<PAGE>
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: October 3, 1999, Commission File No. 0-7647
HAWKINS CHEMICAL, INC.
----------------------------------------------------
(Exact Name of Registrant as specified in its Charter)
MINNESOTA 41-0771293
---------------------- ---------------------------------
(State of Incorporation) (I.R.S. Employer Identification No.)
3100 East Hennepin Avenue, Minneapolis, Minnesota 55413
------------------------------------------------- --------
(Address of Principal Executive Offices) (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, PER
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 X No
--- ---
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 [X]
---
The aggregate market value of voting stock held by nonaffiliates of the
Registrant on December 1, 1999, was $64,804,532 (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 1, 1999 was 10,866,481.
DOCUMENTS INCORPORATED BY REFERENCE
Part II of this Annual Report on Form 10-K incorporates by reference
information (to the extent specific pages are referred to herein from the
Registrant's Annual Report to Shareholders for the year ended October 3, 1999.
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 2000 Annual Meeting of Shareholders to be
held February 16, 2000.
<PAGE>
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.
(b) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS. The
Registrant's principal business is the formulation, blending and distribution of
bulk specialty chemicals, which it conducts in two principal segments: Water
Treatment and Industrial. Financial information regarding these segments is
reported in the Registrant's audited financial statements. See Items 6, 7 and 14
below.
(c) NARRATIVE DESCRIPTION OF THE BUSINESS.
(i) PRODUCTS AND MARKETS. The Registrant'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 services relating to the testing of water
samples in Minnesota, Wisconsin, Iowa, North Dakota, South Dakota,
Nebraska, Michigan and Wyoming. It also operates as a distributor of
all of the Registrant's products to its customers.
(B) INDUSTRIAL. The Industrial segment specializes in
providing industrial chemicals and services to the energy, electronics
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, primarily the
Cheese-Phos(R) liquid phosphate product (discussed more fully in
paragraph (iv) below), none of which are material to the Registrant.
This segment conducts its business primarily through terminal
operations and sales.
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<PAGE>
TERMINAL OPERATIONS. 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 a
liquid caustic soda barge terminal 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
Registrant relies on stockpiles, as well as supplies shipped in by
railroad tank car. Pursuant to operating agreements it has with other
chemical companies, the Registrant also receives, stores and ships
liquid caustic soda and other chemicals at both the Hawkins "Terminal
1" location and its "Terminal 2" site which is located across the river
and downstream from Terminal 1.
Since 1963, flooding of the Mississippi River has required
these operations to be temporarily shifted out of its buildings three
times, the most recent being in April 1997. No substantial
interruptions to sales resulted from the floods because railroad tank
cars were successfully used as an alternative means of supply. Although
the use of tank cars resulted in additional costs, results of
operations were not materially impacted. For approximately two weeks in
1997, the areas around the Registrant's terminal operations were
flooded, preventing shipments to and from these locations. The
terminals themselves were not flooded as the facilities were adequately
protected by dikes. All shipments were made from alternate locations.
The additional costs incurred as a result of the flooding did not
materially impact the Registrant's results of operations for fiscal
1997. No assurance can be given that flooding will not recur or that
there will not be material damage or interruption to the business of
the Registrant in the future.
SALES. 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 Registrant's customers. Sales are
concentrated primarily in Wisconsin, Minnesota, northern Iowa and North
and South Dakota. Among the principal chemicals handled by Sales 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 Registrant acquired the assets of Industrial
Chemical & Equipment Co.
(ii) STATUS OF NEW PRODUCTS. The Registrant began shipping its
Cheese-Phos(R) liquid phosphate product (discussed more fully in paragraph (iv)
below) in late calendar 1995. Sales of this product through fiscal 1999 were not
material to the Registrant's results of operations for the period.
(iii) RAW MATERIALS. The Registrant has approximately 450 suppliers,
including many of the major chemical producers in the United States, of which
approximately 20 account for a majority of the purchases made by the Registrant.
The Registrant typically has written distributorship agreements or supply
contracts with its suppliers that are renewed from time to time. Although there
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<PAGE>
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 by
the Registrant 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 Registrant's business. The
Registrant 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 heat 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 Registrant'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.
Although it is not currently possible to project the effect of Cheese-Phos(R) on
the Registrant's results of operations for future periods, the Registrant does
not currently expect this product to add materially to the Registrant's revenues
and profits.
(v) SEASONAL ASPECTS. The sale of water treatment chemicals used
in municipal water treatment facilities tends to reach a higher level during the
summer months, which are part of the Registrant's third and fourth fiscal
quarters.
(vi) WORKING CAPITAL ITEMS. As a bulk distributor of chemicals, the
Registrant 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 four percent of the Registrant's sales, but
the loss of its four largest customers could have a material adverse effect on
the Registrant's results of operations.
(viii) BACKLOG. Backlog is not material to an understanding of the
Registrant's business.
(ix) GOVERNMENT CONTRACTS. No material portion of the Registrant'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 Registrant operates in a
competitive industry and competes with producers, distributors and sales agents
offering chemicals equivalent to all of the products handled by the Registrant.
Many such producers and distributors have substantially more
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business and are substantially larger than the Registrant. No one competitor,
however, is dominant in Registrant's market. Price and service are the principal
methods of competition in the industry.
(xi) RESEARCH AND DEVELOPMENT. The Registrant 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
Registrant's business.
(xii) ENVIRONMENTAL MATTERS. The Registrant 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
Registrant. The Registrant does not currently anticipate making any material
capital expenditures for environmental control facilities during fiscal 1999.
(xiii) EMPLOYEES. The number of persons employed by the Registrant
and its subsidiaries as of October 3, 1999 was 157.
(d) FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS
AND EXPORT SALES. Because the Registrant deals in only one geographic area of
the United States, a breakdown of revenue, profitability or assets attributable
to different geographic areas is not meaningful to an understanding of
Registrant's business.
ITEM 2. PROPERTIES.
The Registrant's principal location 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 Registrant's principal
office, out of which the Sales segment operates, is located in one of these
buildings, at 3100 East Hennepin Avenue. The other buildings house the rest of
the Registrant's operations. As of the date hereof, the Registrant has installed
sprinkler systems in substantially all of its warehouse facilities for fire
protection. The Registrant carries insurance covering the replacement of
property damaged by fire or flood.
The Registrant is in the process of building a new facility in St.
Paul, Minnesota. To date it has committed $4,000,000 to the completion of the
project, which is expected to be in the fall of 2000. It is anticipated that
this facility will become the focal point for the Registrant's water
disinfection product receiving, filling and shipping.
Information about the Registrant's other principal facilities is
presented below. These facilities, as well as those described above, are
adequate and suitable for the purposes they serve. Unless noted, each facility
is owned and is fully utilized by the Registrant.
<TABLE>
<CAPTION>
Approx.
Segment Location Primary Use Square Feet
- ------- -------- ----------- -----------
<S> <C> <C> <C>
Industrial St. Paul, MN(1) Office, Warehouse and Garage 32,000
Water Treatment Fargo, ND(2) Office and Warehouse 22,800
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<PAGE>
Fond du Lac, WI(3) Warehouse 20,300
Washburn, ND 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
Superior, WI Office and Warehouse 17,000
Slater, IA Warehouse 8,700
</TABLE>
- -------------------
(1) The Registrant'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 by the Registrant from the Port
Authority of the City of St. Paul, Minnesota for a basic rent plus an amount
based on the tonnage unloaded at both sites each year. The applicable leases run
until December 31, 2003, at which time the Registrant 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 Registrant 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 third parties (10,000
square feet).
(4) Part of this facility is leased to a third party (6,000 square
feet).
The Registrant also owns several trucks, tractors, trailers and vans.
ITEM 3. LEGAL PROCEEDINGS.
As of the date of this filing, the Registrant is not involved in any
pending legal proceeding other than ordinary routine litigation incidental to
their business, except as follows:
LYNDE COMPANY WAREHOUSE FIRE. On March 1, 1995, the Registrant
and its former subsidiary The Lynde Company were named as defendants in
an action entitled DONNA M. COOKSEY, ET AL. V. HAWKINS CHEMICAL, INC.
AND THE LYNDE COMPANY ("Cooksey"), which was brought in state district
court in Hennepin County, Minnesota. The plaintiffs sought damages for
personal injury and other damages alleged to have been caused by the
release of hazardous substances as a result of a fire at an
office/warehouse facility used by The Lynde Company. The Registrant
entered into a settlement agreement with the plaintiffs, pursuant to
which the Registrant has agreed to pay certain of the plaintiffs' costs
and expenses as well as certain compensation to the class pursuant to a
Matrix and Plan of Distribution which form a part of the settlement
agreement (the "Settlement Agreement"). The Settlement Agreement was
approved by the court by Order dated January 30, 1998. Most, but not
all, claimants, have now been paid pursuant to the Agreement. During
fiscal 1995, the Registrant
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<PAGE>
recorded $750,000 to cover expected legal and settlement costs for this
litigation and an additional $1,771,439 in fiscal 1997 and paid an
additional $300,000 for other fire-related costs.
The Registrant's primary and umbrella insurers denied a tender
of the defense of the lawsuit and had denied any obligation to
indemnify the Registrant for damages claimed by third parties in
connection with the fire. On July 7, 1995, the Registrant commenced
suits against The North River Insurance Company and the Westchester
Fire Insurance Company, the primary and umbrella insurers,
respectively, in the United States District Court for the District of
Minnesota. By decision dated October 21, 1998, the United States Eighth
Circuit Court of Appeals affirmed decisions of the District Court that
both insurers were obligated to defend the Registrant in connection
with the Cooksey lawsuit. The two insurers have subsequently settled
with the Registrant by reimbursing the Registrant for substantially all
amounts incurred in defending and settling the Cooksey action, in an
amount of $2,851,708.
Approximately 17 claimants under the Settlement Agreement have
not yet resolved their claims. The Registrant anticipates that the
defense and payment of those 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 1999.
ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT.
The executive officers of the Registrant, their ages and offices held,
as of December 15, 1999 are set forth below:
<TABLE>
<CAPTION>
Name Age Office
---- --- ------
<S> <C> <C>
Dean L. Hahn 66 Chairman of the Board and Chief Executive Officer(1)
Donald L. Shipp 64 Vice Chairman of the Board(2)
John R. Hawkins 48 President and Chief Operating Officer(3)
Marvin E. Dee 50 Vice President, Chief Financial Officer, Secretary and
Treasurer
Kurt R. Norman 44 Vice President(4)
</TABLE>
(1) Mr. Hahn will retire as Chairman and CEO effective February 16, 2000.
(2) Mr. Shipp will retire as Vice Chairman effective September 30, 2000.
(3) Mr. Hawkins has been elected Chairman and CEO effective
February 16, 2000.
(4) Mr. Norman has been elected President and COO effective
February 16, 2000.
DEAN L. HAHN has been the Chairman of the Board and Chief Executive
Officer of the Registrant since 1996 and he was the President of the Registrant
from 1983 to 1996.
DONALD L. SHIPP has been the Vice Chairman of the Board since December
1998. He was the President of the Registrant from 1996 to December 1998,
Executive Vice President from 1983
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to 1996 and the President of Feed-Rite Controls, Inc., a former subsidiary of
the Registrant, from 1967 to 1996.
JOHN R. HAWKINS has been the Registrant's President and Chief Operating
Officer since December 1998 and was its 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.
MARVIN E. DEE has been 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.
KURT R. NORMAN has been a Vice President of the Registrant since
February 1999. He was the Vice President of the Water Treatment segment from
1996 to February 1999 and he was General Manager from 1988 to 1996.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS.
The information under the caption "Quarterly Stock Data" on page 19 of
the 1999 Annual Report is incorporated herein by this reference.
ITEM 6. SELECTED FINANCIAL DATA.
The information under the caption "Selected Financial Data Table" on
page 4 of the 1999 Annual Report is incorporated herein by this reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
The information under the caption "Management's Discussion and
Analysis" on pages 5 through 9 of the 1999 Annual Report is incorporated herein
by this reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET
RISK.
The information under the caption "Management's Discussion and
Analysis" on pages 5 through 9 of the 1999 Annual Report is incorporated herein
by this reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The Financial Statements of the Registrant and the Independent
Auditors' Report on pages 10 through 19 of the 1999 Annual Report are
incorporated herein by this reference.
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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.
No changes in accountants or disagreements between the Registrant and
its accountants regarding accounting principles or financial statement
disclosure have occurred during the Registrant's two most recent fiscal years or
any subsequent interim period.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information under the captions "Election of Directors" and "Section
16(a) Beneficial Ownership Reporting Compliance" in the 2000 Proxy Statement is
incorporated herein by this reference.
ITEM 11. EXECUTIVE COMPENSATION.
The information under the caption "Compensation of Executive Officers
and Directors" in the 2000 Proxy Statement is incorporated herein by this
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.
The information under the caption "Security Ownership of Management and
Beneficial Ownership" in the 2000 Proxy Statement is incorporated herein by this
reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information under the captions "Election of Directors" and "Related
Party Transactions" in the 2000 Proxy Statement is incorporated herein by this
reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS
ON FORM 8-K.
(a)(1) FINANCIAL STATEMENTS OF REGISTRANT.
The following financial statements of Hawkins Chemical, Inc., together
with the Independent Auditors' Report, found under appropriate headings in the
Registrant's 1999 Annual Report, are hereby incorporated by reference in this
Annual Report on Form 10-K.
Balance Sheets at October 3, 1999 and September 27, 1998.
Statements of Income for the Years Ended October 3, 1999, September 27,
1998 and September 28, 1997.
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Statements of Shareholders' Equity for the Years Ended October 3, 1999,
September 27, 1998 and September 28, 1997.
Statements of Cash Flows for the Years Ended October 3, 1999, September
27, 1998 and September 28, 1997.
Notes to Financial Statements.
Independent Auditors' Report.
(a)(2) FINANCIAL STATEMENT SCHEDULES OF REGISTRANT.
The additional financial data listed below is included as a schedule to
this Annual Report on Form 10-K and should be read in conjunction with the
financial statements presented in Part II, Item 8. Schedules not included with
this additional financial data have been omitted because they are not required
or the required information is included in the financial statements or the
notes.
Independent Auditors' Report on Schedule.
Schedule for the Years Ended October 3, 1999, September 27, 1998 and
September 28, 1997.
Schedule II - Valuation and Qualifying Accounts.
(a)(3) EXHIBITS.
The exhibits to this Annual Report on Form 10-K are listed on the
Exhibit Index on page 14.
A copy of any of the exhibits listed or referred to above will be
furnished at a reasonable cost to any person who was a shareholder of the
Registrant as of December 30, 1999 upon receipt from any such person of a
written request for any such exhibit. Such request should be sent to Hawkins
Chemical, Inc., 3100 East Hennepin Avenue, Minneapolis, Minnesota, 55413,
Attention: Corporate Secretary.
There are no management contracts or compensatory plans or arrangements
required to be filed as an exhibit to this Annual Report on Form 10-K pursuant
to Item 14(a)(3).
(b) REPORTS ON FORM 8-K.
None.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned.
HAWKINS CHEMICAL, INC.
Dated: December 30, 1999 By /s/ Dean L. Hahn
-------------------------------------
Dean L. Hahn, Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has also been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
<S> <C>
By /s/ Dean L. Hahn Dated: December 30, 1999
--------------------------------------------------
Dean L. Hahn, Chief Executive Officer, Director
By /s/ Donald L. Shipp Dated: December 30, 1999
--------------------------------------------------
Donald L. Shipp, Director
By /s/ John R. Hawkins Dated: December 30, 1999
--------------------------------------------------
John R. Hawkins, President, Director
By /s/ Howard M. Hawkins Dated: December 30, 1999
--------------------------------------------------
Howard M. Hawkins, Director
By /s/ John S. Mckeon Dated: December 30, 1999
--------------------------------------------------
John S. McKeon, Director
By /s/ Duane M. Jergenson Dated: December 30, 1999
--------------------------------------------------
Duane M. Jergenson, Director
By /s/ G. Robert Gey Dated: December 30, 1999
--------------------------------------------------
G. Robert Gey, Director
By /s/ Marvin E. Dee Dated: December 30, 1999
--------------------------------------------------
Marvin Dee, Chief Financial Officer,
Vice President, Secretary, Treasurer
(chief financial and accounting officer)
</TABLE>
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INDEPENDENT AUDITORS' REPORT ON SCHEDULE
We have audited the financial statements of Hawkins Chemical, Inc. (the
"Company") as of October 3, 1999 and September 27, 1998, and for each of the
three years in the period ended October 3, 1999, and have issued our report
thereon dated December 3, 1999; such financial statements and report are
included in the 1999 Annual Report to Shareholders and are incorporated herein
by reference. Our audits also included the financial statement schedule of the
Company, listed in Item 14(a)(2). This financial statement schedule is the
responsibility of the Company's management. Our responsibility is to express an
opinion based on our audits. In our opinion, this financial statement schedule,
when considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
DELOITTE & TOUCHE LLP
Minneapolis, Minnesota
December 3, 1999
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SCHEDULE II
HAWKINS CHEMICAL, INC.
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED OCTOBER 3, 1999, SEPTEMBER 27, 1998 AND SEPTEMBER 28, 1997
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ADDITIONS
---------
BALANCE AT CHARGED TO CHARGED
BEGINNING COSTS AND TO OTHER DEDUCTIONS BALANCE AT
DESCRIPTION OF YEAR EXPENSES ACCOUNTS WRITE-OFFS END OF YEAR
- -----------
<S> <C> <C> <C> <C> <C>
Reserve deducted from asset to
which it applies - allowance for
doubtful accounts:
YEAR ENDED:
October 3, 1999............... $378,726 $131,771 --- $130,497 $380,000
-------- -------- -------- --------
-------- -------- -------- --------
YEAR ENDED:
September 27, 1998............ $361,830 $32,700 --- $15,804 $378,726
-------- -------- -------- --------
-------- -------- -------- --------
YEAR ENDED:
September 28, 1997............ $344,002 $31,200 --- $13,372 $361,830
-------- -------- -------- --------
-------- -------- -------- --------
</TABLE>
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INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit No. Description of Exhibit Method of Filing
- ----------- ---------------------- ----------------
<S> <C> <C>
3.1* Amended and Second Restated Articles of Filed herewith electronically.
Incorporation as amended through June 7,
1999.
3.2 Second Amended and Superseding By-Laws Incorporated by reference to
as amended through February 15, 1995. Exhibit 3.2 to the Registrant's
Annual Report on Form 10-K
for the year ended October 1,
1995.
4 See Exhibits 3.1 and 3.2 above.
13.1* Portions of Annual Report to Security Filed herewith electronically.
Holders for period ended October 3, 1999.
23.1* Independent Auditor' Consent. Filed herewith electronically.
27.1* Financial Data Schedule. Filed herewith electronically.
</TABLE>
* Denotes previously unfiled documents.
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EXHIBIT 3.1
AMENDED AND SECOND RESTATED
ARTICLES OF INCORPORATION
OF
HAWKINS CHEMICAL, INC.
ADOPTED ON FEBRUARY 17, 1983
As Amended through June 7, 1999
(All such Amendments are specifically identified)
ARTICLE I
The name of this Corporation is HAWKINS CHEMICAL, INC.
ARTICLE II
The duration of this Corporation shall be perpetual.
ARTICLE III
The purposes for which this Corporation is organized are as follows:
a. General business purposes.
b. To do everything necessary, proper, advisable and convenient
for the accomplishment of the purposes hereinabove set forth,
and to do all other things incidental thereto or connected
therewith, which are not forbidden by the laws under which
this Corporation is organized, by other laws, or by these
Articles of Incorporation.
c. To carry out the purposes hereinabove set forth in any state,
territory, district or possession of the United States, or in
any foreign country, to the extent that such purposes are not
forbidden by the laws thereof; and, in the case of any state,
territory, district or possession of the United States, or any
foreign country, in which one or more of such purposes are
forbidden by law, to limit, in any certificate for application
to do business, the purpose or purposes which the Corporation
proposes to carry on therein to such as are not forbidden by
the law thereof.
ARTICLE IV
This Corporation shall have all the powers granted to private
corporations organized for profit by said Minnesota Business Corporation Act,
and, in furtherance, and not in limitation, of
<PAGE>
the powers conferred by the laws of the State of Minnesota upon corporations
organized for the foregoing purposes, the Corporation shall have the power:
a. To issue bonds, debentures or other obligations of the
Corporation, to guaranty obligations of others and to contract
indebtedness without limit as to amount for any of the objects
and purposes of the Corporation, and to secure the same by
mortgage or mortgages, deed or deeds of trust, or pledge, or
lien, on any or all of the real or personal property, or both,
of the Corporation.
b. To acquire, hold, mortgage, pledge or dispose of the shares,
bonds, securities or other evidences of indebtedness of the
United States of America, or of any domestic or foreign
corporation, and while the holder of such shares, to exercise
all the privileges of ownership, including the right to vote
thereon, to the same extent as a natural person might or could
do, by the president of this Corporation or by proxy appointed
by him, unless some other person, by resolution of the Board
of Directors, shall be appointed to vote such shares.
c. To purchase or otherwise acquire on such terms and in such
manner as the By-Laws of this Corporation from time to time
provide, and to own and hold, shares of the capital stock of
this Corporation, and to reissue the same from time to time.
d. When and as authorized by the vote of the holders of not less
than a majority of the shares entitled to vote, at a
shareholders' meeting called for that purpose or when
authorized upon written consent of the holders of a majority
of such shares, to sell, lease, exchange or otherwise dispose
of all, or substantially all, of its property and assets,
including its good will, upon such terms and for such
considerations, which may be money, shares, bonds, or other
instruments for the payment of money or other property, as the
Board of Directors deems expedient or advisable.
e. To acquire, hold, lease, encumber, convey, or otherwise
dispose of, either alone or in conjunction with others, real
and personal property within or without the state; and to take
real and personal property by will or gift.
f. To acquire, hold, take over as a going concern and thereafter
to carry on, mortgage, sell or otherwise dispose of, either
alone or in conjunction with others, the rights, property and
business of any person, entity, partnership, association, or
corporation heretofore or hereafter engaged in any business,
the purpose of which is similar to the purposes set forth in
Article III of these Articles of Incorporation.
g. To enter into any lawful arrangement for sharing of profits,
union of interest, reciprocal association, or cooperative
association with any corporation, association, partnership,
individual, or other legal entity, for the carrying on of any
business, the purpose of which is similar to the purposes set
forth in Article
-2-
<PAGE>
III of these Articles of Incorporation, and, insofar as it is
lawful, to enter into any general or limited partnership, the
purpose of which is similar to such purposes.
ARTICLE V
(As amended on February 28, 1989)
An agreement for consolidation or merger with one or more foreign or
domestic corporations may be authorized by vote of the shareholders entitled to
exercise at least two-thirds of the shares entitled to vote unless the necessary
affirmative vote to authorize any particular merger or consolidation is reduced
by the Board of Directors, which reduction shall be to not less than a majority
of the shares entitled to vote.
ARTICLE VI
The location and post office address of the registered office of this
Corporation in the State of Minnesota is 3100 East Hennepin Avenue, Minneapolis,
Minnesota 55413.
ARTICLE VII
(As amended on June 7, 1999)
The aggregate number of shares which this Corporation shall have
authority to issue is 30,000,000, with a par value of $.05 per share, having an
aggregate par value of $1,500,000, which shall be known as "Common Shares."
a. The holders of Common Shares shall be entitled to receive,
when and as declared by the Board of Directors, out of
earnings or surplus legally available therefor, dividends,
payable either in cash, in property, or in shares of the
capital stock of the corporation.
b. The Common Shares may be allotted as and when the Board of
Directors shall determine, and, under and pursuant to the laws
of the State of Minnesota, the Board of Directors shall have
the power to fix or alter, from time to time, in respect to
shares then unallotted, any or all of the following: the
dividend rate; the redemption price; the liquidation price;
the conversion rights and the sinking or purchase fund rights
of shares of any class, or of any series of any class. The
Board of Directors shall also have the power to fix the terms,
provisions and
-3-
<PAGE>
conditions of options to purchase or subscribe for shares of
any class or classes, including the price and conversion basis
thereof, and to authorize the issuance thereof.
c. No holder of shares of the Corporation shall be entitled to
any cumulative voting rights.
d. No holder of stock of the Corporation shall have any
preferential, pre-emptive, or other right of subscription to
any shares of any class of stock of the Corporation allotted
or sold or be allotted or sold and now or hereafter
authorized, or to any right of subscription to any part
thereof.
ARTICLE VIII
Section 1. The business of this Corporation shall be managed by a Board
of Directors, who shall be elected at the annual meeting of the shareholders;
provided, however, that vacancies in the Board of Directors may be filled by the
remaining Directors, and each person so elected shall be a Director until his
successor is elected at an annual meeting of shareholders or at a special
meeting duly called therefor. Until otherwise fixed by the By-Laws, the Board
shall consist of three members. A Director need not be a shareholder.
Section 2. The Board of Directors shall have all of the powers of the
Corporation, subject to such action restricting said powers as may legally be
taken from time to time by the shareholders either at an annual meeting or at a
special meeting duly called therefor.
Section 3. The Board of Directors shall have authority to make and
alter By-Laws, subject to the power of the shareholders to change or repeal such
By-Laws, provided, however, that the Board shall not make or alter any By-Law
fixing the number, qualifications, or term of office of Directors.
Section 4. Any contract or other transaction between the Corporation
and any corporation, association or firm of which one or more of its Directors
are shareholders, members, directors, officers or employees, or in which they
are interested, shall be valid for all purposes,
-4-
<PAGE>
notwithstanding the presence and participation of such Director or Directors at
the meeting of the Board of Directors of the Corporation which acts upon or in
reference to such contract or transaction, if the fact of such interest shall be
disclosed or known to the Board of Directors, and the Board of Directors shall,
nevertheless, authorize, approve and ratify such contract or transaction by a
vote of a majority of the Directors present, such interested Director or
Directors to be counted in determining whether a quorum is present, but not to
be counted in calculating the majority necessary to carry such vote. This
Section shall not be construed to invalidate any contract or transaction which
would otherwise be valid under the laws applicable thereto.
Section 5. The annual meeting of the Board of Directors shall be held
immediately following the annual meeting of the shareholders, and at the same
place.
Section 6. (As adopted on February 28, 1989) A Director of this
Corporation shall not be personally liable to the Corporation or its
shareholders for monetary damages for breach of fiduciary duty as a Director,
except to the extent such exemption from liability or limitation thereof is not
permitted under Chapter 302A of the Minnesota Statutes as the same exists or may
hereafter be amended.
If Chapter 302A of the Minnesota Statutes hereafter is amended to
authorize the further elimination or limitation of the liabilities of directors,
then, in addition to the limitation on personal liability provided herein, the
liability of a Director of the Corporation shall be limited to fullest extent
permitted by the amended Chapter 302A of the Minnesota Statutes.
Any repeal or modification of this Section 6 of Article VIII by the
shareholders of the Corporation shall be prospective only and shall not
adversely affect any limitation on the personal liability of a Director of the
Corporation existing at the time of such repeal or modification.
-5-
<PAGE>
ARTICLE IX
The names and post office addresses of the existing members of the
Board of Directors at the time of the adoption of these Second Restated Articles
of Incorporation are as follows:
Howard J. Hawkins Norman P. Anderson
3660 Glenhurst Avenue 225 Holly Road
Minneapolis, Minnesota 55416 Hopkins, Minnesota 55343
Carl J. Ahlgren Dean L. Hahn
1721 Shryer Avenue West 13404 Knob Hill Road
St. Paul, Minnesota 55113 Burnsville, Minnesota 55337
Howard M. Hawkins E. Thomas Rempfer
22312 Sugarbush Road 4113 Highwood Road
Elk River, Minnesota 55330 Minneapolis, Minnesota 55416
Donald L. Shipp C. Charles Jackson, Jr.
Route 1, Box 54 465 Bovey Road
Center City, Minnesota 55012 Wayzata, Minnesota 55391
ARTICLE X
Any provision contained in these Articles of Incorporation may be
amended solely by the affirmative vote of the holders of a majority of the
shares entitled to vote.
ARTICLE XI
These Second Restated Articles of Incorporation supersede and take the
place of existing Reinstated Articles of Incorporation and all amendments
thereto.
-6-
<PAGE>
SELECTED FINANCIAL DATA TABLE
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Fiscal Year 1999 1998 1997 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Sales from
continuing
operations $95,459,661 $94,722,511 $87,745,980 $80,886,062 $83,332,624 $71,423,471
- -----------------------------------------------------------------------------------------------------------------------------
Income from
continuing
operations 9,698,642 8,213,869 7,790,487 6,476,410 5,723,963 5,044,410
- -----------------------------------------------------------------------------------------------------------------------------
Basic and diluted
earnings per
common share
from continuing
operations .87 .71 .67 .56 .49 .44
- -----------------------------------------------------------------------------------------------------------------------------
Cash dividends declared
per common share .27 .20 .18 .15 .19 .11
- -----------------------------------------------------------------------------------------------------------------------------
Cash dividends
paid per
common share .25 .19 .16 .14 .12 .11
- -----------------------------------------------------------------------------------------------------------------------------
Total assets 68,999,827 66,535,475 63,652,616 56,487,356 53,690,814 45,974,984
- -----------------------------------------------------------------------------------------------------------------------------
Long-term debt 328,040 423,402 512,525 572,453 628,461 680,805
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
ALL PER SHARE DATA HAS BEEN RESTATED TO REFLECT THE 5% STOCK DIVIDENDS IN 1997,
1996 AND 1994 AND THE 10% STOCK DIVIDEND IN 1995.
4
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
THE INFORMATION CONTAINED IN THIS ANNUAL REPORT INCLUDES FORWARD-LOOKING
STATEMENTS AS DEFINED IN SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS
AMENDED. 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 ANNUAL REPORT AND THE
COMPANY'S OTHER FILINGS WITH THE SECURITIES AND EXCHANGE COMMISSION. 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 OR CASH FLOWS.
OVERALL SUMMARY
Net sales in fiscal 1999 increased 0.8% to $95,459,661 from $94,722,511 in
fiscal 1998. Net income in fiscal 1999 increased 18.1% to $9,698,642 from
$8,213,869 in fiscal 1998. Basic and diluted earnings per share in fiscal 1999
were $.87 compared to $.71 in fiscal 1998. Return on average shareholders'
equity was 17.8% for 1999, compared to 16.0% for fiscal 1998. Book value per
share at October 3, 1999 was $5.07 compared to $4.67 one year ago.
RESULTS OF OPERATIONS
The general economic environment in our markets has improved slightly with
the overall improvement in the economy. While this improvement had a favorable
impact on earnings, management will continue to focus efforts on programs aimed
at improving profitability and controlling costs.
NET SALES
For the year ended October 3, 1999, sales increased $737,150, a 0.8%
increase from 1998, due to a decrease of $57,762 in Industrial segment sales and
an increase of $794,912 in Water Treatment segment sales. The Industrial
decrease is due to a significant decrease in the selling price of caustic soda
partially offset by an increase in volumes of caustic soda and the majority of
other product sales in this segment. The Water Treatment segment increase is due
to an increase in volumes.
For the year ended September 27, 1998, sales increased $6,976,531, an 8.0%
increase from fiscal 1997, due to an increase of $5,281,794 in the Industrial
segment sales, and $1,694,737 in the Water Treatment segment sales. The
Industrial segment sales increased due to an increase in the volume and selling
price (and the cost) of caustic soda and to increasing business in food grade
products and pharmaceutical chemicals, which accounted for slightly more than
one-half of the increase. The increase in Water Treatment segment sales was due
to an increase in volumes.
GROSS MARGINS
Gross margin, as a percentage of sales, was 25.1% in fiscal 1999, 23.6% in
fiscal 1998 and 24.3% in fiscal 1997. The gross margin variations are due to a
number of variables in the segments as explained below.
Gross margin, as a percentage of sales, for the Industrial segment was
22.5% in fiscal 1999, 22.0% in fiscal 1998 and 22.8% in fiscal 1997. The 1999
increase over 1998 was due to the Company's ability to maintain relatively
constant profit margins of a
5
<PAGE>
major product line while the cost of the materials were decreasing. The 1998
decrease over 1997 was due to lower profit margins on a major product line while
the cost and selling price of the product line was increasing throughout the
year. The Company attempts to maintain relatively constant dollar margins as the
cost of this product line increases and decreases. The cost of this product is
normally subject to fluctuations and such fluctuations are expected to continue
in future periods. By maintaining relatively stable dollar margins, the gross
margin percentage will decrease when the cost of the product is increasing and
will increase when the cost of the product is decreasing. The Company has also
generally been able to, and expects to continue to, adjust its selling prices as
the cost of materials and other expenses change, thereby maintaining relatively
stable gross margins.
The Company's caustic soda operations are located on the Mississippi River,
enabling the Company to receive caustic soda through barge transportation. When
the river has flooded, the Company has received caustic soda by tank cars.
Although the use of tank cars has resulted in additional costs, results of
operations have not been materially impacted. Based on this experience, the
Company does not expect any future flooding to have a material impact on the
Company's financial condition, results of operations, or cash flows.
Gross margin, as a percentage of sales, for the Water Treatment segment was
31.2% in fiscal 1999, 27.4% in fiscal 1998 and 27.9% in fiscal 1997. The 1999
increase over 1998 was due to a decrease in materials costs. The 1998 gross
margin was relatively constant versus 1997.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expenses increased 8.8% and 7.1% in
fiscal 1999 and fiscal 1998 respectively, over the previous years. The 1999
increase over 1998 was mainly due to increases in the sales staff and to
increases in employee salaries and benefits costs. The 1998 increase over 1997
was due to increases in employee salaries and benefits cost and to costs related
to upgrading the computer and phone systems.
LITIGATION AND SETTLEMENT COSTS RELATED TO 1995 FIRE
The Company paid and expensed $2.9 million in settlement and legal costs
and for other costs in connection with the Company's defense of a lawsuit filed
against it in Minnesota entitled DONNA M. COOKSEY, ET AL. V. HAWKINS CHEMICAL,
INC. AND THE LYNDE COMPANY. The plaintiffs in the lawsuit sought damages for
personal injury and other damages alleged to have been caused by the release of
hazardous substances as a result of a fire at an office/warehouse facility
occupied by The Lynde Company, formerly a wholly owned subsidiary of the
Company. The Company entered into a Settlement Agreement with the plaintiffs.
Most, but not all, of the claimants have now been paid under the Settlement
Agreement.
The Company's primary and umbrella insurers denied coverage and refused to
defend the lawsuit. During fiscal 1999, the Company prevailed in its claims
against its insurers and has been reimbursed $2,851,708 for substantially all of
its settlement and legal expenses. In addition, the Company anticipates that the
defense and payment of the remaining claims, of approximately 17 claimants, will
be covered by the umbrella insurer.
SPECIAL CHARGES
The Company entered into termination agreements with three former employees
due to corporate organizational changes. During fiscal 1999, the Company
recorded Special Charges in the Statement of Income of $1,112,127.
6
<PAGE>
OTHER INCOME
Interest income decreased 9.4% in fiscal 1999 as compared to the previous
year due to investing a larger amount of the cash available for investment in
tax-free municipal bonds, which generally have a lower rate of return, since
earnings from them are not taxable for Federal income tax purposes. Interest
income was up 7.3% in fiscal 1998 as compared to the previous year due to a
higher rate of return on the cash available for investments. Interest expense
decreased in fiscal 1999 and fiscal 1998 as compared to the previous year. Most
of the interest expense is the result of the Company issuing a note payable to
the seller in connection with the acquisition of the assets of Industrial
Chemical & Equipment Company in 1993. The gain on the sale of The Lynde Company
relates to the Company's sale of the subsidiary on May 29, 1997. Other
miscellaneous income increased in fiscal 1999 as compared to fiscal 1998 and
decreased in fiscal 1998 as compared to fiscal 1997 due to gains on the sale of
land in fiscal 1999 and fiscal 1997.
PROVISION FOR INCOME TAXES
The effective income tax rate was 39.4% for the fiscal year ended October
3, 1999, 38.9% for the fiscal year ended September 27, 1998, and 38.8% for the
fiscal year ended September 28, 1997. The 1999 increase over 1998 was due to
incremental income taxed at a higher rate. The 1998 difference from 1997 was due
mainly to variations in tax-free income on investments in municipal bonds.
INFLATION
Inflation has not had a significant impact on the Company during the past
three fiscal years, as selling prices have generally been adjusted as the cost
of materials and other expenses have changed. On occasion, however, slight
fluctuations in the cost of a single, large-volume product historically have not
been reflected in the selling price of that product.
FINANCIAL CONDITION
LIQUIDITY
Cash provided by operations in fiscal 1999 was $13,847,248 compared with
$6,127,052 in fiscal 1998 and $5,675,264 in fiscal 1997. The increase in fiscal
1999 over 1998 was due primarily to a decrease in inventories caused by the
decrease in the cost of a major product line and recovery of the litigation
expenses. The increase in fiscal 1998 over 1997 was due primarily to the
increase in net income.
Cash and investments available-for-sale increased by $4,461,930 to
$22,202,874 at the end of fiscal 1999. The Company is investing excess cash
primarily in conservative investments. Cash equivalents consist of bank
certificates of deposit having a maturity of three months or less. Investments
consist of investment contracts with high-rated, stable insurance companies and
marketable securities consisting of variable rate municipal bonds carried at
fair value which approximates cost. Cash equivalents and investments are highly
liquid and are available upon demand generally with only a minor penalty.
In fiscal 1997, the Company sold the inventory and operations of The Lynde
Company, a wholly-owned subsidiary which specialized in swimming pool chemicals,
for approximately $2,590,000. The Company recorded a gain on the sale of
approximately $1.3 million. At closing, the Company received $500,000 cash and a
note receivable for the balance. The term of the note receivable is six years
and is due March 2003; it bears interest at 8%.
CAPITAL EXPENDITURES
Capital expenditures in fiscal 1999, 1998 and 1997 were $2,449,894,
$5,051,641 and $4,017,543, respectively. Of the 1999 capital expenditures,
transportation equipment additions accounted for $0.9 million, building
improvements and additions amounted to $0.8 million, and warehouse, laboratory
and office machinery and equipment accounted for $0.7 million.
7
<PAGE>
COMMON STOCK REPURCHASES
During fiscal 1999, the Company acquired and retired 499,614 shares of
common stock for $4,888,288. During fiscal 1998, the Company acquired and
retired 153,000 shares of common stock for $1,568,296.
OUTLOOK
Management does not anticipate the need for stock or debt issuances in the
short or long-term, as cash, investments and cash flows from operations have
been more than adequate to fund working capital, capital investments, dividend
needs and common stock repurchases. If the need for additional financing arises,
however, management will consider issuance of debt or equity if such financing
can be obtained on favorable terms. Although management continually looks for
companies to acquire and for ways to modernize its facilities and equipment, no
material commitments for acquisitions or capital expenditures currently exist,
except that approximately $4,000,000 has been committed for the construction of
a facility in St. Paul on the Mississippi River.
Other than as discussed above, management is not aware of any matters or
trends that have materially affected the results of operations for fiscal 1999
that are not expected to have either short or long-term implications, nor is it
aware of any trends or other matters that have not materially affected results
in fiscal 1999 but are expected to have a material effect on future periods.
YEAR 2000 READINESS
As generally known, the Year 2000 issue pertains to the inability of some
computer hardware and software and other electronic devices to operate properly
as January 1, 2000 approaches, and beyond. The Company has taken actions
intended to minimize the impact of the Year 2000 issue, although it is
impossible to eliminate these risks entirely.
The Company's major information technology (IT) systems and infrastructure
have been upgraded or replaced in the ordinary course of business over the last
three years. Approximately $608,000 has been spent through October 3, 1999, to
upgrade the Company's primary IT systems, IT infrastructure and security
systems, and to replace the telephone, voicemail, and timekeeping systems to
Year 2000 compliant systems.
The Company implemented a Year 2000 compliance testing program of its
hardware, software and equipment. Testing included, but was not limited to, IT
systems, IT infrastructure, security systems, telephone systems, manufacturing
and laboratory equipment, and timekeeping systems.
The Company relies on computer processing for its business activities and
the Year 2000 issue creates risk for the Company from unforeseen problems in the
Company's systems and from third parties with whom the Company does business.
The failure of the Company's systems and/or third party systems could have a
material adverse effect on the Company's results of operations, liquidity, and
financial condition.
Year 2000 readiness of third parties with whom the Company does business,
particularly suppliers of critical products and providers of utility and
communication services, could impair the Company's ability to deliver products
and services and could cause system failures or errors, business interruptions
and, in a worst case scenario, the inability to engage in normal business
practices for an unknown length of time. This worst case scenario, if it should
occur, could have a material adverse effect on the Company's operations,
liquidity or financial condition, particularly if the disruption continues for a
significant length of time.
8
<PAGE>
While third party risk related to the Year 2000 issues is difficult to
quantify or control, the Company has taken steps to try to minimize the
potential adverse effect that could arise. The Company has sent Year 2000
surveys to its suppliers asking for the compliance status of suppliers' products
and internal operations. The responses received by the Company indicate that
most of its suppliers expect to be Year 2000 compliant. The Company developed
third party contingency plans as it identified partners evidencing inadequate
Year 2000 preparations. Contingency plans include plans to accumulate extra
inventory and/or establish alternative sources of supply and channels of
distribution. However, even with diligent planning, third party providers pose
an uncertain risk that cannot be entirely eliminated.
Due to the general uncertainty inherent in the Year 2000 issue, resulting
in part from the uncertainty of the Year 2000 issue readiness of third-party
suppliers and customers, the Company is unable to determine at this time whether
the consequences of Year 2000 issue failures will have a material impact on the
Company's results of operations, liquidity, or financial condition.
MARKET RISK
At the end of fiscal 1999, the Company had an investment portfolio of fixed
income securities of $2,304,188, excluding $21,847,878 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.
ACCOUNTING PRONOUNCEMENTS
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, FASB issued SFASNo. 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.
9
<PAGE>
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
For the Fiscal Years Ended
------------------------------------------------------
October 3, September 27, September 28,
1999 1998 1997
<S> <C> <C> <C>
Net sales ................................................. $ 95,459,661 $ 94,722,511 $ 87,745,980
Cost of sales ............................................. (71,515,491) (72,380,576) (66,413,954)
------------------------------------------------------
Gross profit .............................................. 23,944,170 22,341,935 21,332,026
Selling, general and administrative expenses .............. (11,066,346) (10,170,255) (9,499,558)
Litigation settlement proceeds ............................ 2,851,708
Litigation and settlement costs relating to 1995 fire ..... (1,771,439)
Special charges ........................................... (1,112,127)
------------------------------------------------------
Income from operations .................................... 14,617,405 12,171,680 10,061,029
Other income (deductions):
Interest income ........................................ 1,121,939 1,237,789 1,153,322
Interest expense ....................................... (36,867) (43,516) (47,439)
Gain on sale of The Lynde Company ...................... 1,324,827
Miscellaneous .......................................... 303,095 83,084 234,518
------------------------------------------------------
Total other income, net ........................... 1,388,167 1,277,357 2,665,228
------------------------------------------------------
INCOME BEFORE INCOME TAXES ................................ 16,005,572 13,449,037 12,726,257
Provision for income taxes ................................ (6,306,930) (5,235,168) (4,935,770)
------------------------------------------------------
NET INCOME ................................................ $ 9,698,642 $ 8,213,869 $ 7,790,487
------------------------------------------------------
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING ............. 11,130,970 11,594,752 11,603,895
------------------------------------------------------
BASIC AND DILUTED EARNINGS PER SHARE ...................... $ 0.87 $ 0.71 $ 0.67
------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
10
<PAGE>
BALANCE SHEETS
<TABLE>
<CAPTION>
October 3, September 27,
1999 1998
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents .................................................... $ 4,778,174 $ 3,197,015
Investments available-for-sale ............................................... 17,424,700 14,543,929
Trade receivables - less allowance for doubtful
accounts: 1999, $380,000; 1998, $378,726 ................................. 11,329,211 11,436,690
Notes receivable ............................................................. 301,920 271,027
Inventories .................................................................. 8,379,228 10,816,460
Prepaid expenses and other ................................................... 2,536,448 1,848,662
----------- -----------
Total current assets .................................................... 44,749,681 42,113,783
PROPERTY, PLANT AND EQUIPMENT:
Land ......................................................................... 631,662 645,194
Buildings and improvements ................................................... 18,368,313 17,593,650
Machinery and equipment ...................................................... 7,674,678 7,302,134
Transportation equipment ..................................................... 5,693,192 5,211,745
Office furniture and equipment ............................................... 2,100,029 1,978,677
----------- -----------
34,467,874 32,731,400
Less accumulated depreciation ................................................ 15,802,875 14,307,911
----------- -----------
Net property, plant and equipment ....................................... 18,664,999 18,423,489
OTHER ASSETS:
Intangible assets - less accumulated
amortization: 1999, $456,113; 1998, $393,015 ............................. 601,101 664,199
Investments held-to-maturity ................................................. 1,949,192 1,848,843
Notes receivable - noncurrent ................................................ 2,844,220 3,302,923
Other ........................................................................ 190,634 182,238
----------- -----------
Total other assets ........................................................ 5,585,147 5,998,203
----------- -----------
TOTAL ASSETS ....................................................................... $68,999,827 $66,535,475
----------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable - trade ..................................................... $ 5,032,268 $ 4,970,341
Current portion of long-term debt ............................................ 95,362 89,123
Dividends payable ............................................................ 1,314,154 1,147,090
Accrued payroll and employee benefits ........................................ 2,106,213 3,245,815
Container deposits ........................................................... 1,545,255 1,503,889
Other accruals ............................................................... 1,187,167 664,347
----------- -----------
Total current liabilities ............................................... 11,280,419 11,620,605
LONG-TERM DEBT .................................................................. 328,040 423,402
OTHER LONG-TERM LIABILITIES ..................................................... 786,202
DEFERRED INCOME TAXES ........................................................... 1,029,950 1,011,500
COMMITMENTS AND CONTINGENCIES (NOTES 4, 6 AND 9)
SHAREHOLDERS' EQUITY:
Common stock - authorized: 30,000,000 shares of $.05 par value; issued and
outstanding: 1999 - 10,951,281 shares; 1998 - 11,450,895 shares ........... 547,564 572,545
Additional paid-in capital ................................................... 40,129,749 41,960,535
Retained earnings ............................................................ 14,897,903 10,946,888
----------- -----------
Total shareholders' equity ................................................ 55,575,216 53,479,968
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ......................................... $68,999,827 $66,535,475
----------- -----------
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
11
<PAGE>
STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Stock Additional
------------------------------- Paid-in Retained
Shares Amount Capital Earnings
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
BALANCE AT SEPTEMBER 29, 1996 .............. 11,051,690 $ 552,585 $ 38,679,630 $ 3,782,917
Stock dividend .......................... 552,205 27,610 3,837,825 (3,865,435)
Cash dividend ........................... (2,041,623)
Income tax savings from
dividends paid on ESOP shares ....... 177,778
Net income 7,790,487
-------------------------------------------------------------------------
BALANCE AT SEPTEMBER 28, 1997 .............. 11,603,895 580,195 42,517,455 5,844,124
Cash dividend ........................... (2,307,479)
Stock acquired and retired .............. (153,000) (7,650) (556,920) (1,003,726)
Income tax savings from
dividends paid on ESOP shares ....... 200,100
Net income .............................. 8,213,869
-------------------------------------------------------------------------
BALANCE AT SEPTEMBER 27, 1998 .............. 11,450,895 572,545 41,960,535 10,946,888
Cash dividend ........................... (2,981,686)
Stock acquired and retired .............. (499,614) (24,981) (1,830,786) (3,032,521)
Income tax savings from
dividends paid on ESOP shares ....... 266,580
Net income .............................. 9,698,642
-------------------------------------------------------------------------
BALANCE AT OCTOBER 3, 1999 ................. 10,951,281 $ 547,564 $ 40,129,749 $ 14,897,903
-------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
12
<PAGE>
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Fiscal Years Ended
------------------------------------------------------
October 3, September 27, September 28,
1999 1998 1997
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 9,698,642 $ 8,213,869 $ 7,790,487
Gain on sale of The Lynde Company ..................................... (1,324,827)
Litigation and settlement costs relating to 1995 fire ................. (1,083,866) 1,175,286
Reconciliation to cash flows:
Depreciation and amortization ...................................... 2,099,491 1,993,112 1,686,622
Deferred income taxes .............................................. (970,950) 750,894 (307,800)
Earnings on other assets ........................................... (108,745) (112,084) (91,076)
Loss (gain) from property disposals ................................ (256,808) 20,992 (110,807)
Changes in operating accounts (requiring) providing cash:
Trade receivables ............................................. 107,479 (318,699) (1,377,706)
Inventories ................................................... 2,437,232 (2,235,755) (1,221,750)
Accounts payable .............................................. 61,927 (759,243) (979,850)
Accrued liabilities ........................................... 210,786 116,463 383,058
Other ......................................................... 568,194 (458,631) 53,627
------------------------------------------------------
Net cash provided by operating activities ............................. 13,847,248 6,127,052 5,675,264
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment ............................ (2,449,894) (5,051,641) (4,017,543)
Purchase of investments ............................................... (4,766,585) (2,563,852) (1,475,475)
Sale of investments ................................................... 1,885,814
Proceeds from property disposals ...................................... 428,799 164,691 191,946
Cash received on sale of assets and business of The Lynde Company ..... 500,000
Payments received on notes receivable ................................. 427,810 288,708 196,120
------------------------------------------------------
Net cash used in investing activities ................................. (4,474,056) (7,162,094) (4,604,952)
CASH FLOWS FROM FINANCING ACTIVITIES:
Debt repayment ........................................................ (89,123) (59,928) (56,008)
Cash dividends paid ................................................... (2,814,622) (2,204,740) (1,881,408)
Acquisition and retirement of stock ................................... (4,888,288) (1,568,296)
------------------------------------------------------
Net cash used in financing activities ................................. (7,792,033) (3,832,964) (1,937,416)
------------------------------------------------------
Net increase (decrease) in cash and cash equivalents ..................... 1,581,159 (4,868,006) (867,104)
Cash and cash equivalents at beginning of year ........................... 3,197,015 8,065,021 8,932,125
------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF YEAR ................................. $ 4,778,174 $ 3,197,015 $ 8,065,021
------------------------------------------------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Note receivable on sale of The Lynde Company .......................... $ 2,090,083
------------------------------------------------------
Cash paid during the year for:
Interest ........................................................... $ 43,106 $ 47,711 $ 51,359
------------------------------------------------------
Income taxes ....................................................... $ 6,079,339 $ 5,739,297 $ 4,334,567
------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
13
<PAGE>
NOTES TO FINANCIAL STATEMENTS
1. NATURE OF BUSINESS
AND SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS
Hawkins Chemical, Inc. (the Company) has two reportable segments: Industrial and
Water Treatment. The Industrial segment specializes in providing industrial
chemicals and services to the energy, electronics, and plating industries. In
addition, the Industrial segment provides products and services to food
manufacturers and processing plants and the pharmaceutical industry.The Water
Treatment segment specializes in providing water and waste-water treatment
equipment and chemicals and services relating to the testing of water samples.
Prior to December 30, 1998, the basis of the financial statements included the
accounts of Hawkins Chemical, Inc. and its' wholly-owned subsidiary, Hawkins
Water Treatment Group, Inc. All significant inter-company transactions and
balances have been eliminated. Effective December 30, 1998, the subsidiary was
merged into Hawkins Chemical, Inc.
FISCAL YEAR
The Company's fiscal year is a 52/53-week year ending on the Sunday closest to
September 30. The fiscal year ended October 3, 1999, was a fifty-three week year
and the fiscal years ended September 27, 1998 and September 28, 1997 were
fifty-two week years.
CASH EQUIVALENTS
Cash equivalents include all liquid debt instruments (primarily cash funds and
certificates of deposits) purchased with an original maturity of three months or
less. Cash equivalents are carried at cost, which approximates market value.
INVESTMENTS AVAILABLE-FOR-SALE
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.
INVENTORIES
Inventories, consisting primarily of finished goods, are primarily valued at the
lower of cost or net realizable value, with cost being determined using the
last-in, first-out (LIFO) method.
PROPERTY, PLANT AND EQUIPMENT
Property is stated at cost and depreciated over the lives of the assets using
both straight-line and declining-balance methods. Estimated lives are: 10 to 50
years for buildings and improvements; 3 to 15 years for machinery and equipment;
3 to 10 years for transportation equipment; and 3 to 10 years for office
furniture and equipment.
INTANGIBLES
The excess of the purchase price and related costs over the fair value of the
net assets acquired is being amortized over 15 or 40 years.
INVESTMENTS HELD-TO-MATURITY
Held-to-maturity securities consist of Minnesota municipal bonds which the
Company has the intent and ability to hold to maturity, and are valued at
amortized historical cost, increased for accretion of discounts and reduced by
amortization of premiums, computed by the constant-yield method.
RECOVERABILITY OF LONG-LIVED ASSETS
The Company reviews its long-lived assets whenever events or changes in
circumstances indicate the carrying amount of the assets may not be recoverable.
The Company determines potential impairment by comparing the carrying value of
the assets with expected net cash flows expected to be provided by operating
activities of the business or related products. Should the sum of the expected
future net cash flows be less than the carrying value, the Company would
determine whether an impairment loss should be recognized. An impairment loss
would be measured by comparing the amount by which the carrying value exceeds
the fair value of the asset based on market value that is based on the
discounted cash flows expected to be generated by the asset.
INCOME TAXES
The Company utilizes Statement of Financial Accounting Standard (SFAS) No. 109,
"Accounting for Income Taxes." Under SFAS No. 109, the deferred tax assets and
liabilities are recognized based on differences between the financial statements
and the tax bases of assets and liabilities using presently enacted tax rates.
REVENUE RECOGNITION
The Company recognizes revenues upon shipment of the product.
14
<PAGE>
EARNINGS PER SHARE
Basic and diluted earnings per share are computed by dividing net income by the
weighted average number of common shares outstanding.
COMPREHENSIVE INCOME
On September 28, 1998, the Company retroactively adopted Statement of Financial
Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income," which
establishes standards for reporting and display of comprehensive income and its
components in a full set of general purpose financial statements. Comprehensive
income includes all changes in shareholders' equity except those resulting from
investments by and distributions to owners. SFAS No. 130 is not currently
applicable for the Company because the Company did not have any material items
of other comprehensive income in any of the periods presented.
CONCENTRATION OF CREDIT RISK
Financial instruments which potentially subject the Company to a concentration
of credit risk principally consist of cash, investments available-for-sale and
trade receivables. The Company sells its principal products to a large number of
customers in many different industries. To reduce credit risk, the Company
routinely assesses the financial strength of its customers. The Company invests
its excess cash balances in certificates of deposit at a single financial
institution. At October 3, 1999, the Company had certificates of deposits in
excess of federally insured limits of approximately $4,700,000.
At the end of fiscal 1999, the Company also had an investment portfolio of fixed
income securities, excluding $21,847,878 of those classified as cash and cash
equivalents and variable rate securities, of $2,304,188. 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.
ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reported period. Actual
results could differ from those estimates.
RISK AND UNCERTAINTIES
There are no concentrations of business transacted with a particular customer or
supplier nor concentrations of revenue from a particular service or geographic
area that would severely impact the Company in the near term.
ACCOUNTING PRONOUNCEMENTS
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, 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 SFASNo. 133 in
fiscal 2001.
2. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
October 3, September 27,
1999 1998
- ---------------------------------------------------------------------------
<S> <C> <C>
Finished goods (FIFO basis)....... $8,949,497 $12,841,114
LIFO reserve...................... (570,269) (2,024,654)
-----------------------------
Net inventory..................... $8,379,228 $10,816,460
-----------------------------
</TABLE>
Inventories valued under the LIFO method for the fiscal years ended October 3,
1999 and September 27, 1998, were approximately $8,876,432 and $12,238,000,
respectively. The balance of the inventory was valued under the FIFO method.
In fiscal 1999, the LIFO reserve decreased by $1,454,385. As a result, the
ending LIFO cost was less than the ending cost determined using the first-in,
first-out (FIFO) method by $570,269. The decrease in the LIFO reserve was caused
by a significant decrease in the cost of a single, large-volume component of
inventory.
15
<PAGE>
3. NOTES RECEIVABLE
At October 3, 1999 and September 27, 1998, the net balance outstanding on a note
receivable from the sale of Tessman Seed was $468,625 and $615,091,
respectively. The note receivable is due in equal installments of $146,466 with
interest at 8%.
The balance outstanding on a note receivable from the sale of a building was
$1,004,869 and $1,033,629 at October 3, 1999 and September 27, 1998,
respectively. The note receivable is secured by the building and is due in
monthly installments of $9,201 including interest at 8% through January 1, 2004,
when the remaining balance of $849,985 is due.
In fiscal 1997, the Company sold the inventory and operations of The Lynde
Company (Lynde), a wholly owned subsidiary which specialized in swimming pool
chemicals, for approximately $2,590,000. The Company recorded a gain on the sale
of $1,324,827. At closing, the Company received $500,000 cash and a note
receivable for the balance. The note receivable requires principal payments
through March 2003 plus interest at 8%. At October 3, 1999 and September 27,
1998, the balance outstanding on the note receivable was $1,672,646 and
$1,925,230, respectively. Revenues from Lynde for the fiscal year ended
September 28, 1997 were $725,500 and recorded a net loss in 1997 of $19,600
through the effective date of the sale.
4. LONG-TERM DEBT
Long-term debt at October 3, 1999 and September 27, 1998 is summarized as
follows:
<TABLE>
<CAPTION>
1999 1998
- -----------------------------------------------------------
<S> <C> <C>
Note payable, due in annual
installments to 2002 ......... $423,402 $512,525
Less current portion ............ 95,362 89,123
------------------------
Total ........................... $328,040 $423,402
- -----------------------------------------------------------
</TABLE>
Long-term debt maturities for the five fiscal years subsequent to 1999 are: 2000
- - $95,362, 2001 - $102,037, 2002 - $109,180 and 2003 - $116,823.
5. SHAREHOLDERS' EQUITY
The stock dividend in fiscal 1997 was accounted for by transferring the fair
value of the issued stock from retained earnings to the categories of permanent
capitalization as common stock (par value) and additional paid-in capital.
During fiscal 1999, the Company acquired and retired 499,614 shares of common
stock for $4,888,288. During fiscal 1998, the Company acquired and retired
153,000 shares of common stock for $1,568,296.
6. LEASES
The Company has various operating leases for land and buildings on which some of
its operations are located. Total rental expense for the years ended October 3,
1999, September 27, 1998 and September 28, 1997 was $53,843, $47,612, and
$46,003, respectively. Future minimum lease payments due under operating leases
with an initial term of one year or more at October 3, 1999 are $142,945 in
2000, $129,757 in 2001, $131,030 in 2002, $132,305 in 2003 and $98,238 in 2004.
7. PENSION AND EMPLOYEE STOCK OWNERSHIP PLANS
The Company has a defined contribution pension plan covering substantially all
of its non-union employees. Pension expense for the years ended October 3, 1999,
September 27, 1998 and September 28, 1997 was $578,975, $545,650 and $459,367,
respectively. The Company's cost for the pension plan is determined as 7% of
each employee's covered compensation. Amounts charged to pension expense and
contributed to union multi-employer pension plans (not included in the above
amounts) were not material. It is the Company's policy to fund all pension costs
accrued.
The Company has an employee stock ownership plan covering substantially all of
its non-union employees. Contributions are made at the discretion of the Board
of Directors subject to a maximum amount allowed under the Internal Revenue
Code. Contributions for the years ended October 3, 1999, September 27, 1998 and
September 28, 1997 were $1,049,779, $984,455 and $889,979, respectively. The
Company does not currently offer any post-retirement benefits, deferred stock or
stock-based compensation plans.
16
<PAGE>
8. SPECIAL CHARGES
The Company has entered into termination agreements with three former employees.
During fiscal 1999, the Company recorded Special Charges in the Statement of
Income of $1,112,127. At October 3, 1999, the Company is required to make future
payments to the individuals for periods of 15 months to 6 years. The present
value of the future payments to be paid in fiscal 2000 is included in Other
Accruals and the present value of the remaining payments is included in Other
Long-term Liabilities.
9. CONTINGENCIES
During 1995, there was a fire in the office/warehouse of The Lynde Company, a
former wholly-owned subsidiary of the Company. Charges of $1,771,439 in 1997 and
$750,000 in 1995 were recorded to cover legal fees and settlement costs in
connection with the Company's defense of a lawsuit filed against it as a result
of the fire. Other costs paid amounted to approximately $300,000. Most, but not
all, of the claimants have now been paid under a settlement agreement and the
Company anticipates that the remaining claims will be covered by the Company's
umbrella insurer as to the cost of defense and claims payment.
The Company's primary and umbrella insurers denied coverage and refused to
defend the lawsuit. During fiscal 1999, the Company prevailed in its claims
against its insurers and has been reimbursed for substantially all of its
settlement and legal expenses.
In addition, the Company is involved in various legal actions arising from the
normal course of business. Management is of the opinion that any judgement or
settlement resulting from pending or threatened litigation would not have a
material adverse effect on the financial position, results of operations or cash
flows of the Company.
10. INCOME TAXES
The provisions (benefits) for income taxes are as follows:
<TABLE>
<CAPTION>
1999 1998 1997
- ---------------------------------------------------------------
<S> <C> <C> <C>
Federal - current $5,862,780 $3,316,868 $4,143,883
States - current 1,415,100 1,167,300 1,099,687
Deferred (970,950) 751,000 (307,800)
----------- ---------- -----------
Total provision $6,306,930 $5,235,168 $4,935,770
----------- ---------- -----------
</TABLE>
A reconciliation of the provision for income taxes, based on income from
continuing operations, to the applicable federal statutory income tax rate of
35% is as follows:
<TABLE>
<CAPTION>
1999 1998 1997
- ---------------------------------------------------------------
<S> <C> <C> <C>
Statutory federal
income tax $5,601,950 $4,707,163 $4,454,190
State income taxes,
net of federal
deduction 919,815 770,418 687,454
Tax-exempt income (165,390) (122,876) (108,856)
Other, net (49,445) (119,537) (97,018)
----------- ---------- ------------
Total $6,306,930 $5,235,168 $ 4,935,770
----------- ---------- ------------
</TABLE>
The tax effects of items comprising the Company's net deferred tax asset
(liability) are as follows:
<TABLE>
<CAPTION>
1999 1998
- ------------------------------------------------------------------
<S> <C> <C>
Current deferred taxes:
Trade receivables ............. $ 153,000 $ 150,000
Inventory ..................... 965,000 411,000
Accruals ...................... 596,900 164,500
--------------------------------
Total* ..................... $ 1,714,900 $ 725,500
--------------------------------
Noncurrent deferred taxes:
Gain on sale of
The Lynde Company .......... $ (336,850) $ (399,500)
Property basis difference ..... (693,100) (612,000)
--------------------------------
Total ...................... $(1,029,950) $(1,011,500)
--------------------------------
</TABLE>
*Included in prepaid expenses and other on the balance sheet.
17
<PAGE>
11. SEGMENT INFORMATION
The Company adopted SFAS No. 131, "Disclosures about Segments of an Enterprise
and Related Information," in 1999, which changes the way the Company reports
information about its operating segments. The information for 1998 and 1997 has
been restated to conform to the 1999 presentation.
The Company has two reportable segments: Industrial and Water Treatment. The
Industrial segment specializes in providing industrial chemicals and services to
the energy, electronics, and plating industries. In addition, the Industrial
segment provides products and services to the food manufacturers and processing
plants and the pharmaceutical industry. The Water Treatment segment specializes
in providing water and waste-water treatment equipment and chemicals and in
services relating to the testing of water samples.
The accounting policies of the segments are the same as those described in the
summary of significant accounting policies. The cost for each segment is based
on product cost, and expenses are based on actual costs incurred along with cost
allocation of shared and centralized function. The Company evaluates performance
based on profit or loss from operations before income taxes not including
nonrecurring gains and losses.
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, administration, customer
service or purchasing functions.
<TABLE>
<CAPTION>
REPORTABLE SEGMENTS INDUSTRIAL WATER TREATMENT TOTAL
<S> <C> <C> <C>
1999
Net sales .................................... $ 66,683,006 $ 28,776,655 $ 95,459,661
Cost of sales ................................ 51,704,801 19,810,690 71,515,491
Gross margin ................................. 14,978,205 8,965,965 23,944,170
Operating income ............................. 6,599,410 5,166,287 11,765,697
Identifiable assets .......................... $ 36,763,233 $ 5,357,446 $ 42,120,679
---------------------------------------------------------
1998
Net sales .................................... $ 66,740,768 $ 27,981,743 $ 94,722,511
Cost of sales ................................ 52,066,529 20,314,047 72,380,576
Gross margin ................................. 14,674,239 7,667,696 22,341,935
Operating income ............................. 7,234,675 4,937,005 12,171,680
Identifiable assets .......................... $ 39,102,635 $ 5,812,153 $ 44,914,788
---------------------------------------------------------
1997
Net sales .................................... $ 61,458,974 $ 26,287,006 $ 87,745,980
Cost of sales ................................ 47,452,145 18,961,809 66,413,954
Gross margin ................................. 14,006,829 7,325,197 21,332,026
Operating income ............................. 6,996,615 4,835,853 11,832,468
Identifiable assets .......................... $ 33,815,085 $ 5,961,111 $ 39,776,196
---------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
PROFIT RECONCILIATION 1999 1998 1997
<S> <C> <C> <C>
Total income for reportable segments ......... $ 11,765,697 $ 12,171,680 $ 11,832,468
Unallocated corporate income (expense) ....... 2,851,708 (1,771,439)
------------ ------------ ------------
Total operating income ....................... $ 14,617,405 $ 12,171,680 $ 10,061,029
---------------------------------------------------------
</TABLE>
18
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Shareholders of Hawkins Chemical, Inc.:
We have audited the accompanying balance sheets of Hawkins Chemical, Inc. (the
Company) as of October 3, 1999 and September 27, 1998, and the related
statements of income, shareholders' equity and cash flows for each of the three
years in the period ended October 3, 1999. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of Hawkins Chemical,Inc. at October 3, 1999 and
September 27, 1998, and the results of its operations and cash flows for each of
the three years in the period ended October 3, 1999 in conformity with generally
accepted accounting principles.
/s/ Deloitte & Touche LLP
DELOITTE & TOUCHE LLP
Minneapolis, Minnesota
December 3, 1999
QUARTERLY STOCK DATA
- --------------------------------------------------------
<TABLE>
<CAPTION>
High Low
<S> <C> <C>
Fiscal 1999
4th Quarter $ 9 $ 7 1/2
3rd Quarter 9 3/4 8
2nd Quarter 10 1/2 9 3/4
1st Quarter 12 10
Fiscal 1998
4th Quarter 12 1/8 9 7/8
3rd Quarter 14 11 1/4
2nd Quarter 11 3/8 9 3/4
1st Quarter 12 3/4 9 1/2
</TABLE>
CASH DIVIDENDS
- --------------------------------------------------------
<TABLE>
<CAPTION>
Declared Paid
<S> <C> <C>
Fiscal 2000
1st Quarter $.12
Fiscal 1999
4th Quarter $.12
3rd Quarter $.15
2nd Quarter $.15
1st Quarter $.10
Fiscal 1998
4th Quarter $.10
3rd Quarter $.10
2nd Quarter $.10
1st Quarter $.09
</TABLE>
The common stock of Hawkins Chemical, Inc. is as quoted on the NASDAQ National
Market System. The price information represents closing sale prices reported in
the NASDAQ/NMS Monthly Statistical Report. There were 777 common shareholder
accounts on October 3, 1999.
19
<PAGE>
BOARD OF DIRECTORS AND CORPORATE OFFICERS
- --------------------------------------------------------------------------------
BOARD OF DIRECTORS
<TABLE>
<S> <C> <C>
DEAN L. HAHN* JOHN R. HAWKINS*** JOHN S. MCKEON
CHAIRMAN OF THE BOARD AND PRESIDENT AND PRESIDENT,
CHIEF EXECUTIVE OFFICER CHIEF OPERATING OFFICER GOLDEN VALLEY MICROWAVE
DIRECTOR SINCE 1974 DIRECTOR SINCE 1989 FOODS, INC.
EXECUTIVE COMMITTEE EXECUTIVE COMMITTEE DIRECTOR SINCE 1984
AUDIT, COMPENSATION AND
G. ROBERT GEY DUANE M. JERGENSON EXECUTIVE COMMITTEES
PRESIDENT, VICE PRESIDENT OF OPERATIONS,
PENTAIR SERVICE EQUIPMENT TAYLOR CORPORATION DONALD L. SHIPP**
BUSINESS DIRECTOR SINCE 1996 VICE CHAIRMAN OF THE BOARD
DIRECTOR SINCE 1999 AUDIT AND COMPENSATION DIRECTOR SINCE 1977
AUDIT AND COMPENSATION COMMITTEES EXECUTIVE COMMITTEE
COMMITTEES
HOWARD M. HAWKINS
PAST VICE PRESIDENT AND
TREASURER OF HAWKINS
DIRECTOR SINCE 1976
EXECUTIVE COMMITTEE
OFFICERS
DEAN L. HAHN* KURT R. NORMAN**** * DEAN L. HAHN WILL RETIRE AS CHAIRMAN
CHAIRMAN OF THE BOARD AND VICE PRESIDENT AND CEO EFFECTIVE FEBRUARY 16, 2000.
CHIEF EXECUTIVE OFFICER HE WILL REMAIN A DIRECTOR.
DONALD L. SHIPP** MARVIN E. DEE ** DONALD L. SHIPP WILL RETIRE AS VICE
VICE CHAIRMAN OF THE BOARD VICE PRESIDENT, CHIEF FINANCIAL CHAIRMAN EFFECTIVE SEPTEMBER 30, 2000.
OFFICER, SECRETARY, TREASURER HE WILL REMAIN A DIRECTOR.
JOHN R. HAWKINS*** *** JOHN R. HAWKINS WAS ELECTED CHAIRMAN
PRESIDENT AND AND CEO EFFECTIVE FEBRUARY 16, 2000.
CHIEF OPERATING OFFICER
**** KURT R. NORMAN WAS ELECTED PRESIDENT
AND CHIEF OPERATING OFFICER EFFECTIVE
FEBRUARY 16, 2000.
</TABLE>
SUMMARY OF OPERATIONS BY QUARTER
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
UNAUDITED First Quarter Second Quarter Third Quarter Fourth Quarter Total Year
- --------------------------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS
EXCEPT PER SHARE DATA) 1999 1998 1999 1998 1999 1998 1999 1998 1999 1998
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales............$23,311 $22,667 $22,764 $22,316 $24,960 $25,720 $24,425 $24,020 $95,460 $94,723
Gross profit......... 5,187 5,116 5,242 4,890 6,606 6,182 6,909 6,154 23,944 22,342
Net income........... 3,426 1,898 1,789 1,717 2,441 2,229 2,043 2,370 9,699 8,214
Basic and diluted
earnings per share... .30 .16 .16 .15 .22 .19 .19 .20 .87 .71
</TABLE>
*Includes special charges of $1,112 ($674 after tax or $.06 per share) which
should have been recorded in the first quarter of fiscal 1999 (See Note 8).
- --------------------------------------------------------------------------------
20 Hawkins Chemical, Inc. 1999 Anuual Report
<PAGE>
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement No.
33-41323 of Hawkins Chemical, Inc. (the "Company") on Form S-8 of our reports
dated December 3, 1999 included and incorporated by reference in the Annual
Report on Form 10-K for the Company for the year ended October 3, 1999.
DELOITTE & TOUCHE LLP
Minneapolis, Minnesota
December 30, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> OCT-03-1999
<PERIOD-START> SEP-28-1998
<PERIOD-END> OCT-03-1999
<CASH> 4,778,174
<SECURITIES> 17,424,700
<RECEIVABLES> 11,709,211
<ALLOWANCES> 380,000
<INVENTORY> 8,379,228
<CURRENT-ASSETS> 44,749,681
<PP&E> 34,467,874
<DEPRECIATION> 15,802,875
<TOTAL-ASSETS> 68,999,827
<CURRENT-LIABILITIES> 11,280,419
<BONDS> 328,040
0
0
<COMMON> 547,564
<OTHER-SE> 55,027,652
<TOTAL-LIABILITY-AND-EQUITY> 68,999,827
<SALES> 95,459,661
<TOTAL-REVENUES> 95,459,661
<CGS> 71,515,491
<TOTAL-COSTS> 71,515,491
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 36,867
<INCOME-PRETAX> 16,005,572
<INCOME-TAX> 6,306,930
<INCOME-CONTINUING> 9,698,642
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 9,698,642
<EPS-BASIC> .87
<EPS-DILUTED> .87
</TABLE>
