**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D. C. 20549**

 

**FORM 10-K**

 

**ANNUALREPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934**

 

**For the Fiscal Year Ended March 28, 2004**

 

**Commission File No. 0-7647**

 

**HAWKINS, INC.**

(Exact Name of Registrant as specified in itsCharter)

 

| **MINNESOTA**                                          |   | **41-0771293**                       |
|--------------------------------------------------------|--------|--------------------------------------|
| (State of Incorporation)                               |   | (I.R.S. Employer Identification No.) |
|                                                   |   |                                 |
| **3100 East Hennepin Avenue, Minneapolis,  Minnesota** |   | **55413**                            |
| (Address of Principal Executive Offices)               |   | (Zip Code)                           |

 

**(612) 331-6910**

(Registrant’s Telephone Number, IncludingArea 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 reportsrequired to be filed by Section 13 or 15(d) of the Securities Exchange Actof 1934 during the preceding twelve months (or for such shorter period that theRegistrant was required to file such reports) and (2) has been subject to suchfiling requirements for the past 90 days. Yes ý  No   o

 

Indicate by check mark if disclosure of delinquent filers pursuant toItem 405 of Regulation S-K is not contained herein, and will not be contained,to the best of the Registrant’s knowledge, in definitive proxy or informationstatements incorporated by reference in Part III of this Form 10-K or anyamendment to this Form 10-K.  o

 

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

YES                          ý                                    NO                              o

 

The aggregate market value of voting stock held by non-affiliates ofthe Registrant on September 30, 2003 (the last business day of theRegistrant’s most recently completed second fiscal quarter) was $99,493,482based upon the closing sale price for Hawkins, Inc.’s common stock on that dateas reported by The Nasdaq Stock Market, excluding all shares held by officersand directors of the Registrant and by the Trustees of the Registrant’sEmployee Stock Ownership Plan and Trust.

 

As of June 1, 2004, the Registrant had 10,216,688 shares of commonstock outstanding.

 

**DOCUMENTS INCORPORATED BY REFERENCE**

 

Part III of this Annual Report on Form 10-K incorporates by referenceinformation (to the extent specific sections are referred to herein) from theRegistrant’s Proxy Statement for its 2004 Annual Meeting of Shareholders to beheld August 5, 2004.

 

 

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PART I

 

ITEM 1.                                                     BUSINESS.

 

(a)                                  GENERALDEVELOPMENT OF THE BUSINESS. Hawkins, Inc. was incorporated in Minnesota in1955 and has its principal executive offices at 3100 East Hennepin Avenue,Minneapolis, Minnesota. As used in this Annual Report on Form 10-K, exceptwhere otherwise stated or indicated by the content, “Hawkins,” “we,” “theCompany,” “our,” or “the Registrant” means Hawkins, Inc. and its predecessors.

 

During fiscal 2000, the Company acquired certain assets of St. Mary’sChemicals, Inc. (discussed more fully in paragraph (c)(i)(B) below). In fiscal2001, the Company changed its corporate name to Hawkins, Inc., reflecting the factthe Company has expanded its original business beyond the distribution ofchemicals.

 

(b)                                 FINANCIALINFORMATION ABOUT INDUSTRY SEGMENTS. The Company’s principal business is theformulation, blending and distribution of bulk and specialty chemicals, whichit conducts in two principal segments: Water Treatment and Industrial.Financial information regarding these segments is reported in the Company’saudited financial statements. See Items 7 and 8 below.

 

(c)                                  NARRATIVEDESCRIPTION OF THE BUSINESS.

 

(i)                                     PRODUCTS ANDMARKETS. The Company’s business is conducted in two segments, Water Treatmentand Industrial, which are more fully described below:

 

(A)                              WATER TREATMENT. TheWater Treatment segment specializes in providing equipment, chemicals andsolutions to problems for potable water, municipal and industrial wastewater,industrial process water and non-residential swimming pool water. The WaterTreatment Group has warehouses in twelve cities and utilizes aDriver/Technician/Salesperson approach in supplying products and service tocustomers in Minnesota, Wisconsin, Iowa, North Dakota, South Dakota, Nebraska,Illinois, Michigan, Montana, Kansas and Wyoming. In December 2000,operations in the Minneapolis/St. Paul area relocated to a new 59,000 square-footfacility, “the Red Rock facility.” The Red Rock facility, located on theMississippi River in St. Paul, Minnesota, has improved operationalefficiencies, as the Water Treatment operations are now located at the facilitywhere several key products are produced and the consolidated warehouse spacehas reduced the amount of time required to load trucks between deliveries.

 

(B)                                INDUSTRIAL. TheIndustrial segment specializes in providing industrial chemicals and servicesto the energy, electronics, chemical processing, pulp and paper, medical deviceand plating industries. In addition, the Industrial segment provides productsand services to food manufacturers and processing plants. The Industrialsegment also distributes a variety of pharmaceutical products, manufactures andsells certain food grade products, including the Cheese-Phos® liquid phosphate product (discussedmore fully in paragraph (iv) below) and other blended products, none of whichare material to the Company. This segment conducts its business primarilythrough distribution centers and terminal operations.

 

The Industrial segment receives, stores anddistributes various chemicals in bulk, including liquid caustic soda,phosphoric acid, potassium hydroxide and aqua ammonia; manufactures sodiumhypochlorite (bleach) and agricultural products; repackages water treatmentchemicals; and performs custom blending of certain chemicals for customersaccording to customer formulas. The Industrial segment operates liquid causticsoda barge terminals to receive shipments during the period the MississippiRiver is open to barge traffic (approximately April 1 throughNovember 15). During the remainder of the year, the Company relies onstockpiles, as well as supplies shipped in by railroad tank car. Approximately80% of the terminal operations business is related to liquid caustic soda.Pursuant to operating agreements it has with other chemical companies, theCompany receives and stores liquid caustic soda and other chemicals at its twoterminal sites, Hawkins Terminal 1 and Terminal 2. Terminal 1 and Terminal 2are located on opposite sides of the Mississippi River in St. Paul, Minnesota.

 

Since 1963, flooding of the Mississippi Riverhas required the Company’s terminal operations to be temporarily shifted out ofits buildings four times, the most recent being in the spring of 2001. Fromapproximately April 12, 2001 to May 8, 2001, the areas around theterminals were flooded, preventing shipments to and from these locations. Theterminals themselves were not flooded, as the facilities were adequatelyprotected by dikes. Additionally, the high water interrupted barge traffic onthe Mississippi River and no caustic soda barges were received from the closingof the river in the fall of 2000 until the end of May 2001. No substantialinterruptions to sales resulted from the flooding, as trucks and railroad tankcars were used as an alternative means of supply. However, the Company incurredadditional shipping, labor, and other costs and was not able to pass throughall of 

 

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these costs to its customers. This had a negative impact on earnings inthe third quarter of fiscal 2001 of approximately $200,000. No assurance can begiven that flooding will not recur or that there will not be material damage orinterruption to the Company’s operations in the future from flooding. InSeptember 2001, a 1.5 million-gallon caustic soda storage tank wascompleted at the Red Rock facility, allowing it to serve as an additional terminalfor bulk chemicals. Historically, the property on which the Red Rock facilityis located has not been subject to flooding when Terminals 1 and 2 were notusable due to high water, and the facility was not affected by the flooding in2001. The Company believes the impact of future flooding, if any, will bereduced as the Red Rock facility is expected to allow the Company to continuenormal shipping to customers during periods of high water levels.

 

The Industrial segment also includes amanufacturing, blending and sales distribution center for industrial chemicals,food grade chemicals, high-purity electronic chemicals and laboratory chemicalsand supplies. Bulk industrial chemicals are generally repackaged and sold insmaller quantities to the Company’s customers. Sales are concentrated primarilyin Wisconsin, Minnesota, northern Iowa, and North and South Dakota. Theprincipal products are acids and alkalis and industrial and food grade salts.The Industrial segment also specializes in sales to the plating and electronicindustries, relying on a specially trained sales staff that works directly withcustomers on their surface finishing needs.

 

On May 26, 2000, the Company completedthe acquisition of certain assets of St. Mary’s Chemicals, Inc. d.b.a.Universal Chemicals. Universal Chemicals, a Minnesota-based company, wasengaged in the business of marketing, selling, and distributing pharmaceuticalchemicals to pharmacies and pharmacy wholesalers. On May 26, 2000, theCompany also entered into a five-year employment agreement with one of theprevious owners and consulting agreements with the other two previous owners ofUniversal Chemicals. The employment agreement and consulting agreements containperformance bonuses and non-compete provisions. The agreements are based onUniversal Chemicals’ cumulative operating results, as defined in theagreements, for five years after the acquisition date and have a maximum payoutof $3,520,000. Based upon financial results through March 28, 2004, nopayment amount would be due. The non-compete provisions extend for a period offive years after the termination of the employment or consulting agreements,and require annual payments of $100,000 to $200,000 depending on UniversalChemicals’ operating results, as defined in the agreements, for five yearsafter the termination date.

 

(ii)                                  NEW PRODUCTS. TheCompany did not have any significant new products during the fiscal year endedMarch 28, 2004.

 

(iii)                               RAW MATERIALS. TheCompany’s segments have approximately 300 suppliers, including many of themajor chemical producers in the United States, of which approximately 20account for a majority of the Company’s purchases. The Company’s segmentstypically have written distributorship agreements or supply contracts withtheir suppliers that are renewed from time to time. Although there is noassurance that any contract or understanding with any supplier will not beterminated in the foreseeable future, most of the products purchased can beobtained 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 thesuccessful operation of the Company’s business. The Company has, however,obtained a patent on a liquid form of sodium phosphate for use in the processedfood industry, as described below. The patent was granted on October 17,1995 and will expire on November 8, 2013. The Company’s patented Cheese-Phos®,a two-component liquidsodium phosphate, is stored at room temperature. Other competing liquid sodiumphosphates must be stored at elevated temperatures to prevent crystallizationbecause they are single component. Liquid delivery systems, in general, are moreeconomical than dry delivery systems and are easier to automate, measure,monitor and control. As a two-component liquid process, Cheese-Phos®, whenmixed with varied amounts of sodium hydroxide, can create all of the ratios ofsodium phosphates that process cheese makers use. This minimizes inventoriesfor producers. Cheese-Phos® has not and is not expected to materially increasethe Company’s sales or profits.

 

(v)                                 SEASONAL ASPECTS. TheWater Treatment segment has historically experienced higher sales during theApril to September timeframe, which is due primarily to an increasein chemicals used by municipal water treatment facilities.

 

(vi)                              WORKING CAPITAL ITEMS. Asa bulk distributor of chemicals, the Company is required to carry significantamounts of inventory to meet rapid delivery requirements of customers. Workingcapital requirements vary on a seasonal basis as a result of the seasonality ofthe water treatment business.

 

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(vii)                           DEPENDENCE ON LIMITED NUMBEROF CUSTOMERS. No one customer represents more than approximately 5% of theCompany’s sales, but the loss of its five largest customers could have amaterial adverse effect on the Company’s results of operations. Additionally,no one customer represents 10% or more of either the Water Treatment segment orIndustrial segment sales.

 

(viii)                        BACKLOG. Backlog is notmaterial to an understanding of the Company’s business.

 

(ix)                                GOVERNMENT CONTRACTS.No material portion of the Company’s business is subject to renegotiation ofprofits or termination of contracts at the election of any state or federalgovernmental subdivision or agency.

 

(x)                                   COMPETITIVECONDITIONS. The Company operates in a competitive industry and competes withproducers, distributors and sales agents offering chemicals equivalent to allof the products handled by the Company. Many such producers and distributorsare substantially larger than the Company. No one competitor, however, isdominant in the Company’s market. Price and service are the principal factorsaffecting competition in the industry.

 

(xi)                                RESEARCH ANDDEVELOPMENT. The Company does not have a formal research and developmentfunction. Employees are assigned to research and development projects as theneed arises. During the fiscal year ended March 28, 2004, expenditures forresearch and development were negligible and not material to the Company’sbusiness.

 

(xii)                             ENVIRONMENTAL MATTERS. TheCompany is primarily a compounder and distributor, rather than a manufacturer,of chemical products. As such, compliance with current federal, state and localprovisions regarding discharge of materials into the environment, or otherwiserelating to the protection of the environment, is not anticipated to have anymaterial effects upon the capital expenditures, earnings or competitiveposition of the Company. The Company does not currently anticipate making anymaterial capital expenditures for environmental control facilities duringfiscal 2005.

 

(xiii)                          EMPLOYEES. The number ofpersons employed by the Company as of March 28, 2004 was 205.

 

(d)                                 FINANCIALINFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS AND EXPORT SALES. Because theCompany deals primarily in one geographic area of the United States, abreakdown of sales, profitability or assets attributable to differentgeographic areas is not meaningful to an understanding of the Company’sbusiness.

 

(e)                                  AVAILABLE INFORMATION. We have madeavailable, free of charge, through our Internet website (http://www.hawkinsinc.com)our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, CurrentReports on Form 8-K, and if applicable, amendments to those reports, as soon asreasonably practicable after we electronically file such materials with, orfurnish them to, the Securities and Exchange Commission. Reports of beneficialownership filed by our directors and executive officers pursuant toSection 16(a) of the 1934 Act are also available on our website. We arenot including the information contained on our website as part of, or incorporatingit by reference into, this Annual Report on Form 10-K.

 

ITEM 2.                                                     PROPERTIES.

 

The Company owns its principal location, which consists ofapproximately 11 acres of land in Minneapolis, Minnesota, with six buildingscontaining a total of 160,000 square feet of office and warehouse space. TheCompany’s principal office is located in one of these buildings, at 3100 EastHennepin Avenue. As of the date hereof, the Company has installed sprinklersystems in substantially all of its warehouse facilities for fire protection.The Company carries insurance covering the replacement of property damaged byfire or flood.

 

As noted above, in December 2000 the Company completed the RedRock facility, which consists of a 59,000 square-foot building located onapproximately 10 acres of land. This facility has outside storage capacity ofapproximately 1.5 million gallons for the storage of liquid caustic soda, aswell as numerous smaller tanks for storing and mixing chemicals. The land isleased from the Port Authority of the City of St. Paul, Minnesota throughJuly 31, 2029 for a basic rent plus an amount based on the annual tonnageunloaded at the site. The basic rent and annual tonnage rent are to berenegotiated every five years beginning August 1, 2004.

 

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In addition to the facilities described above, the Company’s otherfacilities are described below. These facilities, together with those describedabove, are adequate and suitable for the purposes they serve. Unless noted,each facility is owned and is fully utilized by the Company.

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

 

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(1)                                  TheCompany’s terminal operations are located at two sites on opposite sides of theMississippi River, made up of three buildings, nine outside storage tanks witha total capacity of approximately 8,900,000 gallons for the storage of liquidcaustic soda, as well as numerous smaller tanks for storing and mixingchemicals. The land is leased from the Port Authority of the City of St. Paul,Minnesota for a basic rent plus an amount based on the annual tonnage unloadedat each site. The applicable leases run until December 31, 2008, at whichtime the Company has an option to renew the leases for an additional five-yearperiod on the same terms and conditions subject to renegotiation of rent. TheCompany also has options to renew these leases for additional successivefive-year renewal periods (extending until 2018) for which the rent may beadjusted pursuant to the rental renegotiation provisions contained in theleases.

 

(2)                                  Thisfacility is leased from a third party.

 

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

 

(4)                                  Partof this facility is leased to a third party (2,500 square feet).

 

(5)                                  Partof this facility is leased to a third party (6,000 square feet).

 

ITEM 3.                                                     LEGALPROCEEDINGS.

 

The Company was a defendant in a lawsuitencaptioned *Chavarriaet al v. Hawkins, Inc., Panorama Compounding Pharmacy, and Valley Drug andCompounding, et al*. This action was filed on September 7, 2001in the Superior Court of the State of California, County of Los Angeles,Northwest District, Case No. LC 057561. The plaintiffs were seeking unspecifiedcompensatory and punitive damages relating to claims arising from the allegedmislabeling of certain inventory purchased by the Company as part of anacquisition in May 2000. A tentative settlement was reached inFebruary 2004, and on April 9, 2004 the case was dismissed. Pursuantto the terms of the settlement, the Company did not admit or deny any of theallegations of the complaint. The Company was responsible for the payment of$3.0 million that was not covered by insurance, which was charged againstincome from operations and paid during the fourth quarter of fiscal 2004. TheCompany is pursuing reimbursement of the settlement payment and defense costsfrom third parties.

 

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

 

Not Applicable.

 

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EXECUTIVE OFFICERS OF THE REGISTRANT

 

The executive officers of the Company, their ages and offices held, asof June 1, 2004 are set forth below:

 
| **Name**            |   | **Age** |   | **Office**                                                        |
|---------------------|--------|---------|--------|-------------------------------------------------------------------|
|                |   |    |   |                                                              |
| John R. Hawkins     |   | 52      |   | Chairman of the Board and Chief Executive Officer                 |
|                |   |    |   |                                                              |
| Marvin E. Dee       |   | 55      |   | Vice President, Chief Financial Officer, Secretary, and Treasurer |
|                |   |    |   |                                                              |
| Keenan A. Paulson   |   | 54      |   | Vice President - Water Treatment Group                            |
|                |   |    |   |                                                              |
| John R. Sevenich    |   | 46      |   | Vice President - Manufacturing and Specialty Products             |
|                |   |    |   |                                                              |
| Daniel E. Soderlund |   | 41      |   | Vice President – Pharmaceuticals                             |

 

John R. Hawkins has been the Company’s Chairman and Chief ExecutiveOfficer since February 16, 2000. He was President and Chief OperatingOfficer from December 1998 to February 2000 and was Secretary from1991 to December 1999. He was an Executive Vice President from 1997 toDecember 1998 and Vice President of Sales from 1987 to 1997.

 

Marvin E. Dee has been the Company’s Vice President and Chief FinancialOfficer since September 1999 and its Secretary and Treasurer sinceDecember 1999. He was the Chief Financial Officer of Nath Companies from1997 to September 1999, the Vice President of Finance and Treasurer ofTricord Systems, Inc. from 1993 to 1997 and Senior Director of Accounting ofNordicTrack, Inc. in 1993 and the Controller of NordicTrack from 1991 to1992.

 

Keenan A. Paulson has been the Company’s Vice President - WaterTreatment Group since May 2000. Prior to attaining this position, Ms.Paulson held various positions during her 32-year career with the Company, mostrecently as its Water Treatment General Manager.

 

John R. Sevenich has been the Company’s Vice President - Manufacturingand Specialty Products since May 2000. He was the Business Unit Manager ofManufacturing from 1998 to May 2000 and was a Sales Representative withthe Company from 1989 to 1998.

 

Daniel E. Soderlund has been the Company’s Vice President -Pharmaceuticals since May 2000. He was the Business Unit Manager ofPharmaceuticals from April 1999 to May 2000 and was a SalesRepresentative with the Company from 1992 to April 1999.

 

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PART II

 

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

 
| **Quarterly Stock Data** |   | **High**     |   | **Low**  |   |
|--------------------------|--------|--------------|--------|----------|--------|
|                     |   |         |   |     |   |
| Fiscal 2004              |   |         |   |     |   |
| 4th Quarter              |   | $            | 13.650 |     | $      | 11.600 |   |
| 3rd Quarter              |   | 13.900       |   | 12.620   |   |
| 2nd Quarter              |   | 12.970       |   | 10.280   |   |
| 1st Quarter              |   | 11.350       |   | 9.035    |   |
|                     |   |         |   |     |   |
| Fiscal 2003              |   |         |   |     |   |
| 4th Quarter              |   | $            | 9.400  |     | $      | 8.400 |   |
| 3rd Quarter              |   | 9.000        |   | 8.000    |   |
| 2nd Quarter              |   | 9.900        |   | 8.110    |   |
| 1st Quarter              |   | 10.200       |   | 8.800    |   |
|                     |   |         |   |     |   |
| **Cash Dividends**       |   | **Declared** |   | **Paid** |   |
|                     |   |         |   |     |   |
| Fiscal 2005              |   |         |   |     |   |
| 1st Quarter              |   |         |   | $        | .18    |   |
|                     |   |         |   |     |   |
| Fiscal 2004              |   |         |   |     |   |
| 4th Quarter              |   | $            | .18    |     |   |   |
| 3rd Quarter              |   |         |   | $        | .18    |   |
| 2nd Quarter              |   | $            | .18    |     |   |   |
| 1st Quarter              |   |         |   | $        | .18    |   |
|                     |   |         |   |     |   |
| Fiscal 2003              |   |         |   |     |   |
| 4th Quarter              |   | $            | .18    |     |   |   |
| 3rd Quarter              |   |         |   | $        | .15    |   |
| 2nd Quarter              |   | $            | .15    |     |   |   |
| 1st Quarter              |   |         |   | $        | .15    |   |

 

The Company’s common shares are traded on The Nasdaq Stock Marketâunder the symbol “HWKN.” The price information represents closing sale pricesas reported by The Nasdaq Stock Market. As of March 28, 2004, there wereapproximately 650 registered common shareholders, which includes nominees orbroker dealers holding stock on behalf of an estimated 1,750 beneficial owners.

 

The Company first started paying cash dividends in 1985 and has done soconsecutively since that time. Future dividend levels will be dependent uponHawkins’ results of operations, financial position, cash flows and otherfactors, and will be evaluated by the Hawkins Board of Directors.

 

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ITEM 6.                                                     SELECTEDFINANCIAL DATA.

 

SELECTED FINANCIAL DATA TABLES

 
|                                        |   | **Fiscal  Year  Ended  March 28,  2004** |        | **Fiscal  Year  Ended  March 30,  2003** |   | **Six-Month  Transitional  Period Ended  March 31,  2002** |   |       |       |
|---------------------------------------------|--------|-----------------------------------------------|-------------|-----------------------------------------------|--------|-----------------------------------------------------------------|--------|------------|------------|
|                                        |
| **Fiscal Years Ended September**            |
| **2001**                                    |   | **2000**                                      |        | **1999**                                      |
|                                        |   |                                          |        |                                          |   |                                                            |   |       |       |   |   |   |   |
| Sales                                       |   | $                                             | 107,028,131 |                                          | $      | 104,004,611                                                     |   | $          | 49,868,179 |   | $ | 107,931,668 |   | $ | 98,021,731 |   | $ | 96,734,470 |   |
|                                        |   |                                          |        |                                          |   |                                                            |   |       |       |   |   |   |   |
| Net income                                  |   | 5,751,884                                     |        | 8,430,172                                     |   | 3,083,771                                                       |   | 7,117,578  |       | 8,567,699 |   | 9,698,642 |   |
|                                        |   |                                          |        |                                          |   |                                                            |   |       |       |   |   |   |   |
| Basic and diluted earnings per common share |   | .56                                           |        | .83                                           |   | .30                                                             |   | .69        |       | .81 |   | .87 |   |
|                                        |   |                                          |        |                                          |   |                                                            |   |       |       |   |   |   |   |
| Cash dividends declared per common share    |   | .36                                           |        | .33                                           |   | .15                                                             |   | .30        |       | .32 |   | .27 |   |
|                                        |   |                                          |        |                                          |   |                                                            |   |       |       |   |   |   |   |
| Cash dividends paid per common share        |   | .36                                           |        | .30                                           |   | .15                                                             |   | .30        |       | .29 |   | .25 |   |
|                                        |   |                                          |        |                                          |   |                                                            |   |       |       |   |   |   |   |
| Total assets                                |   | 82,616,905                                    |        | 81,098,739                                    |   | 71,487,133                                                      |   | 74,868,121 |       | 69,894,520 |   | 68,999,827 |   |
|                                        |   |                                          |        |                                          |   |                                                            |   |       |       |   |   |   |   |
| Long-term debt                              |   |                                          |        |                                          |   |                                                            |   | 116,823    |       | 226,003 |   | 328,040 |   |
|                                             |        |                                               |             |                                               |        |                                                                 |        |            |            |  |  |  |  |  |  |  |  |  |  |

 

The Company changed its fiscal year end from the Sunday closest toSeptember 30 to the Sunday closest to March 31, beginning after asix-month transitional period ended on March 31, 2002. See “Management’sDiscussion and Analysis of Financial Condition and Results of Operations -General.”

 

ITEM 7.                                                     MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

 

FORWARD-LOOKING INFORMATION

 

The information contained in this Annual Report on Form 10-K for theyear ended March 28, 2004 contains statements that we believe to be“forward-looking statements” within the meaning of the Private SecuritiesLitigation Reform Act of 1995. Forward-looking statements give our currentexpectations or forecasts of future events. Forward-looking statementsgenerally can be identified by the use of forward-looking terminology such as“may,” “will,” “expect,” “intend,” “estimate,” “anticipate,” “believe,” “project,”or “continue,” or the negative thereof or similar words. From time to time, wealso may provide oral or written forward-looking statements in other materialswe release to the public. Any or all of our forward-looking statements in thisAnnual Report on Form 10-K and in any public statements we make could bematerially different from actual results. They can be affected by assumptionswe might make or by known or unknown risks or uncertainties, including thosedescribed below under “Risk Factors” and other factors disclosed throughoutthis Annual Report on Form 10-K and the Company’s other filings with theSecurities and Exchange Commission. Consequently, we cannot guarantee anyforward-looking statements and undertake no obligation to revise any forward-lookingstatements in order to reflect events or circumstances that may arise after thedate of this Annual Report on Form 10-K. Investors are cautioned not toplace undue reliance on any forward-looking statements. Investors should alsounderstand that it is not possible to predict or identify all factors thatmight affect actual results and should not consider the following list to be acomplete statement of all potential risks and uncertainties.

 

RISK FACTORS

 

In addition to specific factors which may be described in connectionwith any of the Company’s forward-looking statements, factors which could causeactual results to differ materially include, but are not limited to, thefollowing items.

 

•                Reduced profitmargins due to the cyclical nature of commodity chemical prices. Thecyclicality of commodity chemical markets, such as caustic soda, primarilyresults from changes in the balance between supply and demand and the level ofgeneral economic activity. The Company cannot predict with any certainty whetherthe markets for its commodity chemicals will favorably impact the Company’soperations or whether the Company will experience losses due to excessproduction resulting in oversupply and lower prices.

 

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•                Unforeseenliabilities arising from litigation, particularly liabilities that may arisefrom claims under environmental laws which may impose liability for the releaseof hazardous materials whether or not the Company had knowledge of or wasresponsible for such release.

 

•                Changes ingovernmental and regulatory policies that affect the Company which may entailsignificant cost increases relating to the handling, storage, transportation,treatment or disposal of hazardous materials.

 

•                Increased competitionwhich could affect our ability to raise prices or successfully enter certainmarkets.

 

•                Changes incustomer demand which may significantly reduce revenues and income.

 

•                Changes in productcosts or operating expenses which may reduce our operating margins.

 

•                The financialcondition of our customers and their ability to purchase our products atcomparable prices.

 

•                Significantchanges in our business strategies, including acquisition, divestiture andrestructuring activities which may affect our ability to focus on operatingactivities or increase costs.

 

•                General economicand political conditions, such as political instability or the rate of economicgrowth in our principal geographic or product markets.

 

•                Changes inoperating factors, such as our ability to make continued improvements indistribution efficiencies and inventory risks due to shifts in market demand.

 

•                Unforeseen orrecurring operational problems or natural disasters at any of our facilitiescausing significant lost production and/or increased costs.

 

•                Technology risks,such as failure to continue to make process improvements to reduce costs or toanalyze our business.

 

•                Loss of seniormanagement or other key personnel and our ability to hire suitable replacementsin a timely manner.

 

•                The Company iscurrently implementing an Enterprise Resource Planning (ERP) system. The ERPsystem implementation is critical for the Company to make its internal controlcertifications required by the end of fiscal 2005 pursuant to Section 404of the Sarbanes-Oxley Act. The Company believes the ERP system will beimplemented by October 1, 2004. If the ERP system is not implemented bythat date and/or there is not adequate training, policies and proceduresimplemented and documented on a timely basis, the Company may not be able tomake an unqualified certification regarding the Company’s internal controlspursuant to Section 404 of the Sarbanes-Oxley Act at the end of fiscal2005.

 

These factors are not exhaustive and new factors may emerge or existingfactors may change in a manner that impacts our business. We assume noobligation and disclaim any duty to update the forward-looking statements inthis Annual Report on Form 10-K or any other public statement.

 

GENERAL

 

In December 2001, the Company changed its fiscal year end to a52/53-week year ending on the Sunday closest to March 31 from a 52/53-weekfiscal year ending on the Sunday closest to September 30. The change inyear-end better matches the Company’s annual reporting process to its natural businesscycles. This change resulted in a six-month transitional period endedMarch 31, 2002. This discussion compares the Company’s fiscal year endedMarch 28, 2004 with the fiscal year ended March 30, 2003, the fiscalyear ended March 30, 2003 with the six-month transitional period endedMarch 31, 2002, and the six-month transitional period ended March 31,2002 with the fiscal year ended September 30, 2001. Due to the seasonalityof the Company’s business, management feels it would be more meaningful to thereaders of these statements to compare results of operations to comparableperiods.

 

OVERALL SUMMARY

 

Sales for the fiscal year ended March 28, 2004 were $107,028,131versus $104,004,611 for the fiscal year ended March 30, 2003, $49,868,179for the six-month transitional period ended March 31, 2002 and$107,931,668 for the fiscal year ended September 30, 2001. Net income forthe fiscal year ended March 28, 2004 was $5,751,884 or $.56 per sharecompared to $8,430,172, or $.83 per share for the fiscal year endedMarch 30, 2003, $3,083,771, or $.30 per share for the six-monthtransitional period ended March 31, 2002, and $7,117,578, or $.69 pershare for the fiscal year ended September 30, 2001. Return on averageshareholders’ 

 

9

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equity was 8.6% for the fiscal year ended March 28, 2004 comparedto 13.4% for the fiscal year ended March 30, 2003, 10.5% for the six-monthtransitional period ended March 31, 2002 and 12.3% for the fiscal yearended September 30, 2001. Book value per share was $6.65 at March 28,2004, $6.43 at March 30, 2003, and $5.91 at March 31, 2002.

 

The following table sets forth the percentage relationship of certainitems to sales for the period indicated:

 
|                                          |   | **Fiscal  Year Ended  March 28, 2004** |   | **Fiscal  Year Ended  March 30, 2003** |   | **Six-Month  Transitional  Period Ended  March 31, 2002** |   | **Fiscal  Year Ended  September 30, 2001** |   |
|-----------------------------------------------|--------|---------------------------------------------|--------|---------------------------------------------|--------|----------------------------------------------------------------|--------|-------------------------------------------------|--------|
|                                          |   |                                        |   |                                        |   |                                                           |   |                                            |   |
| Sales                                         |   | 100.0                                       | %      | 100.0                                       | %      | 100.0                                                          | %      | 100.0                                           | %      |
| Cost of sales                                 |   | (73.9                                       | )%     | (73.1                                       | )%     | (76.9                                                          | )%     | (77.5                                           | )%     |
| Gross margin                                  |   | 26.1                                        | %      | 26.9                                        | %      | 23.1                                                           | %      | 22.5                                            | %      |
| Selling, general and administrative  expenses |   | (15.7                                       | )%     | (14.3                                       | )%     | (13.9                                                          | )%     | (13.2                                           | )%     |
| Litigation settlement                         |   | (2.8                                        | )%     |                                        |   |                                                           |   |                                            |   |
| Income from operations                        |   | 7.6                                         | %      | 12.6                                        | %      | 9.2                                                            | %      | 9.3                                             | %      |
| Investment income                             |   | .8                                          | %      | .4                                          | %      | .5                                                             | %      | .7                                              | %      |
| Income before income taxes                    |   | 8.4                                         | %      | 12.9                                        | %      | 9.7                                                            | %      | 10.0                                            | %      |
| Provision for income taxes                    |   | (3.0                                        | )%     | (4.8                                        | )%     | (3.5                                                           | )%     | (3.4                                            | )%     |
| Net income                                    |   | 5.4                                         | %      | 8.1                                         | %      | 6.2                                                            | %      | 6.6                                             | %      |

 

SALES

 

For the fiscal year ended March 28, 2004, sales for the Industrialsegment were $67,746,982 and for the Water Treatment segment were $39,281,149.For the fiscal year ended March 30, 2003, sales for the Industrial segmentwere $67,674,289 and for the Water Treatment segment were $36,330,322. Theincrease in sales was primarily driven by the Water Treatment segment, as salesincreased by $2,950,827 or 8.1% in comparison to the prior year. The increaseswere primarily attributable to volume increases, due in part to favorablesummer weather conditions. Industrial segment sales were flat as thecombination of an approximately 5.1% increase in caustic soda volumes sold andan increase in caustic soda selling price that increased sales by approximately1.4% was offset by a decrease in sales to customers in the telecommunicationand circuit board industries.

 

For the six-month transitional period ended March 31, 2002, salesfor the Industrial segment were $35,686,509 and for the Water Treatment segmentwere $14,181,670. The decrease in sales in comparison to the fiscal year endedMarch 30, 2003 was due to a difference in period lengths and the seasonalnature of the Water Treatment segment’s business, as its sales duringApril through September are greater than its sales duringOctober through March.

 

For the fiscal year ended September 30, 2001, sales for theIndustrial segment were $73,818,768 and for the Water Treatment segment were$34,112,900. The decrease in sales for the six-month transitional period endedMarch 31, 2002 as compared to the fiscal year ended September 30,2001 was due to the difference in the length of periods compared and to theseasonal nature of the Water Treatment segment’s business as mentioned above.

 

GROSS MARGIN

 

Gross margin, as a percentage of sales, was 26.1% for the fiscal yearended March 28, 2004 compared to 26.9% for the fiscal year endedMarch 30, 2003 and was 23.1% and 22.5% for the six-month transitionalperiod ended March 31, 2002 and the fiscal year ended September 30,2001, respectively. The gross margin variations are due to a number ofvariables as explained below.

 

Industrial Segment

 

Gross margin, as a percentage of sales, for the Industrial segment was22.4% for the fiscal year ended March 28, 2004 compared to 23.8% for thefiscal year ended March 30, 2003 and was 21.4% and 18.7% for the six-monthtransitional period ended March 31, 2002 and the fiscal year endedSeptember 30, 2001, respectively. The decrease for the fiscal year endedMarch 28, 2004 as compared to the fiscal year ended March 30, 2003relates in part to changes in the cost and selling price of caustic soda duringthese periods and to the high level of high cost inventory on hand at the endof the 2004 fiscal year’s barge shipping season (October 2003). A highlycompetitive market environment resulted in an increase of approximately$600,000 in product costs that the Company was 

 

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unable to pass on to its customers. Also, insurance expense increasedby approximately $160,000 or 22.5% and employee compensation and benefitsincreased by approximately $134,000 or 4.9%.

 

The increases over the previous periods in the fiscal year endedMarch 30, 2003 and the six-month transitional period ended March 31,2002 are mainly due to improved margins in most product lines and tofluctuations in the cost and selling price of caustic soda. During calendar2002, the cost of caustic soda was increasing and continued to increase throughthe end of the 2003 fiscal year. Due to the large quantities of caustic sodainventory that are maintained to meet customer requirements and because the Companyis on the last-in, first out (“LIFO”) method of valuing inventories, any costfluctuations can impact gross margins. The Company attempts to maintainrelatively constant dollar margins as the cost of caustic soda increases ordecreases. The cost of this product is normally subject to fluctuations, whichare expected to continue in future periods. By maintaining relatively stabledollar margins, the gross margin percentage will decrease when the cost of theproduct is increasing and will increase when the cost of the product isdecreasing.

 

Water Treatment Segment

 

Gross margin, as a percentage of sales, for the Water Treatment segmentwas 32.6% for the fiscal year ended March 28, 2004, 32.7% for the fiscalyear ended March 30, 2003, 27.6% for the six-month transitional periodended March 31, 2002, and 30.7% for the fiscal year endedSeptember 30, 2001. The fiscal year ended March 28, 2004 wascomparable with the fiscal year ended March 20, 2003 as the increase insales, due primarily to favorable weather, was offset by higher operatingcosts. Additionally, in fiscal 2004 the Company started to manufacture aproduct line internally that resulted in an increased product margin ofapproximately $670,000. Offsetting this improvement in product margins was an increasein operating costs including an approximately $79,000 or 10.8% increase ininsurance expense and an approximately $732,000 or 19.3% increase in employeecompensation and benefits which includes an increase in commissions paid toroute salespersons for the increase in product margins.

 

The gross margin increase for the fiscal year ended March 30, 2003as compared to the six-month transitional period ended March 31, 2002 wasdue to the fiscal year end change and to the seasonal nature of the Water Treatmentsegment. During the months of April to September, the sales for thissegment are greater and have higher profit margins than the sales forOctober to March. Additionally, there are certain fixed costs included incost of sales that do not fluctuate with sales volumes. The decrease for thesix-month transitional period ended March 31, 2002 in comparison to thefiscal year ended September 30, 2001 was due to the aforementioned fiscalyear end change and the seasonality of the Water Treatment segment.

 

SELLING, GENERAL AND ADMINISTRATIVE

 

Selling, general and administrative expenses, as a percentage of sales,were 15.7% ($16,793,094) for the fiscal year ended March 28, 2004, 14.3%for the fiscal year ended March 30, 2003, 13.9% for the six-monthtransitional period ended March 31, 2002, and 13.2% for the fiscal yearended September 30, 2001. The increase for the fiscal year endedMarch 28, 2004 was partially attributable to $536,000 in consulting feesassociated with the Company’s efforts to comply with the requirements of theSarbanes-Oxley Act and to the Company’s evaluation and investment in anEnterprise Resource Planning system. The Company will continue to incuradditional expenses, including expenses for additional staffing and outsideprofessional services, to implement the Enterprise Resource Planning system andmeet the requirements of the Sarbanes-Oxley Act. Additionally, insurance costsincreased by approximately $138,000 or 27.9% and employee compensation andbenefits increased by approximately $601,000 or 5.4%. Employee compensation andbenefits comprise the majority of the selling, general and administrativeexpenses. The increase for the fiscal year ended March 30, 2003 over thesix-month transitional period ended March 31, 2002 was primarily attributableto the Company’s investment in infrastructure necessary to support future salesincreases as well as a larger, more geographically dispersed organization. Thesix-month transitional period increase over the fiscal year endedSeptember 30, 2001 was primarily attributable to increases in sales staffand insurance expense.

 

LITIGATION SETTLEMENT

 

The Company was a defendant in a lawsuit encaptioned *Chavarria et al v. Hawkins, Inc., Panorama Compounding Pharmacy, andValley Drug and Compounding, et al.* This action was filed onSeptember 7, 2001 in the Superior Court of the State of California, Countyof Los Angeles, Northwest District, Case No. LC 057561. The plaintiffs wereseeking unspecified compensatory and punitive damages relating to claims arisingfrom the alleged mislabeling of certain inventory purchased by the Company aspart of an acquisition by the Company in May 2000. A tentative settlement wasreached in February 2004, and on April 9, 2004 the case wasdismissed. Pursuant to the terms of the settlement, the Company did not admitor deny any of the allegations of the complaint. The Company was responsiblefor the payment of $3.0 million that was not covered by insurance, which wascharged against income from operations and paid during the fourth quarter offiscal 2004. The Company is pursuing reimbursement of the settlement paymentand defense costs from third parties.

 

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INVESTMENT INCOME

 

Investment income increased $458,640 to $825,689 for the fiscal yearended March 28, 2004 compared to $367,049 for the fiscal year endedMarch 30, 2003. The increase was attributable to an increase in cashavailable for investment and to a $370,000 loss recognized in the fiscal yearended March 30, 2003 due to declines in market value on investments whichwere deemed other than temporary. Investment income of $227,360 for thesix-month transitional period ended March 31, 2002 was lower than thefiscal year ended March 30, 2003 due to less cash available for investmentand the aforementioned change in our fiscal year end that resulted in thesix-month transitional period. Investment income for the fiscal year endedMarch 30, 2003 was comparable to the fiscal year ended September 30,2001, excluding the aforementioned $370,000 loss, as the increased amounts ofcash available for investment during the fiscal year ended March 30, 2003were offset by a lower rate of return.

 

PROVISION FOR INCOME TAXES

 

The effective income tax rate was 36.1% for the fiscal year endedMarch 28, 2004, 37.2% for the fiscal year ended March 30, 2003, 36.2%for the six-month transitional period ended March 31, 2002 and 33.8% forthe fiscal year ended September 30, 2001. The decrease for the fiscal yearended March 28, 2004 compared to the fiscal year ended March 30, 2003was due to a decrease in income before income taxes. The increase for thefiscal year ended March 30, 2003 compared to the six-month transitionalperiod ended March 31, 2002 was primarily due to less tax-exempt interestincome in the fiscal year ended March 30, 2003. The increase in theeffective rate for the six-month transitional period compared to the fiscalyear ended September 30, 2001 was due to changes in state apportionmentfactors.

 

INFLATION

 

Inflation did not have a significant impact on the Company during thefiscal years ended March 28, 2004 and March 30, 2003, the six-monthtransitional period ended March 31, 2002, and the fiscal year endedSeptember 30, 2001, as selling prices have generally been adjusted as thecost of materials and other expenses have changed. On occasion, slightfluctuations in the cost of a single, large-volume product have not beenreflected in the selling price of that product.

 

SELECTED QUARTERLY FINANCIAL DATA

 
|                                              |   | **Fiscal  Year Ended March 28, 2004 (Unaudited)** |       |
|---------------------------------------------------|--------|--------------------------------------------------------|------------|
|                                              |   | **First  Quarter Ended  June 30, 2003**           |       | **Second  Quarter Ended  September 30, 2003** |   | **Third  Quarter Ended  December 31, 2003** |   | **Fourth  Quarter Ended  March 28, 2004** |   |
|                                              |   |                                                   |       |   |   |   |   |   |   |
| Sales                                             |   | $                                                      | 29,066,867 |   | $ | 28,645,014 |   | $ | 24,951,807 |   | $ | 24,364,443 |   |
| Gross margin                                      |   | 8,436,133                                              |       | 8,362,307 |   | 5,894,706 |   | 5,281,143 |   |
| Net income (loss)                                 |   | 2,792,016                                              |       | 2,591,573 |   | 1,162,837 |   | (794,542 | ) |
| Basic and diluted  earnings (loss) per share |   | $                                                      | .27        |   | $ | .25 |   | $ | .11 |   | $ | (.08 | ) |
|                                              |   |                                                   |       |   |   |   |   |   |   |
|                                              |   | **Fiscal  Year Ended March 30, 2003 (Unaudited)** | ** ** |
|                                              |   | **First  Quarter Ended  June 30, 2002**           |       | **Second  Quarter Ended  September 30, 2002** | ** ** | **Third  Quarter Ended  December 31, 2002** | ** ** | **Fourth  Quarter Ended  March 30, 2003** | ** ** |
|                                              |   |                                                   |       |   |   |   |   |   |   |
| Sales                                             |   | $                                                      | 27,282,901 |   | $ | 27,636,311 |   | $ | 24,331,951 |   | $ | 24,753,448 |   |
| Gross margin                                      |   | 7,751,126                                              |       | 7,962,555 |   | 6,290,581 |   | 5,953,590 |   |
| Net income                                        |   | 2,574,395                                              |       | 2,681,311 |   | 1,835,163 |   | 1,339,303 |   |
| Basic and diluted  earnings per share        |   | $                                                      | .25        |   | $ | .26 |   | $ | .18 |   | $ | .14 |   |

 

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FINANCIAL CONDITION

 

LIQUIDITY

 

Cash provided by operations in the fiscal year ended March 28,2004 was $7,411,596 compared to $14,589,108 in the fiscal year endedMarch 30, 2003, $3,860,076 during the six-month transitional period endedMarch 31, 2002 and $9,950,745 in the fiscal year ended September 30,2001. The decrease in the fiscal year ended March 28, 2004 compared to thefiscal year ended March 30, 2003 was due to the decrease in net income,including the $3,000,000 litigation settlement, the timing of liabilitypayments, and the year-over-year variances in tax payments. The increase in thefiscal year ended March 30, 2003 compared to the six-month transitionalperiod ended March 31, 2002 was due primarily to the timing of definedcontribution retirement plan payments and the increase in net income due to thesix month period, which was offset by fluctuations in inventory values andquantities. The decrease in the six-month transitional period endedMarch 31, 2002 compared to the fiscal year ended September 30, 2001was due primarily to fluctuations in inventory and timing of liability paymentsand a decrease in net income due to the six-month period.

 

Cash and investments available-for-sale of $23,923,408 atMarch 28, 2004 was comparable with the $24,256,281 available as ofMarch 30, 2003 and increased by $9,412,765 since March 31, 2002,primarily because of cash generated by operations in excess of capitalexpenditures and financing uses. Cash and investments available-for-sale increasedby $1,909,772 from September 30, 2001 to $14,510,643 at the end of thesix-month transitional period ended March 31, 2002. This increase wasprimarily attributable to cash generated by operations in excess of capitalexpenditures and financing uses and the maturity of investments classified asinvestments held-to-maturity, which were invested in available-for-saleinvestments. Cash equivalents consist of money market accounts at a financialinstitution. Investments consist of investment contracts with high-rated,stable insurance companies, marketable securities consisting of variable ratemunicipal bonds, U.S. Government agency securities and mutual funds carried atfair value. Investments are highly liquid and are available upon demandgenerally with only a minor penalty. Additionally, cash and cash equivalentsincreased by $6,221,039 from September 30, 2001 to March 31, 2002 asthe Company was in process at March 31, 2002 of transitioning investmentsinto higher rate of return investments. Subsequent to March 31, 2002 asignificant portion of the cash equivalents were invested in the aforementionedinvestment options.

 

As of March 28, 2004, the Company had an investment portfolio offixed income securities of $10,705,527 and mutual funds of $11,031,316,excluding $2,911,565 classified as cash and cash equivalents and variable ratesecurities. The fixed income securities, like all fixed income instruments, aresubject to interest rate risk and will decline in value if market interestrates increase. However, while the value of the investment may fluctuate in anygiven period, the Company intends to hold its fixed income investments untilmaturity. Consequently, the Company would not expect to recognize an adverseimpact on net income or cash flows or the amount ultimately realized on theinvestment. The value of the mutual funds, like all mutual funds, may increaseor decrease due to market volatility. The Company recorded a loss of $370,000in the fiscal year ended March 30, 2003 due to declines in market valuethat were deemed other than temporary.

 

CAPITAL EXPENDITURES

 

Capital expenditures in the fiscal years ended March 28, 2004 andMarch 30, 2003, the six-month transitional period ended March 31,2002, and the fiscal year ended September 30, 2001 were $4,897,551,$2,348,124, $1,145,030, and $7,056,226, respectively. Capital expendituresduring the fiscal year ended March 28, 2004 consisted primarily of$1,450,000 for office furniture and equipment which includes approximately$1,000,000 for software and hardware data processing equipment, $1,425,000 formachinery and equipment, $1,275,000 for land, buildings and improvements, and$750,000 for transportation equipment. We anticipate capital expenditures infiscal 2005 to be approximately $6.5 million primarily related toimplementation of the Enterprise Resource Planning system, new route salestrucks and general maintenance projects.

 

COMMON STOCK REPURCHASES

 

The Company did not acquire any common stock during the fiscal yearsended March 28, 2004 and March 30, 2003. During the six-monthtransitional period ended March 31, 2002, the Company acquired and retired32,100 shares of common stock for $251,790.

 

OFF-BALANCE SHEET ARRANGEMENTS

 

The Company does not have any off-balance sheet arrangements.

 

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CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS

 

The following table provides aggregate information about ourcontractual payment obligations and the periods in which payments are due:

 
|                        |   | **Payments  due by period** |      |
|-----------------------------|--------|-----------------------------|-----------|
| **Contractual Obligation**  |   | **2005**                    |      | **2006** |   | **2007** |   | **2008** |   | **2009** |   | **More than  5 Years** |   | **Total** |   |
|                        |   |                        |      |   |   |   |   |   |   |   |   |   |   |   |   |
| Operating lease obligations |   | $                           | 208,366   |   | $ | 175,110 |   | $ | 158,179 |   | $ | 137,848 |   | $ | 138,800 |   | $ | 2,271,673 |   | $ | 3,089,976 |   |
| Purchase obligations (1)    |   | 6,697,437                   |      | — |   | — |   | — |   | — |   | — |   | 6,697,437 |   |
| Total                       |   | $                           | 6,905,803 |   | $ | 175,110 |   | $ | 158,179 |   | $ | 137,848 |   | $ | 138,800 |   | $ | 2,271,673 |   | $ | 9,787,413 |   |

 

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(1)                                  TheCompany is committed to pay suppliers under the terms of open purchase ordersissued in the normal course of business. The Company does not purchase, orcommit to purchase, quantities in excess of normal usage or amounts that cannotbe used within one year.

 

OUTLOOK

 

Expected future cash flows from operations,coupled with the Company’s strong financial position, put the Company in aposition to fund both short and long-term working capital and capitalinvestment needs with internally generated funds. Management does not,therefore, anticipate the need to engage in significant financing activities ineither the short or long term. If the need to obtain additional capital doesarise, however, management is confident that the Company’s total debt tocapital ratio puts it in a position to obtain debt financing on favorableterms.

 

The Company will continue to incur significant expenditures in fiscal2005 associated with the implementation of the Enterprise Resource Planningsystem and to meet the requirements of the Sarbanes-Oxley Act. Fiscal 2005expenses, including additional staffing and outside professional services, areexpected to significantly exceed the additional fiscal 2004 expense ofapproximately $750,000.

 

Although management continually reviewsopportunities to enhance the value of the Company through strategicacquisitions, other capital investments and strategic divestitures, no materialcommitments for such investments or divestitures currently exist.

 

Other than as discussed above, management is not aware of any trends orother matters that have not materially affected results in the fiscal yearended March 28, 2004 but are expected to have a material effect on futureperiods.

 

CRITICAL ACCOUNTING POLICIES

 

Accounting policies whose application may have a significanteffect on the reported results of operations and financial position of theCompany, and that can require judgments by management that affect theirapplication, include Statement of Financial Accounting Standards (SFAS) No. 5,“Accounting for Contingencies,” and SFAS No. 144, “Accounting for theImpairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of.”

 

SFAS No. 5 requires management judgments regarding the probability andestimated amount of possible future contingent liabilities, including legalmatters. SFAS No. 144 requires judgments regarding future operating ordisposition plans for marginally performing assets and estimates of expectedrealizable values for assets to be sold. Other accounting policies that aresignificant to the Company include the following:

 

Revenue Recognition - The Company recognizes revenue when the producthas been shipped to the customer if there is evidence that the customer hasagreed to purchase the products, delivery and performance has occurred, theprice and terms of sale are fixed, and collection of the receivable isexpected.

 

Allowance for Doubtful Accounts - Accounts receivable are reduced by anallowance for amounts that may become uncollectible in the future.Substantially all of the Company’s receivables are due from customers locatedin the United States. The estimated allowance for doubtful accounts is basedupon the age of the outstanding receivables and the payment history and creditworthiness of each customer. Management evaluates the adequacy of the reservefor doubtful accounts on a quarterly basis.

 

Inventories - Inventories are valued at the lower of cost or market. Ona quarterly basis, management assesses the inventory quantities on hand toestimated future usage and sales and, if necessary, writes down the value ofinventory deemed obsolete or excess to market.

 

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Property, Plant and Equipment - Property, plant and equipment arestated at cost and depreciated over the lives of the assets, using both thestraight-line and declining balance methods. Major replacements and improvementsare capitalized, while maintenance and repairs which do not improve or extendthe useful lives of the respective assets are charged to operations. The assetsand related accumulated depreciation accounts are adjusted for assetretirements and disposals with the resulting gain or loss, if any, recorded inthe statement of income at the time of disposal.

 

The Company’s policies for these matters, which are described in Note 1to the financial statements, are in accordance with generally accepted accountingprinciples. Management believes that their application results in a fairpresentation in the financial statements of the Company’s operating results andfinancial position.

 

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

 

In November 2002, the Financial AccountingStandards Board (FASB) issued Interpretation No. 45 (FIN 45), “Guarantor’sAccounting and Disclosure Requirements for Guarantees, Including IndirectGuarantees of Indebtedness of Others.” FIN 45 clarifies the disclosures to bemade by a guarantor in its interim and annual financial statements about itsobligations under certain guarantees that it has issued. FIN 45 also requires aguarantor to recognize, at the inception of a guarantee, a liability for thefair value of the obligation undertaken in issuing certain types of guarantees.The disclosure requirements in FIN 45 are effective for interim or annualfinancial statements for periods ending after December 15, 2002. Theadoption of FIN 45 did not have an impact on the Company’s results of operationsor financial position.

 

In January 2003, the FASB issuedInterpretation No. 46 (FIN 46), “Consolidation of Variable Interest Entities(“VIE”), an Interpretation of ARB No. 51,” which requires all VIEs to beconsolidated by the primary beneficiary. The primary beneficiary is the entitythat holds the majority of the beneficial interests in the VIE. In addition,the interpretation expands disclosure requirements for both VIEs that areconsolidated as well as VIEs from which the entity is the holder of asignificant amount of the beneficial interests, but not the majority. InDecember 2003, the FASB revised FIN 46 to exclude from its scope certainentities that meet the definition of a business under Emerging Issues TaskForce Issue No. 98-3, “Determining Whether a Nonmonetary Transaction Involvesthe Receipt of Productive Assets or of a Business.” The revised FIN 46 (FIN46R) is to be applied no later than the end of the first fiscal year or interimreporting period ending after March 15, 2004. The adoption of FIN 46R didnot have an impact on the Company’s results of operations or financialposition.

 

In May 2003, the FASB issued SFAS No. 150,“Accounting for Certain Financial Instruments with Characteristics of bothLiabilities and Equity.” SFAS No. 150 establishes new standards on how anissuer classifies and measures certain financial instruments withcharacteristics of both liabilities and equity. Under previous guidance,issuers could account for many of those instruments as equity. SFAS No. 150 requiresthat those instruments be classified as liabilities in statements of financialposition. SFAS No. 150 is effective for all financial instruments entered intoor modified after May 31, 2003, and otherwise is effective at the beginning ofthe first interim period beginning after June 15, 2003. The adoption ofSFAS No. 150 did not have an impact on the Company’s financial position.

 

In March 2004, the Emerging Issues Task Force (EITF) reached aconsensus on the remaining portions of EITF 03-01, “The Meaning ofOther-Than-Temporary Impairment and Its Application to Certain Investments,”with an effective date of June 15, 2004. EITF 03-01 provides newdisclosure requirements for other-than-temporary impairments on debt and equityinvestments. Investors are required to disclose quantitative information about:(i) the aggregate amount of unrealized losses, and (ii) the aggregate relatedfair values of investments with unrealized losses, segregated into time periodsduring which the investment has been in an unrealized loss position of lessthan 12 months and greater than 12 months. In addition, investors are requiredto disclose the qualitative information that supports their conclusion that theimpairments noted in the qualitative disclosure are not other-than-temporary.We adopted the initial portions of EITF 03-01 in December 2003. Theadoption of the remaining portions is not expected to have a material impact onour results of operations or financial condition.

 

ITEM 7A.                                           QUANTITATIVEAND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.

 

Not applicable.

 

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ITEM 8.                                                     FINANCIALSTATEMENTS AND SUPPLEMENTARY DATA.

 

**REPORT OF INDEPENDENTREGISTERED PUBLIC ACCOUNTING FIRM**

 

 

Shareholders

Hawkins, Inc.

 

We have audited the accompanying balance sheets of Hawkins, Inc. (the“Company”) as of March 28, 2004 and March 30, 2003 and the relatedstatements of income, shareholders’ equity, and cash flows for the fiscal yearsended March 28, 2004 and March 30, 2003, the six-month transitionalperiod ended March 31, 2002, and the fiscal year ended September 30,2001. These financial statements are the responsibility of the Company’smanagement. Our responsibility is to express an opinion on these financialstatements based on our audits.

 

We conducted our audits in accordance with the standards of the PublicCompany Accounting Oversight Board (United States). Those standards requirethat we plan and perform the audit to obtain reasonable assurance about whetherthe financial statements are free of material misstatement. An audit includesexamining, on a test basis, evidence supporting the amounts and disclosures inthe financial statements. An audit also includes assessing the accountingprinciples used and significant estimates made by management, as well asevaluating the overall financial statement presentation. We believe that ouraudits provide a reasonable basis for our opinion.

 

In our opinion, such financial statements present fairly, in allmaterial respects, the financial position of Hawkins, Inc. at March 28,2004 and March 30, 2003 and the results of its operations and cash flowsfor the fiscal years ended March 28, 2004 and March 30, 2003, thesix-month transitional period ended March 31, 2002, and the fiscal yearended September 30, 2001, in conformity with accounting principlesgenerally accepted in the United States of America.

 

 

Minneapolis, Minnesota

June 4, 2004

 

16

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**HAWKINS, INC.BALANCE SHEETS**

 
|                                                                                                      |   | **March 28,  2004** |       | **March 30,  2003** |       |
|-----------------------------------------------------------------------------------------------------------|--------|--------------------------|------------|--------------------------|------------|
|                                                                                                      |   |                     | ** ** |                     | ** ** |
| **ASSETS**                                                                                                |   |                     |       |                     |       |
|                                                                                                      |   |                     |       |                     |       |
| CURRENT ASSETS:                                                                                           |   |                     |       |                     |       |
| Cash and cash equivalents                                                                                 |   | $                        | 1,558,969  |                     | $          | 1,353,720 |   |
| Investments available-for-sale                                                                            |   | 22,364,439               |       | 22,902,561               |       |
| Trade receivables - less allowance for  doubtful accounts of $275,000 in both years                       |   | 11,308,851               |       | 11,253,571               |       |
| Inventories                                                                                               |   | 8,887,081                |       | 9,398,338                |       |
| Prepaid expenses and other current assets                                                                 |   | 3,566,891                |       | 2,502,496                |       |
| Total current assets                                                                                      |   | 47,686,231               |       | 47,410,686               |       |
|                                                                                                      |   |                     |       |                     |       |
| PROPERTY, PLANT, AND EQUIPMENT:                                                                           |   |                     |       |                     |       |
| Land                                                                                                      |   | 793,491                  |       | 719,942                  |       |
| Buildings and improvements                                                                                |   | 28,377,593               |       | 27,197,171               |       |
| Machinery and equipment                                                                                   |   | 12,087,543               |       | 11,491,227               |       |
| Transportation equipment                                                                                  |   | 7,919,585                |       | 7,520,148                |       |
| Office furniture and equipment                                                                            |   | 4,215,690                |       | 2,776,787                |       |
|                                                                                                      |   | 53,393,902               |       | 49,705,275               |       |
| Less accumulated depreciation                                                                             |   | 23,861,417               |       | 22,238,756               |       |
| Net property, plant, and equipment                                                                        |   | 29,532,485               |       | 27,466,519               |       |
|                                                                                                      |   |                     |       |                     |       |
| OTHER ASSETS:                                                                                             |   |                     |       |                     |       |
| Intangible assets – less accumulated  amortization:  2004, $1,584,871; 2003,  $1,301,386        |   | 2,778,178                |       | 3,061,663                |       |
| Other                                                                                                     |   | 2,620,011                |       | 3,159,871                |       |
| Total other assets                                                                                        |   | 5,398,189                |       | 6,221,534                |       |
|                                                                                                      |   | $                        | 82,616,905 |                     | $          | 81,098,739 |   |
|                                                                                                      |   |                     |       |                     |       |
| **LIABILITIES AND  SHAREHOLDERS’ EQUITY**                                                            |   |                     |       |                     |       |
|                                                                                                      |   |                     |       |                     |       |
| CURRENT LIABILITIES:                                                                                      |   |                     |       |                     |       |
| Accounts payable—trade                                                                               |   | $                        | 4,752,049  |                     | $          | 5,854,720 |   |
| Dividends payable                                                                                         |   | 1,839,004                |       | 1,839,004                |       |
| Accrued payroll and employee benefits                                                                     |   | 3,629,800                |       | 3,665,247                |       |
| Container deposits                                                                                        |   | 1,495,294                |       | 1,444,040                |       |
| Other accruals                                                                                            |   | 1,292,137                |       | 1,101,239                |       |
| Total current liabilities                                                                                 |   | 13,008,284               |       | 13,904,250               |       |
|                                                                                                      |   |                     |       |                     |       |
| OTHER LONG-TERM LIABILITIES                                                                               |   | 89,133                   |       | 226,336                  |       |
|                                                                                                      |   |                     |       |                     |       |
| DEFERRED INCOME TAXES                                                                                     |   | 1,614,843                |       | 1,254,649                |       |
|                                                                                                      |   |                     |       |                     |       |
| COMMITMENTS AND CONTINGENCIES (Note 7)                                                                    |   |                     |       |                     |       |
|                                                                                                      |   |                     |       |                     |       |
| SHAREHOLDERS’ EQUITY:                                                                                |   |                     |       |                     |       |
| Common stock; authorized: 30,000,000 shares  of $.05 par value; issued and outstanding: 10,216,688 shares |   | 510,834                  |       | 510,834                  |       |
| Additional paid-in capital                                                                                |   | 37,747,492               |       | 37,747,492               |       |
| Accumulated other comprehensive income                                                                    |   | 196,328                  |       | 79,063                   |       |
| Retained earnings                                                                                         |   | 29,449,991               |       | 27,376,115               |       |
| Total shareholders’ equity                                                                           |   | 67,904,645               |       | 65,713,504               |       |
|                                                                                                      |   | $                        | 82,616,905 |                     | $          | 81,098,739 |   |

 

See accompanying notes to financial statements.

 

17

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**HAWKINS, INC.STATEMENTS OF INCOME**

 
|                                           |   | **Fiscal  Year Ended  March 28, 2004** | ** **  | **Fiscal  Year Ended  March 30, 2003** | ** ** | **Six-Month  Transitional  Period Ended  March 31, 2002** | ** ** | **Fiscal  Year  Ended  September 30,  2001** | ** ** |
|------------------------------------------------|--------|---------------------------------------------|-------------|---------------------------------------------|------------|----------------------------------------------------------------|------------|---------------------------------------------------|------------|
|                                           |   |                                        | ** **  |                                        | ** ** |                                                           | ** ** |                                              | ** ** |
| Sales                                          |   | $                                           | 107,028,131 |                                        | $          | 104,004,611                                                    |       | $                                                 | 49,868,179 |   | $ | 107,931,668 |   |
|                                           |   |                                        |        |                                        |       |                                                           |       |                                              |       |
| Cost of sales                                  |   | (79,053,842                                 | )           | (76,046,759                                 | )          | (38,332,473                                                    | )          | (83,634,081                                       | )          |
|                                           |   |                                        |        |                                        |       |                                                           |       |                                              |       |
| Gross margin                                   |   | 27,974,289                                  |        | 27,957,852                                  |       | 11,535,706                                                     |       | 24,297,587                                        |       |
|                                           |   |                                        |        |                                        |       |                                                           |       |                                              |       |
| Selling, general and administrative  expenses  |   | (16,793,094                                 | )           | (14,890,640                                 | )          | (6,924,750                                                     | )          | (14,242,227                                       | )          |
|                                           |   |                                        |        |                                        |       |                                                           |       |                                              |       |
| Litigation settlement (Note 7)                 |   | (3,000,000                                  | )           |                                        |       |                                                           |       |                                              |       |
|                                           |   |                                        |        |                                        |       |                                                           |       |                                              |       |
| Income from operations                         |   | 8,181,195                                   |        | 13,067,212                                  |       | 4,610,956                                                      |       | 10,055,360                                        |       |
|                                           |   |                                        |        |                                        |       |                                                           |       |                                              |       |
| Investment income                              |   | 825,689                                     |        | 367,049                                     |       | 227,360                                                        |       | 727,117                                           |       |
|                                           |   |                                        |        |                                        |       |                                                           |       |                                              |       |
| Interest expense                               |   |                                        |        | (4,089                                      | )          | (6,152                                                         | )          | (26,279                                           | )          |
|                                           |   |                                        |        |                                        |       |                                                           |       |                                              |       |
| Income before income taxes                     |   | 9,006,884                                   |        | 13,430,172                                  |       | 4,832,164                                                      |       | 10,756,198                                        |       |
|                                           |   |                                        |        |                                        |       |                                                           |       |                                              |       |
| Provision for income taxes                     |   | (3,255,000                                  | )           | (5,000,000                                  | )          | (1,748,393                                                     | )          | (3,638,620                                        | )          |
|                                           |   |                                        |        |                                        |       |                                                           |       |                                              |       |
| Net income                                     |   | $                                           | 5,751,884   |                                        | $          | 8,430,172                                                      |       | $                                                 | 3,083,771  |   | $ | 7,117,578 |   |
|                                           |   |                                        |        |                                        |       |                                                           |       |                                              |       |
| Weighted average number of shares  outstanding |   | 10,216,688                                  |        | 10,216,688                                  |       | 10,219,432                                                     |       | 10,346,964                                        |       |
|                                           |   |                                        |        |                                        |       |                                                           |       |                                              |       |
| Basic and diluted earnings per share           |   | $                                           | .56         |                                        | $          | .83                                                            |       | $                                                 | .30        |   | $ | .69 |   |

 

See accompanying notes to financial statements.

 

18

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**HAWKINS, INC.STATEMENTS OF SHAREHOLDERS’ EQUITY****                           **

 
|                                                             |   |       |   |    | ** ** | **Additional  Paid-in  Capital** | ** ** | **Retained  Earnings** | ** ** | **Accumulated  Other  Comprehensive  Income (Loss)** |       | **Total  Shareholders’  Equity** | ** ** |
|------------------------------------------------------------------|--------|------------|--------|---------|------------|----------------------------------|------------|------------------------|------------|------------------------------------------------------|------------|---------------------------------------|------------|
| **Common  Stock**                                                |
| **Shares**                                                       |   | **Amount** |
|                                                             |   |       |   |    |       |                             |       |                   |       |                                                 |       |                                  |       |
| BALANCE—October 1, 2000                                |   | 10,417,739 |   | $       | 520,887    |                             | $          | 38,490,313             |       | $                                                    | 17,660,026 |                                  |       |   | $ | 56,671,226 |   |
|                                                             |   |       |   |    |       |                             |       |                   |       |                                                 |       |                                  |       |
| Cash dividends                                                   |   |       |   |    |       |                             |       | (3,090,491             | )          |                                                 |       | (3,090,491                            | )          |
| Stock acquired and retired                                       |   | (168,951   | )      | (8,448  | )          | (624,221                         | )          | (788,972               | )          |                                                 |       | (1,421,641                            | )          |
| Comprehensive income:                                            |   |       |   |    |       |                             |       |                   |       |                                                 |       |                                  |       |
| Unrealized loss on investments available  for sale               |   |       |   |    |       |                             |       |                   |       | $                                                    | (192,258   | )                                     | (192,258   | ) |
| Net income                                                       |   |       |   |    |       |                             |       | 7,117,578              |       |                                                 |       | 7,117,578                             |       |
| Comprehensive income                                             |   |       |   |    |       |                             |       |                   |       |                                                 |       | 6,925,320                             |       |
|                                                             |   |       |   |    |       |                             |       |                   |       |                                                 |       |                                  |       |
| BALANCE—September 30, 2001                             |   | 10,248,788 |   | 512,439 |       | 37,866,092                       |       | 20,898,141             |       | (192,258                                             | )          | 59,084,414                            |       |
|                                                             |   |       |   |    |       |                             |       |                   |       |                                                 |       |                                  |       |
| Cash dividends                                                   |   |       |   |    |       |                             |       | (1,532,690             | )          |                                                 |       | (1,532,690                            | )          |
| Stock acquired and retired                                       |   | (32,100    | )      | (1,605  | )          | (118,600                         | )          | (131,585               | )          |                                                 |       | (251,790                              | )          |
| Comprehensive income:                                            |   |       |   |    |       |                             |       |                   |       |                                                 |       |                                  |       |
| Unrealized gain on investments available  for sale               |   |       |   |    |       |                             |       |                   |       | 46,730                                               |       | 46,730                                |       |
| Net income                                                       |   |       |   |    |       |                             |       | 3,083,771              |       |                                                 |       | 3,083,771                             |       |
| Comprehensive income                                             |   |       |   |    |       |                             |       |                   |       |                                                 |       | 3,130,501                             |       |
|                                                             |   |       |   |    |       |                             |       |                   |       |                                                 |       |                                  |       |
| BALANCE—March 31, 2002                                 |   | 10,216,688 |   | 510,834 |       | 37,747,492                       |       | 22,317,637             |       | (145,528                                             | )          | 60,430,435                            |       |
|                                                             |   |       |   |    |       |                             |       |                   |       |                                                 |       |                                  |       |
| Cash dividends                                                   |   |       |   |    |       |                             |       | (3,371,694             | )          |                                                 |       | (3,371,694                            | )          |
| Comprehensive income:                                            |   |       |   |    |       |                             |       |                   |       |                                                 |       |                                  |       |
| Unrealized loss on investments available  for sale               |   |       |   |    |       |                             |       |                   |       | (8,509                                               | )          | (8,509                                | )          |
| Adjustment for impairment of investments  included in net income |   |       |   |    |       |                             |       |                   |       | 233,100                                              |       | 233,100                               |       |
| Net income                                                       |   |       |   |    |       |                             |       | 8,430,172              |       |                                                 |       | 8,430,172                             |       |
| Comprehensive income                                             |   |       |   |    |       |                             |       |                   |       |                                                 |       | 8,654,763                             |       |
|                                                             |   |       |   |    |       |                             |       |                   |       |                                                 |       |                                  |       |
| BALANCE—March 30, 2003                                 |   | 10,216,688 |   | 510,834 |       | 37,747,492                       |       | 27,376,115             |       | 79,063                                               |       | 65,713,504                            |       |
|                                                             |   |       |   |    |       |                             |       |                   |       |                                                 |       |                                  |       |
| Cash dividends                                                   |   |       |   |    |       |                             |       | (3,678,008             | )          |                                                 |       | (3,678,008                            | )          |
| Comprehensive income:                                            |   |       |   |    |       |                             |       |                   |       |                                                 |       |                                  |       |
| Unrealized gain on investments available  for sale               |   |       |   |    |       |                             |       |                   |       | 117,265                                              |       | 117,265                               |       |
| Net income                                                       |   |       |   |    |       |                             |       | 5,751,884              |       |                                                 |       | 5,751,884                             |       |
| Comprehensive income                                             |   |       |   |    |       |                             |       |                   |       |                                                 |       | 5,869,149                             |       |
|                                                             |   |       |   |    |       |                             |       |                   |       |                                                 |       |                                  |       |
| BALANCE—March 28, 2004                                 |   | 10,216,688 |   | $       | 510,834    |                             | $          | 37,747,492             |       | $                                                    | 29,449,991 |                                  | $          | 196,328 |   | $ | 67,904,645 |   |

 

Seeaccompanying notes to financial statements.

 

19

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**HAWKINS, INC.STATEMENTS OF CASH FLOWS**

 
|                                                       |   | **Fiscal  Year Ended  March 28, 2004** |      | **Fiscal  Year Ended  March 30, 2003** | ** ** | **Six-Month  Transitional  Period Ended  March 31, 2002** | ** ** | **Fiscal  Year  Ended  September 30,  2001** | ** ** |
|------------------------------------------------------------|--------|---------------------------------------------|-----------|---------------------------------------------|------------|----------------------------------------------------------------|------------|---------------------------------------------------|------------|
|                                                       |   |                                        |      |                                        |       |                                                           |       |                                              |       |
| CASH FLOWS FROM OPERATING ACTIVITIES:                      |   |                                        |      |                                        |       |                                                           |       |                                              |       |
| Net income                                                 |   | $                                           | 5,751,884 |                                        | $          | 8,430,172                                                      |       | $                                                 | 3,083,771  |   | $ | 7,117,578 |   |
| Reconciliation to cash flows:                              |   |                                        |      |                                        |       |                                                           |       |                                              |       |
| Depreciation and amortization                              |   | 2,992,104                                   |      | 2,958,975                                   |       | 1,481,750                                                      |       | 2,727,577                                         |       |
| Deferred income taxes                                      |   | 270,612                                     |      | (121,770                                    | )          | 322,585                                                        |       | 414,641                                           |       |
| Impairment of investments                                  |   |                                        |      | 370,000                                     |       |                                                           |       |                                              |       |
| Earnings on other assets                                   |   | (41,642                                     | )         | (72,929                                     | )          | (45,750                                                        | )          | (104,386                                          | )          |
| Loss from property disposals                               |   | 69,716                                      |      | 34,713                                      |       | 6,144                                                          |       | 35,901                                            |       |
| Changes in operating accounts (requiring)  providing cash: |   |                                        |      |                                        |       |                                                           |       |                                              |       |
| Trade receivables                                          |   | (55,280                                     | )         | (590,763                                    | )          | 1,602,016                                                      |       | (601,796                                          | )          |
| Inventories                                                |   | 511,257                                     |      | (797                                        | )          | 3,187,182                                                      |       | (3,654,766                                        | )          |
| Accounts payable                                           |   | (1,102,671                                  | )         | 1,758,900                                   |       | (3,198,910                                                     | )          | 2,288,150                                         |       |
| Accrued liabilities                                        |   | 69,502                                      |      | 2,079,348                                   |       | (1,630,471                                                     | )          | 602,677                                           |       |
| Other                                                      |   | (1,053,886                                  | )         | (256,741                                    | )          | (948,241                                                       | )          | 1,125,169                                         |       |
| Net cash provided by operating activities                  |   | 7,411,596                                   |      | 14,589,108                                  |       | 3,860,076                                                      |       | 9,950,745                                         |       |
|                                                       |   |                                        |      |                                        |       |                                                           |       |                                              |       |
| CASH FLOWS FROM INVESTING ACTIVITIES:                      |   |                                        |      |                                        |       |                                                           |       |                                              |       |
| Additions to property, plant, and equipment                |   | (4,897,551                                  | )         | (2,348,124                                  | )          | (1,145,030                                                     | )          | (7,056,226                                        | )          |
| Purchase of investments                                    |   | (8,506,919                                  | )         | (21,395,228                                 | )          | (3,600,099                                                     | )          | (800,597                                          | )          |
| Sale and maturities of investments                         |   | 9,630,392                                   |      | 6,022,000                                   |       | 8,797,736                                                      |       | 1,032,018                                         |       |
| Proceeds from property disposals                           |   | 53,250                                      |      | 59,150                                      |       | 28,825                                                         |       | 93,453                                            |       |
| Payments received on notes receivable                      |   | 192,489                                     |      | 269,122                                     |       | 178,306                                                        |       | 356,106                                           |       |
| Net cash (used in) provided by investing  activities       |   | (3,528,339                                  | )         | (17,393,080                                 | )          | 4,259,738                                                      |       | (6,375,246                                        | )          |
|                                                       |   |                                        |      |                                        |       |                                                           |       |                                              |       |
| CASH FLOWS FROM FINANCING ACTIVITIES:                      |   |                                        |      |                                        |       |                                                           |       |                                              |       |
| Cash dividends paid                                        |   | (3,678,008                                  | )         | (3,065,380                                  | )          | (1,537,805                                                     | )          | (3,118,722                                        | )          |
| Debt repayment                                             |   |                                        |      | (116,823                                    | )          | (109,180                                                       | )          | (102,037                                          | )          |
| Acquisition and retirement of stock                        |   |                                        |      |                                        |       | (251,790                                                       | )          | (1,421,641                                        | )          |
| Net cash used in financing activities                      |   | (3,678,008                                  | )         | (3,182,203                                  | )          | (1,898,775                                                     | )          | (4,642,400                                        | )          |
|                                                       |   |                                        |      |                                        |       |                                                           |       |                                              |       |
| NET INCREASE (DECREASE) IN CASH AND CASH  EQUIVALENTS      |   | 205,249                                     |      | (5,986,175                                  | )          | 6,221,039                                                      |       | (1,066,901                                        | )          |
|                                                       |   |                                        |      |                                        |       |                                                           |       |                                              |       |
| CASH AND CASH EQUIVALENTS—                            |   |                                        |      |                                        |       |                                                           |       |                                              |       |
| Beginning of period                                        |   | 1,353,720                                   |      | 7,339,895                                   |       | 1,118,856                                                      |       | 2,185,757                                         |       |
|                                                       |   |                                        |      |                                        |       |                                                           |       |                                              |       |
| CASH AND CASH EQUIVALENTS—                            |   |                                        |      |                                        |       |                                                           |       |                                              |       |
| End of period                                              |   | $                                           | 1,558,969 |                                        | $          | 1,353,720                                                      |       | $                                                 | 7,339,895  |   | $ | 1,118,856 |   |
|                                                       |   |                                        |      |                                        |       |                                                           |       |                                              |       |
| SUPPLEMENTAL DISCLOSURES OF CASH FLOW  INFORMATION—   |   |                                        |      |                                        |       |                                                           |       |                                              |       |
| Cash paid during the year for:                             |   |                                        |      |                                        |       |                                                           |       |                                              |       |
| Interest                                                   |   | $                                           |      |                                        | $          | 8,177                                                          |       | $                                                 | 17,884     |   | $ | 33,422 |   |
| Income taxes                                               |   | $                                           | 3,897,997 |                                        | $          | 5,106,724                                                      |       | $                                                 | 1,917,426  |   | $ | 2,078,071 |   |

 

See accompanying notes to financial statements.

 

20

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**HAWKINS, INC.NOTES TO FINANCIAL STATEMENTS**

 

**1.****                                      NATUREOF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES**

 

***Nature of Business*—**Hawkins,Inc. (the “Company”) has two reportable segments: Industrial and WaterTreatment. The Industrial segment specializes in providing industrial chemicalsand services to the energy, electronics, and plating industries. In addition,the Industrial segment provides products and services to food manufacturers,processing plants and the pharmaceutical industry. The Water Treatment segmentspecializes in providing water and waste-water treatment equipment, chemicalsand service.

 

***Fiscal Year*—**InDecember 2001, the Company changed its fiscal year end to a 52/53-weekyear ending on the Sunday closest to March 31 from a 52/53-week fiscalyear ending on the Sunday closest to September 30. The change in year-endwill better match the Company’s annual reporting process to its naturalbusiness cycles. This change resulted in a six-month transitional period endedMarch 31, 2002. The six-month transitional period was a 26-week period,the fiscal years ended March 28, 2004, March 30, 2003, andSeptember 30, 2001 were 52-week years.

 

***Estimates*—**Thepreparation of financial statements in conformity with accounting principlesgenerally accepted in the United States of America (“generally accepted accountingprinciples”) requires management to make estimates and assumptions that affectthe reported amounts of assets and liabilities and disclosure of contingentassets and liabilities at the date of the financial statements and the reportedamounts of revenues and expenses during the reported period. Actual resultscould differ from those estimates.

 

***Revenue Recognition*—**TheCompany recognizes revenue when the product has been shipped to the customer ifthere is evidence that the customer has agreed to purchase the products,delivery and performance has occurred, the price and terms of sale are fixed,and collection of the receivable is expected.

 

***Shipping andHandling—***All shipping and handling amounts billedto customers are included in revenues. Costs incurred related to shipping andhandling are included in costs of goods sold.

 

***Cash Equivalents*—**Cashequivalents include all liquid debt instruments (primarily cash funds and moneymarket accounts) purchased with an original maturity of three months or less.The balances maintained at financial institutions may, at times, exceedfederally insured limits.

 

***InvestmentsAvailable-For-Sale*—**In accordance with theprovisions of Statement of Financial Accounting Standards (“SFAS”) No. 115,“Accounting for Certain Investments in Debt and Equity Securities,” theseinvestments are carried at fair market value with unrealized gains and lossesreported in shareholders’ equity as a component of other comprehensive income(loss). Investments classified as available-for-sale securities consist offixed income securities, primarily municipal bonds and U.S. Government agencysecurities (45%), mutual funds (49%), and variable rate marketable securities,primarily annuity contracts (6%) that will be held for indefinite periods of time,including securities that may be sold in response to changes in market interestor prepayment rates, needs for liquidity, or changes in the availability oryield of alternative investments. Gross unrealized gains, primarily within themutual fund and fixed income portfolios, were $314,328 and $126,063 as ofMarch 28, 2004 and March 30, 2003, respectively. In the fiscal yearsended March 28, 2004 and March 30, 2003, the six-month transitionalperiod ended March 31, 2002, and the fiscal year ended September 30,2001, proceeds from the sale of investments available-for-sale were $9,630,392,$6,022,000, $8,797,736 and $1,032,018, respectively. A loss of $370,000 wasrecorded in the fiscal year ended March 30, 2003 due to declines in marketvalue that were deemed other than temporary. Realized gains and losses were notmaterial for the fiscal year ended March 28, 2004, the six-monthtransitional period ended March 31, 2002 and the fiscal year endedSeptember 30, 2001.

 

***Inventories*—**Inventories,consisting primarily of finished goods, are primarily valued at the lower ofcost or net realizable value, with cost being determined using the last-in,first-out (“LIFO”) method.

 

***Property, Plant andEquipment*—**Property is stated at cost anddepreciated over the lives of the assets, using both straight-line anddeclining-balance methods. Estimated lives are: 10 to 50 years for buildingsand improvements; 3 to 15 years for machinery and equipment; 3 to 10 years fortransportation equipment; and 3 to 10 years for office furniture and equipment.

 

***Intangible Assets*—**Intangibleassets consist primarily of customer lists, trademarks, and trade namesacquired in previous business acquisitions. The values assigned to theintangible assets are being amortized primarily over 15 years. As ofMarch 28, 2004, the Company had net intangible assets of $2,778,178.Amortization expense was $283,485 during the fiscal years ended March 28,2004, March 30, 2003 and September 30, 2001 and was $141,742 duringthe six-month transitional 

 

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period ended March 31, 2002. The estimated amortization expensefor each of the next five years is approximately $284,000 per year.

 

***InvestmentsHeld-To-Maturity*—**Held-to-maturity securitiesconsist of Minnesota municipal bonds, which the Company has the intent andability 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. Investments held-to-maturity, includedwithin other assets, were $725,000 and $1,086,825 at March 28, 2004 andMarch 30, 2003, respectively.

 

***Recoverability ofLong-Lived Assets*—**The Company reviews itslong-lived assets whenever events or changes in circumstances indicate thecarrying amount of the assets may not be recoverable. The Company determinespotential impairment by comparing the carrying value of the assets withexpected net cash flows expected to be provided by operating activities of thebusiness or related products. Should the sum of the expected future net cashflows be less than the carrying value, the Company would determine whether animpairment loss should be recognized. An impairment loss would be measured bycomparing the amount by which the carrying value exceeds the fair value of theasset based on market value that is based on the discounted cash flows expectedto be generated by the asset.

 

***Income Taxes*—**TheCompany follows SFAS No. 109, “Accounting for Income Taxes.” Under SFASNo. 109, the deferred tax assets and liabilities are recognized based ondifferences between the financial statements and the tax bases of assets andliabilities using presently enacted tax rates.

 

***Earnings Per Share*—**Basicand diluted earnings per share are computed by dividing net income by theweighted average number of common shares outstanding.

 

***Concentrations ofCredit Risk*—**Financial instruments whichpotentially subject the Company to a concentration of credit risk principallyconsist of investments available-for-sale and trade receivables. The Companysells its principal products to a large number of customers in many differentindustries. To reduce credit risk, the Company routinely assesses the financialstrength of its customers. The Company invests its excess cash balances in amoney market account at a single financial institution.

 

At March 28, 2004, the Company also had an investment portfolio offixed income securities and mutual funds, excluding $2,911,565 of thoseclassified as cash and cash equivalents and variable rate securities, of$10,705,527 and $11,031,316, respectively. The fixed income securities, likeall fixed income instruments, are subject to interest rate risk and willdecline in value if market interest rates increase. However, the Company has theability to hold its fixed income investments until maturity and therefore theCompany would not expect to recognize an adverse impact on net income or cashflows. The value of mutual funds, like all mutual funds, may increase ordecrease due to market volatility.

 

***DerivativeInstruments and Hedging Activities*—**In fiscal 2001,the Company adopted SFAS No. 133, “Accounting for Derivative Instruments andHedging Activities,” as amended by SFAS No. 138, “Accounting for CertainDerivative Instruments and Certain Hedging Activities.” SFAS No. 133establishes accounting and reporting standards for derivative instruments andfor hedging activities. It requires that all derivatives, including thoseembedded in other contracts, be recognized as either assets or liabilities andthat those financial instruments be measured at fair value. The accounting forchanges in the fair value of derivatives depends on their intended use anddesignation. Management has reviewed the requirements of SFAS No. 133 and hasdetermined that the Company has no freestanding or embedded derivatives. Allcontracts that contain provisions meeting the definition of a derivative alsomeet the requirements of, and have been designated as, normal purchases andsales. The Company’s policy is to not use freestanding derivatives and to notenter into contracts with terms that cannot be designated as normal purchasesor sales.

 

***Risk andUncertainties*—**There are no concentrations ofbusiness transacted with a particular customer or supplier nor concentrationsof sales from a particular service or geographic area that would severelyimpact the Company in the near term.

 

***AccountingPronouncements*—**In November 2002, theFinancial Accounting Standards Board (FASB) issued Interpretation No. 45 (FIN45), “Guarantor’s Accounting and Disclosure Requirements for Guarantees,Including Indirect Guarantees of Indebtedness of Others.” FIN 45 clarifies thedisclosures to be made by a guarantor in its interim and annual financialstatements about its obligations under certain guarantees that it has issued.FIN 45 also requires a guarantor to recognize, at the inception of a guarantee,a liability for the fair value of the obligation undertaken in issuing certaintypes of guarantees. The disclosure requirements in FIN 45 are effective forinterim or annual financial statements for periods ending afterDecember 15, 2002. The adoption of FIN 45 did not have an impact on theCompany’s results of operations or financial position.

 

In January 2003, the FASB issuedInterpretation No. 46 (FIN 46), “Consolidation of Variable Interest Entities(“VIE”), an Interpretation of ARB No. 51,” which requires all VIEs to beconsolidated by the primary beneficiary. The primary 

 

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beneficiary is the entity that holds themajority of the beneficial interests in the VIE. In addition, theinterpretation expands disclosure requirements for both VIEs that areconsolidated as well as VIEs from which the entity is the holder of asignificant amount of the beneficial interests, but not the majority. InDecember 2003, the FASB revised FIN 46 to exclude from its scope certainentities that meet the definition of a business under Emerging Issues TaskForce Issue No. 98-3, “Determining Whether a Nonmonetary Transaction Involvesthe Receipt of Productive Assets or of a Business.” The revised FIN 46 (FIN46R) is to be applied no later than the end of the first fiscal year or interimreporting period ending after March 15, 2004. The adoption of FIN 46R did nothave an impact on the Company’s results of operations or financial position.

 

In May 2003, the FASB issued SFAS No. 150, “Accounting for CertainFinancial Instruments with Characteristics of both Liabilities and Equity.”SFAS No. 150 establishes new standards on how an issuer classifies and measurescertain financial instruments with characteristics of both liabilities andequity. Under previous guidance, issuers could account for many of thoseinstruments as equity. SFAS No. 150 requires that those instruments beclassified as liabilities in statements of financial position. SFAS No. 150 iseffective for all financial instruments entered into or modified after May 31,2003, and otherwise is effective at the beginning of the first interim periodbeginning after June 15, 2003. The adoption of SFAS No. 150 did not havean impact on the Company’s financial position.

 

In March 2004, the Emerging Issues Task Force (EITF) reached aconsensus on the remaining portions of EITF 03-01, “The Meaning ofOther-Than-Temporary Impairment and Its Application to Certain Investments,”with an effective date of June 15, 2004. EITF 03-01 provides newdisclosure requirements for other-than-temporary impairments on debt and equityinvestments. Investors are required to disclose quantitative information about:(i) the aggregate amount of unrealized losses, and (ii) the aggregate relatedfair values of investments with unrealized losses, segregated into time periodsduring which the investment has been in an unrealized loss position of lessthan 12 months and greater than 12 months. In addition, investors are requiredto disclose the qualitative information that supports their conclusion that theimpairments noted in the qualitative disclosure are not other-than-temporary.We adopted the initial portions of EITF 03-01 in December 2003. Theadoption of the remaining portions is not expected to have a material impact onour results of operations or financial condition.

 

**2.****                                      INVENTORIES**

 

Inventories at March 28, 2004 and March 30, 2003 consisted ofthe following:

 
|                        |   | **2004** |      | **2003** |   |
|-----------------------------|--------|----------|-----------|----------|--------|
|                        |   |     |      |     |   |
| Finished goods (FIFO basis) |   | $        | 9,289,560 |     | $      | 9,909,599 |   |
| LIFO reserve                |   | (402,479 | )         | (511,261 | )      |
| Net inventory               |   | $        | 8,887,081 |     | $      | 9,398,338 |   |

 

Inventories valued under the LIFO method at March 28, 2004 andMarch 30, 2003 were $7,152,123 and $8,204,400, respectively. The balanceof the inventory was valued under the FIFO method.

 

In fiscal 2003, the LIFO reserve decreased by $790,268. The decrease inthe LIFO reserve was caused by a significant decrease in the cost of a single,large-volume component of inventory. During the fiscal years endedMarch 28, 2004 and March 30, 2003 and the six-month transitionalperiod ended March 31, 2002, the Company liquidated LIFO inventory layersthat were at lower costs than current costs. During the fiscal year endedSeptember 30, 2001, there were no LIFO inventory layers liquidated. Theimpact of the liquidation on cost of sales was not material for the fiscalyears ended March 28, 2004 and March 30, 2003 and was $300,000 forthe six-month transitional period ended March 31, 2002.

 

**3.****                                      NOTESRECEIVABLE**

 

The Company has three notes receivable related to the sales of TessmanSeed, Inc., certain land and a building, and The Lynde Company. AtMarch 28, 2004 and March 30, 2003, the net balances outstanding onthe notes receivable were $1,773,255 and $1,965,744, respectively. The currentportion of $176,083 and $192,489 at March 28, 2004 and March 30,2003, respectively, are included within prepaid expenses and other current assetsand the remaining balances are included within other assets. The notesreceivable bear interest at 8% and are due in equal monthly installments of$36,204 through September 1, 2010 at which time the remaining unpaidbalance of $1,213,163 is due. Land and a building, and a personal guaranteesecure the notes receivable.

 

**4.****                                      LONG-TERMDEBT**

 

The final installment of $116,823 on the Company’s previouslyoutstanding long-term debt was paid in October 2002.

 

23

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**5.****                                      SHAREHOLDERS’EQUITY**

 

During the six-month transitional period ended March 31, 2002 andthe fiscal year ended September 30, 2001, the Company acquired and retired32,100 shares and 168,951 shares of common stock, respectively, for $251,790and $1,421,641, respectively. There were no shares acquired and retired duringthe fiscal years ended March 28, 2004 and March 30, 2003.

 

**6.****                                      PENSIONAND EMPLOYEE STOCK OWNERSHIP PLANS**

 

The Company has a defined contribution pension plan coveringsubstantially all of its non-bargaining employees. Pension expense for thefiscal years ended March 28, 2004 and March 30, 2003, the six-monthtransitional period ended March 31, 2002, and the fiscal year endedSeptember 30, 2001 were $1,606,085, $1,093,697, $504,349, and $870,787,respectively. The Company’s cost for the pension plan was determined as 15% ofeach employee’s covered compensation in the fiscal year ended March 28,2004, 11% in the fiscal year ended March 30, 2003 and the six-monthtransitional period ended March 31, 2002 and 10% in the fiscal year endedSeptember 30, 2001. Amounts charged to pension expense and contributed tounion multi-employer pension plans (not included in the above amounts) were notmaterial. It is the Company’s policy to fund all pension costs accrued.

 

The Company has an employee stock ownership plan covering substantiallyall of its non-bargaining employees. Contributions are made at the discretionof the Board of Directors subject to a maximum amount allowed under theInternal Revenue Code. Contributions for the fiscal years ended March 28,2004 and March 30, 2003, the six-month transitional period endedMarch 31, 2002, and the fiscal year ended September 30, 2001 were$544,189, $901,922, $412,649, and $1,027,828, respectively.

 

The Company does not currently offer any post-retirement benefits,deferred stock or stock-based compensation plans.

 

**7.****                                      COMMITMENTSAND CONTINGENCIES**

 

***Leases*—**TheCompany has various operating leases for land and buildings on which some ofits operations are located. Total rental expense for the fiscal years endedMarch 28, 2004 and March 30, 2003, the six-month transitional periodended March 31, 2002, and the fiscal year ended September 30, 2001were $197,676, $193,187, $98,034, and $172,552, respectively. Future minimumlease payments due under operating leases with an initial term of one year ormore at March 28, 2004 are $208,366 in 2005, $175,110 in 2006, $158,179 in2007, $137,848 in 2008, $138,800 in 2009, and $2,271,673 thereafter.

 

***Termination Agreements—***Duringfiscal 1999, the Company entered into termination agreements with three formeremployees and recorded special charges in the statement of income of$1,112,127. At March 28, 2004, the Company is required to make futurepayments to one individual for a period of 1.5 years. The present value of thefuture payments to be paid in fiscal 2005 is included in other accruals and thepresent value of the remaining payments is included in other long-termliabilities.

 

***Litigation*—**TheCompany was a defendant in a lawsuit encaptioned*Chavarriaet al v. Hawkins, Inc., Panorama Compounding Pharmacy, and Valley Drug andCompounding, et al.* This action was filed on September 7, 2001in the Superior Court of the State of California, County of Los Angeles,Northwest District, Case No. LC 057561. The plaintiffs were seeking unspecifiedcompensatory and punitive damages relating to claims arising from the allegedmislabeling of certain inventory purchased by the Company as part of anacquisition in May 2000. A tentative settlement was reached inFebruary 2004, and on April 9, 2004 the case was dismissed. Pursuantto the terms of the settlement, the Company did not admit or deny any of theallegations of the complaint. The Company was responsible for the payment of$3.0 million that was not covered by insurance, which was charged againstincome from operations and paid during the fourth quarter of fiscal 2004. TheCompany is pursuing reimbursement of the settlement payment and defense costsfrom third parties.

 

The Company is involved in various legal actions arising from thenormal course of business. Management is of the opinion that any judgment orsettlement resulting from pending or threatened litigation would not have amaterial adverse effect on the financial position, results of operations orcash flows of the Company.

 

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**8.****                                      INCOMETAXES**

 

The provisions for income taxes are as follows:

 
|                 |   | **Fiscal Year  Ended  March 28,  2004** |      | **Fiscal  Year  Ended  March 30,  2003** | ** ** | **Six-Month  Transitional  Period Ended  March 31,  2002** | ** ** | **Fiscal  Year  Ended  September 30,  2001** | ** ** |
|----------------------|--------|----------------------------------------------|-----------|-----------------------------------------------|------------|-----------------------------------------------------------------|------------|---------------------------------------------------|------------|
|                 |   |                                         |      |                                          |       |                                                            |       |                                              |       |
| Federal—current |   | $                                            | 2,351,497 |                                          | $          | 4,057,347                                                       |       | $                                                 | 1,122,058  |   | $ | 2,591,327 |   |
| State—current   |   | 632,891                                      |      | 1,064,423                                     |       | 303,750                                                         |       | 632,652                                           |       |
| Deferred             |   | 270,612                                      |      | (121,770                                      | )          | 322,585                                                         |       | 414,641                                           |       |
| Total provision      |   | $                                            | 3,255,000 |                                          | $          | 5,000,000                                                       |       | $                                                 | 1,748,393  |   | $ | 3,638,620 |   |

 

Reconciliations of the provisions for income taxes, based on incomefrom continuing operations, to the applicable federal statutory income tax rateof 35% are as follows:

 
|                                          |   | **Fiscal  Year  Ended  March 28,  2004** |      | **Fiscal  Year  Ended  March 30,  2003** |   | **Six-Month  Transitional  Period Ended  March 31,  2002** |   | **Fiscal  Year  Ended  September 30,  2001** |      |
|-----------------------------------------------|--------|-----------------------------------------------|-----------|-----------------------------------------------|--------|-----------------------------------------------------------------|--------|---------------------------------------------------|-----------|
|                                          |   |                                          |      |                                          |   |                                                            |   |                                              |      |
| Statutory federal income tax                  |   | $                                             | 3,152,409 |                                          | $      | 4,700,560                                                       |   | $                                                 | 1,691,257 |   | $ | 3,764,669 |   |
| State income taxes, net of federal  deduction |   | 506,730                                       |      | 702,552                                       |   | 225,773                                                         |   | 490,750                                           |      |
| Tax-exempt income                             |   | (83,458                                       | )         | (74,163                                       | )      | (31,904                                                         | )      | (139,329                                          | )         |
| ESOP dividend deduction on allocated shares   |   | (221,447                                      | )         | (226,373                                      | )      | (112,345                                                        | )      | (235,902                                          | )         |
| Other—net                                |   | (99,234                                       | )         | (102,576                                      | )      | (24,388                                                         | )      | (241,568                                          | )         |
| Total                                         |   | $                                             | 3,255,000 |                                          | $      | 5,000,000                                                       |   | $                                                 | 1,748,393 |   | $ | 3,638,620 |   |

 

The tax effects of items comprising the Company’s net deferred taxasset (liability) as of March 28, 2004 and March 30, 2003 are asfollows:

 
|                              |   | **2004**   |       | **2003**   |   |
|-----------------------------------|--------|------------|------------|------------|--------|
|                              |   |       |       |       |   |
| Current deferred taxes:           |   |       |       |       |   |
| Trade receivables                 |   | $          | 107,250    |       | $      | 107,250 |   |
| Inventory                         |   | 620,062    |       | 544,458    |   |
| Accruals                          |   | 391,093    |       | 448,115    |   |
| Total*                            |   | $          | 1,118,405  |       | $      | 1,099,823 |   |
|                              |   |       |       |       |   |
| Noncurrent deferred taxes:        |   |       |       |       |   |
| Gain on sale of The Lynde Company |   | $          | (147,941   | )          | $      | (193,219 | ) |
| Property basis difference         |   | (1,348,902 | )          | (1,014,430 | )      |
| Unrealized gain on investments    |   | (118,000   | )          | (47,000    | )      |
| Total                             |   | $          | (1,614,843 | )          | $      | (1,254,649 | ) |

 

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*Included in prepaid expenses and other current assets on the balancesheet.

 

**9.****                                      ST.MARY’S CHEMICALS, INC. ACQUISITION**

 

On May 26, 2000, the Company completed the acquisition of certainassets of St. Mary’s Chemicals, Inc. d.b.a. Universal Chemicals. UniversalChemicals, a Minnesota-based company, was engaged in the business of marketing,selling, and distributing pharmaceutical chemicals to pharmacies and pharmacywholesalers. The Company also entered into a five-year employment agreementwith one of the previous owners of Universal Chemicals and consulting agreementswith the other two previous owners of Universal Chemicals. The employmentagreement and consulting agreements contain performance bonuses and noncompeteprovisions. The agreements are based on Universal Chemicals’ cumulativeoperating results, as defined in the agreements, for five years after theacquisition date and have a maximum payout of $3,520,000. Based upon financialresults through March 28, 2004, no payment amount would be due. Thenoncompete provisions cover a period of five years after the termination of theemployment or consulting agreements, and require annual payments of $100,000 to

 

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$200,000 depending on Universal Chemicals’ operating results, asdefined in the agreements, for five years after the termination date.

 

**10.****                               SEGMENTINFORMATION**

 

The Company has two reportable segments: Industrial and WaterTreatment. The Industrial segment specializes in providing industrial chemicalsand services to the energy, electronics, and plating industries. In addition,the Industrial segment provides products and services to food manufacturers andprocessing plants and the pharmaceutical industry. The Water Treatment segmentspecializes in providing water and waste-water treatment equipment and chemicalsand in helping customers find solutions to system problems.

 

The accounting policies of the segments are the same as those describedin the summary of significant accounting policies. Product costs and expensesfor each segment are based on actual costs incurred along with cost allocationof shared and centralized functions. The Company evaluates performance based onprofit or loss from operations before income taxes not including nonrecurringgains and losses. Reportable segments are defined by product and type ofcustomer. Segments are responsible for the sales, marketing and development oftheir products and services. The segments do not have separate accounting,administration, customer service or purchasing functions.

 
| **Reportable Segments**                                   |   | **Industrial** |       | **Water  Treatment** |       | **Total**  |       |
|-----------------------------------------------------------|--------|----------------|------------|----------------------|------------|------------|------------|
|                                                      |   |           | ** ** |                 | ** ** |       | ** ** |
| Fiscal Year Ended March 28, 2004:                    |   |           |       |                 |       |       |       |
| Sales                                                     |   | $              | 67,746,982 |                 | $          | 39,281,149 |       | $ | 107,028,131 |   |
| Cost of sales                                             |   | 52,577,877     |       | 26,475,965           |       | 79,053,842 |       |
| Gross margin                                              |   | 15,169,105     |       | 12,805,184           |       | 27,974,289 |       |
| Income from operations                                    |   | 955,996        |       | 7,225,199            |       | 8,181,195  |       |
|                                                      |   |           |       |                 |       |       |       |
| Identifiable assets                                       |   | $              | 40,713,109 |                 | $          | 13,566,741 |       | $ | 54,279,850 |   |
|                                                      |   |           |       |                 |       |       |       |
| Fiscal Year Ended March 30, 2003:                    |   |           |       |                 |       |       |       |
| Sales                                                     |   | $              | 67,674,289 |                 | $          | 36,330,322 |       | $ | 104,004,611 |   |
| Cost of sales                                             |   | 51,598,804     |       | 24,447,955           |       | 76,046,759 |       |
| Gross margin                                              |   | 16,075,485     |       | 11,882,367           |       | 27,957,852 |       |
| Income from operations                                    |   | 6,311,138      |       | 6,756,074            |       | 13,067,212 |       |
|                                                      |   |           |       |                 |       |       |       |
| Identifiable assets                                       |   | $              | 40,023,730 |                 | $          | 13,122,105 |       | $ | 53,145,835 |   |
|                                                      |   |           |       |                 |       |       |       |
| Six-Month Transitional Period Ended  March 31, 2002: |   |           |       |                 |       |       |       |
| Sales                                                     |   | $              | 35,686,509 |                 | $          | 14,181,670 |       | $ | 49,868,179 |   |
| Cost of sales                                             |   | 28,059,961     |       | 10,272,512           |       | 38,332,473 |       |
| Gross margin                                              |   | 7,626,548      |       | 3,909,158            |       | 11,535,706 |       |
| Income from operations                                    |   | 2,559,529      |       | 2,051,427            |       | 4,610,956  |       |
|                                                      |   |           |       |                 |       |       |       |
| Identifiable assets                                       |   | $              | 40,113,075 |                 | $          | 13,415,036 |       | $ | 53,528,111 |   |
|                                                      |   |           |       |                 |       |       |       |
| Fiscal Year Ended September 30, 2001:                |   |           |       |                 |       |       |       |
| Sales                                                     |   | $              | 73,818,768 |                 | $          | 34,112,900 |       | $ | 107,931,668 |   |
| Cost of sales                                             |   | 59,990,184     |       | 23,643,897           |       | 83,634,081 |       |
| Gross margin                                              |   | 13,828,584     |       | 10,469,003           |       | 24,297,587 |       |
| Income from operations                                    |   | 3,850,444      |       | 6,204,916            |       | 10,055,360 |       |
|                                                      |   |           |       |                 |       |       |       |
| Identifiable assets                                       |   | $              | 44,622,720 |                 | $          | 14,244,584 |       | $ | 58,867,304 |   |

 

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**11.****                               TRANSITIONALPERIOD DISCLOSURE (UNAUDITED)**

 

The following information for the twelve-month period endedMarch 31, 2002 and the six-month period ended March 31, 2001 isincluded for comparison purposes.

 
|                                 |   | **Twelve-Month  Period Ended  March 31, 2002** | ** **  | **Six-Month  Period Ended  March 31, 2001** | ** ** |
|--------------------------------------|--------|-----------------------------------------------------|-------------|--------------------------------------------------|------------|
|                                 |   |                                                | ** **  |                                             | ** ** |
| Sales                                |   | $                                                   | 107,390,209 |                                             | $          | 50,409,638 |   |
| Gross margin                         |   | 25,389,535                                          |        | 10,443,758                                       |       |
| Income taxes                         |   | 3,718,913                                           |        | 1,668,100                                        |       |
| Net income                           |   | 7,612,681                                           |        | 2,588,668                                        |       |
| Basic and diluted earnings per share |   | $                                                   | .74         |                                             | $          | .25 |   |

 

ITEM 9.                                                     CHANGESIN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.

 

Not Applicable.

 

ITEM 9A.                                           CONTROLSAND PROCEDURES.

 

As of the end of the period covered by this report, the Companyconducted an evaluation, under the supervision and with the participation ofits management, including the principal executive officer and principalfinancial officer, of the Company’s disclosure controls and procedures (asdefined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of1934 (the “Exchange Act”)). Based on this evaluation, the principal executiveofficer and principal financial officer concluded that the Company’s disclosurecontrols and procedures are effective to ensure that information required to bedisclosed by the Company in reports that it files or submits under the ExchangeAct is recorded, processed, summarized and reported within the time periodsspecified in Securities and Exchange Commission rules and forms. There was nochange in the Company’s internal control over financial reporting during theCompany’s most recently completed fiscal quarter that has materially affected,or is reasonably likely to materially affect, the Company’s internal controlover financial reporting.

 

PART III

 

ITEM 10.                                               DIRECTORSAND EXECUTIVE OFFICERS OF THE COMPANY.

 

The information under the captions “Election of Directors” and“Section 16(a) Beneficial Ownership Reporting Compliance” in the ProxyStatement for the 2004 Annual Meeting of Shareholders is incorporated herein bythis reference. Information required under this item with respect to executiveofficers is contained in Part I of this Form 10-K under the caption “ExecutiveOfficers of the Registrant.”

 

We have adopted a Code of Business Conduct and Ethics that applies to allof our directors and employees, including our principal executive officer,principal financial officer, controller and other persons performing similarfunctions. We have posted the Code of Business Conduct and Ethics on ourwebsite located at http://www.hawkinsinc.com. We intend to post on our websiteany amendment to, or waiver from, a provision of our Code of Business Conductand Ethics that applies to our principal executive officer, principal financialofficer, controller and other persons performing similar functions within fivebusiness days following the date of such amendment or waiver.

 

ITEM 11.                                               EXECUTIVECOMPENSATION.

 

The information under the caption “Compensation of Executive Officersand Directors” in the Proxy Statement for the 2004 Annual Meeting ofShareholders is incorporated herein by this reference.

 

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| ITEM 12. |   | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND  RELATED STOCKHOLER MATTERS. |
|----------|--------|-------------------------------------------------------------------------------------------------|

 

The information under the caption “Security Ownership of Management andBeneficial Ownership” in the Proxy Statement for the 2004 Annual Meeting ofShareholders is incorporated herein by this reference. The Company does nothave any equity compensation plans as defined in Statement of FinancialAccounting Standards No. 123, “Accounting for Stock-Based Compensation.”

 

ITEM 13.                                               CERTAINRELATIONSHIPS AND RELATED TRANSACTIONS.

 

The information under the captions “Election of Directors” and “RelatedParty Transactions” in the Proxy Statement for the 2004 Annual Meeting ofShareholders is incorporated herein by this reference.

 

ITEM 14.                                               PRINCIPALACCOUNTANT FEES AND SERVICES.

 

The information under the caption “Independent Auditors’ Fees” in theProxy Statement for the 2004 Annual Meeting of Shareholders is incorporatedherein by this reference.

 

PART IV

 

ITEM 15.                                               EXHIBITS,FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.

 

(a)(1)                    FINANCIALSTATEMENTS OF THE COMPANY.

 

The following financial statements of Hawkins, Inc. are filed as partof this Annual Report on Form 10-K.

 

Report of Independent Registered Public Accounting Firm.

 

Balance Sheets at March 28, 2004 and March 30, 2003.

 

Statements of Income for the fiscal years ended March 28, 2004 andMarch 30, 2003, the six-month transitional period ended March 31,2002, and the fiscal year ended September 30, 2001.

 

Statements of Shareholders’ Equity for the fiscal years endedMarch 28, 2004 and March 30, 2003, the six-month transitional periodended March 31, 2002, and the fiscal year ended September 30, 2001.

 

Statements of Cash Flows for the fiscal years ended March 28, 2004and March 30, 2003, the six-month transitional period ended March 31,2002, and the fiscal year ended September 30, 2001.

 

Notes to Financial Statements.

 

(a)(2)                    FINANCIALSTATEMENT SCHEDULES OF THE COMPANY.

 

The additional financial data listed below is included as aschedule to this Annual Report on Form 10-K and should be read inconjunction with the financial statements presented in Part II, Item 8.Schedules not included with this additional financial data have been omittedbecause they are not required or the required information is included in thefinancial statements or the notes.

 

Report of Independent Registered Public Accounting Firm on Schedule.

 

The following financial statement schedule for the fiscal yearsended March 28, 2004 and March 30, 2003, the six-month transitionalperiod ended March 31, 2002, and the fiscal year ended September 30,2001.

 

Schedule II - Valuation and Qualifying Accounts.

 

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(a)(3)                    EXHIBITS.

 
| **Exhibit** |   | **Description**                                                                                                                |   | **Method of  Filing**     |
|-------------|--------|--------------------------------------------------------------------------------------------------------------------------------|--------|---------------------------|
| 3.1         |   | Amended and Second Restated Articles of Incorporation as amended  through February 27, 2001. (1)                          |   | Incorporated by Reference |
| 3.2         |   | Second Amended and Superseding By-Laws as amended through  February 15, 1995. (2)                                         |   | Incorporated by Reference |
| 10.1        |   | Asset purchase agreement dated May 9, 2000 among St. Mary’s  Chemicals, Inc., its shareholders, and the Company. (3) |   | Incorporated by Reference |
| 23.1        |   | Consent of Independent Registered Public Accounting Firm.                                                                      |   | Filed Electronically      |
| 31.1        |   | Certification by Chief Executive Officer pursuant to Rule 13a-14(a)  of the Exchange Act.                                      |   | Filed Electronically      |
| 31.2        |   | Certification by Chief Financial Officer pursuant to Rule 13a-14(a)  of the Exchange Act.                                      |   | Filed Electronically      |
| 32.1        |   | Section 1350 Certification by Chief Executive Officer.                                                                    |   | Filed Electronically      |
| 32.2        |   | Section 1350 Certification by Chief Financial Officer.                                                                    |   | Filed Electronically      |

 

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(1)          Incorporated by reference to Exhibit 3.1 tothe Company’s Annual Report on Form 10-K for the year ended September 30,2001.

(2)          Incorporated by reference to Exhibit 3.2 tothe Company’s Annual Report on Form 10-K for the year ended October 1,1995.

(3)          Incorporated by reference to Exhibit 10.1 tothe Company’s Quarterly Report on Form 10-Q for the quarter ended June 30,2000.

 

(b)                                 REPORTSON FORM 8-K.

 

On February 20, 2004, we furnished a Current Report on Form 8-K tothe SEC, including the Company’s press release announcing a tentativesettlement of its litigation relating to its pharmaceutical business.

 

On February 13, 2004, we furnished a Current Report on Form 8-K tothe SEC, including the Company’s press release announcing financial results forthe quarter ended December 31, 2003.

 

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SIGNATURES

 

Pursuant to the requirements of Section 13 or 15(d) of theSecurities Exchange Act of 1934, the Company has duly caused this report to besigned on its behalf by the undersigned on June 10, 2004.

 
|   | HAWKINS, 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 ofthe Company and in the capacities indicated on June 10, 2004.

 
|   | /s/ John R. Hawkins                                                                                                                              |   |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------|--------|
|   | John R. Hawkins, Chief Executive Officer (Principal  Executive Officer) and Director                                                             |   |
|   |                                                                                                                                             |   |
|   | /s/ Marvin E. Dee                                                                                                                                |   |
|   | Marvin E. Dee, Chief Financial Officer, Vice  President, Secretary and Treasurer (Principal Financial  Officer and Principal Accounting Officer) |   |
|   |                                                                                                                                             |   |
|   | /s/ Dean L. Hahn                                                                                                                                 |   |
|   | Dean L. Hahn, Director                                                                                                                           |   |
|   |                                                                                                                                             |   |
|   | /s/ Donald L. Shipp                                                                                                                              |   |
|   | Donald L. Shipp, Director                                                                                                                        |   |
|   |                                                                                                                                             |   |
|   | /s/ Howard M. Hawkins                                                                                                                            |   |
|   | Howard M. Hawkins, Director                                                                                                                      |   |
|   |                                                                                                                                             |   |
|   | /s/ John S. McKeon                                                                                                                               |   |
|   | John S. McKeon, Director                                                                                                                         |   |
|   |                                                                                                                                             |   |
|   | /s/ Duane M. Jergenson                                                                                                                           |   |
|   | Duane M. Jergenson, Director                                                                                                                     |   |
|   |                                                                                                                                             |   |
|   | /s/ G. Robert Gey                                                                                                                                |   |
|   | G. Robert Gey, Director                                                                                                                          |   |
|   |                                                                                                                                             |   |
|   | /s/ Daryl I. Skaar                                                                                                                               |   |
|   | Daryl I. Skaar, Director                                                                                                                         |   |

 

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**REPORT OF INDEPENDENTREGISTERED PUBLIC ACCOUNTING FIRM ON SCHEDULE**

 

We have audited the financial statements of Hawkins, Inc. (the“Company”) as of March 28, 2004 and March 30, 2003 and for the fiscalyears ended March 28, 2004 and March 30, 2003, the six-monthtransitional period ended March 31, 2002, and the fiscal year endedSeptember 30, 2001 and have issued our report thereon dated June 4,2004; such report is included elsewhere in this Form 10-K. Our audits alsoincluded the financial statement schedule of the Company, listed inItem 15(a)(2). This financial statement schedule is theresponsibility of the Company’s management. Our responsibility is to express anopinion 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.

 

 

Minneapolis, Minnesota

June 4, 2004

 

**SCHEDULE II**

 

**HAWKINS, INC.**

 

**VALUATIONAND QUALIFYING ACCOUNTS**

**FORTHE FISCAL YEARS ENDED MARCH 28, 2004 AND MARCH 30, 2003, THESIX-MONTH TRANSITIONAL PERIOD ENDED MARCH 31, 2002 AND THE FISCAL YEARENDED SEPTEMBER 30, 2001**

 
|                                                                                |   |                               |    | **Additions**                       |   |                            |   |                       |   |
|-------------------------------------------------------------------------------------|--------|------------------------------------|---------|-------------------------------------|--------|---------------------------------|--------|----------------------------|--------|
| **Description**                                                                     |   | **Balance at  Beginning  of Year** |    | **Charged to  Costs and  Expenses** |   | **Charged  To Other  Accounts** |   | **Deductions  Write-Offs** |   | **Balance at  End of Year** |   |
|                                                                                |   |                               |    |                                |   |                            |   |                       |   |   |   |
| Reserve  deducted from asset to which it applies - allowance for doubtful accounts: |   |                               |    |                                |   |                            |   |                       |   |   |   |
|                                                                                |   |                               |    |                                |   |                            |   |                       |   |   |   |
| YEAR  ENDED:                                                                        |   |                               |    |                                |   |                            |   |                       |   |   |   |
| March 28,  2004                                                                |   | $                                  | 275,000 |                                | $      | 47,432                          |   |                       |   | $ | 47,432 |   | $ | 275,000 |   |
|                                                                                |   |                               |    |                                |   |                            |   |                       |   |   |   |
| YEAR  ENDED:                                                                        |   |                               |    |                                |   |                            |   |                       |   |   |   |
| March 30,  2003                                                                |   | $                                  | 300,000 |                                | $      | 18,051                          |   |                       |   | $ | 43,051 |   | $ | 275,000 |   |
|                                                                                |   |                               |    |                                |   |                            |   |                       |   |   |   |
| SIX MONTHS  ENDED:                                                                  |   |                               |    |                                |   |                            |   |                       |   |   |   |
| March 31,  2002                                                                |   | $                                  | 335,000 |                                | $      | 30,868                          |   |                       |   | $ | 65,868 |   | $ | 300,000 |   |
|                                                                                |   |                               |    |                                |   |                            |   |                       |   |   |   |
| YEAR  ENDED:                                                                        |   |                               |    |                                |   |                            |   |                       |   |   |   |
| September 30,  2001                                                            |   | $                                  | 377,000 |                                | $      | 70,803                          |   |                       |   | $ | 112,803 |   | $ | 335,000 |   |

 

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Exhibit Index

 
| **Exhibit** |   | **Description**                                                                                                                |   | **Method of  Filing**     |
|-------------|--------|--------------------------------------------------------------------------------------------------------------------------------|--------|---------------------------|
| 3.1         |   | Amended and Second Restated Articles of Incorporation as amended  through February 27, 2001. (1)                          |   | Incorporated by Reference |
| 3.2         |   | Second Amended and Superseding By-Laws as amended through  February 15, 1995. (2)                                         |   | Incorporated by Reference |
| 10.1        |   | Asset purchase agreement dated May 9, 2000 among St. Mary’s  Chemicals, Inc., its shareholders, and the Company. (3) |   | Incorporated by Reference |
| 23.1        |   | Consent of Independent Registered Public Accounting Firm.                                                                      |   | Filed Electronically      |
| 31.1        |   | Certification by Chief Executive Officer pursuant to Rule 13a-14(a)  of the Exchange Act.                                      |   | Filed Electronically      |
| 31.2        |   | Certification by Chief Financial Officer pursuant to Rule 13a-14(a)  of the Exchange Act.                                      |   | Filed Electronically      |
| 32.1        |   | Section 1350 Certification by Chief Executive Officer.                                                                    |   | Filed Electronically      |
| 32.2        |   | Section 1350 Certification by Chief Financial Officer.                                                                    |   | Filed Electronically      |

 

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(1)          Incorporated by reference to Exhibit 3.1 tothe Company’s Annual Report on Form 10-K for the year ended September 30,2001.

(2)          Incorporated by reference to Exhibit 3.2 tothe Company’s Annual Report on Form 10-K for the year ended October 1,1995.

(3)          Incorporated by reference to Exhibit 10.1 tothe Company’s Quarterly Report on Form 10-Q for the quarter ended June 30,2000.

 

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