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 March 30, 2003

 

Commission File No. 0-7647

 

HAWKINS, INC.

(Exact Name of Registrant as specified in its Charter)

 

 

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

 

Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

 

YES    o        NO    ý

 

The aggregate market value of voting stock held by non-affiliates of the Registrant on September 30, 2002 (the last business day of the Registrant’s most recently completed second fiscal quarter) was $65,982,706 based upon the closing sale price for

Hawkins, Inc.’s common stock 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 and Trust.

 

As of May 30, 2003, the Registrant had 10,216,688 shares of common stock outstanding.

 

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 2003 Annual Meeting of Shareholders to be held August 14, 2003.

 

 

PART I

 

ITEM 1.                                                     BUSINESS.

 

(a)                                  GENERAL DEVELOPMENT OF THE BUSINESS.  Hawkins, Inc. was incorporated in Minnesota in 1955 and has its principal executive offices at 3100 East Hennepin Avenue, Minneapolis, Minnesota.  As used in this Annual Report on Form 10-K, except where otherwise stated or indicated by the content, “Hawkins,” “we,” “the Company,” “our,” or “the Registrant” means Hawkins, Inc. and its predecessors.

 

In fiscal 1998, the Company combined three of its former subsidiaries, Feed-Rite Controls, Inc., Mon-Dak Chemical, Inc., and 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 Company merged HWTG into the Company.  During fiscal 2000, the Company acquired certain assets of St. Mary’s Chemicals, Inc. (discussed more fully in paragraph (c)(i)(B) below).  In fiscal 2001, the Company changed its corporate name to Hawkins, Inc., reflecting the fact the Company has expanded its original business beyond 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 two segments, Water Treatment and Industrial, which are more fully described below:

 

(A)                              WATER TREATMENT.  The Water Treatment segment specializes in providing equipment, chemicals and solutions to problems for potable water, municipal and industrial wastewater, industrial process water and non-residential swimming pool water.  The Water Treatment Group has warehouses in eleven cities and utilizes a Driver/Technician/Salesperson approach in supplying products and service to customers in Minnesota, Wisconsin, Iowa, North Dakota, South Dakota, Nebraska, Illinois, Michigan, Montana, Kansas and Wyoming.  In December 2000, operations in the Minneapolis/St. Paul area relocated to a new 59,000 square-foot facility, “the Red Rock facility.” The Red Rock facility, located on the Mississippi River in St. Paul, Minnesota, has improved operational efficiencies, as the Water Treatment operations are now located at the facility where several key products are produced and 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, manufactures and sells certain food grade products, including the Cheese-Phos® 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 distribution centers and terminal operations.

 

The Industrial segment receives, stores and distributes various chemicals in bulk, including liquid caustic soda, phosphoric acid, potassium hydroxide and aqua ammonia; manufactures sodium hypochlorite (bleach) and agricultural products; repackages liquid chlorine; and performs custom blending of certain chemicals for customers according to customer formulas.  The Industrial segment 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.  Approximately 80% of the terminal operations business is related to liquid caustic soda.  Pursuant to operating agreements it has with other chemical companies, the Company receives and stores liquid caustic soda and other chemicals at their two terminal sites, Hawkins Terminal 1 and Terminal 2.  Terminal 1 and Terminal 2 are located on opposite sides of the Mississippi River in St. Paul, Minnesota.  The chlorine repackaging and bleach manufacturing operations, formerly located at Terminal 1, were moved to the Red Rock facility during fiscal 2001.

 

Since 1963, flooding of the Mississippi River has required the Company’s terminal 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,

 

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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 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 flooding in 2001.  The Company believes the impact of future flooding, if any, will be reduced as the Red Rock facility is expected to allow the Company to continue normal shipping to customers during periods of high water levels.

 

The Industrial segment also includes a manufacturing, blending and sales distribution center for industrial chemicals, food grade chemicals, high-purity electronic chemicals and laboratory chemicals and 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.  The principal products are acids and alkalis and industrial and food grade salts.  The Industrial segment 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 surface finishing needs.

 

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 payout 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 Company did not have any significant new products during the fiscal year ended March 30, 2003.

 

(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 Company’s purchases.  The Company’s segments typically have written distributorship agreements or supply contracts with their 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 products 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.  The Company’s patented Cheese-Phos®, a two-component liquid sodium phosphate, is stored at room temperature.  Other competing liquid sodium phosphates must be stored at elevated temperatures to prevent crystallization because they are single component.  Liquid delivery systems, in general, are more economical than dry delivery systems and are easier to automate, measure, monitor and control.  As a two-component liquid process, Cheese-Phos®, when mixed with varied amounts of sodium hydroxide, can create all of the ratios of sodium phosphates that process cheese makers use.  This minimizes inventories for producers.  Cheese-Phos® 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 April to September timeframe, 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.

 

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(vii)                           DEPENDENCE ON LIMITED NUMBER OF CUSTOMERS.  No one customer represents more than approximately 5% of the Company’s sales, but the loss of its five 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 are substantially larger than the Company.  No one competitor, however, is dominant in the Company’s market.  Price and service are the principal factors affecting 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 fiscal year ended March 30, 2003, 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 effects 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 2004.

 

(xiii)                          EMPLOYEES.  The number of persons employed by the Company as of March 30, 2003 was 201.

 

(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.

 

(e)                                  AVAILABLE INFORMATION.  Our Internet website is: http://www.hawkinsinc.com.  We have made available, free of charge, through our Internet website, our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to those reports, as soon as reasonably practicable after we electronically file such materials with, or furnish them to, the SEC.

 

ITEM 2.                                                     PROPERTIES.

 

The Company owns its principal location, which consists of approximately 11 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.  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, in December 2000 the Company completed the Red Rock facility, which consists of a 59,000 square-foot building located on approximately 10 acres of land.  This 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.

 

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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.

 

Segment		Location		Primary Use		Approx. Square Feet
Industrial		St. Paul, MN (1)		Office, Warehouse and Garage		32,000
		St. Paul, MN (1)		Office		3,000
Water Treatment		Fargo, ND (2)		Office and Warehouse		22,800
		Fond du Lac, WI		Warehouse		20,300
		Washburn, ND (3)		Office and Warehouse		14,000
		Billings, MT		Office and Warehouse		6,000
		Sioux Falls, SD (4)		Warehouse		18,000
		Rapid City, SD		Warehouse		3,600
		Willow Springs, IL (5)		Warehouse		2,000
		Superior, WI		Office and Warehouse		17,000
		Slater, IA		Warehouse		8,700
		Lincoln, NE (5)		Office and Warehouse		5,400

 

(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)                                  Part of this facility is leased to a third party (5,000 square feet).

 

(3)                                  Part of this facility is leased to a third party (2,500 square feet).

 

(4)                                  Part of this facility is leased to a third party (6,000 square feet).

 

(5)                                  This facility is leased from a third party.

 

The Company also owns several trucks, tractors, trailers and vans.

 

ITEM 3.                                                     LEGAL PROCEEDINGS.

 

Not Applicable.

 

ITEM 4.                                                     SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

 

Not Applicable.

 

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ITEM 4A.                                           The executive officers of the Company, their ages and offices held, as of May 31, 2003 are set forth below:

 

Name		Age		Office
John R. Hawkins		51		Chairman of the Board and Chief Executive Officer
Kurt R. Norman		47		President and Chief Operating Officer
Marvin E. Dee		54		Vice President, Chief Financial Officer, Secretary, and Treasurer
Keenan A. Paulson		53		Vice President - Water Treatment Group
John R. Sevenich		45		Vice President - Manufacturing and Specialty Products
Daniel E. Soderlund		40		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.

 

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PART II

 

ITEM 5.                                                     MARKET FOR THE COMPANY’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.

 

Quarterly Stock Data		High			Low
Fiscal 2003
4th Quarter		$	9.400		$	8.400
3rd Quarter		9.000			8.000
2nd Quarter		9.900			8.110
1st Quarter		10.200			8.800
Fiscal 2002
2nd Quarter		$	9.650		$	8.370
1st Quarter		8.900			7.150
Fiscal 2001
4th Quarter		$	8.900		$	7.080
3rd Quarter		9.688			8.140
2nd Quarter		10.250			8.375
1st Quarter		8.750