,
which was a $30 million multi-year investment to construct an additional brass
foundry enabling CBCC to increase casting capacity and to provide customers
with multiple alloys. The new brass foundry began producing billets on a trial
basis in February 2000 and is now producing billets at expected production
rates. The new foundry has reduced costs and increased production capacity and
shipments.
In fourth quarter 1999, the Company announced Phase III of Project
400, which was a $50 million multi-year investment to purchase a second
extrusion press and additional finishing equipment. When Phase III comes on
line, which is expected to occur in 2002, CBCC's production capacity will
increase by about one-third to more than 400 million pounds annually. Phase III
building construction began in second quarter 2000. Contracts have been signed
for the long lead time equipment. 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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<PAGE> 22
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 originally
included a $60 million term loan ("Term Loan") and a $40 million revolving
credit facility ("Revolving Credit Facility"). Prior to second quarter 2000,
the Company had prepaid all amounts on the Term Loan originally due through
April 2001. The remaining balance of $7 million on the Term Loan was prepaid in
second quarter 2000. Effective September 8, 1999, the Company and PNC Bank
agreed on an amendment to the Bank Credit Facility which increased the
Revolving Credit Facility by $10 million, to $50 million. On September 1, 2000,
the Company and PNC Bank agreed on an extension to August 30, 2002 on the
Revolving Credit Facility.
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. There were no borrowings outstanding on the Bank Credit
Facility at September 30, 2000. The weighted average interest rate on the Bank
Credit Facility was 6.5% at December 31, 1999.
The Bank Credit Facility contains certain covenants that, among other
things, limit the Company's ability to incur additional debt or pay dividends.
The covenants also require the Company to maintain a minimum interest coverage
ratio and level of net worth and restrict the Company from exceeding a maximum
ratio of debt to cash flow from operations. The Bank Credit Facility also
requires the Company to maintain CBCC and Leavitt as wholly-owned subsidiaries.
As of September 30, 2000, no amount was outstanding under the
Revolving Credit Facility. Total availability under the Revolving Credit
Facility was $48.7 million as of September 30, 2000.
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. As of the August 24, 1999, due date of the BP Note, the Company also offset
the $1,856,000 in accrued and unpaid interest due August 24, 1999, and the full
principal balance of the BP Note against the receivable from BP and other
amounts claimed by the Company to be owed by BP to the Company as a result of
BP's breach of the CBCC Purchase Agreement and the Remediation Agreement.
However, for financial statement reporting purposes, pursuant to SFAS 125, the
Company continues to record the full principal balance of the BP Note as a
liability. SFAS 125 requires that in order to extinguish a liability,
22
<PAGE> 23
CHASE INDUSTRIES INC.
the debtor must be legally released from the obligation by either the creditor
or judicially. As the BP Note is subject to determination in litigation
described below, the Company has maintained the debt on its books and continues
to accrue interest at 9.28%. 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.
CONTINGENCIES - ENVIRONMENTAL MATTERS
As discussed in Note 4 of Notes to Consolidated Financial Statements
included in Item 1., each of CBCC and Leavitt are subject to certain contingent
liabilities relating to environmental conditions at their respective
facilities.
CBCC. CBCC initiated interim remedial actions for certain portions of
its Montpelier, Ohio site in second quarter 1999. As of September 30, 2000, the
estimated remaining costs for these remediation activities, which CBCC expects
to complete in fourth quarter 2000, range from approximately $3.1 million to
$5.2 million depending on the use of certain remediation methodologies,
quantities of material generated and disposal options that may be permitted
and/or available. CBCC also is in the process of developing a remediation plan
for two additional areas of its site, and expects to initiate remediation
activities at those areas in 2001 at an estimated cost ranging from
approximately $1.7 million to $3.7 million.
Based on currently available data, the Company believes that, upon
completion of the remediation activities described above, CBCC will have
substantially completed the remediation activities at its site that are
necessary to address contamination of which CBCC currently is aware. However,
until completion of these remedial and associated investigatory activities and
receipt of approval from the Ohio EPA of CBCC's activities to remediate this
contamination, the Company cannot be certain that further remediation
activities will not be required at CBCC's site.
Although BP has acknowledged its contractual obligation to fund
certain investigatory and cleanup activities related to site contamination
attributable to Old Chase's operations, as described below under "Contingencies
- Legal Proceedings" BP and CBCC currently are involved in litigation
regarding, among other things, the extent of BP's obligations under the
Remediation Agreement and CBCC Purchase Agreement. BP has not yet reimbursed
CBCC for costs incurred by CBCC for prior remediation activities conducted by
CBCC. To the extent BP fails to fund current and future remediation activities
at CBCC's manufacturing facility, CBCC will be required to fund these
activities. However, to the extent CBCC is required to fund cleanup costs
related to the remediation of contamination at its manufacturing facility, the
Company believes it would be able to fund these costs with cash on hand and
borrowings under its existing Bank Credit Facility. Therefore, the Company does
not believe that funding these remediation activities will have a material
adverse effect on the Company's financial condition, results of operations or
liquidity.
The Company notified BP in third quarter 1999 that amounts payable by
the Company under the BP Note were being offset against damages incurred by the
Company, including environmental investigation and remediation costs, as a
result of BP's breaches of the CBCC Purchase Agreement and the Remediation
Agreement. To the extent CBCC incurs future
23
<PAGE> 24
CHASE INDUSTRIES INC.
cleanup costs with respect to investigatory and remedial activities at its
site, it intends to enforce its rights under the CBCC Purchase Agreement and/or
Remediation Agreement to recover such amounts from BP to the extent such costs
exceed the amount recouped as a result of the prior offsets against the BP
Note.
Leavitt. Pending further direction from the IDEM, the Company
currently is unable to determine what, if any, remedial activities may be
required at Leavitt's Hammond property. Although the cleanup costs associated
with the environmental conditions at the Hammond property may be material,
based on the results of sampling conducted to date the Company believes that
the probability that Leavitt would be required to make material expenditures
relating to site cleanup at the Hammond property appears to be remote.
Therefore, the Company has not made any specific accrual for costs related to
investigation or cleanup at the Hammond property. To the extent the Company or
Leavitt incurs a liability with respect to site cleanup at the Hammond
property, 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 property)
prior to the Leavitt Acquisition, to the extent such losses exceed $400,000 in
the aggregate (approximately $150,000 have been incurred for various matters).
In addition, to the extent the contamination at the Hammond property 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, remediation plans developed and in the
process of being developed by independent consultants of CBCC (which plans are
based on certain assumptions regarding applicable cleanup standards and
methodologies), cost estimates for completion of current remediation activities
and preliminary cost estimates for completion of remediation at other areas of
CBCC's site. 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
remediation plans for the two remaining areas of CBCC's site at which
remediation currently is contemplated, completion of currently ongoing and
proposed remediation activities, acceptance by applicable governmental agencies
of cleanup standards relied upon in developing remediation plans and cost
estimates, 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 Part I., Item 1 and 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
24
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CHASE INDUSTRIES INC.
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 available
under the Company's existing Bank Credit Facility. Therefore, the Company
continues to classify the BP Note as long-term, and believes that judgment
adverse to the Company and CBCC would not have a material adverse effect on the
Company's financial condition, results of operations or liquidity. See "BP
Note" above.
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 and successfully implement its capacity expansion program.
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<PAGE> 26
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 Part I.,
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, 1999
and Part II, Item 1. Legal Proceedings contained in the Company's Quarterly
Report on Form 10-Q for the periods ended March 31, 2000 and June 30, 2000.
In August 2000, the trial court in the lawsuit styled Ken-Chas
Reserve Company and BP Exploration (Alaska) Inc. and The Standard Oil Company
v. Chase Industries Inc. and Chase Brass & Copper Company, Inc., denied BP's
motion for partial summary judgment seeking payment under the BP Note, denied
the Company's motion for partial summary judgment seeking a declaration that BP
breached the Asset Purchase Agreement and the Remediation Agreement and denied
the Company's motion for partial summary judgment seeking a declaration that
the Company properly deducted amortization in determining "EBDIT" in the
contingent interest calculation under the BP Note. The trial court also granted
BP's motion, in part, to compel arbitration of the Company's environmental
claims and stayed the trial court proceedings in the litigation pending the
outcome of the arbitration. The Company has appealed the trial court's order
partially granting BP's motion, and the trial has been postponed until the
appeal and, if necessary, the arbitration is completed.
In October 2000, BP filed a motion with the appellate court to dismiss
the Company's appeal of the trial court's order partially granting BP's motion.
The court has not yet ruled on BP's motion.
Additional information regarding this lawsuit is included in Note 4
of Notes to Consolidated Financial Statements included in Part I., Item 1.
of this report.
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<PAGE> 27
CHASE INDUSTRIES INC.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
3.1 - Restated Certificate of Incorporation of the Company
(incorporated by reference to Exhibit 3.1 to the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30,
1998), 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 (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
27
<PAGE> 28
CHASE INDUSTRIES INC.
(b) REPORTS ON FORM 8-K
No Current Report on Form 8-K was filed by the Company during the
third quarter of 2000.
`
28
<PAGE> 29
CHASE INDUSTRIES INC.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned hereto duly authorized.
CHASE INDUSTRIES INC.
Date: November 14, 2000 By: MICHAEL T. SEGRAVES
-----------------------------------
Michael T. Segraves
Vice President
Chief Financial Officer
(duly authorized officer and
Principal Financial Officer)
29
<PAGE> 30
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------ -----------
<S> <C>
3.1 - Restated Certificate of Incorporation of the Company
(incorporated by reference to Exhibit 3.1 to the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30,
1998), as amended by the Certificate of First Amendment to
the Company's Restated Certificate of Incorporation
(incorporated by reference to Exhibit 3.2 to the Company's
Current Report on Form 8-K dated May 14, 1997) and
Certificate of Second Amendment to the Company's Restated
Certificate of Incorporation, (incorporated by reference to
Exhibit 3.2 to the Company's Current Report on Form 8-K dated
May 26, 1998).
3.2 - By-Laws of the Company (incorporated by reference to
Exhibit 3.2 to the Company's Registration Statement on Form
S-1 as filed with the Securities and Exchange Commission on
November 3, 1994, Registration No. 33-83178).
4.1 - Specimen Common Stock Certificate (incorporated by
reference to Exhibit 4.1 to the Company's Registration
Statement on Form S-1 as filed with the Securities and
Exchange Commission on November 3, 1994, Registration No.
33-83178).
4.2 - Exchange Agreement dated November 4, 1994, between the
Company and Citicorp Venture Capital Ltd. ("CVC")
(incorporated by reference to Exhibit 4.4 to the Company's
Registration Statement on Form S-8 dated December 9, 1994,
Registration No. 33-87278).
4.3 - Voting Agreement dated November 4, 1994, between the
Company, CVC and Martin V. Alonzo (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
