10-Q 1 a10-q.txt FORM 10-Q 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 HAWKINS CHEMICAL, INC. INDEX TO FORM 10-Q
Page No. ---- PART I. FINANCIAL INFORMATION 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 ........................................
2 PART I. FINANCIAL INFORMATION ITEM I. FINANCIAL STATEMENTS HAWKINS CHEMICAL, INC. CONDENSED BALANCE SHEETS
JUNE 30, 2000 OCTOBER 3, 1999 ------------- --------------------- (Unaudited) (Derived from audited financial statements) 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 =========== ===========
See accompanying Notes to Condensed Financial Statements. 3 HAWKINS CHEMICAL, INC. CONDENSED STATEMENTS OF INCOME
Three Months Ended June 30 Nine Months Ended June 30 2000 1999 2000 1999 ----------------------------- ----------------------------- (Unaudited) (Unaudited) 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 ============ ============ ============ ============
See accompanying Notes to Condensed Financial Statements. 4 HAWKINS CHEMICAL, INC. CONDENSED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED JUNE 30 ---------------------------- 2000 1999 ----------- ------------ (Unaudited) 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 =========== ============
See accompanying Notes to Condensed Financial Statements. 5 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 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: 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 ==========
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 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.
REPORTABLE SEGMENTS INDUSTRIAL WATER TREATMENT TOTAL 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
PROFIT RECONCILIATION
THREE MONTHS ENDED JUNE 30, 2000 1999 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 ========== ===========
8 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 9 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 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: 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 ==========
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 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 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 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.
Exhibit No. Description of Exhibit ------------- --------------------------------------------------- 10.1 Asset purchase agreement dated May 26, 2000 among St. Mary's Chemicals, Inc., its shareholders, and registrant 27 Financial Data Schedule
(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 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.
Page Exhibit No. Description of Exhibit No. ------------- --------------------------------------------------- ------ 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
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