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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended JUNE 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 number 0-7647
HAWKINS CHEMICAL, INC.
----------------------
(Exact name of registrant as specified in its charter)
MINNESOTA 41-0771293
----------- ------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation of organization)
3100 EAST HENNEPIN AVENUE, MINNEAPOLIS, MINNESOTA 55413
-------------------------------------------------------
(Address of principal executive offices) Zip Code
(612) 331-6910
--------------
Registrant's telephone number, including area code
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
----- -----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
CLASS OUTSTANDING AT AUGUST 8, 2000
-------------------------------------- -----------------------------
Common Stock, par value $.05 per share 10,465,539
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HAWKINS CHEMICAL, INC.
INDEX TO FORM 10-Q
<TABLE>
<CAPTION>
Page
No.
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PART I. FINANCIAL INFORMATION
<S> <C> <C>
Item 1. Financial Statements:
Condensed Balance Sheets - June 30, 2000 and October 3, 1999..... 3
Condensed Statements of Income - Three and Nine Months
Ended June 30, 2000 and 1999................................ 4
Condensed Statements of Cash Flows - Nine Months
Ended June 30, 2000 and 1999................................ 5
Notes to Condensed Financial Statements.......................... 6-8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations ................................. 9-13
PART II. OTHER INFORMATION
Item 1. Legal Proceedings................................................ 13
Item 2. Change in Securities and Use of Proceeds......................... 14
Item 6. Exhibits and Reports on Form 8-K................................. 14
Exhibit Index.................................................... 15
Financial Data Schedule ........................................
</TABLE>
2
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PART I. FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS
HAWKINS CHEMICAL, INC.
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, 2000 OCTOBER 3, 1999
------------- ---------------------
(Unaudited) (Derived from audited
financial statements)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ...................................... $ 317,652 $ 4,778,174
Investments available-for-sale ................................. 11,837,037 17,424,700
Trade receivables-net .......................................... 11,833,558 11,329,211
Notes receivable ............................................... 326,749 301,920
Inventories .................................................... 8,812,407 8,379,228
Prepaid expenses and other ..................................... 2,197,266 2,536,448
----------- -----------
Total current assets ..................................... 35,324,669 44,749,681
Property, plant and equipment-net ................................ 23,131,661 18,664,999
Notes receivable-noncurrent ...................................... 2,447,859 2,844,220
Other assets ..................................................... 6,008,089 2,740,927
----------- -----------
Total .......................................................... $66,912,278 $68,999,827
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable ............................................... $ 5,021,657 $ 5,032,268
Current portion of long-term debt .............................. 102,037 95,362
Dividends payable .............................................. -- 1,314,154
Other current liabilities ...................................... 3,839,106 4,838,635
----------- -----------
Total current liabilities ................................ 8,962,800 11,280,419
Long-term debt ................................................... 226,003 328,040
Deferred income taxes ............................................ 1,037,950 1,029,950
Other long-term liabilities ...................................... 562,681 786,202
----------- -----------
Commitments and contingencies
Shareholders' equity:
Common stock, par value $.05 per share; issued and
outstanding, 10,494,539 and 10,951,281 shares respectively 524,727 547,564
Additional paid-in capital .................................. 38,774,066 40,129,749
Retained earnings............................................ 16,824,051 14,897,903
----------- -----------
Total shareholders' equity .............................. 56,122,844 55,575,216
----------- -----------
Total .......................................................... $66,912,278 $68,999,827
=========== ===========
</TABLE>
See accompanying Notes to Condensed Financial Statements.
3
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HAWKINS CHEMICAL, INC.
CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Three Months Ended June 30 Nine Months Ended June 30
2000 1999 2000 1999
----------------------------- -----------------------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Net sales ................................... $ 26,832,838 $ 24,959,934 $ 71,206,581 $ 71,034,944
Cost of sales ............................... (19,190,913) (18,353,963) (53,205,404) (53,999,756)
------------ ------------ ------------ ------------
Gross profit ................................ 7,641,925 6,605,971 18,001,177 17,035,188
Selling, general and administrative ......... (3,416,755) (2,894,343) (8,719,220) (7,900,237)
Litigation settlement reimbursement ......... -- 97,708 -- 2,851,708
------------ ------------ ------------ ------------
Income from operations ...................... 4,225,170 3,809,336 9,281,957 11,986,659
Other income (deductions):
Interest income ........................... 256,184 276,843 817,911 826,914
Interest expense .......................... (7,498) (9,211) (22,604) (27,656)
Miscellaneous ............................. 51,704 (4,444) 82,573 (28,921)
------------ ------------ ------------ ------------
Total other income (deductions) ........ 300,390 263,188 877,880 770,337
------------ ------------ ------------ ------------
Income before income taxes .................. 4,525,560 4,072,524 10,159,837 12,756,996
Provision for income taxes .................. (1,783,100) (1,631,800) (4,003,000) (5,101,300)
------------ ------------ ------------ ------------
Net income .................................. $ 2,742,460 $ 2,440,724 $ 6,156,837 $ 7,655,696
============ ============ ============ ============
Weighted average number of shares outstanding 10,515,251 10,991,611 10,671,563 11,192,820
============ ============ ============ ============
Earnings per share - basic and diluted ...... $ 0.26 $ 0.22 $ 0.58 $ 0.68
============ ============ ============ ============
</TABLE>
See accompanying Notes to Condensed Financial Statements.
4
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HAWKINS CHEMICAL, INC.
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED JUNE 30
----------------------------
2000 1999
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(Unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................ $ 6,156,837 $ 7,655,696
Depreciation and amortization ............................ 1,578,699 1,465,723
Deferred income taxes .................................... 83,000 (12,800)
Other .................................................... (82,195) (79,499)
Changes in certain current assets and liabilities ........ (1,870,162) 2,415,989
----------- ------------
Net cash provided by operating activities ............. 5,866,179 11,445,109
----------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment ............... (5,967,171) (1,834,620)
Purchases of investments ................................. (523,204) (4,593,637)
Sales of investments ..................................... 6,110,867 1,885,814
Acquisition of St. Mary's Chemicals, Inc. ................ (2,700,000) --
Payments received on notes receivable .................... 371,532 357,210
----------- ------------
Net cash used in investing activities ................. (2,707,976) (4,185,233)
----------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash dividends paid ..................................... (3,109,181) (2,814,622)
Acquisition and retirement of stock ..................... (4,414,182) (4,888,288)
Debt repayment .......................................... (95,362) (89,123)
----------- ------------
Net cash used in financing activities ................. (7,618,725) (7,792,033)
----------- ------------
DECREASE IN CASH AND CASH EQUIVALENTS ...................... (4,460,522) (532,157)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR ............... 4,778,174 3,197,015
----------- ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD ................... $ 317,652 $ 2,664,858
=========== ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest ................................... $ 34,658 $ 40,897
=========== ============
Cash paid for income taxes ............................... $ 4,504,049 $ 4,113,666
=========== ============
</TABLE>
See accompanying Notes to Condensed Financial Statements.
5
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HAWKINS CHEMICAL, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
1. The accompanying unaudited condensed financial statements have been
prepared in accordance with the instructions for Form 10-Q and,
accordingly, do not include all information and footnotes required by
generally accepted accounting principles for complete financial statements.
These statements should be read in conjunction with the financial
statements and footnotes included in the Company's Annual Report on Form
10-K for the year ended October 3, 1999, previously filed with the
Commission. In the opinion of management, the accompanying unaudited
condensed financial statements contain all adjustments necessary to present
fairly the Company's financial position and the results of its operations
and cash flows for the periods presented. All adjustments made to the
interim financial statements were of a normal recurring nature.
The accounting policies followed by the Company are set forth in Note 1 to
the Company's financial statements in the 1999 Hawkins Chemical, Inc.
Annual Report which is incorporated by reference in the Form 10-K filed
with the Commission on January 3, 2000.
2. The results of operations for the period ended June 30, 2000 are not
necessarily indicative of the results that may be expected for the full
year.
3. Inventories, principally valued by the LIFO method, are less than current
cost by approximately $770,000 at June 30, 2000. Inventory consists
principally of finished goods. Inventory quantities fluctuate during the
year. No material amounts of interim liquidation of inventory quantities
have occurred that are not expected to be replaced by year-end.
4. During the nine months ended June 30, 2000, the Company acquired and
retired 532,100 shares of common stock for $4,414,182.
5. During 1995, the Company had a fire in the office/warehouse of The Lynde
Company, a former wholly owned subsidiary. The Company's insurers denied
coverage and refused to defend the lawsuit filed against it as a result of
the fire. In the first quarter of fiscal 1999, the Company prevailed
against its insurers to recover the legal and settlement costs in
connection with the 1995 warehouse fire. Through the nine-month period
ended June 30, 1999, the company received $2,851,708 of which $97,708 was
received during the third quarter, which covered substantially all of its
settlement and legal costs. The Company's results of operations for the
first nine-months of fiscal 1999 include $2,851,708 associated with the
settlement. The umbrella insurer has agreed to defend and indemnify the
Company on remaining claims under the Settlement Agreement up to and in
accordance with its policy limits of $5,000,000.
6
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6. On May 26, 2000, the Company completed the acquisition of certain assets of
St. Mary's Chemicals, Inc. d.b.a. Universal Chemicals. Universal Chemicals,
a Minnesota-based company, is engaged in the business of marketing,
selling, and distributing pharmaceutical chemicals to pharmacies and
pharmacy wholesalers. In connection with the acquisition, assets purchased,
common stock issued, and cash consideration paid were as follows:
<TABLE>
<S> <C>
Assets Acquired:
Inventory $ 36,843
Equipment 12,692
Excess of purchase price over
net assets acquired 3,250,465
----------
3,300,000
Common Stock Issued (75,358 shares) 600,000
----------
Cash Consideration Paid $2,700,000
==========
</TABLE>
The acquisition will be accounted for using the purchase method of
accounting, and the excess of the purchase price over net assets acquired
is being amortized over 15 years using the straight-line method. The
operations of Universal Chemicals are included in the Company's statement
of income beginning on May 26, 2000. The pro forma effect of this
acquisition on sales, operating income, and earnings per share were not
significant.
On May 26, 2000, the Company also entered into a five-year employment
agreement with one of the previous owners of Universal Chemicals and
consulting agreements with the other two previous owners of Universal
Chemicals.
The employment agreement and consulting agreements contain performance
bonuses and non-compete provisions. The agreements are based on Universal
Chemicals' operating results, as defined, for five years after the
acquisition date and have a maximum payment of $3,520,000. The non-compete
provisions cover a period of five years after the termination of the
employment or consulting agreements, and require annual payments of
$100,000 to $200,000 depending on Universal Chemicals' operating results,
as defined, for five years after the acquisition date.
7
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7. The Company has two reportable segments: Industrial and Water Treatment.
Reportable segments are defined by product and type of customer. Segments
are responsible for the sales, marketing and development of their products
and services. The segments do not have separate accounting, administrative,
customer service or purchasing functions. The information for 1999 has been
restated to conform to the 2000 presentation.
<TABLE>
<CAPTION>
REPORTABLE SEGMENTS INDUSTRIAL WATER TREATMENT TOTAL
<S> <C> <C> <C>
THREE MONTHS ENDED JUNE 30, 2000
Net sales ................ $17,804,687 $ 9,028,151 $26,832,838
Gross profit ............. 4,711,194 2,930,731 7,641,925
Operating income ......... 2,548,908 1,676,262 4,225,170
THREE MONTHS ENDED JUNE 30, 1999
Net sales ................ $16,999,262 $ 7,960,672 $24,959,934
Gross profit ............. 4,069,095 2,536,876 6,605,971
Operating income ......... 2,203,302 1,508,326 3,711,628
NINE MONTHS ENDED JUNE 30, 2000
Net sales ................ $49,570,772 $21,635,809 $71,206,581
Gross profit ............. 11,155,798 6,845,379 18,001,177
Operating income ......... 5,459,111 3,822,846 9,281,957
NINE MONTHS ENDED JUNE 30, 1999
Net sales ................ $50,610,887 $20,424,057 $71,034,944
Gross profit ............. 10,743,853 6,291,335 17,035,188
Operating income ......... 5,562,446 3,572,505 9,134,951
</TABLE>
PROFIT RECONCILIATION
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, 2000 1999
<S> <C> <C>
Total income for reportable segments........... $4,225,170 $ 3,711,628
Unallocated corporate income .................. -- 97,708
---------- -----------
Total operating income ........................ $4,225,170 $ 3,809,336
========== ===========
NINE MONTHS ENDED JUNE 30, 2000 1999
Total income for reportable segments........... $9,281,957 $ 9,134,951
Unallocated corporate income .................. -- 2,851,708
---------- -----------
Total operating income ........................ $9,281,957 $11,986,659
========== ===========
</TABLE>
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
THE INFORMATION CONTAINED IN THIS FORM 10-Q INCLUDES FORWARD-LOOKING STATEMENTS
AS DEFINED IN SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED.
FORWARD-LOOKING INFORMATION OR STATEMENTS INCLUDE STATEMENTS ABOUT THE FUTURE OF
THE INDUSTRIES REPRESENTED BY OUR OPERATING GROUPS, STATEMENTS ABOUT OUR FUTURE
BUSINESS PLANS AND STRATEGIES, THE TIMELINESS OF PRODUCT INTRODUCTIONS AND
DELIVERIES, EXPECTATIONS ABOUT INDUSTRY AND MARKET GROWTH DEVELOPMENTS,
EXPECTATIONS ABOUT OUR GROWTH AND PROFITABILITY AND OTHER STATEMENTS THAT ARE
NOT HISTORICAL IN NATURE. MANY OF THESE STATEMENTS CONTAIN WORDS SUCH AS "MAY,"
"WILL," "BELIEVE," "INTEND," "ESTIMATE," OR "CONTINUE" OR OTHER SIMILAR WORDS.
THESE FORWARD-LOOKING STATEMENTS INVOLVE A NUMBER OF RISKS AND UNCERTAINTIES,
INCLUDING DEMAND FROM MAJOR CUSTOMERS, COMPETITION, CHANGES IN PRODUCT OR
CUSTOMER MIX OR REVENUES, CHANGES IN PRODUCT COSTS AND OPERATING EXPENSES AND
OTHER FACTORS DISCLOSED THROUGHOUT THIS REPORT. THE ACTUAL RESULTS THAT THE
COMPANY ACHIEVES MAY DIFFER MATERIALLY FROM ANY FORWARD-LOOKING STATEMENTS DUE
TO SUCH RISKS AND UNCERTAINTIES. THE COMPANY UNDERTAKES NO OBLIGATION TO REVISE
ANY FORWARD-LOOKING STATEMENTS IN ORDER TO REFLECT EVENTS OR CIRCUMSTANCES THAT
MAY ARISE AFTER THE DATE OF THIS REPORT. READERS ARE URGED TO CAREFULLY REVIEW
AND CONSIDER THE VARIOUS DISCLOSURES MADE BY THE COMPANY IN THIS REPORT AND IN
THE COMPANY'S OTHER REPORTS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION
THAT ATTEMPT TO ADVISE INTERESTED PARTIES OF THE RISKS AND UNCERTAINTIES THAT
MAY AFFECT THE COMPANY'S FINANCIAL CONDITION, RESULTS OF OPERATIONS, AND CASH
FLOWS, PARTICULARLY THE COMPANY'S ANNUAL REPORT ON FORM 10-K, FILED WITH THE
COMMISSION.
CONTINUING OPERATIONS
Net sales increased $1,872,904, or 7.5%, in the third quarter of this fiscal
year, and $171,637, or .2%, in the first nine months of this fiscal year as
compared to the comparable periods in fiscal 1999. The Industrial segment sales
increased $805,425 in the third quarter of this fiscal year as compared to the
third quarter of fiscal 1999 and decreased $1,040,115 in the first nine months
of fiscal 2000 as compared to the first nine months of fiscal 1999. The third
quarter increase was mainly attributable to volume increases in certain product
lines. The nine-month decrease is mainly attributable to selling price decreases
of a single, large-volume product (caustic soda), although the decrease was
partially offset by increased volumes in other product lines. The Water
Treatment segment sales increased $1,067,479 in the third quarter of this fiscal
year as compared to the third quarter of fiscal 1999 and increased $1,211,752 in
the first nine months of fiscal 2000 as compared to the first nine months of
fiscal 1999. These increases are due mainly to increased sales volumes.
Gross margin, as a percentage of net sales, for the third quarter of fiscal 2000
was 28.5% compared to 26.5% for the third quarter of fiscal 1999, and was 25.3%
for the first nine months of fiscal 2000 compared to 24.0% for the first nine
months of fiscal 1999. For the Industrial segment, gross margin, as a percentage
of sales, was 26.5% for the third quarter of fiscal 2000 compared to 23.9% for
the third quarter of fiscal 1999 and 22.5% for the first nine months of this
fiscal year compared to 21.2% for the first nine months of fiscal 1999. The
Industrial segment's increases are mainly due to decreases in both the selling
price and cost of caustic soda compared to the prior periods. The demand for
this product does not fluctuate materially as the cost and selling price
increases or decreases. The Company has generally been able to, and expects to
continue to be able to, adjust its selling prices as the cost of materials and
other expenses change, thereby maintaining relatively stable dollar gross
margins. Gross margin, as a
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percentage of sales, for the Water Treatment segment was 32.5% for the third
quarter ended June 30, 2000 compared to 31.9% for the third quarter of fiscal
1999 and 31.6% for the nine-month period ended June 30, 2000 compared to 30.8%
for the nine-month period of fiscal 1999. These increases are due to increased
sales volume of certain products with higher profit margins and to selling price
increases in various product lines.
Selling, general and administrative expenses as a percentage of net sales for
the third quarter of fiscal 2000 were 12.7% compared to 11.6% for the third
quarter of fiscal 1999, and 12.2% for the first nine months of fiscal 2000
compared to 11.1% for the first nine months of fiscal 1999. Stated as a
percentage of the same period one year ago, the third quarter increase in such
expenses was 18.0%, or $522,412, and the nine-month increase was 10.4%, or
$818,983. These increases were mainly due to increases in the sales and
administrative staff, consulting fees, and to employee compensation and benefit
costs. Most of the remaining expenses vary only slightly with fluctuations in
sales.
Income from operations increased by $415,834, or 10.9%, in the third quarter of
fiscal 2000, and decreased $2,704,702, or 22.6%, in the first nine months of
fiscal 2000 compared to the comparable periods of fiscal 1999. The third quarter
increase is primarily due to an increase in gross margin resulting from a
decrease in materials costs. The nine-month decrease is primarily attributable
to the $2,851,708 recovery during fiscal 1999 from the Company's insurers in
connection with the 1995 fire at the Lynde Company, a former wholly owned
subsidiary. This insurance recovery covers substantially all of the related
settlement and legal costs previously incurred in the periods prior to the
payment.
OTHER INCOME
Interest income decreased $20,659 in the third quarter of fiscal 2000 compared
to the same quarter one year ago and $9,003 for the first nine months of this
fiscal year compared to the same nine-month period one year ago. These decreases
are mainly due to less cash available for investment. Interest expense decreased
slightly in the third quarter and the first nine months of fiscal 2000 compared
to the same periods one year ago due to the decline in the amount of long-term
debt outstanding. Other miscellaneous income (deductions) increased $56,148 for
the second quarter and $111,494 for the nine-month periods ended June 30, 2000
compared to the same periods one year ago, due mainly to gains on disposals of
fixed assets.
LIQUIDITY AND CAPITAL RESOURCES
For the nine-month period ended June 30, 2000, cash provided by operations was
$5,866,179 compared to $11,445,109 for the same period one-year ago. This
decrease was due mainly to the decrease in net income and to changes in certain
current asset and liability accounts discussed in the next paragraph below. The
decrease in net income is primarily due to the $2,851,708 recovery received in
fiscal 1999 from the Company's insurers in connection with the 1995 fire at the
Lynde Company, a former wholly owned subsidiary of the company. During the nine
months ended June 30, 2000, the Company invested $5,967,171 in property and
equipment additions, which included approximately $3,450,000 for a new building
being constructed in St. Paul, Minnesota that will be occupied by both the
Industrial and Water Treatment segments.
Accounts receivable increased due to the increase in sales for the quarter.
Inventories increased due to increased quantities of caustic soda, food grade
chemicals, and pharmaceutical chemicals. Other current assets decreased during
the first nine months of fiscal 2000 due to prepayments that existed at October
3, 1999 and are currently being expensed. Other current liabilities decreased as
a result of the payment of benefit plan accruals that existed at fiscal year
end. The Company did not issue any securities during the
10
<PAGE>
nine-month period ended June 30, 2000, except that 75,358 shares were issued in
connection with the acquisition of St. Mary's Chemicals on May 26, 2000.
Through open market purchases, the Company acquired and retired 132,700 shares
of common stock for $1,085,008 during the quarter ended June 30, 2000. For the
nine-month period ending June 30, 2000, 532,100 shares of common stock, at a
cost of $4,414,182, have been acquired and retired.
Cash flows from operations, coupled with the Company's strong cash position,
puts the Company in a position to fund both short and long-term working capital
and capital investment needs with internally generated funds. Management does
not, therefore, anticipate the need to engage in significant financing
activities in either the short or long-term. If the need to obtain additional
capital does arise, however, management is confident that the Company's total
debt to capital ratio puts it in a position to issue debt on favorable terms.
On May 26, 2000, the Company completed the acquisition of certain assets of St.
Mary's Chemicals, Inc. d.b.a. Universal Chemicals. Universal Chemicals, a
Minnesota-based company, is engaged in the business of marketing, selling, and
distributing pharmaceutical chemicals to pharmacies and pharmacy wholesalers. In
connection with the acquisition, assets purchased, common stock issued, and cash
consideration paid were as follows:
<TABLE>
<S> <C>
Assets Acquired:
Inventory $ 36,843
Equipment 12,692
Excess of purchase price over
net assets acquired 3,250,465
----------
3,300,000
Common Stock Issued (75,358 shares) 600,000
----------
Cash Consideration Paid $2,700,000
==========
</TABLE>
The acquisition will be accounted for using the purchase method of accounting,
and the excess of the purchase price over net assets acquired is being amortized
over 15 years using the straight-line method. The operations of Universal
Chemicals are included in the Company's statement of income beginning on May 26,
2000. The pro forma effect of this acquisition on sales, operating income, and
earnings per share were not significant.
On May 26, 2000, the Company also entered into a five-year employment agreement
with one of the previous owners of Universal Chemicals and consulting agreements
with the other two previous owners of Universal Chemicals.
The employment agreement and consulting agreements contain performance bonuses
and non-compete provisions. The agreements are based on Universal Chemicals'
operating results, as defined, for five years after the acquisition date and
have a maximum payment of $3,520,000. The non-compete provisions cover a period
of five years after the termination of the employment or consulting agreements,
and require annual payments of $100,000 to $200,000 depending on Universal
Chemicals' operating results, as defined, for five years after the acquisition
date.
Although management continually reviews opportunities to enhance the value of
the Company through strategic acquisitions, other capital investments and
strategic divestitures, no material commitments for such investments or
divestitures currently exist. Until appropriate investment opportunities are
identified, the Company will continue to invest excess cash in conservative
investments. Cash equivalents include
11
<PAGE>
all liquid debt instruments (primarily cash funds and certificates of deposit)
purchased with an original maturity of three months or less. Cash equivalents
are carried at cost, which approximates market value. Investments classified as
available-for-sale securities consist of insurance contracts and variable rate
marketable securities (primarily municipal bonds and annuity contracts) that
will be held for indefinite periods of time, including securities that may be
sold in response to changes in market interest or prepayment rates, needs for
liquidity or changes in the availability or yield of alternative investments.
These securities are carried at market value, which approximates cost.
Other than as discussed above, management is not aware of any matters that have
materially affected the first nine months of fiscal 2000, or are expected to
materially affect future periods, nor is management aware of other matters not
affecting this period that are expected to materially affect future periods.
MARKET RISK
At June 30, 2000, the Company had an investment portfolio of fixed income
securities of approximately $1,606,643, excluding $12,573,916 of those
classified as cash and cash equivalents and variable rate securities. These
securities, like all fixed income instruments, are subject to interest rate risk
and will decline in value if market interest rates increase. However, the
Company has the ability to hold its fixed income investments until maturity and
therefore the Company would not expect to recognize an adverse impact in income
or cash flows.
12
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RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for
Derivative Instruments and Hedging Activities." SFAS No. 133 requires
companies to record derivatives on the balance sheet as assets and
liabilities, measured at fair value. Gains or losses resulting from changes
in the values of those derivatives would be accounted for depending on the
use of the derivative and whether it qualifies for hedge accounting. In July
1999, the FASB issued SFAS No. 137 delaying the effective date of SFAS No.
133 for one year to fiscal years beginning after June 15, 2000, with earlier
adoption encouraged. Management has not yet determined the effects SFAS No.
133 will have on its financial position or the results of its operations. The
Company will be required to adopt SFAS No. 133 in fiscal 2001.
In December 1999, the Securities and Exchange Commission released Staff
Accounting Bulletin ("SAB") No. 101 that provides the staff's views in applying
generally accepted accounting principles to selected revenue recognitions
issues. Companies are required to modify their revenue recognition policy to
comply with SAB No. 101 by December 31, 2000. Management has not yet determined
the effects SAB No. 101 will have on the Company's financial position or the
results of its operations.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
As of the date of this filing, the Registrant was not involved in any pending
legal proceedings other than ordinary routine litigation incidental to their
business, except as follows:
LYNDE COMPANY WAREHOUSE FIRE. The settlement agreement (the "Settlement
Agreement") relating to the class action, DONNA M. COOKSEY, ET AL. V.
HAWKINS CHEMICAL, INC. AND THE LYNDE COMPANY ("Cooksey"), brought in March
1995 against the Company and its former subsidiary, for damages alleged to
be caused by a fire at an office/warehouse facility used by the former
subsidiary, was approved by the court on January 30, 1998. Pursuant to the
Settlement Agreement, the Company agreed to pay certain of the plaintiffs'
costs and expenses as well as certain compensation to the class. In October
1998 the Company obtained a judgment against its primary and umbrella
insurers obligating both insurers to defend the Company in connection with
the Cooksey lawsuit. The two insurers subsequently settled with the Company
by reimbursing it $2,754,000 for substantially all amounts incurred in
defending and settling the Cooksey action. Less than 10 claimants remain
who have not yet resolved their claims under the Settlement Agreement. The
Registrant anticipates that the defense and payment of these remaining
claims, which are subject to arbitration, will be covered by its umbrella
insurer.
13
<PAGE>
Item 2. Change in Securities and Use of Proceeds
On May 26, 2000 in connection with the acquisition of substantially all of
the assets of St. Mary's Chemicals, Inc., 75,358 shares of common stock
were issued to St. Mary's Chemicals, Inc., at a value of $600,000 based on
the weighted average closing price of such shares as listed on the NASDAQ
National Market System for the twenty trading days ending five trading days
before the closing date. Since it was a privately negotiated sale, the
issuance of the securities was exempt from Section 4(2) of the Securities
Act of 1933.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
The following exhibits are included with this Quarterly Report on Form 10-Q
(or incorporated by reference) as required by Item 601 of Regulation S-K.
<TABLE>
<CAPTION>
Exhibit No. Description of Exhibit
------------- ---------------------------------------------------
<S> <C>
10.1 Asset purchase agreement dated May 26, 2000 among
St. Mary's Chemicals, Inc., its shareholders, and
registrant
27 Financial Data Schedule
</TABLE>
(b) Reports on Form 8-K.
No reports on Form 8-K have been filed during the fiscal quarter ended
JUNE 30, 2000.
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 thereunto duly authorized.
HAWKINS CHEMICAL, INC.
BY /s/ Marvin E. Dee
---------------------------------------
Marvin E. Dee, Vice President, Chief
Financial Officer, Secretary, Treasurer
Dated: August 8, 2000
14
<PAGE>
EXHIBIT INDEX
The following exhibits are included with this Quarterly Report on Form 10-Q (or
incorporated by reference) as required by Item 601 of Regulation S-K.
<TABLE>
<CAPTION>
Page
Exhibit No. Description of Exhibit No.
------------- --------------------------------------------------- ------
<S> <C> <C>
10.1 Asset purchase agreement dated May 26, 2000 among 16-35
St. Mary's Chemicals, Inc., its shareholders, and
registrant
27 Financial Data Schedule 36
</TABLE>
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