ITEM 1. BUSINESS.
(a) GENERAL DEVELOPMENT OF THE BUSINESS. The Registrant was incorporated under the laws of the State of Minnesota in 1955. In the past year the Registrant has not changed its form of organization or mode of conducting business and has not acquired or disposed of any material amount of assets other than in the ordinary course of business. Following the end of fiscal 1997, on October 1, 1997 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.
(b) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS. Although the Registrant operates through several divisions and subsidiaries, its principal business is the formulation, blending and distribution of bulk specialty chemicals. Throughout its operations the Registrant provides related products and services which share similar raw materials, production methods and distribution channels. In the judgment of the Registrant, therefore, it is operating in a single industry segment.
(c) NARRATIVE DESCRIPTION OF THE BUSINESS.
(i) PRODUCTS AND MARKETS. The Registrant's business is conducted throughout the nine-state area of Minnesota, Wisconsin, Iowa, North Dakota, South Dakota, Montana, Nebraska, Michigan and Wyoming through its wholly owned subsidiary and three divisions described below:
(A) HAWKINS WATER TREATMENT GROUP, INC. This wholly owned subsidiary specializes in providing water and waste-water treatment equipment and chemicals and in services relating to the testing of water samples in Minnesota, Wisconsin, Iowa, North Dakota, South Dakota, Nebraska and Wyoming. It also operates as a distributor of the Registrant's products, and a regional distributor of laundry, dry cleaning, and janitorial supplies in Montana, Wyoming, the Dakotas, Minnesota, northern Wisconsin and the upper peninsula of Michigan.
(B) HAWKINS TERMINAL DIVISION. This division 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 business of the Hawkins Terminal Division is related to liquid caustic soda. Hawkins Terminal Division 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 Division 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 the Hawkins Terminal Division to temporarily shift its operations out of its buildings three times, the most recent being in April of 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 reoccur or that there will not be material damage or interruption to the business of the Registrant's Hawkins Terminal Division in the future.
(C) INDUSTRIAL CHEMICAL AND EQUIPMENT DIVISION. This division was created in 1993 when the Registrant acquired the assets of Industrial Chemical & Equipment Co. It specializes in sales to the plating and electronic industries, and relies on a specially trained sales staff which works directly with customers on their plating and other processes.
(D) HAWKINS SALES DIVISION. The Hawkins Sales Division is 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 western Wisconsin, Minnesota, northern Iowa and North and South Dakota. Among the principal chemicals handled by the Sales Division 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).
(ii) STATUS OF NEW PRODUCTS. The Registrant began shipping its Cheese- Phos-Registered Trademark- product (discussed below) in late calendar 1995. Sales of this product in fiscal 1997 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 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, however, is that they 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-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 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 4% 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 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 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. Registrant does not currently anticipate making any material capital expenditures for environmental control facilities during fiscal year 1998.
(xiii) EMPLOYEES. The number of persons employed by the Registrant and its subsidiaries as of September 28, 1997 was 151.
(d) FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS AND EXPORT SALES. Because the Registrant deals in only one geographic area of the United States, no breakdown of revenue, profitability or assets attributable to different geographic areas is meaningful to an understanding of Registrant's business.
ITEM 2.
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 Hawkins Sales Division operates, is located in one of these buildings, at 3100 East Hennepin Avenue. The other buildings are used by the Registrant, its Hawkins Water Treatment Group subsidiary, and its Industrial Chemical & Equipment division. The Registrant's warehouse facilities in Minneapolis have been retrofitted with sprinklers for fire protection; this process was completed in the second quarter of calendar 1996. The Registrant carries insurance covering the replacement of property damaged by fire or flood.
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 or one of its subsidiaries.
Subsidiary Approximate or Division Location Primary Use Square Feet - ----------- -------- ----------- ----------- Hawkins Terminal Division St. Paul, MN(1) Office, Ware- 32,000 house and Garage
Hawkins Water Treatment Group Fargo, ND(2) Office and 22,800 Warehouse
Fond du Lac, WI(3) Warehouse 20,300
Washburn, ND Office and 14,000 Warehouse
Billings, MT Office and 6,000 Warehouse
Aberdeen, SD Warehouse 8,000
Sioux Falls, SD(4) Warehouse 18,000
Rapid City, SD Warehouse 3,600
Superior, WI Office and 17,000 Warehouse
- -----------------------
(1) The Hawkins Terminal Division operation, located at two sites on opposite sides of the Mississippi River, is 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 on which the Hawkins Terminal Division buildings and storage tanks are located 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, 1998, at which time the Registrant has an option to renew the leases for an additional five-year period on the same terms and conditions. Thereafter, the Registrant has options for three additional successive five-year renewal periods (extending until 2018) for which the rent may be adjusted pursuant to the rental renegotiation provisions contained in the leases.
(2) This facility is occupied by Hawkins Water Treatment Group (17,800 square feet) and leased to a third party (5,000 square feet).
(3) In addition to the space in this building being used by Hawkins Water Treatment Group, 10,000 square feet of space is being leased by the Registrant to third parties.
(4) The Sioux Falls facility is occupied by Hawkins Water Treatment Group (12,000 square feet) and leased to a third party (6,000 square feet).
The Registrant and its subsidiaries also own several trucks, tractors, trailers, and vans.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS.
As of the date of this filing, neither the Registrant nor any of its subsidiaries were involved in any pending legal proceeding to which the Registrant or its subsidiaries was a party or of which any property of the Registrant or its subsidiaries were the subject 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"). This action was certified as a partial class action earlier this year and remains pending in state district court in Hennepin County, Minnesota. The plaintiffs are seeking damages for personal injury and other damages alleged to have been caused by the alleged release of hazardous substances as a result of a fire at an office/warehouse facility used by The Lynde Company. The Registrant has entered into a class settlement agreement with the class, pursuant to which the Registrant has agreed to pay certain of the class' 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 district court has given preliminary approval of the settlement and a hearing on final approval is scheduled for January 30, 1998.
The Registrant's primary and umbrella insurers have denied a tender of the defense of the lawsuit and have denied any obligation to indemnify the Registrant for damages claimed by third parties in connection with the fire. This denial is based on a "Total Pollution Exclusion" which purports to exclude coverage for bodily injury and other losses caused by a release of pollutants, even if such release is caused by a hostile 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. These actions were filed in the United States District Court for the District of Minnesota. On October 6, 1996, the Court entered an Order for Judgment against the two insurers declaring that they each owed the Registrant a duty to defend the Cooksey action, that the insurers had breached their duty to defend and that the Registrant was entitled to judgment against North River in the amount of $890,174 and against Westchester in the amount of $90,868 for fees and expenses incurred by the Registrant through October of 1996 in defending against the Cooksey action and in prosecuting the action against the two insurers. The two insurers have appealed the
judgment to the Eighth Circuit Court of Appeals. Briefs have not yet been filed with the Eighth Circuit and a decision is not expected on the appeal until sometime during the second half of 1998. It is not possible at this time to predict with certainty the outcome on appeal or the amount of any ultimate recovery.
Because the Registrant's insurers have denied tender of the defense of the COOKSEY lawsuit, the Registrant has incurred significant legal fees and expenses in fiscal 1997 and may continue to do so in future periods. The actual legal fees, expenses and settlement costs which will ultimately be borne by the Registrant as a result of the settlement of the COOKSEY lawsuit and as a result of the action against the Registrant's insurers are highly dependent on a variety of factors which are the subject of the Matrix and Plan of Distribution described above, as well as the ultimate result of the litigation regarding insurance coverage.
During fiscal 1995, the Registrant recorded $750,000 to cover expected settlement costs relating to the COOKSEY litigation. The Registrant recorded an additional $1,100,000 in the fourth quarter of fiscal 1997 to cover certain quantifiable costs and expenses it will incur as a result of the settlement of the COOKSEY litigation. In addition to these accruals, the Registrant expended approximately $775,000 for legal fees and other costs relating to the litigation in fiscal 1997. It is not possible at this time to quantify the probable settlement costs which may be payable by the Registrant pursuant to the Matrix and Plan of Distribution which form a part of the settlement agreement. The Registrant reasonably expects, however, that such settlement costs will be estimable by the end of 1998.
The Registrant became self-insured with respect to products liability claims in December 1985 with the establishment of a $1,000,000 trust fund to fund this self-insurance program. No claims covered by this program have been made to date. As of October 1, 1989, the Registrant again secured product liability insurance of $1,000,000, although the trust fund was maintained as an umbrella over this insurance coverage. In March of 1997, the insurance trust was terminated, although all investments held by the trust were retained by the Registrant.
ITEM 4.
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 1997.
PART II
ITEM 5.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
See the Registrant's Annual Report for the year ended September 28, 1997, referenced on page 2 of this Form 10-K.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA.
See the Registrant's Annual Report for the year ended September 28, 1997, referenced on page 2 of this Form 10-K.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
See the Registrant's Annual Report for the year ended September 28, 1997, referenced on page 2 of this Form 10-K.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
See the Registrant's Annual Report for the year ended September 28, 1997, referenced on page 2 of this Form 10-K.
ITEM 9.
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 disclosures have occurred during the Registrant's two most recent fiscal years or any subsequent interim period.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
See the Registrant's Proxy Statement for the 1998 Annual Meeting of Shareholders to be filed with the Commission on January 5, 1998, referenced on page 2 of this Form 10-K.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION.
See the Registrant's Proxy Statement for the 1998 Annual Meeting of Shareholders to be filed with the Commission on January 5, 1998, referenced on page 2 of this Form 10-K.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
See the Registrant's Proxy Statement for the 1998 Annual Meeting of Shareholders to be filed with the Commission on January 5, 1998, referenced on page 2 of this Form 10-K.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
See the Registrant's Proxy Statement for the 1998 Annual Meeting of Shareholders to be filed with the Commission on January 5, 1998, referenced on page 2 of this Form 10-K.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) FINANCIAL STATEMENTS, FINANCIAL STATEMENT SCHEDULES, AND EXHIBITS.
1. The following consolidated financial statements of Hawkins Chemical, Inc. and subsidiaries, together with the Independent Auditors' Report, found under appropriate headings in the Registrant's 1997 Annual Report to Shareholders, are hereby incorporated by reference in this Annual Report on Form 10-K.
Consolidated Balance Sheets at September 28, 1997 and September 29, 1996
Consolidated Statements of Income and Retained Earnings for the Years Ended September 28, 1997, September 29, 1996 and October 1, 1995.
Consolidated Statements of Cash Flows for the Years Ended September 28, 1997, September 29, 1996 and October 1, 1995.
Notes to Consolidated Financial Statements
Independent Auditors' Report
2. 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 consolidated 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 September 28, 1997, September 29, 1996 and October 1, 1995:
II - Valuation and Qualifying Accounts
Condensed financial information of the Registrant is not presented because no restrictions exist on the transfer of funds or assets between the Registrant and its subsidiaries.
3. (a) EXHIBITS.
The following exhibits are included with this Annual Report on Form 10-K (or incorporated by reference) as required by Item 601 of Regulation S-K.
3.1 Amended and Second Restated Articles of Incorporation as amended through February 28, 1989 (Incorporated by reference to Exhibit 3D to the Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 1989).
3.2 Second Amended and Superseding By-Laws as amended through February 15, 1995 (incorporated by reference to 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* Portions of Annual Report to Security Holders for period ended September 28, 1997.
21* Subsidiaries of Registrant.
23* Independent Auditors' Consent
27* Financial Data Schedule
* Denotes previously unfiled documents.
(b) REPORTS ON FORM 8-K.
None.
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, thereunto duly authorized.
HAWKINS CHEMICAL, INC. By /s/ Dean L. Hahn ------------------------------ Dean L. Hahn, Chairman Dated: December 29, 1997. of the Board of Directors
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.
By /s/ Dean L. Hahn Dated: December 29, 1997 ------------------------------------- Dean L. Hahn, Chief Executive Officer, Director
By /s/ Howard J. Hawkins Dated: December 29, 1997 ------------------------------------- Howard J. Hawkins, Chairman Emeritus, Director
By /s/ Donald L. Shipp Dated: December 29, 1997 ------------------------------------- Donald L. Shipp, President, Director
By /s/ Howard M. Hawkins Dated: December 29, 1997 ------------------------------------- Howard M. Hawkins, Treasurer (Chief Financial and Accounting Officer), Director
By /s/ John R. Hawkins Dated: December 29, 1997 ------------------------------------- John R. Hawkins, Executive Vice President, Director
By /s/ Carl J. Ahlgren Dated: December 29, 1997 ------------------------------------- Carl J. Ahlgren, Director
By /s/ Norman P. Anderson Dated: December 29, 1997 ------------------------------------- Norman P. Anderson, Director
By /s/ John S. McKeon Dated: December 29, 1997 ------------------------------------- John S. McKeon, Director
By /s/ S. Albert Diez Hanser Dated: December 29, 1997 ------------------------------------- S. Albert Diez Hanser, Director
By /s/ Duane M. Jergenson Dated: December 29, 1997 ------------------------------------- Duane M. Jergenson, Director
INDEPENDENT AUDITORS' REPORT ON SCHEDULE
We have audited the consolidated financial statements of Hawkins Chemical, Inc. and subsidiaries (the Company) as of September 28, 1997 and September 29, 1996, and for each of the three years in the period ended September 28, 1997, and have issued our report thereon dated December 9, 1997; such consolidated financial statements and report are included in the 1997 Annual Report to Shareholders and are incorporated herein by reference. Our audits also included the consolidated financial statement schedule of the Company, listed in Item 14(a)(2). This consolidated 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 consolidated financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
DELOITTE & TOUCHE LLP
Minneapolis, Minnesota
December 9, 1997
SCHEDULE II
HAWKINS CHEMICAL, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED SEPTEMBER 28, 1997, SEPTEMBER 29, 1996 AND OCTOBER 1, 1995 ------------------------------------------------------------------------------
INDEX TO EXHIBITS
Exhibit No. Description of Exhibit - ----------- ----------------------
3.1 Amended and Second Restated Articles of Incorporation as amended through February 28, 1989 (Incorporated by reference to Exhibit 3D to the Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 1989).
3.2 Second Amended and Superseding By-Laws as amended through February 15, 1995 (incorporated by reference to 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* Portions of Annual Report to Security Holders for period ended September 28, 1997
21* Subsidiaries of Registrant.
23* Independent Auditors' Consent
27* Financial Data Schedule.
* Denotes previously unfiled documents.