SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended: September 30, 2001, Commission File No. 0-7647
HAWKINS, INC.
(Exact Name of Registrant as specified in its Charter)
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MINNESOTA |
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41-0771293 |
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(State of Incorporation) |
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(I.R.S. Employer Identification No.) |
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3100 East Hennepin Avenue, Minneapolis, Minnesota |
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55413 |
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(Address of Principal Executive Offices) |
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(Zip Code) |
(612) 331-6910
(Registrant's Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK, PAR VALUE $.05 PER SHARE
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 twelve 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 ý No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K o
The aggregate market value of voting stock held by nonaffiliates of the Registrant on December 3, 2001, was $57,838,659 (based upon the last reported sale price on that date as reported by The Nasdaq Stock Market), excluding all shares held by officers and directors of the Registrant and by the Trustees of the Registrant's Employee Stock Ownership Plan. The number of shares outstanding of the Registrant's common stock on December 3, 2001 was 10,216,688.
DOCUMENTS INCORPORATED BY REFERENCE
Part III of this Annual Report on Form 10-K incorporates by reference information (to the extent specific sections are referred to herein) from the Registrant's Proxy Statement for its 2002 Annual Meeting of Shareholders to be held February 13, 2002.
CAUTIONARY STATEMENT REGARDING
FUTURE RESULTS AND FORWARD-LOOKING STATEMENTS
The future results of the Registrant, including results reflected in any forward-looking statement made by or on behalf of the Registrant, will be impacted by a number of important factors. Words such as "may," "will," "expect," "believe," "anticipate," "estimate," or "continue" or comparable terminology are intended to identify forward-looking statements. Forward-looking statements, by their nature, involve substantial risks and uncertainties.
PART I
ITEM 1. BUSINESS.
(a) GENERAL DEVELOPMENT OF THE BUSINESS. The Registrant was incorporated under the laws of the State of Minnesota in 1955. In fiscal 1998, the Registrant merged three of its former subsidiaries, Feed-Rite Controls, Inc., Mon-Dak Chemical, Inc., Dakota Chemical, Inc. and its Arrowhead Chemical Division together to form a single wholly-owned subsidiary known as Hawkins Water Treatment Group, Inc. (HWTG). In fiscal 1999, the Registrant merged HWTG into the Registrant. During fiscal 2000, the Registrant acquired certain assets of St. Mary’s Chemicals, Inc. (discussed more fully in paragraph (i) below). In fiscal 2001, the Registrant’s corporate name was changed to Hawkins, Inc. from Hawkins Chemical, Inc. reflecting the fact the Registrant has expanded its original business from the distribution of chemicals.
(b) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS. The Company’s principal business is the formulation, blending and distribution of bulk and specialty chemicals, which it conducts in two principal segments: Water Treatment and Industrial. Financial information regarding these segments is reported in the Company’s audited financial statements. See Items 7 and 8 below.
(c) NARRATIVE DESCRIPTION OF THE BUSINESS.
(i) PRODUCTS AND MARKETS. The Company’s business is conducted in its two segments, Water Treatment and Industrial, which are more fully described below:
(A) WATER TREATMENT. The Water Treatment segment specializes in providing water and waste-water treatment equipment and chemicals, as well as helping customers find solutions to systems problems in Minnesota, Wisconsin, Iowa, North Dakota, South Dakota, Nebraska, Illinois, Michigan, Montana and Wyoming. It also operates as a distributor of the Company’s products to its customers. The Water Treatment operations in the Minneapolis/St. Paul area relocated to a new 59,000 square-foot facility, “the Red Rock facility,” during the first quarter of fiscal 2001. The new facility, located on the Mississippi River in St. Paul, MN has improved operational efficiencies, as the Water Treatment operations are located at the facility where several key products are produced. The consolidated warehouse space has reduced the amount of time required to load trucks between deliveries.
(B) INDUSTRIAL. The Industrial segment specializes in providing industrial chemicals and services to the energy, electronics, chemical processing, pulp and paper, medical device and plating industries. In addition, the Industrial segment provides products and services to food manufacturers and processing plants. The Industrial segment also distributes a variety of pharmaceutical products and sells certain food grade products, including the Cheese-Phos(R) liquid phosphate product (discussed more fully in paragraph (iv) below) and other blended products, none of which are material to the Company. This segment conducts its business primarily through terminal operations and sales.
The Industrial segment receives, stores and distributes various chemicals in bulk, including liquid caustic soda, phosphoric acid and aqua ammonia; manufactures sodium hypochlorite (bleach); repackages liquid chlorine; and performs custom blending of certain chemicals for customers according to customer formulas. Approximately 80% of the terminal operations business is related to liquid caustic soda. The Industrial segment also operates liquid caustic soda barge terminals to receive shipments during the period the Mississippi River is open to barge traffic (approximately April 1 through November 15). During the remainder of the year the Company relies on stockpiles, as well as supplies shipped in by railroad tank car. Pursuant to operating agreements it has with other chemical companies, the Company also receives, stores and ships liquid caustic soda and other chemicals at the Hawkins "Terminal 1" location and its "Terminal 2" site, which is located across the river and downstream from Terminal 1. The chlorine repackaging and bleach manufacturing operations, formerly located at Terminal 1, were moved to Red Rock during fiscal 2001.
Since 1963, flooding of the Mississippi River has required the Company’s Terminal 1 and 2 operations to be temporarily shifted out of its buildings four times, the most recent being in the spring of 2001. From approximately April 12, 2001 to May 8, 2001, the areas around the terminals were flooded, preventing shipments to and from these locations. The terminals themselves were not flooded as the facilities were adequately protected by dikes. Additionally, the high water interrupted barge traffic on the Mississippi River and no caustic soda barges were received from the closing of the river in the fall of 2000 until the end of May 2001. No substantial interruptions to sales resulted from the flooding as trucks and railroad tank cars were used as an alternative means of supply. However, the Company incurred additional shipping, labor, and other costs and was not been able to pass through all of these costs to its customers. This had a negative impact on earnings in the third quarter of fiscal 2001 of approximately $200,000. No assurance can be given that flooding will not recur or that there will not be material damage or interruption to the Company’s operations in the future from flooding. In September 2001, a 1.5 million gallon caustic soda storage tank was completed at the Red Rock facility allowing it to serve as an additional terminal for bulk chemicals. Historically, the property on which the Red Rock facility is located has not been subject to flooding when Terminals 1 and 2 were not usable due to high water and the facility was not affected by the fiscal 2001 flooding. The Company expects the impact of future flooding, if any, will be reduced as the new Red Rock facility is expected to allow the Company to continue shipping to customers during periods of high water levels.
The Industrial segment also includes a sales distribution center for industrial chemicals, laboratory chemicals and laboratory supplies. Bulk industrial chemicals are generally repackaged and sold in smaller quantities to the Company’s customers. Sales are concentrated primarily in Wisconsin, Minnesota, northern Iowa and North and South Dakota. Among the principal chemicals handled are water purification and pollution control chemicals (such as chlorine) and industrial chemicals (such as anhydrous ammonia, aluminum sulphate, hydrofluosilicic acid, soda ash, phosphates, muriatic acid, aqua ammonia, sulfuric acid and liquid caustic soda). It also specializes in sales to the plating and electronic industries, for which it relies on a specially trained sales staff that works directly with customers on their plating and other processes. This aspect of its operations commenced in 1993 when the Company acquired the assets of Industrial Chemical & Equipment Co.
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, was engaged in the business of marketing, selling, and distributing pharmaceutical chemicals to pharmacies and pharmacy wholesalers. On May 26, 2000, the Company also entered into a five-year employment agreement with one of the previous owners 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 extend for 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 in the agreements, for five years after the termination date.
(ii) NEW PRODUCTS. The Registrant did not have any significant new products in fiscal 2001.
(iii) RAW MATERIALS. The Company’s segments have approximately 300 suppliers, including many of the major chemical producers in the United States, of which approximately 20 account for a majority of the purchases. The Company’s segments typically have written distributorship agreements or supply contracts with its suppliers that are renewed from time to time. Although there is no assurance that any contract or understanding with any supplier will not be terminated in the foreseeable future, most of the basic chemicals purchased can be obtained from alternative sources should existing relationships be terminated.
(iv) PATENTS, TRADEMARKS, LICENSES, FRANCHISES, AND CONCESSIONS. There are no patents, trademarks, licenses, franchises or concessions that are currently material to the successful operation of the Company’s business. The Company has, however, obtained a patent on a liquid form of sodium phosphate for use in the processed food industry, as described below; the patent was granted on October 17, 1995 and will expire on November 8, 2013.
Process cheese producers are increasingly moving away from dry forms of sodium ortho phosphates to liquid versions. The advantages of the liquid form include delivery by pumping, greater measurement accuracy and consistency in finished product and the elimination of undissolved chemical dust and the disposal of empty chemical bags. The major drawback of the liquid sodium phosphates currently being used in the cheese processing industry is that it must be stored at between 130 and 160 degrees Fahrenheit to prevent crystallization. Expensive heated storage and steam heated piping is necessary to maintain required temperatures. Back-up generators must also be installed as safeguards against product cooling and solidifying in case of a plant power outage.
The Company’s patented Cheese-Phos(R) liquid sodium phosphate, which can be stored at room temperature, offers all the advantages of a liquid sodium phosphate product, but eliminates the need for high-heat delivery systems. Cheese-Phos(R) has not and is not expected to materially increase the Company’s sales or profits.
(v) SEASONAL ASPECTS. The Water Treatment segment has historically experienced higher sales during the third and fourth fiscal quarters, which is due primarily to an increase in chemicals used by municipal water treatment facilities.
(vi) WORKING CAPITAL ITEMS. As a bulk distributor of chemicals, the Company is required to carry significant amounts of inventory to meet rapid delivery requirements of customers. Working capital requirements vary on a seasonal basis as a result of the seasonality of the water treatment business.
(vii) DEPENDENCE ON LIMITED NUMBER OF CUSTOMERS. No one customer represents more than approximately three percent of the Company’s sales, but the loss of its four largest customers could have a material adverse effect on the Company’s results of operations. Additionally, no one customer represents 10% or more of either the Water Treatment segment or Industrial segment sales.
(viii) BACKLOG. Backlog is not material to an understanding of the Company’s business.
(ix) GOVERNMENT CONTRACTS. No material portion of the Company’s business is subject to renegotiation of profits or termination of contracts at the election of any state or federal governmental subdivision or agency.
(x) COMPETITIVE CONDITIONS. The Company operates in a competitive industry and competes with producers, distributors and sales agents offering chemicals equivalent to all of the products handled by the Company. Many such producers and distributors have substantially more business and are substantially larger than the Company. No one competitor, however, is dominant in the Company’s market. Price and service are the principal methods of competition in the industry.
(xi) RESEARCH AND DEVELOPMENT. The Company does not have a formal research and development function. Employees are assigned to research and development projects as the need arises. During the past fiscal year, expenditures for research and development were negligible and not material to the Company’s business.
(xii) ENVIRONMENTAL MATTERS. The Company is primarily a compounder and distributor, rather than a manufacturer, of chemical products. As such, compliance with current federal, state and local provisions regarding discharge of materials into the environment, or otherwise relating to the protection of the environment, is not anticipated to have any material effect upon the capital expenditures, earnings or competitive position of the Company. The Company does not currently anticipate making any material capital expenditures for environmental control facilities during fiscal 2002.
(xiii) EMPLOYEES. The number of persons employed by the Company as of September 30, 2001 was 200.
(d) FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS AND EXPORT SALES. Because the Company deals primarily in one geographic area of the United States, a breakdown of sales, profitability or assets attributable to different geographic areas is not meaningful to an understanding of the Company's business.
ITEM 2. PROPERTIES.
The Company owns its principal location, which consists of approximately eleven acres of land in Minneapolis, Minnesota, with six buildings containing a total of 160,000 square feet of office and warehouse space. The Company’s principal office is located in one of these buildings, at 3100 East Hennepin Avenue. The other buildings house the rest of the Company’s operations. As of the date hereof, the Company has installed sprinkler systems in substantially all of its warehouse facilities for fire protection. The Company carries insurance covering the replacement of property damaged by fire or flood.
As noted above, during the first quarter of fiscal 2001 the Company completed the new Red Rock facility in St. Paul, Minnesota. The Red Rock facility consists of a 59,000 square foot building located on approximately 10 acres of land. The new facility has outside storage capacity of approximately 1.5 million gallons for the storage of liquid caustic soda, as well as numerous smaller tanks for storing and mixing chemicals. The land is leased from the Port Authority of the City of St. Paul, Minnesota for a basic rent plus an amount based on the annual tonnage unloaded at the site through May 31, 2029. The basic rent and annual tonnage rent are to be renegotiated every five years beginning June 1, 2004.
In addition to the facilities described above, the Company’s other facilities are described below. These facilities, together with those described above, are adequate and suitable for the purposes they serve. Unless noted, each facility is owned and is fully utilized by the Company.
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Approx. |
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Segment |
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Location |
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Primary Use |
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Square Feet |
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Industrial |
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St. Paul, MN(1) |
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Office, Warehouse and Garage |
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32,000 |
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St. Paul, MN(2) |
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Office |
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3,000 |
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Water Treatment |
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Fargo, ND(3) |
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Office and Warehouse |
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22,800 |
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Fond du Lac, WI(4) |
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Warehouse |
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20,300 |
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Washburn, ND |
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Office and Warehouse |
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14,000 |
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Billings, MT |
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Office and Warehouse |
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6,000 |
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Sioux Falls, SD(5) |
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Warehouse |
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18,000 |
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Rapid City, SD |
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Warehouse |
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3,600 |
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Willow Springs, IL(2) |
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Warehouse |
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2,000 |
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Superior, WI |
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Office and Warehouse |
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17,000 |
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Slater, IA |
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Warehouse |
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8,700 |
(1) The Company’s terminal operations are located at two sites on opposite sides of the Mississippi River, made up of three buildings, nine outside storage tanks with a total capacity of approximately 8,900,000 gallons for the storage of liquid caustic soda, as well as numerous smaller tanks for storing and mixing chemicals. The land is leased from the Port Authority of the City of St. Paul, Minnesota for a basic rent plus an amount based on the annual tonnage unloaded at each site. The applicable leases run until December 31, 2003, at which time the Company has an option to renew the leases for an additional five-year period on the same terms and conditions subject to renegotiation of rent. The Company also has options to renew these leases for additional successive five-year renewal periods (extending until 2018) for which the rent may be adjusted pursuant to the rental renegotiation provisions contained in the leases.
(2) This facility is leased from a third party.
(3) Part of this facility is leased to a third party (5,000 square feet).
(4) Part of this facility is leased to third parties (10,000 square feet).
(5) Part of this facility is leased to a third party (6,000 square feet).
The Company also owns several trucks, tractors, trailers and vans.
ITEM 3. LEGAL PROCEEDINGS.
As of the date of this filing, the Company is not involved in any pending legal proceeding 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. Three claimants remain who have not yet resolved their claims under the Settlement Agreement. The Company anticipates that the defense and payment of these remaining claims, which are subject to arbitration, will be covered by its umbrella insurer.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matter was submitted to a vote of security holders during the fourth quarter of fiscal 2001.
ITEM 4A. EXECUTIVE OFFICERS OF THE COMPANY.
The executive officers of the Company, their ages and offices held, as of December 14, 2001 are set forth below:
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Name |
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Age |
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Office |
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John R. Hawkins |
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50 |
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Chairman of the Board and Chief Executive Officer |
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Kurt R. Norman |
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46 |
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President and Chief Operating Officer |
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Marvin E. Dee |
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52 |
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Vice President, Chief Financial Officer, Secretary, and Treasurer |
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Keenan A. Paulson |
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52 |
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Vice President - Water Treatment Group |
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John R. Sevenich |
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43 |
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Vice President - Manufacturing and Specialty Products |
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Daniel E. Soderlund |
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39 |
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Vice President - Pharmaceuticals |
John R. Hawkins has been the Company’s Chairman and Chief Executive Officer since February 16, 2000. He was President and Chief Operating Officer from December 1998 to February 2000 and was Secretary from 1991 to December 1999. He was an Executive Vice President from 1997 to December 1998 and Vice President of Sales from 1987 to 1997.
Kurt R. Norman has been the Company’s President and Chief Operating Officer since February 16, 2000. He was a Vice President of the Company from February 1999 until February 2000, the Vice President of the Water Treatment segment from 1996 to February 1999 and was the Water Treatment General Manager from 1988 to 1996.
Marvin E. Dee has been the Company’s Vice President and Chief Financial Officer since September 1999 and its Secretary and Treasurer since December 1999. He was the Chief Financial Officer of Nath Companies from 1997 to September 1999, the Vice President of Finance and Treasurer of Tricord Systems, Inc. from 1993 to 1997 and Senior Director of Accounting of NordicTrack, Inc. in 1993 and the Controller of NordicTrack from 1991 to 1992.
Keenan A. Paulson has been the Company’s Vice President - Water Treatment Group since May 2000. Prior to attaining this position, Ms. Paulson held various positions during her 30-year career with the Company, most recently as its Water Treatment General Manager.
John R. Sevenich has been the Company’s Vice President - Manufacturing and Specialty Products since May 2000. He was the Business Unit Manager of Manufacturing from 1998 to May 2000 and was a Sales Representative with the Company from 1989 to 1998.
Daniel E. Soderlund has been the Company’s Vice President - Pharmaceuticals since May 2000. He was the Business Unit Manager of Pharmaceuticals from April 1999 to May 2000 and was a Sales Representative with the Company from 1992 to April 1999.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS.
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Quarterly Stock Data |
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High |
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Low |
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Fiscal 2001 |
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4th Quarter |
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$ |
8.900 |
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$ |
7.080 |
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3rd Quarter |
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9.688 |
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8.140 |
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2nd Quarter |
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10.250 |
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8.375 |
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1st Quarter |
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8.750 |
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6.625 |
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Fiscal 2000 |
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4th Quarter |
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$ |
8.063 |
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$ |
7.250 |
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