Item 1. Business.
General Development and Industry Segment. Chase Corporation (the "Company") is primarily engaged in the manufacture of protective coatings and tape products. The Company implemented a strategy of focusing its direction towards its core businesses which resulted in the divesting of its elastomeric materials division and the discontinuance of the fuel technology products and services division during fiscal 1991. During 1992, a facility that manufactures tape and related products in Webster, Massachusetts became operational. In April 1992, the Company acquired certain tape product lines and associated assets for cash from The Stewart Group, Ltd. This division, Chase Canada, maintains manufacturing operations in Winnipeg, Manitoba, Canada. Effective May 25, 1994, the Company purchased the electrical cable insulation tape product lines and certain associated assets from Haartz Mason, Inc. and these products were folded into the Chase & Sons division. On June 5, 1995, the Company formed a joint venture with the Stewart Group, Ltd. which was called The Stewart Group, Inc. This venture produces a variety of dielectric strength members from composite materials and sold into the fiber optic cable market. The original investment was increased on February 1, 1996. The additional investment enabled the venture to purchase equipment and a license in order to broaden its opportunities. The Company now owns 42% of this venture. On June 29, 1995, certain assets of Fluid Polymers, Inc. of Las Vegas, Nevada were acquired and then relocated to the Royston facility. On June 11, 1996, the Company acquired a 20% interest in Wireless, Inc. a provider of telecommunications services. In a continuance of a strategy of selective investments, on August 27, 1996 announced the purchase of a 20% interest in D. C. Scientific, which provides circuit board assembly services to electronic goods manufacturers, and a 32% interest in webpa.com, an internet software developer. There have no been any other material changes or developments since September 1, 1996.
As of October 31, 1996, the Company employed approximately 139 people.
Products and Markets. The Company's principal products are protective coatings and tape products that are sold by Company salespeople and manufacturers' representatives. These products consist of: (i)insulating and conducting materials for the manufacture of electrical and telephone wire and cable, and electrical splicing, terminating and repair tapes which are marketed to wire and cable manufacturers and public utilities; (ii)protective pipe coating tapes and other protectants for valves, regulators, casings, joints, metals, concrete, and wood that are sold to oil companies, gas utilities, and pipeline companies; (iii)protectants for highway bridge deck metal surfaces sold to municipal transportation authorities; (iv)thermo-electric insulation for transformers, motors, and other electrical equipment that are sold to original equipment manufacturers; and (v)moisture protective coatings that are sold to the electronics industry. There are no material seasonal aspects to the Company's business and the Company has introduced no new products or segments requiring an investment of a material amount of the Company's assets.
Backlog, Customers and Competition. As of October 31, 1996, the backlog of orders believed to be firm was about $1,654,000, all of which is expected to be filled in fiscal year 1997. As of October 31, 1995 the backlog was approximately $1,409,000. The backlog is not seasonal. The Company does not do business with any customer the loss of which would have a material adverse effect on the Company and no material portion of the Company's business is subject to renegotiation or termination of profits or contracts at the election of the government. Many companies manufacture or sell protective coatings and tape products similar to those of the Company, some of which companies are larger and have greater financial resources than the Company. Competition is principally based on technical performance, service reliability, quality and price.
Raw Materials. The Company obtains raw materials from a wide variety of suppliers with alternative sources of all essential materials available within reasonable lead time.
Patents, Trademarks, Licenses, Franchises and Concessions. Other than HumiSeal , a trademark for moisture protective coatings sold to the electronics industry, and Chase BLH2OCK , a trademark for water blocking compound sold to the wire and cable industry, there are no material trademarks, licenses, franchises, or concessions. The Company holds various patents, but believes that at this time they are not material to the success of the business.
Working Capital and Research and Development. There are no special practices followed by the Company relating to working capital. Approximately $502,000, $511,000 and $594,000 was spent for Company- sponsored research and development during the fiscal years 1996, 1995 and 1994, respectively.
Environmental Disclosures. The Company is aware of potential claims concerning a site in Bruin, Pennsylvania where an affiliate of the Company had sponsored research into experimental oil and coal-based fuels in the early 1980's. In August 1991, a spill of the affiliate's stored material occurred at the Bruin site, apparently due to vandalism of the storage tanks. Upon learning of the spill, the Company provided notice of the release to appropriate authorities and undertook to remedy the spill. The remedy was completed in October 1992 under plans approved by the Pennsylvania Department of Environmental Protection ("Pennsylvania DEP"). The Company believes that this work terminated its liabilities for the spill, but Pennsylvania DEP has not provided a final release.
The Bruin site had been used for many years for a variety of oil refining operations by unrelated parties. The site has significant contamination from those unrelated activities. Since the spill of the material remedied by the Company, the U.S. Environmental Protection Agency has conducted an investigation of the site, conducted emergency clean-up activities at the site focused on materials other than the affiliate's material and spill, and turned responsibility for the site back to Pennsylvania DEP. To date, EPA has not made any claim against the Company.
During 1993 to 1995, Pennsylvania DEP has conducted an investigation of the site, has completed a surface cleanup, and has proposed a permanent remedy. Pennsylvania DEP has notified the Company that it may be a person responsible under Pennsylvania law to contribute to the costs of those activities. During 1995, Pennsylvania DEP suggested that the Company contribute an amount toward the costs of the investigation and the surface cleanup in an attempt to settle with the Company. On July 18, 1996, the Pennsylvania DEP sent a settlement proposal to Chase requesting a payment of $335,000 to resolve all of Chase's potential liabilities to the State of Pennsylvania at the Bruin site. While the amount proposed is not deemed material, the Company still believes that the work previously performed to remedy the spill terminated its liabilities and therefore declined the proposal.
The Company remains in communication with Pennsylvania DEP, and expects that it will eventually determine that the Company resolved any potential liability at the site by its response to the 1991 spill.
See also Legal Proceedings Caption.
Financial Information about Foreign and Domestic Operations and Export Sales. Export sales from continuing domestic operations to unaffiliated third parties were $3,594,000, $2,764,000 and $2,486,000 for the years ended August 31, 1996, 1995 and 1994, respectively. The Company does not anticipate any material change to export sales during fiscal 1996. The Company's products are sold world-wide with no foreign geographic area accounting for more than 10% of revenues. The Company's Canadian operations accounted for 6.3% of consolidated sales and 8.3% of its assets.
The Company has very limited currency exposure since all invoices, except those from the Canadian operation to Canadian customers, are denominated in US dollars. The Company maintains minimal cash balances in Canada and, other than the currency conversion effects on the fixed assets in Canada, which are deferred and recorded directly in equity per FAS52, there are no significant assets held in foreign currencies. The Company does not engage in hedging activities. Foreign currency transaction gains or losses have not been material.
Item 1A.
Item 1A. Executive Officers of the Registrant.
The following table sets forth information concerning the Company's executive officers. Each officer is selected by the Company's Board of Directors and holds office until his successor is elected and qualified.
Name Age Offices Held and Business Experience during Past Five Years. Peter R. Chase 48 Chief Executive Officer of the Company since September 1993 and President of the Company since April 1992; Chief Operating Officer of the Company since September 1988.
Everett Chadwick,Jr. 55 Treasurer of the Company since September 1993 and Chief Financial Officer since September 1992; Director of Finance of the Company from April 1991 to August 1993 and Controller of the Company from September 1988 to August 1993.
Item 2.
Item 2. Properties.
The Company leases its principal executive office, which is located in Braintree, Massachusetts and contains approximately 4,300 square feet. The Company also rents a modern one-story building of approximately 5,000 square feet in Woodside, New York, which is used by the conformal coatings division.
A division of the Company engaged in the manufacture and sale of electrical protective coatings and tape products uses offices and plants owned by the Company that are located on seven acres in Randolph, Massachusetts and consist of a three-story building containing about 10,500 square feet and ten one-story buildings, aggregating about 67,000 square feet. This division also currently leases about 25,000 square feet of manufacturing space in a new building in Webster, Massachusetts. This plant manufactures tape and related products for the electronic, telecommunication and high technology industries.
Another division of the Company uses offices and a plant, owned by the Company, that are located on three acres in Pittsburgh, Pennsylvania and consist of thirteen buildings, three of which are used for offices, one of which is rented as a residence and the rest of which are used as manufacturing and warehouse facilities. These facilities, excluding the residence, contain about 44,000 square feet and are used in the manufacture and sale of protective coatings and tape products.
The Canadian division of the Company is engaged in the process of laminating and slitting film, foils and papers primarily for the wire and cable industry. This division leases about 14,000 square feet of manufacturing space in a modern building in Winnipeg, Manitoba, Canada.
The above facilities range in age from new to about 100 years. They generally are in good condition and, in the opinion of management, adequate and suitable for present operations. The Company also owns equipment and machinery that is in good repair and, in the opinion of management, adequate and suitable for present operations. The Company could significantly add to its capacity by increasing shift operations. Availability of machine hours through additional shifts would provide expansion of current product volume without significant additional capital investment.
Item 3.
Item 3. Legal Proceedings.
The Company has been named as a third party defendant in eighteen personal injury lawsuits filed in state court in Jackson County, Mississippi. These lawsuits, each of which has multiple plaintiffs and defendants, arose out of alleged asbestos exposure by the plaintiffs as a result of their work at the Ingalls Shipyard. The Company was sued as a third-party defendant by USX Corporation, General Cable Corporation and G.K. Technologies, Inc., each of whom is a primary defendant in these actions. USX, General Cable and G.K. are alleged to have supplied wire and cable products containing asbestos to the shipyard. The third-party complaints allege that tape products containing asbestos were manufactured by the Company, sold to USX, General Cable and G.K., and then incorporated in their wire and cable products sold for use in the ships. USX, General Cable and G.K. are seeking indemnification from the Company for damages that may be assessed against them and expenses including legal fees.
The third-party claims against the Company, along with all other third- party and crossclaims, were severed from the trial of the primary actions. USX, General Cable and G.K. were each dismissed by the plaintiffs prior to the commencement of trial of nine of the primary actions, which took place in the summer of 1993. It is not known how much, if anything, each paid to settle these claims. To date, no effort has been made by USX, General Cable or G.K. to pursue the third-party claims against the Company arising out of the resolution of any of the cases tried in the summer of 1993. Some of the remaining primary actions remain pending, but it is not now known when those cases will be tried, whether the plaintiffs will proceed against any of the wire and cable manufacturers, including USX, General Cable or G.K., and whether any of these defendants will, in turn, pursue their claims against the Company.
The Company's liability insurer has assumed defense of these claims subject to reservation of its rights as to coverage for any underlying liability assessed.
In July 1994, the Company received a notice letter from General Cable and G.K. that they have been sued in fourteen additional asbestos personal injury lawsuits, ten of which are pending in Mississippi, two in Pennsylvania and two in Texas. Each of these cases involves multiple plaintiffs and defendants. This notice letter is an effort to bind the Company to the factual determination made in these cases, if General Cable or G.K. brings an action against the Company for indemnification arising out of these cases. No such action for indemnification has yet been brought and the Company is not now a party in any of these fourteen additional cases. The Company's liability insurer has been informed that the Company has been notified of these potential claims.
The Company is investigating the defenses available to it in connection with all these matters and its rights against its supplier. Although the Company cannot predict whether any of these claims will be pursued, management believes that such claims will not have any material financial impact on the Company.
See also Environmental Disclosures Caption.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders.
There were no matters submitted to a vote of the Company's security holders during the fourth quarter of the Company's last fiscal year.
PART II
Item 5.
Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters.
The Company's common stock is traded on the American Stock Exchange (symbol CCF). The approximate number of record holders of the Company's common stock on October 31, 1996 was 918.
The quarterly high and low sales prices for the Company's common stock over the last two years were as follows:
Item 6.
Item 6. Selected Financial Data.
Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.
Results of Operations
Total revenues for fiscal 1996 increased 5% to $34.4 million when compared to $32.7 million in 1995. The increase was largely due to the steady growth of sales from the Webster facility of the Chase & Sons division which utilizes 100% solids technology to produce shielding tapes for the wire and cable market. We also received some benefit from increased revenue generated as a result of the Fluid Polymers acquisition along with some continued strengthening of the Company's international sales. Our more traditional product lines were basically unchanged when compared to the prior period.
The sales increase during fiscal 1995, as compared to 1994 was largely due to the Haartz Mason product line acquisition, an increased share of the market for shielding tapes used in electronic data cables and improved sales of Megolon , a product sold through a distributorship agreement. The Humiseal division growth was related to the growing demand for its products in non-defense applications. These were somewhat offset by lower sales from Chase Canada as these markets remained very soft and have gone through a state of transition and consolidation.
The dollar value of cost of products was higher in fiscal 1996 compared to both 1995 and 1994. To a large extent, these increases were volume related. As a percent of sales, cost of products decreased to 66.8% in 1996 from 67.9% in 1995, an increase from 1994 which was 66.6%. During the past fiscal year, lower raw material costs were somewhat offset by increases of some manufacturing expenses. Direct labor remained about the same. Competitive pressures prevent the company from recovering any price increases from customers. Fiscal 1995 costs were higher largely because of raw material shortages and related price increases.
Selling and administrative expenses in 1996 increased by $316,000 and $699,000 when compared to 1995 and 1994, respectively. However, as a percent of sales, 1996 was about the same as 1995 and was 2.1% lower than the previous year. A significant portion of these increases relate to the costs associated with increased levels of sales.
Bad debt expense for 1996 and 1995 was considerably lower and more normal when compared to 1994. Fiscal 1994 provided for write-offs and reserves established on certain accounts affected during a previously difficult economic environment.
Interest expense increased to $595,000 in 1996 from $396,000 in 1995. About 40% of our 1996 interest expense was related to the obligation associated with the repurchase of shares and the buy out of a Consulting and Non-Compete Agreement from a retired officer of the company. Interest expense in 1995 was higher than fiscal 1994 due to higher rates of interest, increased debt related to outside investments and the carrying cost of certain inventory items where shortages were anticipated. Some interest expense is offset by interest income earned from the note receivable acquired as a result of the elastomeric material division sale. The Company continues to benefit from low borrowing rates from its lender providing funds at its bank's prime rate or a LIBOR - based rate, whichever is lower.
The continued solid operating performance over the past few years has been a result of management's ability to respond quickly to business issues and market opportunities while employing tight cost containment policies where required. Management will continue this approach of maximizing our current businesses and at the same time seeking out future opportunities through selective acquisitions.
The federal tax rates for the fiscal years 1996, 1995 and 1994 are slightly lower when compared to the applicable rates because of the export sales through the Chase Export Corporation subsidiary.
Liquidity and Sources of Capital. Cash flow generated from operations was $4,419,000 in 1996 as compared to $157,000 in 1995. During 1996, the primary asset change was the reduction to inventory. Last year's cash flow was reduced because of the decision to increase inventory to reduce exposure to price increases and shortages, increased receivables related to higher sales during the end of the fiscal year and cash associated with the early buyout of the Consulting and Non- Compete Agreement of a retired officer of the Company.
The ratio of current assets to current liabilities was 1.6 at the end of the current fiscal year, compared to 1.8 and 1.6 at the end of the 1995 and 1994 fiscal years.
The unused available long-term credit amounted to $2,440,000 at August 1996, compared to $1,840,000 at August 1995. Effective September 11, 1996 the Company's maximum credit availability was increased $1,000,000 to the amount of $6,000,000. The Company will utilize this facility to help finance its interim needs in the coming year. Current financial resources and anticipated funds from operations are expected to be adequate to meet requirements for funds in the year ahead.
Impact of Inflation. Inflation has not had a significant long-term impact on earnings. In the event of significant inflation, the Company's efforts to cover cost increases would be hampered as a result of the competitive nature of the products.
Item 8.
Item 8. Financial Statements and Supplementary Data. Financial statements and supplementary financial information required to be filed hereunder may be located through the List of Financial Statements and Schedules attached to this report.
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures. Not applicable.
PART III
Item 10.
Item 10. Directors and Executive Officers of the Registrant.
Information with respect to the names, ages, positions with the Company, terms of office, periods of service, business experience, and other directorships of the Company's Directors and Executive Officers is incorporated herein by reference to Item 1A of the report and to the Definitive Proxy Statement (under the caption "Election of Directors").
Item 11.
Item 11. Executive Compensation.
The information required in Item 11 is contained in the Definitive Proxy Statement (under the caption "Executive Compensation"). Such information is incorporated herein by reference.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
Information regarding the ownership of the Company's common stock by certain beneficial owners and by management is incorporated herein by reference to the Definitive Proxy Statement under the captions "Principal Holders of Voting Securities" and "Election of Directors."
Item 13.
Item 13. Certain Relationships and Related Transactions.
Information regarding certain relationships and related transactions with the Company's Directors and Executive Officers is incorporated herein by reference to the Definitive Proxy Statement under the captions "Election of Directors" and "Remuneration of Directors and Executive Officers."
PART IV
Item 14.
Item 14. Exhibits, Financial Statements, Schedules and Reports on Form 8-K.
See the List of Financial Statements and Schedules included in this report for a list of the financial statements and schedules included with this report and see the Exhibit Index included in this report for a list of the exhibits required to be filed with this report. The Company did not file any reports on Form 8K during the fourth quarter of its most recent fiscal year. Copies of any of the exhibits are available to beneficial shareholders as of the record date (December 1, 1996) without charge upon written request to the Investor Relations Department, Chase Corporation, 50 Braintree Hill Park, Braintree, Massachusetts 02184.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
CHASE CORPORATION Date
By /s/ Peter R. Chase President and November 22, 1996 Peter R. Chase Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Capacity Date By /s/ Peter R. Chase President, Chief November 22, 1996 Peter R. Chase Executive Officer and Director (Principal Executive Officer)
By /s/ Everett Chadwick, Jr. Treasurer and Chief November 22, 1996 Everett Chadwick, Jr. Financial Officer (Principal Financial and Accounting Officer)
By /s/ Edward L. Chase Director November 22, 1996 Edward L. Chase
By /s/ William H. Dykstra Director November 22, 1996 William H. Dykstra
By /s/ George M. Hughes Director November 22, 1996 George M. Hughes
By /s/ Ronald Levy Director November 22, 1996 Ronald Levy
By /s/ Ernest E. Siegfriedt, Jr. Director November 22, 1996 Ernest E. Siegfriedt, Jr.
EXHIBIT INDEX
Exhibit Number Description
3.1 Articles of Organization (incorporated by reference from Exhibit 3 to the Company's annual report on Form 10-K for the fiscal year ended August 31, 1988)
3.2 By-Laws (incorporated by reference from Exhibit 3 to the Company's annual report on Form 10-K for the fiscal year ended August 31, 1988)
3.3 Amendment to By-Laws (adding Article IV, Section 7) (incorporated by reference from Exhibit 3.3 to the Company's annual report on Form 10-K for the fiscal year ended August 31, 1990)
10.1 Split Dollar Insurance Agreement dated December 2, 1983 by and between the Company and Edward L. Chase (incorporated by reference from Exhibit 10.1 to the Company's annual report on Form 10-K for the fiscal year ended August 31, 1990)
10.2 Split Dollar Insurance Agreement dated December 2, 1983 by and between the Company and Francis M. Chase (incorporated by reference from Exhibit 10.2 to the Company's annual report on Form 10-K for the fiscal year ended August 31, 1990)
10.3 Edward L. Chase Consulting and Non-Compete Agreement (incorporated by reference from Exhibit 10.3 to the Company's annual report on Form 10-K for the fiscal year ended August 31, 1986)
10.6 Edward L. Chase Retirement and Succession Agreement (incorporated by reference from Exhibit 10.6 to the Company's annual report on Form 10-K for the fiscal year ended August 31, 1988)
10.9 Edward L. Chase Right of First Refusal (incorporated by reference from Exhibit 10.9 to the Company's annual report on Form 10-K for the fiscal year ended August 31, 1988)
10.11 Purchase and Sale Agreement dated October 26, 1990 by and between the Company and Avon Custom Mixing Service, Inc. (incorporated by reference from Exhibit 2.1 to the Company's Current Report on Form 8-K dated October 26, 1990)
10.14 Amendment dated August 7, 1990 to Edward L. Chase Retirement and Succession Agreement (incorporated by reference from Exhibit 10.14 to the Company's annual report on Form 10-K for the fiscal year ended August 31, 1990)
10.17 Amendment dated April 30, 1992 to Split Dollar Insurance Agreement dated December 2, 1983 by and between the Company and Edward L. Chase (incorporated by reference from Exhibit 10.17 to the Company's annual report on Form 10-K for the fiscal year ended August 31, 1992)
10.18 Amendment dated April 30, 1992 to Split Dollar Insurance Agreement dated November 10, 1987 by and between the Company and Edward L. Chase and Claire Chase (incorporated by reference from Exhibit 10.18 to the Company's annual report on Form 10-K for the fiscal year ended August 31, 1992)
10.19 Amendment dated April 30, 1992 to Edward L. Chase Consulting and Non- Compete Agreement dated January 17, 1986 (incorporated by reference from Exhibit 10.19 to the Company's annual report on Form 10-K for the fiscal year ended August 31, 1992)
10.20 Amendment dated August 31, 1992 to Split Dollar Insurance Agreement dated December 2, 1983 by and between the Company and Francis M. Chase (incorporated by reference from Exhibit 10.20 to the Company's annual report on Form 10-K for the fiscal year ended August 31, 1992)
10.21 Amendment dated August 31, 1992 to Split Dollar Insurance Agreement dated November 10, 1987 by and between the Company and Francis M. Chase and Barbara Chase (incorporated by reference from Exhibit 10.21 to the Company's annual report on Form 10-K for the fiscal year ended August 31, 1992)
10.23 Stock Redemption Agreement dated July 18, 1995 by and between the Company and Francis M. Chase (incorporated by reference from Exhibit 99.1 to the Company's Current Report on Form 8-K dated July 18, 1995)
10.24 Amendment dated July 18, 1995 terminating the Consulting and Non-Compete Agreement by and between the Company and Francis M. Chase.
22 Subsidiaries of the Company (incorporated by reference from Exhibit 22 to the Company's annual report on Form 10-K for the fiscal year ended August 31, 1989)
List of Financial Statements and Schedules
Report of Independent Certified Public Accountants.................... 13
Consolidated Balance Sheets as of August 31, 1996 and August 31, 1995................................................. 14
Consolidated Statements of Operations for each of the three fiscal years in the period ended August 31, 1996................ 16
Consolidated Statements of Shareholders' Equity for each of the three fiscal years in the period ended August 31, 1996...... 17
Consolidated Statements of Cash Flows for each of the three fiscal years in the period ended August 31, 1996................ 18
Notes to Consolidated Financial Statements........................... 19
Schedules:
VIII-Valuation and Qualifying Accounts and Reserves......... 33
INDEPENDENT AUDITORS' REPORT
To the Shareholders and Board of Directors Chase Corporation Braintree, Massachusetts
We have audited the consolidated balance sheets of Chase Corporation and subsidiary as of August 31, 1996 and 1995, and the related consolidated statements of operations, shareholders' equity and cash flows for each year in the three year period ended August 31, 1996 and the schedule VIII, Valuation and Qualifying Accounts and Reserves. These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Chase Corporation and subsidiary at August 31, 1996 and 1995, and the consolidated results of their operations and cash flows for each year in the three year period ended August 31, 1996, in conformity with generally accepted accounting principles, and the schedule referred to above presents fairly, in all material respects, when read in conjunction with the related financial statements, the information therein set forth.
/s/ LIVINGSTON & HAYNES, P.C. Wellesley Hills, Massachusetts October 16, 1996
CHASE CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH YEAR IN THE THREE YEAR PERIOD ENDED AUGUST 31, 1996
NOTE A - ACCOUNTING POLICIES
The principal accounting policies of Chase Corporation ("the Company") and its subsidiary are as follows:
Basis of Presentation
The financial statements include the accounts of the Company and its foreign sales corporation subsidiary. Investments in unconsolidated companies which are at least 20% owned are carried at cost plus equity in undistributed earnings since acquisition. All significant intercompany transactions and balances have been eliminated in consolidation. The Company uses the U.S. dollar as the functional currency for financial reporting.
Products and Markets
The Company's principal products are protective coatings and tape products that are sold in national and international markets. These products consist of: (i) insulating and conducting materials for the manufacture of electrical and telephone wire and cable, and electrical splicing, terminating and repair tapes which are marketed to wire and cable manufacturers and public utilities; (ii) protective pipe coating tapes and other protectants for valves, regulators, casings, joints, metals, concrete, and wood that are sold to oil companies, gas utilities and pipeline companies; (iii) protectants for highway bridge deck metal surfaces which are sold to municipal transportation authorities; (iv) thermo-electric insulation for transformers, motors, and other electrical equipment that are sold to original equipment manufacturers, and (v) moisture protective coatings that are sold to the electronics industry.
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Cash
For the purpose of the statement of cash flows, the Company considers all highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents.
Inventories
Inventories are stated at first-in, first-out cost, which is not in excess of market.
Investment in Minority Interests
The Company makes investments in closely held companies. These investments are recorded on the equity method reflecting the Company's original investment and a proportional interest in the net operations of these companies since no public quotations exist for these investments.
CHASE CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR EACH YEAR IN THE THREE YEAR PERIOD ENDED AUGUST 31, 1996
NOTE A - ACCOUNTING POLICIES
Property, Plant and Equipment
These assets are reflected at cost. Provisions for depreciation of property, plant and equipment were computed by both straight-line and accelerated methods.
Expenditures for maintenance repairs and minor renewals have been charged to expense as incurred. Betterments and major renewals have been capitalized. Upon retirement or other disposition of assets, related allowances for depreciation and amortization have been eliminated from the accounts and any resulting profit or loss reflected in consolidated net income. The annual provisions for depreciation have been computed principally in accordance with the following range of rates:
Buildings - 4% to 7% Machinery and equipment - 10% to 20%
Excess of Cost Over Net Assets of Acquired Businesses
The excess of cost over the fair value of net assets of acquired businesses is being amortized over forty years or until the disposal of the acquired business.
Patents and Agreements
Patents and agreements are stated at cost and are being amortized over periods of fifteen, seventeen and twenty years.
Pension Plan
The projected unit credit method is utilized for measuring net periodic pension cost over the employee's service life.
Deferred Compensation
The net present value of the estimated payments to be made under agreements for deferred compensation is accrued over the period of active employment from the time of the agreement to the anticipated date of retirement.
Translation of Foreign Currency
The financial position and results of operations of the Company's Canadian branch are measured using the Canadian dollar as the functional currency. Revenues and expenses of the branch have been translated at average exchange rates. Assets and liabilities have been translated at the year-end exchange rate. Translation gains and losses are being deferred as a separate component of shareholders' equity, unless there is a sale or liquidation of the underlying foreign investments. The Company has no present plans for the sale or liquidation of its foreign investment. Aggregate foreign currency transaction gains and losses are included in determining net income ($5,952 loss for the year ended August 31, 1996).
CHASE CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR EACH YEAR IN THE THREE YEAR PERIOD ENDED AUGUST 31, 1996
NOTE A - ACCOUNTING POLICIES (Continued)
Income Taxes
The Company has adopted the method of accounting for income taxes of SFAS No. 109. This method compares the tax basis and financial reporting basis of the Company's assets and liabilities and recognizes the related tax benefits and liabilities under enacted tax law. Assets arising from future tax benefits are recognized when it is more likely than not that the Company will have sufficient future taxable income or has had sufficient taxable income in the available carryback period to allow realization of the tax asset. A valuation allowance is provided for potential limitations on the realization of future benefits.
Income Per Share of Common Stock
Income per share is computed based upon the weighted average number of shares outstanding, after giving effect to the number of shares purchased for Treasury and the dilutive effect of potential stock options. The number of shares used in the computation of primary income per share as restated was 3,759,467 at August 31, 1996, 4,474,854 at August 31, 1995 and 4,519,013 at August 31, 1994. Fully diluted income per share was computed based upon 3,765,913 shares at August 31, 1996, 4,490,413 shares at August 31, 1995 and 4,544,623 shares at August 31, 1994.
NOTE B - NOTE RECEIVABLE
The Company has advanced $362,319 to Stewart Group, Inc. of which it is a forty-two percent shareholder (see Note N), with an annual payment of CAN $100,000 and interest at Royal Bank of Canada prime rate.
The Company has a note receivable from Avon Custom Mixing Service, Inc., the purchaser of its Avon Custom Mixing Division, secured by the assets of the purchaser. Effective May 1993, the note provides for monthly payments of $8,333 with interest payable at First National Bank of Boston base rate (8.25% at August 31, 1996).
NOTE C - CASH SURRENDER VALUE OF LIFE INSURANCE
The Company recognizes cash surrender value in life insurance policies, net of loans secured by the policies, with Aurora National Life Assurance Company, the Manufacturers' Life Insurance Company, Sun Life Assurance Company of Canada and Metropolitan Life Insurance of $599,393; $800,872; $106,468; and $151,555, respectively. Subject to periodic review, the Company intends to maintain these policies through the lives of the insureds.
CHASE CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR EACH YEAR IN THE THREE YEAR PERIOD ENDED AUGUST 31, 1996
CHASE CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR EACH YEAR IN THE THREE YEAR PERIOD ENDED AUGUST 31, 1996
NOTE D - LONG-TERM DEBT (Continued)
The Company has long-term credit available up to a maximum amount of $5,000,000 at the bank's base lending rate or, at the option of the Company, at the effective London Interbank Offered Rate (LIBOR) for ninety days plus two percent. The line of credit is secured by all assets and is limited to 50% of inventory and 80% of current receivables. The Company had net borrowings of $2,400,000 and $3,000,000 under the credit agreement at August 31, 1996 and 1995, respectively. The unused available long-term credit amounted to $2,440,120 at August 31, 1996. Effective September 11, 1996, the Company's maximum credit availability was increased to $6,000,000.
NOTE E - NOTE PAYABLE TO BANK
The Company has a short-term credit facility at one half percent over prime with a Canadian bank secured by a letter of credit.
NOTE F - INCOME TAXES
A reconciliation of federal income taxes computed at applicable rates of income from continuing operations before income taxes to the amounts provided in the consolidated financial statements is as follows:
CHASE CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR EACH YEAR IN THE THREE YEAR PERIOD ENDED AUGUST 31, 1996
NOTE F - INCOME TAXES (Continued)
The timing differences that give rise to the components of net tax assets are as follows at August 31, 1996 and 1995:
NOTE G - OPERATING LEASES
The following is a schedule for the next five years of future minimum rental payments required under operating leases that have initial or remaining noncancellable lease terms in excess of one year as of August 31, 1996:
$661,688 ========
CHASE CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR EACH YEAR IN THE THREE YEAR PERIOD ENDED AUGUST 31, 1996
NOTE G - OPERATING LEASES (Continued)
Total rental expense for all operating leases amounted to $353,265, $340,068, and $348,260 for the years ended August 31, 1996, 1995 and 1994, respectively.
NOTE H - SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
Selected unaudited quarterly financial data for 1996, 1995 and 1994, is as follows:
CHASE CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR EACH YEAR IN THE THREE YEAR PERIOD ENDED AUGUST 31, 1996
NOTE I - EXPORT SALES AND FOREIGN OPERATIONS
Export sales from continuing domestic operations to unaffiliated third parties were $3,594,317, $2,764,170 and $2,486,448 for the years ended August 31, 1996, 1995 and 1994, respectively. The Company's products are sold world-wide with no foreign geographic area accounting for more than 10 percent of revenues from continuing operations. The Company's Canadian operations accounted for 6.3 percent of consolidated sales and 8.3 percent of assets.
NOTE J - RESEARCH AND DEVELOPMENT EXPENSE
Research and development expense amounted to approximately $501,964, $511,355, and $593,536 for the years ended August 31, 1996, 1995 and 1994, respectively.
NOTE K - BENEFITS
401(K) Plan
The Company has a deferred compensation plan adopted pursuant to Section 401(k) of the Internal Revenue Code of 1986. Any qualified employee who has attained age 21 and has been employed by the Company for at least six months may contribute a portion of their salary to the plan and the Company will match 50% of such contribution up to an amount equal to three percent of such employee's yearly salary.
Pension Plan
The Company has non-contributory defined benefit pension plans covering substantially all employees. Total pension expense, including the net periodic pension cost and the effects of settlements, was $332,458, $275,188 and $370,383 for the years ended August 31, 1996, 1995 and 1994, respectively. The Company has a funded, qualified plan and an unfunded supplemental retirement plan designed to maintain benefits for all employees at the plan formula level.
CHASE CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR EACH YEAR IN THE THREE YEAR PERIOD ENDED AUGUST 31, 1996
NOTE K - BENEFITS (Continued)
The following table sets forth the actuarial present value of benefit obligations and funded status:
CHASE CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR EACH YEAR IN THE THREE YEAR PERIOD ENDED AUGUST 31, 1996
NOTE K - BENEFITS (Continued)
The net transition assets amount is being amortized at a level rate over 15 years. The actuarial calculations were based on assumptions of a weighted average discount rate of 8.0% and a future rate of increase in compensation levels of 5%. The expected rate of return on plan assets is 10%. Prior service cost arose from the amendment of the plan's benefit schedules to comply with the Tax Reform Act of 1986 (TRA) and adoption of the unfunded supplemental pension plan.
The pension plan recorded net losses on settlement of $127,147 during the year ended August 31, 1994. The settlement occurred due to lump sum retirement payments exceeding the amount of the pension obligation arising from the service cost and interest cost components of the net periodic pension cost.
Deferred Compensation
The Company has deferred compensation agreements with a former officer providing for post retirement health benefits and annual payments of $200,000 for the officer through August 31, 1998.
Additionally, life insurance is provided under a split dollar life insurance agreement whereby the Company will recover the premiums paid from the proceeds of the policies. The Company recognizes an offset to expense for the growth in the cash surrender value of the policies.
The Company also has an agreement with its former Chairman of the Board, who retired August 31, 1991, that the Company will make ten annual payments of $58,000 to him or his beneficiaries.
Stock Option Plans
1989 Non-Statutory Plan - Options to purchase 612,000 shares of Common Stock were granted to officers, senior employees, and independent directors. Options on 156,000 shares of Common Stock are currently outstanding. The options are exercisable at the fair market value of the shares at the date of grant adjusted for stock dividends. Directors' options vest ratably over a two year period and officer and employee options vest over a four year period. All options are fully vested. The options expire seven years from the date of grant, one year after ceasing to be a director, or at various times up to six months after termination as an employee. Options on 93,500 and 97,000 shares were exercised during the years ended August 31, 1996 and 1995, respectively.
1995 Stock Option Plan - Effective July 18, 1995, the Company adopted, subject to stockholder approval, a stock award plan and an incentive plan which permit the issuance of options and restricted stock to selected employees of the Company. The plans reserve 600,000 shares of Common Stock for grant.
Under the terms of the 1995 stock option plan, options granted may be either nonqualified or incentive stock options and the exercise price may not be less than the fair market value of a share at the date of grant. The board of directors approved issuance of 450,000 options (at $3.375, based upon the market value at July 18, 1995). The options vest ratably over ten years. In addition, the board of directors granted 150,000 shares of restricted Common Stock to the Company's CEO, Mr. Peter Chase, at no cost. Other than the restrictions which limit the sale and transfer of these shares, Mr. Chase is entitled to all rights of a shareholder. The grant includes provisions for a future grant of 100,000 shares. The grants vest at the end of nine years. If Mr. Chase is not providing services to the Company prior to vesting, the shares revert to the Company.
CHASE CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR EACH YEAR IN THE THREE YEAR PERIOD ENDED AUGUST 31, 1996
NOTE K - BENEFITS (Continued)
CHASE CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR EACH YEAR IN THE THREE YEAR PERIOD ENDED AUGUST 31, 1996
NOTE L - CONTINGENCIES
Environmental
The Company is aware of potential claims concerning a site in Bruin, Pennsylvania where an affiliate of the Company had sponsored research into experimental oil and coal-based fuels in the early 1980s. In August 1991, a spill of the affiliate's stored material occurred at the Bruin site, apparently due to vandalism of the storage tanks. Upon learning of the spill, the Company provided notice of the release to appropriate authorities and undertook to remedy the spill. The remedy was completed in October 1992 under plans approved by the Pennsylvania Department of Environmental Protection ("Pennsylvania DEP"). The Company believes that this work terminated its liabilities for the spill, but Pennsylvania DEP has not provided a final release.
The Bruin site had been used for many years for a variety of oil refining operations by unrelated parties. The site has significant contamination from those unrelated activities. Since the spill of the material remedied by the Company, the U.S. Environmental Protection Agency has conducted an investigation of the site, conducted emergency clean-up activities at the site focused on materials other than the affiliate's material and spill, and turned responsibility for the site back to Pennsylvania DEP. To date, EPA has not made any claim against the Company.
During 1993 to 1995, Pennsylvania DEP has conducted an investigation of the site, has completed a surface cleanup, and has proposed a permanent remedy. Pennsylvania DEP has notified the Company that it may be a person responsible under Pennsylvania law to contribute to the costs of those activities. During 1995, Pennsylvania DEP suggested that the Company contribute an amount toward the costs of the investigation and the surface cleanup in an attempt to settle with the Company. On July 18, 1996, the Pennsylvania DEP sent a settlement proposal to Chase requesting a payment of $335,000 to resolve all of Chase's potential liabilities to the State of Pennsylvania at the Bruin site. While the amount proposed is not deemed material, the Company still believes that the work previously performed to remedy the spill terminated its liabilities and therefore declined the proposal.
The Company remains in communication with Pennsylvania DEP, and expects that it will eventually determine that the Company resolved any potential liability at the site by its response to the 1991 spill.
Legal
The Company has been named as a third-party defendant in eighteen personal injury lawsuits filed in state court in Jackson County, Mississippi. These lawsuits, each of which has multiple plaintiffs and defendants, arose out of alleged asbestos exposure by the plaintiffs as a result of their work at the Ingalls Shipyard. The Company was sued as a third-party defendant by USX Corporation, General Cable Corporation and G. K. Technologies, Inc., each of whom is a primary defendant in these actions. USX, General Cable and G.K. are alleged to have supplied wire and cable products containing asbestos to the shipyard. The third-party complaints allege that tape products containing asbestos were manufactured by the Company, sold to USX, General Cable and G.K., and then incorporated in their wire and cable products sold for use in the ships. USX, General Cable and G.K. are seeking indemnification from the Company for damages that may be assessed against them and expenses including legal fees.
CHASE CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR EACH YEAR IN THE THREE YEAR PERIOD ENDED AUGUST 31, 1996
NOTE L - CONTINGENCIES (Continued)
Legal (Continued)
The third-party claims against the Company, along with all other third-party and crossclaims, were severed from the trial of the primary actions. USX, General Cable and G.K. were each dismissed by the plaintiffs prior to the commencement of trial of nine of the primary actions, which took place in the summer of 1993. It is not known how much, if anything, each paid to settle these claims. To date, no effort has been made by USX, General Cable and G.K. to pursue the third-party claims against the Company arising out of the resolution of any of the cases tried in the summer of 1993. Some of the remaining primary actions remain pending, but it is not now known when those cases will be tried, whether the plaintiffs will proceed against any of the wire and cable manufacturers, including USX, General Cable or G.K., and whether any of these defendants will, in turn, pursue their claims against the Company.
The Company's liability insurer has assumed defense of these claims subject to reservation of its rights as to coverage for any underlying liability assessed.
In July 1994 the Company received a notice letter from General Cable and G.K. that they have been sued in fourteen additional asbestos personal injury lawsuits, ten of which are pending in Mississippi, two in Pennsylvania and two in Texas. Each of these cases involves multiple plaintiffs and defendants. This notice letter is an effort to bind the Company to the factual determination made in these cases, if General Cable or G.K. brings an action against the Company for indemnification arising out of these cases. No such action for indemnification has yet been brought and the Company is not now a party in any of these fourteen additional cases. The Company's liability insurer has been informed that the Company has been notified of these potential claims.
The Company is investigating the defenses available to it in connection with all these matters and its rights against its supplier. Although the Company cannot predict whether any of these claims will be pursued, management believes that such claims will not have any material financial impact on the Company.
CHASE CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR EACH YEAR IN THE THREE YEAR PERIOD ENDED AUGUST 31, 1996
NOTE M - SUPPLEMENTAL CASH FLOW DATA
The Company acquired production equipment valued at $903,415 under capitalized leases during the year ended August 31, 1994.
During the year ended August 31, 1994, the Company sold the equipment formerly leased to Avon Custom Mixing Service, Inc. for a note receivable, with interest at bank base rate plus two percent, of $224,023. The equipment had a cost of $1,496,392 and accumulated depreciation of $1,368,500.
NOTE N - INVESTMENT IN MINORITY INTERESTS
The Company has formed a joint venture, The Stewart Group, Inc., with The Stewart Group, Ltd. of Canada, to produce various products for the fiber optical cable market. Chase Corporation owned a 42% interest in the joint venture at August 31, 1996.
The Company has invested in minority interests in various closely held companies. Investments at August 31, 1996, in addition to The Stewart Group, Inc., consist of a 20% interest in DC Scientific, Inc., an electronics assembly company, 20% interest in Wireless, Inc., a telecommunications marketing company and a 32% interest in webpa.com, an internet software developer.
NOTE O - SALE OF AVON REAL ESTATE
During April 1996, the Company sold the real estate formerly leased to Avon Custom Mixing Service, Inc. for $122,649 and recorded a gain on the sale of $40,000. The assets sold consisted of land and buildings with a cost of $835,488 and accumulated depreciation of $760,393, with expenses related to the sale of $7,554.