<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 1, 2000, Commission File No. 0-7647
HAWKINS CHEMICAL, INC.
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(Exact Name of Registrant as specified in its Charter)
MINNESOTA 41-0771293
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(State of Incorporation) (I.R.S. Employer Identification No.)
3100 EAST HENNEPIN AVENUE, MINNEAPOLIS, MINNESOTA 55413
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(Address of Principal Executive Offices) (Zip Code)
(612) 331-6910
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(Registrant's Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK, PAR
VALUE $.05 PER SHARE
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding twelve months (or for such shorter period that the Registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes 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 [ ]
The aggregate market value of voting stock held by nonaffiliates of the
Registrant on December 1, 2000, was $63,097,225 (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, 2000 was 10,405,739.
DOCUMENTS INCORPORATED BY REFERENCE
Part III of this Annual Report on Form 10-K incorporates by reference
information (to the extent specific sections are referred to herein) from the
Registrant's Proxy Statement for its 2001 Annual Meeting of Shareholders to be
held February 14, 2001.
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CAUTIONARY STATEMENT REGARDING
FUTURE RESULTS AND FORWARD-LOOKING STATEMENTS
The future results of the Registrant, including results reflected in
any forward-looking statement made by or on behalf of the Registrant, will be
impacted by a number of important factors. Words such as "may," "will,"
"expect," "believe," "anticipate," "estimate," or "continue" or comparable
terminology are intended to identify forward-looking statements. Forward-looking
statements, by their nature, involve substantial risks and uncertainties.
PART I
ITEM 1. BUSINESS.
(a) GENERAL DEVELOPMENT OF THE BUSINESS. The Registrant was incorporated
under the laws of the State of Minnesota in 1955. In fiscal 1998, the Registrant
merged three of its former subsidiaries, Feed-Rite Controls, Inc., Mon-Dak
Chemical, Inc., Dakota Chemical, Inc. and its Arrowhead Chemical Division
together to form a single wholly-owned subsidiary known as Hawkins Water
Treatment Group, Inc. (HWTG). In fiscal 1999, the Registrant merged HWTG into
the Registrant. During fiscal 2000, the Registrant acquired St. Mary's
Chemicals, Inc. (discussed more fully in paragraph (i) below).
(b) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS. The Registrant's
principal business is the formulation, blending and distribution of bulk and
specialty chemicals, which it conducts in two principal segments: Water
Treatment and Industrial. Financial information regarding these segments is
reported in the Registrant's audited financial statements. See Items 7 and 8
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 helping customers find solutions to
systems problems in Minnesota, Wisconsin, Iowa, North Dakota,
South Dakota, Nebraska, Michigan, Montana and Wyoming. It also
operates as a distributor of the Registrant's products to its
customers. The Water Treatment operations in the Minneapolis/St.
Paul area are relocating to a new 59,000 square foot facility,
"Red Rock", which is expected to occur during the first quarter of
fiscal 2001. The new facility, located on the Mississippi River in
St. Paul, is expected to improve operational efficiencies, as the
Water Treatment operations will then be located at the facility
where several key products will be produced. The additional
warehouse space will reduce the amount of time required to load
trucks between deliveries.
(B) INDUSTRIAL. The Industrial segment specializes in
providing industrial chemicals and services to the energy,
electronics, chemical processing, pulp and paper, medical device
and plating industries. In addition, the Industrial segment
provides products and services to food manufacturers and
processing plants. The Industrial segment also distributes a
variety of pharmaceutical products and sells certain food grade
products, including the Cheese-Phos(R) liquid phosphate product
(discussed more fully in paragraph (iv) below) and other blended
products, none of which are material to the Registrant. This
segment conducts its business primarily through terminal
operations and sales.
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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 the Hawkins "Terminal 1" location and its "Terminal
2" site, which is located across the river and downstream from
Terminal 1. The chlorine repackaging and bleach manufacturing
operations currently located at Terminal 1 will be moved to Red
Rock during fiscal 2001.
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. The Red Rock facility will
serve as an additional terminal for bulk chemicals. Historically,
the property on which the Red Rock facility is located has not
been subject to flooding when Terminals 1 and 2 were not usable
due to high water. This is expected to allow the Registrant to
continue shipping to customers from the Red Rock facility during
periods of high water levels. 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.
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 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.
RECENT ACQUISITION. On May 26, 2000, the Company completed
the acquisition of certain assets of St. Mary's Chemicals, Inc.
d.b.a. Universal Chemicals. Universal Chemicals, a Minnesota-based
company, was engaged in the business of marketing, selling, and
distributing pharmaceutical chemicals to pharmacies and pharmacy
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wholesalers. In connection with the acquisition, assets purchased,
common stock issued, and cash consideration paid were as follows:
<TABLE>
<S> <C>
Assets Acquired:
Inventory $ 36,843
Equipment 12,692
Excess of purchase price over net assets acquired 3,250,465
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3,300,000
Common Stock Issued (75,358 shares) 600,000
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Cash Consideration Paid $ 2,700,000
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</TABLE>
The acquisition was accounted for using the purchase method
of accounting, and the excess of the purchase price over net
assets acquired is being amortized over 15 years using the
straight-line method. The operations of Universal Chemicals are
included in the Company's statement of income beginning on May 26,
2000. The pro forma effect of this acquisition on prior periods
sales, operating income, and earnings per share was not
significant.
On May 26, 2000, the Company also entered into a five-year
employment agreement with one of the previous owners and
consulting agreements with the other two previous owners of
Universal Chemicals. The employment agreement and consulting
agreements contain performance bonuses and non-compete provisions.
The agreements are based on Universal Chemicals' operating
results, as defined, for five years after the acquisition date and
have a maximum payment of $3,520,000. The non-compete provisions
extend for a period of five years after the termination of the
employment or consulting agreements, and require annual payments
of $100,000 to $200,000 depending on Universal Chemicals'
operating results, as defined in the agreements, for five years
after the termination date.
(ii) NEW PRODUCTS. There were no significant new products in
fiscal 2000.
(iii) RAW MATERIALS. The Registrant's segments have approximately
300 suppliers, including many of the major chemical producers in the
United States, of which approximately 20 account for a majority of the
purchases. The Registrant's segments typically have written
distributorship agreements or supply contracts with its suppliers that
are renewed from time to time. Although there is no assurance that any
contract or understanding with any supplier will not be terminated in the
foreseeable future, most of the basic chemicals purchased can be obtained
from alternative sources should existing relationships be terminated.
(iv) PATENTS, TRADEMARKS, LICENSES, FRANCHISES, AND CONCESSIONS.
There are no patents, trademarks, licenses, franchises or concessions
that are currently material to the successful operation of the
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
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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-Registered Trademark- 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-Registered Trademark- 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 or profits.
(v) SEASONAL ASPECTS. The Water Treatment segment has
historically experienced higher sales during the third and fourth fiscal
quarters, which is due primarily to an increase in chemicals used by
municipal water treatment facilities.
(vi) WORKING CAPITAL ITEMS. As a bulk distributor of chemicals,
the 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. Additionally,
no one customer represents 10% or more of either the Water Treatment
segment or Industrial segment sales.
(viii) BACKLOG. Backlog is not material to an understanding of the
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 business and are substantially larger than the Registrant. No one
competitor, however, is dominant in the 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 the 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 2001.
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(xiii) EMPLOYEES. The number of persons employed by the Registrant
as of October 1, 2000 was 182.
(d) FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS AND
EXPORT SALES. Because the Registrant deals primarily in 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 the
Registrant's business.
ITEM 2. PROPERTIES.
The Registrant owns its principal location, which consists of
approximately eleven acres of land in Minneapolis, Minnesota, with six buildings
containing a total of 160,000 square feet of office and warehouse space. The
Registrant's principal office 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.
As noted above, the Registrant is in the process of completing the new
Red Rock facility in St. Paul, Minnesota. The Red Rock facility will consist of
a 59,000 square foot building located on approximately 10 acres of land. The new
facility will have outside storage capacity of approximately 1,500,000 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 annual tonnage unloaded at the site through May 31, 2029. The basic
rent and annual tonnage rent are to be renegotiated every five years beginning
June 1, 2004.
In addition to the facilities described above, the Registrant's other
facilities are described below. These facilities, together with those described
above, are adequate and suitable for the purposes they serve. Unless noted, each
facility is owned and is fully utilized by the 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
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 annual tonnage
unloaded at each site. 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
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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. The settlement agreement (the Settlement
Agreement) relating to the class action, DONNA M. COOKSEY, ET AL. V. HAWKINS
CHEMICAL, INC. AND THE LYNDE COMPANY (Cooksey), brought in March 1995 against
the Company and its former subsidiary, for damages alleged to be caused by a
fire at an office/warehouse facility used by the former subsidiary, was approved
by the court on January 30, 1998. Pursuant to the Settlement Agreement, the
Company agreed to pay certain of the plaintiffs' costs and expenses as well as
certain compensation to the class. In October 1998 the Company obtained a
judgment against its primary and umbrella insurers obligating both insurers to
defend the Company in connection with the Cooksey lawsuit. The two insurers
subsequently settled with the Company by reimbursing it $2,754,000 for
substantially all amounts incurred in defending and settling the Cooksey action.
Less than 10 claimants remain who have not yet resolved their claims under the
Settlement Agreement. The Registrant anticipates that the defense and payment of
these remaining claims, which are subject to arbitration, will be covered by its
umbrella insurer.
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 2000.
ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT.
The executive officers of the Registrant, their ages and offices held, as
of December 15, 2000 are set forth below:
<TABLE>
<CAPTION>
Name Age Office
<S> <C> <C>
John R. Hawkins 49 Chairman of the Board and Chief Executive Officer
Kurt R. Norman 45 President and Chief Operating Officer
Marvin E. Dee 51 Vice President, Chief Financial Officer,
Secretary, and Treasurer
Keenan A. Paulson 51 Vice President - Water Treatment Group
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John R. Sevenich 42 Vice President - Manufacturing and Specialty
Products
Daniel E. Soderlund 38 Vice President - Pharmaceuticals
</TABLE>
John R. Hawkins has been the Registrant's Chairman and Chief Executive
Officer since February 16, 2000. He was President and Chief Operating Officer
from December 1998 to February 2000 and was Secretary from 1991 to December
1999. He was an Executive Vice President from 1997 to December 1998 and Vice
President of Sales from 1987 to 1997.
Kurt R. Norman has been the Registrant's President and Chief Operating
Officer since February 16, 2000. He was a Vice President of the Registrant from
February 1999 until February 2000 and was the Vice President of the Water
Treatment segment from 1996 to February 1999 and was the Water Treatment General
Manager from 1988 to 1996.
Marvin E. Dee has been the Registrant's Vice President and Chief
Financial Officer since September 1999 and its Secretary and Treasurer since
December 1999. He was the Chief Financial Officer of Nath Companies from 1997 to
September 1999, the Vice President of Finance and Treasurer of Tricord Systems,
Inc. from 1993 to 1997 and Senior Director of Accounting of NordicTrack, Inc. in
1993 and the Controller of NordicTrack from 1991 to 1992.
Keenan A. Paulson has been the Registrant's Vice President - Water
Treatment Group since May 2000. Prior to attaining this position, Ms. Paulson
held various positions during her 29-year career with the Company, most recently
as its Water Treatment General Manager.
John R. Sevenich has been the Registrant's Vice President - Manufacturing
and Specialty Products since May 2000. He was the Business Unit Manager of
Manufacturing from 1998 to May 2000 and was a Sales Representative with the
Company from 1989 to 1998.
Daniel E. Soderlund has been the Registrant's Vice President -
Pharmaceuticals since May 2000. He was the Business Unit Manager of
Pharmaceuticals from April 1999 to May 2000 and was a Sales Representative with
the Company from 1992 to April 1999.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER
MATTERS.
<TABLE>
<CAPTION>
Quarterly Stock Data High Low
<S> <C> <C>
Fiscal 2000
4th Quarter $ 8 $ 7 1/4
3rd Quarter 8 3/8 7
2nd Quarter 8 5/8 7 5/8
1st Quarter 8 7/8 7 5/8
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
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Cash Dividends Declared Paid
Fiscal 2001
1st Quarter $.15
Fiscal 2000
4th Quarter $.15
3rd Quarter $.17
2nd Quarter $.17
1st Quarter $.12
Fiscal 1999
4th Quarter $.12
3rd Quarter $.15
2nd Quarter $.15
1st Quarter $.10
</TABLE>
The common stock of Hawkins Chemical, Inc. trades on the NASDAQ National Market
System under the symbol "HWKN." The price information represents closing sale
prices reported in the NASDAQ/NMS Monthly Statistical Report.
As of October 1, 2000, there were approximately 800 shareholders of record of
the Company's common stock. Additionally, the Depository Trust Company, the
principal central securities depository in the United States, held the shares
of approximately 1700 shareholders that were counted as owned by one holder.
ITEM 6. SELECTED FINANCIAL DATA.
<TABLE>
<CAPTION>
SELECTED FINANCIAL DATA TABLE
Fiscal Year 2000 1999 1998 1997 1996
<S> <C> <C> <C> <C> <C>
Sales $ 97,075,223 $ 95,459,661 $ 94,722,511 $ 87,745,980 $ 80,886,062
Net income 8,567,699 9,698,642 8,213,869 7,790,487 6,476,410
Basic and diluted
earnings per
common share .81 .87 .71 .67 .56
Cash dividends
declared per
common share .32 .27 .20 .18 .15
Cash dividends
paid per
common share .29 .25 .19 .16 .14
Total assets 69,894,520 68,999,827 66,535,475 63,652,616 56,487,356
Long-term debt 226,003 328,040 423,402 512,525 572,453
</TABLE>
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All per share data has been restated to reflect the 5% stock dividends in
1997 and 1996. See Management's Discussion and Analysis of Financial Condition
and Results of Operations in Item 7 and the Financial Statements and
Supplementary Data including the Notes thereto in Item 8.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The information contained in this Annual Report on Form 10-K 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 on
Form 10-K 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 2000 increased 1.7% to $97,075,223 from $95,459,661
in fiscal 1999. Net income for fiscal 2000 was $8,567,699, or $0.81 per share,
compared to $9,698,642, or $0.87 per share for fiscal 1999. However, the fiscal
1999 results include litigation settlement reimbursements, special charges
related to organizational changes and a gain on sale of land, which increased
earnings by $0.10 per share, net of related costs and taxes. Return on average
shareholders' equity was 15.3% for fiscal 2000, compared to 17.8% for fiscal
1999. Book value per share at October 1, 2000 was $5.44 compared to $5.07 one
year ago.
RESULTS OF OPERATIONS
The general economic environment in our markets has improved slightly.
While this improvement had a favorable impact on gross margin, management will
continue to focus efforts on programs aimed at improving profitability and
controlling costs.
NET SALES
For the year ended October 1, 2000, sales increased $1,615,562, a 1.7%
increase from fiscal 1999, due to an increase of $1,821,293 in Water Treatment
segment sales partially offset by a decrease of $205,731 in Industrial segment
sales. The Water Treatment segment increase is due to an increase in volumes.
The Industrial decrease is due to a 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.
For the year ended October 3, 1999, sales increased $737,150, a 0.8%
increase from fiscal 1998, due to an increase of $794,912 in Water Treatment
segment sales partially offset by a decrease of $57,762 in Industrial segment
sales. The Water Treatment segment increase is due to an increase in volumes.
The Industrial segment 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.
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GROSS MARGINS
Gross margin, as a percentage of sales, was 25.5% in fiscal 2000, 25.1%
in fiscal 1999 and 23.6% in fiscal 1998. The gross margin variations are due to
a number of variables in both segments as explained below.
Gross margin, as a percentage of sales, for the Industrial segment was
22.9% in fiscal 2000, 22.5% in fiscal 1999 and 22.0% in fiscal 1998. The fiscal
2000 and fiscal 1999 increase over the previous years were due to the Company's
ability to maintain relatively constant profit margins of a major product line
while the cost of the materials were decreasing. 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, which 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.
Gross margin, as a percentage of sales, for the Water Treatment segment
was 31.3% in fiscal 2000, 31.2% in fiscal 1999 and 27.4% in fiscal 1998. The
fiscal 2000 gross margin was comparable to fiscal 1999. The fiscal 1999 increase
over fiscal 1998 was due to a decrease in materials costs.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expenses increased 7.2% and 8.8% in
fiscal 2000 and fiscal 1999, respectively over the previous years. The fiscal
2000 increase over fiscal 1999 was mainly due to increases in the sales and
administrative staff, consulting fees and to employee benefits costs. The fiscal
1999 increase over fiscal 1998 was due to increases in sales staff and to
increases in employee compensation and benefits costs.
LITIGATION AND SETTLEMENT COSTS RELATED TO 1995 FIRE
Prior to September 1998, 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 10 claimants, will
be covered by the umbrella insurer.
SPECIAL CHARGES
During fiscal 1999, the Company entered into termination agreements with
three former employees due to corporate organizational changes and recorded
Special Charges in the Statement of Income of $1,112,127.
11
<PAGE>
OTHER INCOME
Interest income decreased 4.3% in fiscal 2000 as compared to the previous
year due to less cash available for investment. 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 pre-tax, but higher after-tax, rate of return, since
earnings are not taxable for Federal income tax purposes. Interest expense
decreased in fiscal 2000 and fiscal 1999 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. Other miscellaneous income decreased in
fiscal 2000 as compared to fiscal 1999 due to gains on the sale of land in
fiscal 1999 and was consistent with fiscal 1998.
PROVISION FOR INCOME TAXES
The effective income tax rate was 39.2% for the fiscal year ended October
1, 2000, 39.4% for the fiscal year ended October 3, 1999, and 38.9% for the
fiscal year ended September 27, 1998. The fiscal 2000 and fiscal 1999 increase
over fiscal 1998 was due to incremental income taxed at a higher rate.
SELECTED QUARTERLY FINANCIAL DATA
<TABLE>
<CAPTION>
FISCAL YEAR ENDED OCTOBER 1, 2000
-------------------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
<S> <C> <C> <C> <C>
Net sales $ 21,626,369 $ 22,747,374 $ 26,832,838 $ 25,868,642
Gross profit 4,972,352 5,386,900 7,641,925 6,800,999
Net income 1,639,687 1,774,690 2,742,460 2,410,862
============== =============== ============== ==============
Basic and diluted
earnings per share $ .15 $ .17 $ .26 $ .23
============== =============== ============== ==============
<CAPTION>
FISCAL YEAR ENDED OCTOBER 3, 1999
-------------------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
<S> <C> <C> <C> <C>
Net sales $ 23,311,125 $ 22,763,885 $ 24,959,934 $ 24,424,717
Gross profit 5,187,408 5,241,809 6,605,971 6,908,982
Net income 3,426,234 1,788,738 2,440,724 2,042,946
============== =============== ============== ==============
Basic and diluted
earnings per share $ .30 $ .16 $ .22 $ .19
============== =============== ============== ==============
</TABLE>
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.
12
<PAGE>
FINANCIAL CONDITION
LIQUIDITY
Cash provided by operations in fiscal 2000 was $9,693,479 compared with
$13,847,248 in fiscal 1999 and $6,127,052 in fiscal 1998. The decrease in fiscal
2000 over fiscal 1999 was due primarily to fluctuations in inventory values and
to the recovery of litigation expenses in fiscal 1999. 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.
Cash and investments available-for-sale decreased by $7,983,251 to
$14,219,623 at the end of fiscal 2000. The decrease was primarily attributable
to capital expenditures and the acquisition of St. Mary's Chemicals. The Company
is investing excess cash primarily in conservative investments. Cash equivalents
consist of a money market account at a financial institution. 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. Investments are highly liquid and are
available upon demand generally with only a minor penalty.
CAPITAL EXPENDITURES
Capital expenditures in fiscal 2000, 1999 and 1998 were $7,216,301,
$2,449,894 and $5,051,641, respectively. Of the fiscal 2000 capital
expenditures, the new Red Rock facility accounted for $4.5 million,
transportation equipment additions accounted for $1.3 million, building
improvements and additions amounted to $0.4 million, and warehouse, laboratory
and office machinery and equipment accounted for $1.0 million.
COMMON STOCK REPURCHASES
During fiscal 2000, the Company acquired and retired 608,900 shares of
common stock for $5,020,366. During fiscal 1999, the Company acquired and
retired 499,614 shares of common stock for $4,888,288.
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.
Currently, management is aware of significant price increases in caustic
soda caused by a reduction in the production of chlorine used in producing
plastics. The Company cannot predict what the impact of this increased raw
material cost will have on the fiscal 2001 financial performance of its
Industrial segment when the caustic soda supply is replenished upon the river
shipping season opening in the spring. However, based upon historical experience
the Company expects to be able to maintain its profit margin.
Other than as discussed above, management is not aware of any matters or
trends that have materially affected the results of operations for fiscal 2000
that are not expected to have either short or
13
<PAGE>
long-term implications, nor is it aware of any trends or other matters
that have not materially affected results in fiscal 2000 but are expected to
have a material effect on future periods.
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, the FASB issued SFAS
No. 137 delaying the effective date of SFAS No. 133 for one year to fiscal years
beginning after June 15, 2000, with earlier adoption encouraged. This statement
was adopted by the Company for the fiscal year beginning October 2, 2000, and is
not expected to materially impact the Company's financial statements.
In December 1999, the Securities and Exchange Commission released Staff
Accounting Bulletin (SAB) No. 101 that provides the staff's views in applying
generally accepted accounting principles to selected revenue recognition issues.
An amendment in June 2000 delayed the effective date and it is not required to
be adopted by the Company until the fourth quarter of fiscal 2001. The Company
is reviewing the requirements of this standard and has not yet determined the
impact of this standard on its financial statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.
At the end of fiscal 2000, the Company had an investment portfolio of
fixed income securities of $1,591,986, excluding $14,678,140 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
anticipates that it will continue 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.
14
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
HAWKINS CHEMICAL, INC.
STATEMENTS OF INCOME
----------------------------
<TABLE>
<CAPTION>
FOR THE FISCAL YEARS ENDED
-------------------------------------------------------
OCTOBER 1, OCTOBER 3, SEPTEMBER 27,
2000 1999 1998
<S> <C> <C> <C>
Net sales $ 97,075,223 $ 95,459,661 $ 94,722,511
Cost of sales (72,273,047) (71,515,491) (72,380,576)
-------------- -------------- ---------------
Gross margin 24,802,176 23,944,170 22,341,935
Selling, general and administrative expenses (11,863,401) (11,066,346) (10,170,255)
Litigation settlement proceeds 2,851,708
Special charges (1,112,127)
-------------- -------------- ---------------
Income from operations 12,938,775 14,617,405 12,171,680
Other income (deductions):
Interest income 1,073,823 1,121,939 1,237,789
Interest expense (30,192) (36,867) (43,516)
Miscellaneous 97,643 303,095 83,084
-------------- -------------- ---------------
Total other income, net 1,141,274 1,388,167 1,277,357
-------------- -------------- ---------------
Income before income taxes 14,080,049 16,005,572 13,449,037
Provision for income taxes (5,512,350) (6,306,930) (5,235,168)
-------------- -------------- ---------------
Net income $ 8,567,699 $ 9,698,642 $ 8,213,869
============== ============== ===============
Weighted average number of shares outstanding 10,615,881 11,130,970 11,594,752
============== ============== ===============
Basic and diluted earnings per share $ 0.81 $ 0.87 $ 0.71
============== ============== ==============
</TABLE>
See accompanying notes to financial statements.
15
<PAGE>
HAWKINS CHEMICAL, INC.
BALANCE SHEETS
---------------------------
<TABLE>
<CAPTION>
OCTOBER 1, OCTOBER 3,
2000 1999
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 2,185,757 $ 4,778,174
Investments available-for-sale 12,033,866 17,424,700
Trade receivables - less allowance for doubtful accounts: 2000, $377,000;
1999, $380,000 11,610,606 11,329,211
Notes receivable 157,701 301,920
Inventories 8,929,957 8,379,228
Prepaid expenses and other 2,658,875 2,536,448
----------- -----------
Total current assets 37,576,762 44,749,681
PROPERTY, PLANT AND EQUIPMENT:
Land 631,662 631,662
Buildings and improvements 23,319,413 18,368,313
Machinery and equipment 8,078,640 7,674,678
Transportation equipment 6,462,568 5,693,192
Office furniture and equipment 1,839,836 2,100,029
----------- -----------
40,332,119 34,467,874
Less accumulated depreciation 16,644,782 15,802,875
----------- -----------
Net property, plant and equipment 23,687,337 18,664,999
OTHER ASSETS:
Intangible assets - less accumulated amortization: 2000, $592,674; 1999, $456,113 3,770,375 601,101
Investments held-to-maturity 2,050,503 1,949,192
Notes receivable - noncurrent 2,611,577 2,844,220
Other 197,966 190,634
----------- -----------
Total other assets 8,630,421 5,585,147
----------- -----------
$69,894,520 $68,999,827
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable - trade $ 5,006,580 $ 5,032,268
Current portion of long-term debt 102,037 95,362
Dividends payable 1,566,036 1,314,154
Accrued payroll and employee benefits 2,417,746 2,106,213
Container deposits 1,533,800 1,545,255
Other accruals 836,819 1,187,167
----------- -----------
Total current liabilities 11,463,018 11,280,419
LONG-TERM DEBT 226,003 328,040
OTHER LONG-TERM LIABILITIES 596,943 786,202
DEFERRED INCOME TAXES 937,330 1,029,950
COMMITMENTS AND CONTINGENCIES (Notes 4, 6 and 9)
SHAREHOLDERS' EQUITY:
Common stock - authorized: 30,000,000 shares of $.05 par value; issued and
outstanding: 2000 - 10,417,739 shares; 1999 - 10,951,281 shares 520,887 547,564
Additional paid-in capital 38,490,313 40,129,749
Retained earnings 17,660,026 14,897,903
----------- -----------
Total shareholders' equity 56,671,226 55,575,216
----------- -----------
$69,894,520 $68,999,827
=========== ===========
</TABLE>
See accompanying notes to financial statements.
16
<PAGE>
HAWKINS CHEMICAL, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
-------------------------------------
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
--------------------- PAID-IN RETAINED
SHARES AMOUNT CAPITAL EARNINGS
<S> <C> <C> <C> <C>
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
Cash dividend (3,361,063)
Stock acquired and retired (608,900) (30,445) (2,235,668) (2,754,253)
Stock issued in conjunction with the
acquisition of St. Mary's Chemicals, Inc. 75,358 3,768 596,232
Income tax savings from
dividends paid on ESOP shares 309,740
Net income 8,567,699
----------- --------- ------------ ------------
BALANCE AT OCTOBER 1, 2000 10,417,739 $ 520,887 $ 38,490,313 $ 17,660,026
=========== ========= ============ ============
</TABLE>
See accompanying notes to financial statements.
17
<PAGE>
HAWKINS CHEMICAL, INC.
STATEMENTS OF CASH FLOWS
---------------------------
<TABLE>
<CAPTION>
FOR THE FISCAL YEARS ENDED
----------------------------------------------------
OCTOBER 1, OCTOBER 3, SEPTEMBER 27,
2000 1999 1998
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 8,567,699 $ 9,698,642 $ 8,213,869
Litigation and settlement costs relating to 1995 fire (1,083,866)
Reconciliation to cash flows:
Depreciation and amortization 2,259,864 2,099,491 1,993,112
Deferred income taxes 177,320 (970,950) 750,894
Earnings on other assets (108,643) (108,745) (112,084)
Loss (gain) from property disposals (4,266) (256,808) 20,992
Changes in operating accounts (requiring) providing cash:
Trade receivables (281,395) 107,479 (318,699)
Inventories (513,886) 2,437,232 (2,235,755)
Accounts payable (25,688) 61,927 (759,243)
Accrued liabilities (239,529) 210,786 116,463
Other (137,997) 568,194 (458,631)
------------ ------------ ------------
Net cash provided by operating activities 9,693,479 13,847,248 6,127,052
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment (7,216,301) (2,449,894) (5,051,641)
Purchase of investments (2,247,230) (4,766,585) (2,563,852)
Sale of investments 7,638,064 1,885,814
Proceeds from property disposals 87,618 428,799 164,691
Acquisition of St. Mary's Chemicals, Inc. (2,700,000)
Payments received on notes receivable 376,862 427,810 288,708
------------ ------------ ------------
Net cash used in investing activities (4,060,987) (4,474,056) (7,162,094)
CASH FLOWS FROM FINANCING ACTIVITIES:
Debt repayment (95,362) (89,123) (59,928)
Cash dividends paid (3,109,181) (2,814,622) (2,204,740)
Acquisition and retirement of stock (5,020,366) (4,888,288) (1,568,296)
------------ ------------ ------------
Net cash used in financing activities (8,224,909) (7,792,033) (3,832,964)
------------ ------------ ------------
NET (DECREASE) INCREASE IN CASH AND CASH
EQUIVALENTS (2,592,417) 1,581,159 (4,868,006)
CASH AND CASH EQUIVALENTS AT BEGINNING
OF YEAR 4,778,174 3,197,015 8,065,021
------------ ------------ -------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 2,185,757 $ 4,778,174 $ 3,197,015
============ ============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Stock issued in conjunction with the acquisition of
St. Mary's Chemicals, Inc $ 600,000
============
Cash paid during the year for:
Interest $ 36,867 $ 43,106 $ 47,711
============ ============ ============
Income taxes $ 6,071,804 $ 6,079,339 $ 5,739,297
============ ============ ============
</TABLE>
See accompanying notes to financial statements.
18
<PAGE>
HAWKINS CHEMICAL, INC.
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 in helping customers find solutions to system
problems.
FISCAL YEAR - The Company's fiscal year is a 52/53-week year ending on
the Sunday closest to September 30. The fiscal years ended October 1,
2000, October 3, 1999 and September 27, 1998 were fifty-two, fifty-three
and fifty-two week years, respectively.
CASH EQUIVALENTS - Cash equivalents include all liquid debt instruments
(primarily cash funds, certificates of deposits, and a money market
account) purchased with an original maturity of three months or less.
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 are 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
19
<PAGE>
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.
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 - The Company does not have any material items of
other comprehensive income in any of the periods presented.
CONCENTRATIONS 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 a money market account at a single financial
institution. At October 1, 2000, the Company had deposits in excess of
federally insured limits of approximately $2,100,000.
At the end of fiscal 2000, the Company also had an investment portfolio
of fixed income securities, excluding $14,678,140 of those classified as
cash and cash equivalents and variable rate securities, of $1,591,986.
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, the FASB issued SFAS No.
137 delaying the effective date of SFAS No. 133 for one year to fiscal
years beginning after June 15, 2000, with earlier adoption encouraged.
This statement was adopted by the Company for
20
<PAGE>
the fiscal year beginning October 2, 2000, and is not expected to
materially impact the Company's financial statements.
In December 1999, the Securities and Exchange Commission released Staff
Accounting Bulletin (SAB) No. 101 that provides the staff's views in
applying generally accepted accounting principles to selected revenue
recognition issues. An amendment in June 2000 delayed the effective date
and it is not required to be adopted by the Company until the fourth
quarter of fiscal 2001. The Company is reviewing the requirements of this
standard and has not yet determined the impact of this standard on its
financial statements.
2. INVENTORIES
Inventories at October 1, 2000 and October 3, 1999 consisted of the
following:
<TABLE>
<CAPTION>
2000 1999
<S> <C> <C>
Finished goods (FIFO basis) $ 9,505,795 $ 8,949,497
LIFO reserve (575,838) (570,269)
------------- --------------
Net inventory $ 8,929,957 $ 8,379,228
============= ==============
</TABLE>
Inventories valued under the LIFO method for the fiscal years ended
October 1, 2000 and October 3, 1999, were approximately $8,121,829 and
$8,876,432, respectively. The balance of the inventory was valued under
the FIFO method.
3. NOTES RECEIVABLE
The Company has three notes receivable related to the sales of Tessman
Seed, Inc., land and building, and The Lynde Company. At October 1, 2000
and October 3, 1999, the net balance outstanding on the notes receivable
were $2,769,278 and $3,146,140, respectively. The notes receivable bear
interest at 8% and are due in equal monthly installments of $36,204
through September 1, 2010 at which time the remaining unpaid balance of
$1,213,163 is due. The notes receivable are secured by land and building,
and a personal guarantee.
4. LONG-TERM DEBT
Long-term debt at October 1, 2000 and October 3, 1999 is summarized as
follows:
<TABLE>
<CAPTION>
2000 1999
<S> <C> <C>
Note payable, due in annual
installments to October 2002 $ 328,040 $ 423,402
Less current portion 102,037 95,362
------------- --------------
Long-term portion $ 226,003 $ 328,040
============= ==============
</TABLE>
Long-term debt maturities for the fiscal years subsequent to 2000 are:
2001 - $102,037, 2002 - $109,180 and 2003 - $116,823.
21
<PAGE>
5. SHAREHOLDERS' EQUITY
During fiscal 2000, 1999 and 1998, the Company acquired and retired
608,900, 499,614 and 153,000, shares of common stock, respectively, for
$5,020,366, $4,888,288 and $1,568,296, respectively.
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 1, 2000, October 3, 1999 and September 27, 1998 was
$136,416, $53,843 and $47,612, respectively. Future minimum lease
payments due under operating leases with an initial term of one year or
more at October 1, 2000 are $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 1, 2000, October 3, 1999 and September 27, 1998 was
$751,936, $578,975 and $545,650, respectively. Beginning in fiscal 2000,
the Company's cost for the pension plan is determined as 10% of each
employee's covered compensation compared to 7% in prior years. 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 1, 2000,
October 3, 1999 and September 27, 1998 were $787,667, $1,049,779 and
$984,455, respectively.
The Company does not currently offer any post-retirement benefits,
deferred stock or stock-based compensation plans.
8. SPECIAL CHARGES
During fiscal 1999, the Company entered into termination agreements with
three former employees and recorded Special Charges in the Statement of
Income of $1,112,127. At October 1, 2000, the Company is required to make
future payments to the individuals for periods of 15 months to 5 years.
The present value of the future payments to be paid in fiscal 2001 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.
22
<PAGE>
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
judgment 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 for the fiscal years ended
October 1, 2000, October 3, 1999 and September 27, 1998 are as follows:
<TABLE>
<CAPTION>
2000 1999 1998
<S> <C> <C> <C>
Federal - current $ 4,094,040 $ 5,862,780 $ 3,316,868
States - current 1,240,990 1,415,100 1,167,300
Deferred 177,320 (970,950) 751,000
-------------- ------------- --------------
Total provision $ 5,512,350 $ 6,306,930 $ 5,235,168
============== ============= ==============
</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% for the fiscal years ended October 1, 2000, October 3, 1999
and September 27, 1998 are as follows:
<TABLE>
<CAPTION>
2000 1999 1998
<S> <C> <C> <C>
Statutory federal income tax $ 4,928,017 $ 5,601,950 $ 4,707,163
State income taxes, net of federal deduction 806,644 919,815 770,418
Tax-exempt income (142,344) (165,390) (122,876)
Other, net (79,967) (49,445) (119,537)
-------------- ------------- --------------
Total $ 5,512,350 $ 6,306,930 $ 5,235,168
============== ============= ==============
</TABLE>
The tax effects of items comprising the Company's net deferred tax asset
(liability) as of October 1, 2000 and October 3, 1999 are as follows:
<TABLE>
<CAPTION>
2000 1999
<S> <C> <C>
Current deferred taxes:
Trade receivables $ 150,000 $ 153,000
Inventory 908,000 965,000
Accruals 386,960 596,900
------------- --------------
Total* $ 1,444,960 $ 1,714,900
============= ==============
Noncurrent deferred taxes:
Gain on sale of The Lynde Company $ (331,000) $ (336,850)
Property basis difference (606,330) (693,100)
------------- --------------
Total $ (937,330) $ (1,029,950)
============= ==============
</TABLE>
*Included in prepaid expenses and other on the balance sheet.
23
<PAGE>
11. ST. MARY'S CHEMICALS, INC. ACQUISITION
On May 26, 2000, the Company completed the acquisition of certain assets
of St. Mary's Chemicals, Inc. d.b.a. Universal Chemicals. Universal
Chemicals, a Minnesota-based company, was engaged in the business of
marketing, selling, and distributing pharmaceutical chemicals to
pharmacies and pharmacy wholesalers. In connection with the acquisition,
assets purchased, common stock issued, and cash consideration paid were
as follows:
<TABLE>
<S> <C>
Assets Acquired:
Inventory $ 36,843
Equipment 12,692
Excess of purchase price over net assets acquired 3,250,465
--------------
3,300,000
Common Stock Issued (75,358 shares) 600,000
--------------
Cash Consideration Paid $ 2,700,000
==============
</TABLE>
The acquisition was accounted for using the purchase method of
accounting, and the excess of the purchase price over net assets acquired
is being amortized over 15 years using the straight-line method. The
operations of Universal Chemicals are included in the Company's statement
of income beginning on May 26, 2000. The pro forma effect of this
acquisition on prior periods sales, operating income, and earnings per
share were not significant.
On May 26, 2000, the Company also entered into a five-year employment
agreement with one of the previous owners of Universal Chemicals and
consulting agreements with the other two previous owners of Universal
Chemicals. The employment agreement and consulting agreements contain
performance bonuses and non-compete provisions. The agreements are based
on Universal Chemicals' operating results, as defined, for five years
after the acquisition date and have a maximum payment of $3,520,000. The
non-compete provisions cover a period of five years after the termination
of the employment or consulting agreements, and require annual payments
of $100,000 to $200,000 depending on Universal Chemicals' operating
results, as defined, for five years after the termination date.
12. SEGMENT INFORMATION
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 helping customers find solutions
to system problems.
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 functions.
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.
24
<PAGE>
<TABLE>
<CAPTION>
WATER
REPORTABLE SEGMENTS INDUSTRIAL TREATMENT TOTAL
<S> <C> <C> <C>
2000
Net sales $ 66,477,275 $ 30,597,948 $ 97,075,223
Cost of sales 51,241,533 21,031,514 72,273,047
Gross margin 15,235,742 9,566,434 24,802,176
Operating income 7,429,097 5,509,678 12,938,775
Identifiable assets $ 42,710,196 $ 8,057,357 $ 50,767,553
============== ============== ===============
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
============== ============== ===============
PROFIT RECONCILIATION 2000 1999 1998
Total income for reportable segments $ 12,938,775 $ 11,765,697 $ 12,171,680
Unallocated corporate income 2,851,708
-------------- -------------- ---------------
Total operating income $ 12,938,775 $ 14,617,405 $ 12,171,680
============== ============== ===============
</TABLE>
25
<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 1, 2000 and October 3, 1999, and the related statements
of income, shareholders' equity and cash flows for each of the three years in
the period ended October 1, 2000. 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 auditing standards generally accepted
in the United States of America. 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 1, 2000
and October 3, 1999, and the results of its operations and cash flows for each
of the three years in the period ended October 1, 2000 in conformity with
accounting principles generally accepted in the United States of America.
/s/ Deloitte & Touche LLP
Minneapolis, Minnesota
December 5, 2000
26
<PAGE>
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 2001 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 2001 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 2001 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 2001 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., are filed
as part of this Annual Report on Form 10-K.
Balance Sheets at October 1, 2000 and October 3, 1999.
Statements of Income for the Years Ended October 1, 2000, October 3, 1999
and September 27, 1998.
Statements of Shareholders' Equity for the Years Ended October 1, 2000,
October 3, 1999 and September 27, 1998.
Statements of Cash Flows for the Years Ended October 1, 2000, October 3,
1999 and September 27, 1998.
27
<PAGE>
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.
The following financial statement schedule for the years ended October 1,
2000, October 3, 1999 and September 27, 1998 is included herein.
Schedule II - Valuation and Qualifying Accounts.
(a)(3) EXHIBITS.
See the Exhibit Index and Exhibits attached as a separate section of this
Annual Report on Form 10-K.
A copy of any of the exhibits listed or referred to above will be
furnished at a reasonable cost to any person who is a shareholder of the
Registrant 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.
28
<PAGE>
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 on December 20, 2000.
HAWKINS CHEMICAL, INC.
By /s/ John R. Hawkins
------------------------------------
John R. Hawkins, 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 indicated on December 20, 2000.
`
By /s/ John R. Hawkins
----------------------------------------------------------------
John R. Hawkins, Chief Executive Officer, Director
By /s/ Kurt R. Norman
----------------------------------------------------------------
Kurt R. Norman, President, Director
By /s/ Dean L. Hahn
----------------------------------------------------------------
Dean L. Hahn, Director
By /s/ Donald L. Shipp
----------------------------------------------------------------
Donald L. Shipp, Director
By /s/ Howard M. Hawkins
----------------------------------------------------------------
Howard M. Hawkins, Director
By /s/ John S. McKeon
----------------------------------------------------------------
John S. McKeon, Director
By /s/ Duane M. Jergenson
----------------------------------------------------------------
Duane M. Jergenson, Director
By /s/ G. Robert Gey
----------------------------------------------------------------
G. Robert Gey, Director
By /s/ Marvin E. Dee
----------------------------------------------------------------
Marvin E. Dee, Chief Financial Officer,
Vice President, Secretary, Treasurer
29
<PAGE>
INDEPENDENT AUDITORS' REPORT ON SCHEDULE
We have audited the financial statements of Hawkins Chemical, Inc. (the Company)
as of October 1, 2000 and October 3, 1999, and for each of the three years in
the period ended October 1, 2000, and have issued our report thereon dated
December 5, 2000; such report is included elsewhere in this Form 10-K. 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.
/s/ Deloitte & Touche LLP
Minneapolis, Minnesota
December 5, 2000
30
<PAGE>
SCHEDULE II
HAWKINS CHEMICAL, INC.
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED OCTOBER 1, 2000, OCTOBER 3, 1999 AND SEPTEMBER 27, 1998
--------------------------------------------------------------------------------
<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 1, 2000 $ 380,000 $ 3,000 $ 377,000
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
</TABLE>
31
<PAGE>
<TABLE>
<CAPTION>
INDEX TO EXHIBITS
Exhibit No. Description of Exhibit Method of Filing
<S> <C> <C>
3.1 Amended and Second Restated Articles of Incorporated by reference to
Incorporation as amended through June 7, the Registrant's Annual
1999. Report on Form 10-K for the
year ended October 3, 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.
12.1 Asset purchase agreement dated Incorporated by reference to
May 26, 2000 among St. Mary's Exhibit 10.1 to the
Chemicals, Inc., its shareholders, Registrant's Quarterly
and Registrant Report on Form 10-Q for the
Quarter ended June 30, 2000
23.1* Independent Auditor' Consent. Filed herewith electronically
27.1* Financial Data Schedule. Filed herewith electronically
</TABLE>
* Denotes previously unfiled documents.
32
