**SECURITIES AND EXCHANGE COMMISSION**

**Washington,D. C. 20549**

 

**FORM 10-K**

 

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

 

**For theFiscal Year Ended March 30, 2003**

 

**CommissionFile No. 0-7647**

 

**HAWKINS, INC.**

(Exact Name of Registrantas specified in its Charter)

 

| **MINNESOTA**                                                                                                 |   | **41-0771293**                        |
|---------------------------------------------------------------------------------------------------------------|--------|---------------------------------------|
| (State of  Incorporation)                                                                                     |   | (I.R.S. Employer  Identification No.) |
|                                                                                                          |   |                                  |
| **3100  East Hennepin Avenue, Minneapolis, Minnesota**                                                        |   | **55413**                             |
| (Address of Principal  Executive Offices)                                                                     |   | (Zip Code)                            |
|                                                                                                          |   |                                  |
| **(612)  331-6910**                                                                                           |
| (Registrant’s Telephone  Number, Including Area Code)                                                    |
|                                                                                                          |
| Securities registered pursuant to Section 12(b) of  the Act: **NONE**                                         |
| Securities registered pursuant to Section 12(g)  of the Act: **COMMON STOCK, PAR VALUE $.05  PER SHARE** |

 

Indicate by check mark whether the Registrant (1) hasfiled all reports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding twelve months (or for such shorterperiod that the Registrant was required to file such reports) and (2) has beensubject to such filing requirements for the past 90days.  Yes  ý   No   o

 

Indicate by check mark if disclosure of delinquentfilers pursuant to Item 405 of Regulation S-K is not contained herein, and willnot be contained, to the best of Registrant’s knowledge, in definitive proxy orinformation statements incorporated by reference in Part III of this Form 10-Kor any amendment to this Form 10-K.   o

 

Indicateby check mark whether the Registrant is an accelerated filer (as defined inRule 12b-2 of the Exchange Act).

 

YES    o        NO    ý

 

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

Hawkins, Inc.’s common stock on that date as reported by The NasdaqStock Market, excluding all shares held by officers and directors of theRegistrant and by the Trustees of the Registrant’s Employee Stock OwnershipPlan and Trust.

 

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

 

**DOCUMENTSINCORPORATED BY REFERENCE**

 

Part III of this Annual Report on Form 10-Kincorporates by reference information (to the extent specific sections arereferred to herein) from the Registrant’s Proxy Statement for its 2003 AnnualMeeting of Shareholders to be held August 14, 2003.

 

 

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PART I

 

ITEM 1.                                                     BUSINESS.

 

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

 

In fiscal 1998, the Company combined three of its former subsidiaries,Feed-Rite Controls, Inc., Mon-Dak Chemical, Inc., and Dakota Chemical, Inc. andits Arrowhead Chemical Division together to form a single wholly-ownedsubsidiary known as Hawkins Water Treatment Group, Inc. (HWTG).  In fiscal 1999, the Company merged HWTG intothe Company.  During fiscal 2000, theCompany acquired certain assets of St. Mary’s Chemicals, Inc. (discussed morefully in paragraph (c)(i)(B) below).  Infiscal 2001, the Company changed its corporate name to Hawkins, Inc.,reflecting the fact the Company has expanded its original business beyond thedistribution of chemicals.

 

(b)                                 FINANCIALINFORMATION ABOUT INDUSTRY SEGMENTS. The Company’s principal business is the formulation, blending anddistribution of bulk and specialty chemicals, which it conducts in twoprincipal segments: Water Treatment and Industrial.  Financial information regarding these segments is reported in theCompany’s audited financial statements. See Items 7 and 8 below.

 

(c)                                  NARRATIVEDESCRIPTION OF THE BUSINESS.

 

(i)                                     PRODUCTSAND MARKETS.  The Company’s business isconducted in two segments, Water Treatment and Industrial, which are more fullydescribed below:

 

(A)                              WATERTREATMENT.  The Water Treatment segmentspecializes in providing equipment, chemicals and solutions to problems forpotable water, municipal and industrial wastewater, industrial process waterand non-residential swimming pool water. The Water Treatment Group has warehouses in eleven 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 arearelocated to a new 59,000 square-foot facility, “the Red Rock facility.” TheRed Rock facility, located on the Mississippi River in St. Paul, Minnesota, hasimproved operational efficiencies, as the Water Treatment operations are nowlocated at the facility where several key products are produced and theconsolidated warehouse space has reduced the amount of time required to loadtrucks between deliveries.

 

(B)                                INDUSTRIAL.  The Industrial segment specializes inproviding industrial chemicals and services to the energy, electronics,chemical processing, pulp and paper, medical device and platingindustries.  In addition, the Industrialsegment provides products and services to food manufacturers and processingplants.  The Industrial segment alsodistributes a variety of pharmaceutical products, manufactures and sellscertain food grade products, including the Cheese-Phos® liquid phosphate product (discussed more fully in paragraph(iv) below) and other blended products, none of which are material to theCompany.  This segment conducts itsbusiness primarily through distribution centers and terminal operations.

 

The Industrial segmentreceives, stores and distributes various chemicals in bulk, including liquidcaustic soda, phosphoric acid, potassium hydroxide and aqua ammonia;manufactures sodium hypochlorite (bleach) and agricultural products; repackagesliquid chlorine; and performs custom blending of certain chemicals for customersaccording to customer formulas.  TheIndustrial segment operates liquid caustic soda barge terminals to receiveshipments during the period the Mississippi River is open to barge traffic(approximately April 1 through November 15). During the remainder of the year the Company relies on stockpiles, aswell as supplies shipped in by railroad tank car.  Approximately 80% of the terminal operations business is relatedto liquid caustic soda.  Pursuant tooperating agreements it has with other chemical companies, the Company receivesand stores liquid caustic soda and other chemicals at their two terminal sites,Hawkins Terminal 1 and Terminal 2. Terminal 1 and Terminal 2 are located on opposite sides of the MississippiRiver in St. Paul, Minnesota.  The chlorinerepackaging and bleach manufacturing operations, formerly located at Terminal1, were moved to the Red Rock facility during fiscal 2001.

 

Since 1963, flooding ofthe Mississippi River has required the Company’s terminal operations to betemporarily shifted out of its buildings four times, the most recent being inthe spring of 2001.  From approximatelyApril 12, 2001 to May 8, 2001, the areas around the terminals were flooded,preventing shipments to and from these locations.  The terminals themselves were not flooded as the facilities wereadequately protected by dikes. Additionally, 

 

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the high water interrupted barge traffic on theMississippi River and no caustic soda barges were received from the closing ofthe river in the fall of 2000 until the end of May 2001.  No substantial interruptions to salesresulted from the flooding as trucks and railroad tank cars were used as analternative means of supply.  However,the Company incurred additional shipping, labor, and other costs and was notable to pass through all of 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 be given that flooding willnot recur or that there will not be material damage or interruption to theCompany’s operations in the future from flooding.  In September 2001, a 1.5 million-gallon caustic soda storage tankwas completed at the Red Rock facility allowing it to serve as an additionalterminal for bulk chemicals. Historically, the property on which the Red Rock facility is located hasnot been subject to flooding when Terminals 1 and 2 were not usable due to highwater and the facility was not affected by the flooding in 2001.  The Company believes the impact of futureflooding, if any, will be reduced as the Red Rock facility is expected to allowthe Company to continue normal shipping to customers during periods of highwater levels.

 

The Industrial segmentalso includes a manufacturing, blending and sales distribution center forindustrial chemicals, food grade chemicals, high-purity electronic chemicalsand laboratory chemicals and supplies. Bulk industrial chemicals are generally repackaged and sold in smallerquantities to the Company’s customers. Sales are concentrated primarily in Wisconsin, Minnesota, northern Iowa,and North and South Dakota.  Theprincipal products are acids and alkalis and industrial and food gradesalts.  The Industrial segment alsospecializes in sales to the plating and electronic industries, for which itrelies on a specially trained sales staff that works directly with customers ontheir surface finishing needs.

 

On May 26, 2000, theCompany completed the acquisition of certain assets of St. Mary’s Chemicals,Inc. d.b.a. Universal Chemicals. Universal Chemicals, a Minnesota-based company, was engaged in thebusiness of marketing, selling, and distributing pharmaceutical chemicals topharmacies and pharmacy wholesalers.  OnMay 26, 2000, the Company also entered into a five-year employmentagreement with one of the previous owners and consulting agreements with theother two previous owners of Universal Chemicals.  The employment agreement and consulting agreements containperformance bonuses and non-compete provisions.  The agreements are based on Universal Chemicals’ operatingresults, as defined, for five years after the acquisition date and have amaximum payout of $3,520,000.  Thenon-compete provisions extend for a period of five years after the terminationof the employment or consulting agreements, and require annual payments of$100,000 to $200,000 depending on Universal Chemicals’ operating results, asdefined in the agreements, for five years after the termination date.

 

(ii)                                  NEWPRODUCTS.  The Company did not have anysignificant new products during the fiscal year ended March 30, 2003.

 

(iii)                               RAWMATERIALS.  The Company’s segments haveapproximately 300 suppliers, including many of the major chemical producers inthe United States, of which approximately 20 account for a majority of theCompany’s purchases.  The Company’ssegments typically have written distributorship agreements or supply contractswith their suppliers that are renewed from time to time.  Although there is no assurance that anycontract or understanding with any supplier will not be terminated in theforeseeable future, most of the products purchased can be obtained fromalternative sources should existing relationships be terminated.

 

(iv)                              PATENTS,TRADEMARKS, LICENSES, FRANCHISES, AND CONCESSIONS.  There are no patents, trademarks, licenses, franchises orconcessions that are currently material to the successful operation of theCompany’s business.  The Company has,however, obtained a patent on a liquid form of sodium phosphate for use in theprocessed food industry, as described below. The patent was granted on October 17, 1995 and will expire on November8, 2013.  The Company’s patentedCheese-Phos®, a two-component liquidsodium phosphate, is stored at room temperature.  Other competing liquid sodium phosphates must be stored atelevated temperatures to prevent crystallization because they are singlecomponent.  Liquid delivery systems, ingeneral, are more economical than dry delivery systems and are easier to automate,measure, monitor and control.  As atwo-component liquid process, Cheese-Phos®,when mixed with varied amounts of sodium hydroxide, can create all of theratios of sodium phosphates that process cheese makers use.  This minimizes inventories for producers.  Cheese-Phos® has not and is not expected to materially increase theCompany’s sales or profits.

 

(v)                                 SEASONALASPECTS.  The Water Treatment segmenthas historically experienced higher sales during the April to Septembertimeframe, which is due primarily to an increase in chemicals used by municipalwater treatment facilities.

 

(vi)                              WORKINGCAPITAL ITEMS.  As a bulk distributor ofchemicals, the Company is required to carry significant amounts of inventory tomeet rapid delivery requirements of customers. Working capital requirements vary on a seasonal basis as a result of theseasonality of the water treatment business.

 

3

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(vii)                           DEPENDENCEON LIMITED NUMBER OF CUSTOMERS.  No onecustomer represents more than approximately 5% of the Company’s sales, but theloss of its five largest customers could have a material adverse effect on theCompany’s results of operations. Additionally, no one customer represents 10% or more of either the WaterTreatment segment or Industrial segment sales.

 

(viii)                        BACKLOG.  Backlog is not material to an understandingof the Company’s business.

 

(ix)                                GOVERNMENTCONTRACTS.  No material portion of theCompany’s business is subject to renegotiation of profits or termination ofcontracts at the election of any state or federal governmental subdivision oragency.

 

(x)                                   COMPETITIVECONDITIONS.  The Company operates in acompetitive industry and competes with producers, distributors and sales agentsoffering chemicals equivalent to all of the products handled by theCompany.  Many such producers anddistributors are substantially larger than the Company.  No one competitor, however, is dominant inthe Company’s market.  Price and serviceare the principal factors affecting competition in the industry.

 

(xi)                                RESEARCHAND DEVELOPMENT.  The Company does nothave a formal research and development function.  Employees are assigned to research and development projects asthe need arises.  During the fiscal yearended March 30, 2003, expenditures for research and development were negligibleand not material to the Company’s business.

 

(xii)                             ENVIRONMENTALMATTERS.  The Company is primarily acompounder and distributor, rather than a manufacturer, of chemicalproducts.  As such, compliance withcurrent federal, state and local provisions regarding discharge of materialsinto the environment, or otherwise relating to the protection of theenvironment, is not anticipated to have any material effects upon the capitalexpenditures, earnings or competitive position of the Company.  The Company does not currently anticipatemaking any material capital expenditures for environmental control facilitiesduring fiscal 2004.

 

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

 

(d)                                 FINANCIALINFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS AND EXPORT SALES.  Because the Company deals primarily in onegeographic area of the United States, a breakdown of sales, profitability orassets attributable to different geographic areas is not meaningful to anunderstanding of the Company’s business.

 

(e)                                  AVAILABLEINFORMATION.  Our Internet website is:http://www.hawkinsinc.com.  We have madeavailable, free of charge, through our Internet website, our Annual Reports onForm 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, andamendments to those reports, as soon as reasonably practicable after weelectronically file such materials with, or furnish them to, the SEC.

 

ITEM 2.                                                     PROPERTIES.

 

The Company owns its principal location, whichconsists of approximately 11 acres of land in Minneapolis, Minnesota, with sixbuildings containing a total of 160,000 square feet of office and warehousespace.  The Company’s principal officeis located in one of these buildings, at 3100 East Hennepin Avenue.  As of the date hereof, the Company hasinstalled sprinkler systems in substantially all of its warehouse facilitiesfor fire protection.  The Companycarries insurance covering the replacement of property damaged by fire or flood.

 

As noted above, in December 2000 the Company completedthe Red Rock facility, which consists of a 59,000 square-foot building locatedon approximately 10 acres of land.  Thisfacility has outside storage capacity of approximately 1.5 million gallons forthe storage of liquid caustic soda, as well as numerous smaller tanks forstoring and mixing chemicals.  The landis leased from the Port Authority of the City of St. Paul, Minnesota for abasic rent plus an amount based on the annual tonnage unloaded at the sitethrough May 31, 2029.  The basicrent and annual tonnage rent are to be renegotiated every five years beginningJune 1, 2004.

 

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

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

 

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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 thePort Authority of the City of St. Paul, Minnesota for a basic rent plus anamount based on the annual tonnage unloaded at each site.  The applicable leases run until December 31,2003, at which time the Company has an option to renew the leases for anadditional five-year period on the same terms and conditions subject torenegotiation of rent.  The Company alsohas options to renew these leases for additional successive five-year renewalperiods (extending until 2018) for which the rent may be adjusted pursuant tothe rental renegotiation provisions contained in the leases.

 

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

 

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

 

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

 

(5)                                  Thisfacility is leased from a third party.

 

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

 

ITEM 3.                                                     LEGALPROCEEDINGS.

 

Not Applicable.

 

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

 

Not Applicable.

 

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ITEM 4A.                                           The executiveofficers of the Company, their ages and offices held, as of May 31, 2003 areset forth below:

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

 

John R. Hawkins has been the Company’s Chairman andChief Executive Officer since February 16, 2000.  He was President and Chief Operating Officer from December 1998to February 2000 and was Secretary from 1991 to December 1999.  He was an Executive Vice President from 1997to December 1998 and Vice President of Sales from 1987 to 1997.

 

Kurt R. Norman has been the Company’s President andChief Operating Officer since February 16, 2000.  He was a Vice President of the Company from February 1999 untilFebruary 2000, the Vice President of the Water Treatment segment from 1996 toFebruary 1999 and was the Water Treatment General Manager from 1988 to 1996.

 

Marvin E. Dee has been the Company’s Vice Presidentand Chief Financial Officer since September 1999 and its Secretary andTreasurer since December 1999.  He wasthe Chief Financial Officer of Nath Companies from 1997 to September 1999, theVice President of Finance and Treasurer of Tricord Systems, Inc. from 1993 to1997 and Senior Director of Accounting of NordicTrack, Inc. in 1993 andthe Controller of NordicTrack from 1991 to 1992.

 

Keenan A. Paulson has been the Company’s VicePresident - Water Treatment Group since May 2000.  Prior to attaining this position, Ms. Paulson held variouspositions during her 30-year career with the Company, most recently as itsWater Treatment General Manager.

 

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

 

Daniel E. Soderlund has been the Company’s VicePresident - Pharmaceuticals since May 2000. He was the Business Unit Manager of Pharmaceuticals from April 1999 toMay 2000 and was a Sales Representative with the Company from 1992 to April1999.

 

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PART II

 

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

 
| **Quarterly Stock Data** |   | **High** |   | **Low** |   |
|--------------------------|--------|----------|--------|---------|--------|
|                     |   |     |   |    |   |
| Fiscal 2003              |   |     |   |    |   |
| 4th  Quarter             |   | $        | 9.400  |    | $      | 8.400 |   |
| 3rd  Quarter             |   | 9.000    |   | 8.000   |   |
| 2nd  Quarter             |   | 9.900    |   | 8.110   |   |
| 1st  Quarter             |   | 10.200   |   | 8.800   |   |
|                     |   |     |   |    |   |
| Fiscal 2002              |   |     |   |    |   |
| 2nd  Quarter             |   | $        | 9.650  |    | $      | 8.370 |   |
| 1st  Quarter             |   | 8.900    |   | 7.150   |   |
|                     |   |     |   |    |   |
| Fiscal 2001              |   |     |   |    |   |
| 4th  Quarter             |   | $        | 8.900  |    | $      | 7.080 |   |
| 3rd  Quarter             |   | 9.688    |   | 8.140   |   |
| 2nd  Quarter             |   | 10.250   |   | 8.375   |   |
| 1st  Quarter             |   | 8.750    |   | 6.625   |   |

 
| **Cash Dividends** |   | **Declared** |   | **Paid** | ** ** |
|--------------------|--------|--------------|--------|----------|------------|
|               |   |         |   |     |       |
| Fiscal 2004        |   |         |   |     |       |
| 1st  Quarter       |   |         |   | $        | .18        |   |
|               |   |         |   |     |       |
| Fiscal 2003        |   |         |   |     |       |
| 4th  Quarter       |   | $            | .18    |     |       |   |
| 3rd  Quarter       |   |         |   | $        | .15        |   |
| 2nd  Quarter       |   | $            | .15    |     |       |   |
| 1st  Quarter       |   |         |   | $        | .15        |   |
|               |   |         |   |     |       |
| Fiscal 2002        |   |         |   |     |       |
| 2nd  Quarter       |   | $            | .15    |     |       |   |
| 1st  Quarter       |   |         |   | $        | .15        |   |
|               |   |         |   |     |       |
| Fiscal 2001        |   |         |   |     |       |
| 4th  Quarter       |   | $            | .15    |     |       |   |
| 3rd  Quarter       |   |         |   | $        | .15        |   |
| 2nd  Quarter       |   | $            | .15    |     |       |   |
| 1st  Quarter       |   |         |   | $        | .15        |   |

 

The Company’s common shares are traded on The NasdaqStock Marketâ under the symbol“HWKN.”  The price informationrepresents closing sale prices as reported by Nasdaq.  As of March 30, 2003, there were approximately 700 registeredcommon stockholders.  Additionally, theDepository Trust Company, the principal central securities depository in theUnited States, held the shares of approximately 1,400 stockholders that werecounted as owned by one holder.

 

The Company first started paying cash dividends in1985 and has done so consecutively since that time.  Future dividend levels will be dependent upon Hawkins’ results ofoperations, financial position, cash flows and other factors, and will beevaluated by the Hawkins Board of Directors.

 

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ITEM 6.                                                     SELECTEDFINANCIAL DATA.

 

SELECTED FINANCIAL DATA TABLES

 
| **Fiscal Year**                              |   | **Fiscal Year  Ended  March 30,  2003** |        | **Six-Month  Transitional  Period Ended  March 31,  2002** |     | **Fiscal Years Ended September** |     |
|----------------------------------------------|--------|----------------------------------------------|-------------|------------------------------------------------------------|----------|----------------------------------|----------|
|                                         |   |                                         |        |
|                                         |   |                                         |        |
|                                         |   |                                         |        |
|                                         |   |                                         | **2001**    |                                                       | **2000** |                             | **1999** |   | **1998** |   |
|                                         |   |                                         |        |                                                       |     |                             |     |   |   |   |   |   |   |
| Sales                                        |   | $                                            | 104,004,611 |                                                       | $        | 49,868,179                       |     | $ | 107,931,668 |   | $ | 98,021,731 |   | $ | 96,734,470 |   | $ | 95,860,765 |   |
|                                         |   |                                         |        |                                                       |     |                             |     |   |   |   |   |   |   |
| Net income                                   |   | 8,430,172                                    |        | 3,083,771                                                  |     | 7,117,578                        |     | 8,567,699 |   | 9,698,642 |   | 8,213,869 |   |
|                                         |   |                                         |        |                                                       |     |                             |     |   |   |   |   |   |   |
| Basic and  diluted earnings per common share |   | .83                                          |        | .30                                                        |     | .69                              |     | .81 |   | .87 |   | .71 |   |
|                                         |   |                                         |        |                                                       |     |                             |     |   |   |   |   |   |   |
| Cash dividends  declared per common share    |   | .33                                          |        | .15                                                        |     | .30                              |     | .32 |   | .27 |   | .20 |   |
|                                         |   |                                         |        |                                                       |     |                             |     |   |   |   |   |   |   |
| Cash dividends  paid per common share        |   | .30                                          |        | .15                                                        |     | .30                              |     | .29 |   | .25 |   | .19 |   |
|                                         |   |                                         |        |                                                       |     |                             |     |   |   |   |   |   |   |
| Total assets                                 |   | 81,098,739                                   |        | 71,487,133                                                 |     | 74,868,121                       |     | 69,894,520 |   | 68,999,827 |   | 66,535,475 |   |
|                                         |   |                                         |        |                                                       |     |                             |     |   |   |   |   |   |   |
| Long-term debt                               |   |                                         |        |                                                       |     | 116,823                          |     | 226,003 |   | 328,040 |   | 423,402 |   |
|                                              |        |                                              |             |                                                            |          |                                  |          |  |  |  |  |  |  |  |  |  |  |  |  |

 

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’s Discussion and Analysis ofFinancial 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 onForm 10-K for the year ended March 30, 2003 contains statements that we believeto be “forward-looking statements” within the meaning of the Private SecuritiesLitigation Reform Act of 1995.  Forward-lookingstatements give our current expectations or forecasts of future events.Forward-looking statements generally can be identified by the use offorward-looking terminology such as “may,” “will,” “expected,” “intend,”“estimate,” “anticipate,” “believe,” “project,” or “continue,” or the negativethereof or similar words. From time to time, we also may provide oral orwritten forward-looking statements in other materials we release to the public.Any or all of our forward-looking statements in this Annual Report on

Form 10-K and in any public statements we make could be materiallydifferent from actual results. They can be affected by assumptions we mightmake or by known or unknown risks or uncertainties, including those describedbelow under “Risk Factors” and other factors disclosed throughout this AnnualReport on Form 10-K and the Company’s other filings with the Securities andExchange Commission.  Consequently, wecannot guarantee any forward-looking statements and undertake no obligation torevise any forward-looking statements in order to reflect events orcircumstances that may arise after the date of this Annual Report on

Form 10-K.  Investors arecautioned not to place undue reliance on any forward-looking statements.  Investors should also understand that it isnot possible to predict or identify all such factors and should not considerthe following list to be a complete statement of all potential risks anduncertainties.

 

RISK FACTORS

 

In addition to specific factors which may be describedin connection with any of the Company’s forward-looking statements, factorswhich could cause actual results to differ materially include, but are notlimited to, the following 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 Companycannot predict with any certainty whether the markets for its commoditychemicals will favorably impact the Company’s operations or whether the Companywill experience losses due to excess production resulting in oversupply andhence lower prices.

 

8

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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.

 

•                Increasedcompetition which could affect our ability to raise prices or successfullyenter certain markets.

 

•                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.

 

These factors are not exhaustive and new factors may emerge or existingfactors may change in a manner that impacts our business.  We assume no obligation and disclaim anyduty to update the forward-looking statements in this Annual Report on Form10-K or any other public statement.

 

GENERAL

 

In December 2001, the Company changed its fiscal yearend to a 52/53-week year ending on the Sunday closest to March 31 from a52/53-week fiscal year ending on the Sunday closest to September 30.  The change in year-end better matches theCompany’s annual reporting process to its natural business cycles.  This change resulted in a six-monthtransitional period ended March 31, 2002. This discussion compares the Company’s fiscal year ended March 30, 2003with the six-month transitional period ended March 31, 2002, the six-monthtransitional period ended March 31, 2002 with the fiscal year ended September30, 2001, and the fiscal year ended September 30, 2001 with the fiscal yearended October 1, 2000.  Due to theseasonality of the Company’s business, management feels it would be moremeaningful to the readers of these statements to compare results of operationsto comparable periods.

 

OVERALL SUMMARY

 

Sales for the fiscal year ended March 30, 2003 were$104,004,611 versus $49,868,179 for the six-month transitional period endedMarch 31, 2002 and $107,931,668 for the fiscal year ended September 30,2001.  Net income for the fiscal yearended March 30, 2003 was $8,430,172, or $.83 per share, $3,083,771, or $.30 pershare for the six-month transitional period ended March 31, 2002, and$7,117,578, or $.69 per share for the fiscal year ended September 30,2001.  Return on average shareholders’equity was 13.4% for the fiscal year ended March 30, 2003 compared to 10.5% forthe six-month transitional period ended March 31, 2002 and 12.3% for the fiscalyear ended September 30, 2001.  Bookvalue per share was $6.43 at March 30, 2003, $5.91 at March 31, 2002, and $5.77at September 30, 2001.

 

9

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SALES

 

For the fiscal year ended March 30, 2003, sales forthe Industrial segment were $67,674,289 and for the Water Treatment segmentwere $36,330,322.  For the six-monthtransitional period ended March 31, 2002, sales for the Industrial segment were$35,686,509 and for the Water Treatment segment were $14,181,670.  The increase in sales was due to adifference in period lengths and the seasonal nature of the Water Treatmentsegment’s business as its sales during April through September are greater thanits sales during October through March.

 

For the fiscal year ended September 30, 2001, salesfor the Industrial segment were $73,818,768 and for the Water Treatment segmentwere $34,112,900.  The decrease in salesfor the six-month transitional period ended March 31, 2002 as compared to thefiscal year ended September 30, 2001 was due to the difference in length ofperiods compared and to the seasonal nature of the Water Treatment segment’sbusiness as mentioned above.

 

For the fiscal year ended September 30, 2001, salesincreased $9,909,937, a 10.1% increase from the fiscal year ended October 1,2000, due to an increase of $6,494,368, or 9.6%, in Industrial segment salesand an increase of $3,415,569, or 11.1%, in Water Treatment segment sales.  The Industrial segment increase was mainlydue to an increase in the selling price of caustic soda and volume increases inother product lines, which were partially offset by a decrease in the volume ofcaustic soda sold.  The Water Treatmentsegment increase is due mainly to an increase in volumes of products sold.

 

GROSS MARGIN

 

Gross margin, as a percentage of sales, was 26.9% forthe fiscal year ended March 30, 2003 compared to 23.1% for the six-monthtransitional period ended March 31, 2002 and was 22.5% and 25.3% for the fiscalyears ended September 30, 2001 and October 1, 2000, respectively.  The gross margin variations are due to anumber of variables as explained below.

 

Gross margin, as a percentage of sales, for theIndustrial segment was 23.8% for the fiscal year ended March 30, 2003 and 21.4%for the six-month transitional period ended March 31, 2002 and was 18.7% and22.6% for the fiscal years ended September 30, 2001 and October 1, 2000,respectively.  The increases over theprevious year in the fiscal year ended March 30, 2003 and the six-monthtransitional period ended March 31, 2002 are mainly due to improved margins inmost product lines and to fluctuations in the cost and selling price of causticsoda.  During calendar 2002, the cost ofcaustic soda was increasing and continued to increase through the end of the2003 fiscal year.  Due to the largequantities of caustic soda inventory that are maintained to meet customerrequirements and because the Company is on the last-in, first out (LIFO) methodof valuing inventories, any cost fluctuations can impact gross margins.  The Company attempts to maintain relativelyconstant dollar margins as the cost of caustic soda increases or decreases.  The cost of this product is normally subjectto fluctuations, which are expected to continue in future periods.  By maintaining relatively stable dollarmargins, the gross margin percentage will decrease when the cost of the productis increasing and will increase when the cost of the product isdecreasing.  The Company has generallybeen able to, and expects to continue to, adjust its selling price as the costof materials and other expenses change.

 

The decrease in gross margin for the fiscal year endedSeptember 30, 2001 compared to the fiscal year ended October 1, 2000 wasprimarily due to the cost of caustic soda, which began to increase at thebeginning of fiscal year 2001 but then started to decrease and continued todecrease through the end of the fiscal year. Due to the large quantities of caustic soda that the Company had on handat the beginning of fiscal 2001 and because of the LIFO method of valuinginventories, this increase negatively impacted gross margins.  The Company implemented caustic soda priceincreases during the year; however, market pressures prevented the Company fromrecovering all of the increased caustic soda costs.  Additionally, an increase over the prior year in the volume ofcaustic soda in the year-end inventory combined with the increase in cost ofcaustic soda resulted in an increase in the LIFO reserve, all of whichnegatively affected earnings by $1.4 million or $.14 per share.

 

Gross margin, as a percentage of sales, for the WaterTreatment segment was 32.7% for the fiscal year ended March 30, 2003, 27.6% forthe six-month transitional period ended March 31, 2002, and 30.7% and 31.2% forthe fiscal years ended September 30, 2001 and October 1, 2000,respectively.  The gross margin increasefor the fiscal year ended March 30, 2003 as compared to the six-monthtransitional period ended March 31, 2002 was due to the fiscal year end changeand to the nature of the Water Treatment segment business.  During the months of April to September, thesales for this segment are greater and have higher profit margins than thesales for October to March. Additionally, there are certain fixed costs included in cost of salesthat do not fluctuate with sales volumes. The decrease for the six-month transitional period ended March 31, 2002in comparison to the fiscal year ended September 30, 2001 was due to theaforementioned fiscal year end change and the seasonality of the WaterTreatment segment.  The decrease for thefiscal year ended September 30, 2001 in comparison to the fiscal year endedOctober 1, 2000 was attributable to the aforementioned changes in caustic sodacosts and costs associated with the new Red Rock facility.

 

10

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SELLING, GENERAL AND ADMINISTRATIVE

 

Selling, general and administrative expenses, as apercentage of sales, were 14.3% for the fiscal year ended March 30, 2003, 13.9%for the six-month transitional period ended March 31, 2002, and 13.2% and 12.0%for the fiscal years ended September 30, 2001 and October 1, 2000,respectively.  The increase for thefiscal year ended March 30, 2003 over the six-month transitional period endedMarch 31, 2002 was primarily attributable to the Company’s investment ininfrastructure necessary to support future sales increases as well as a larger,more geographically dispersed organization. The six-month transitional period increase over the fiscal year endedSeptember 30, 2001 was primarily attributable to increases in sales staff andinsurance expense.  The fiscal yearended September 30, 2001 increase over the fiscal year ended October 1, 2000 wasmainly due to increases in the sales staff, consulting fees, amortization ofintangibles related to the acquisition of Universal Chemicals, and employeebenefit costs.

 

INVESTMENT INCOME

 

Investment income increased $139,689 to $367,049 forthe fiscal year ended March 30, 2003 compared to $227,360 for the six-monthtransitional period ended March 31, 2002 due to increased amounts of cashavailable for investment and the aforementioned change in our fiscal year endthat resulted in the six-month transitional period.  The increase was partially offset by a $370,000 loss recognizedin the fiscal year ended March 30, 2003 due to declines in market value oninvestments which were deemed other than temporary.  Investment income for the fiscal year ended March 30, 2003 wascomparable to the fiscal year ended September 30, 2001, excluding theaforementioned $370,000 loss, as the increased amounts of cash available forinvestment during the fiscal year ended March 30, 2003 was offset by a lowerrate of return.  Interest income for thefiscal year ended September 30, 2001 decreased by $346,706 in comparison to thefiscal year ended October 1, 2000 due to less cash available for investment anda lower rate of return.

 

PROVISION FOR INCOME TAXES

 

The effective income tax rate was 37.2% for the fiscalyear ended March 30, 2003, 36.2% for the six-month transitional period endedMarch 31, 2002, 33.8% for the fiscal year ended September 30, 2001 and 39.2%for the fiscal year ended October 1, 2000. The increase for the fiscal year ended March 30, 2003 compared to thesix-month transitional period ended March 31, 2002 was primarily due to lesstax-exempt interest income.  Theincrease in the effective rate for the six-month transitional period comparedto the fiscal year ended September 30, 2001 was due to changes in stateapportionment factors, and the decrease in the fiscal year ended September 30,2001 from the fiscal year ended October 1, 2000 was due to changes in stateapportionment factors and a deduction for dividends paid on allocated sharesheld in the Employee Stock Ownership Plan and Trust.

 

INFLATION

 

Inflation did not have a significant impact on theCompany during the fiscal year ended March 30, 2003, the six-month transitionalperiod ended March 31, 2002, and the fiscal years ended September 30, 2001 andOctober 1, 2000, as selling prices have generally been adjusted as the cost ofmaterials and other expenses have changed. On occasion, slight fluctuations in the cost of a single, large-volumeproduct have not been reflected in the selling price of that product.

 

11

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SELECTED QUARTERLY FINANCIAL DATA

 
|                                  |   | **Fiscal Year Ended March 30, 2003**    |       |
|---------------------------------------|--------|-----------------------------------------|------------|
|                                  |   | **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 |   |

 
|                                  |   | **Six-Month Transitional Period  Ended March 31, 2002** |       |
|---------------------------------------|--------|---------------------------------------------------------|------------|
|                                  |   | **First  Quarter Ended  December 31, 2001**             |       | **Second  Quarter Ended  March 31, 2002** |   |
|                                  |   |                                                    |       |   |   |
| Sales                                 |   | $                                                       | 25,210,631 |   | $ | 24,657,548 |   |
| Gross margin                          |   | 5,959,375                                               |       | 5,576,331 |   |
| Net income                            |   | 1,620,604                                               |       | 1,463,167 |   |
| Basic and  diluted earnings per share |   | $                                                       | .16        |   | $ | .14 |   |

 
|                                  |   | **Fiscal Year Ended September 30, 2001**    | ** ** |
|---------------------------------------|--------|---------------------------------------------|------------|
|                                  |   | **First  Quarter Ended  December 31, 2000** |       | **Second  Quarter Ended  March 31, 2001** |   | **Third  Quarter Ended  June 30, 2001** |   | **Fourth  Quarter Ended  September 30, 2001** |   |
|                                  |   |                                        |       |   |   |   |   |   |   |
| Sales                                 |   | $                                           | 24,256,916 |   | $ | 26,152,722 |   | $ | 28,978,656 |   | $ | 28,543,374 |   |
| Gross margin                          |   | 5,075,036                                   |       | 5,368,722 |   | 7,080,326 |   | 6,773,503 |   |
| Net income                            |   | 1,340,378                                   |       | 1,248,290 |   | 2,082,953 |   | 2,445,957 |   |
| Basic and  diluted earnings per share |   | $                                           | .13        |   | $ | .12 |   | $ | .20 |   | $ | .24 |   |

 

FINANCIAL CONDITION

 

LIQUIDITY

 

Cash provided by operations in the fiscal year endedMarch 30, 2003 was $14,589,108 compared to $3,860,076 during the six-monthtransitional period ended March 31, 2002, $9,950,745 in the fiscal year endedSeptember 30, 2001 and $9,693,479 in the fiscal year ended October 1,2000.  The increase in the fiscal yearended March 30, 2003 compared to the six-month period ended March 31, 2002 wasdue primarily to timing of retirement plan payments and the increase in netincome, which was offset by fluctuations in inventory values andquantities.  The decrease in thesix-month transitional period ended March 31, 2002 compared to the fiscal yearended September 30, 2001 was due primarily to fluctuations in inventory andtiming of liability payments and a decrease in net income due to the six-monthperiod.

 

Cash and investments available-for-sale increased by$9,745,638 from March 31, 2002 to $24,256,281 as of March 30, 2003. Theincrease was primarily attributable to cash generated by operations in excessof capital expenditures and financing uses. Cash and investments available-for-sale increased by $1,909,772 fromSeptember 30, 2001 to $14,510,643 at the end of the six-month transitionalperiod.  This increase was primarilyattributable to cash generated by operations in excess of capital expendituresand financing uses and the maturity of investments from investments held tomaturity, which were invested in available-for-sale investments.  Cash equivalents consist of money marketaccounts at a financial institution. Investments consist of investment contracts with high-rated, stableinsurance companies, marketable securities consisting of variable ratemunicipal bonds, U.S. Government agency securities and mutual funds carried atfair value.  Investments are highlyliquid and are available upon demand generally with only a minor penalty.  Additionally, cash and cash equivalentsincreased by $6,221,039 from September 30, 2001 to

 

12

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March 31, 2002 as the Company was in process at March 31, 2002 oftransitioning investments into higher rate of return investments.  Subsequent to March 31, 2002 a significantportion of the cash equivalents were invested in the aforementioned investmentoptions.

 

As of March 30, 2003, the Company had an investmentportfolio of fixed income securities of $15,966,207 and mutual funds of$6,724,198, excluding $2,652,701 classified as cash and cash equivalents andvariable rate securities.  The fixedincome securities, like all fixed income instruments, are subject to interestrate risk and will decline in value if market interest rates increase.  However, while the value of the investmentmay fluctuate in any given period, the Company intends to hold its fixed incomeinvestments until maturity. Consequently the Company would not expect to recognize an adverse impacton net income or cash flows or the amount ultimately realized on theinvestment.  The value of the mutualfunds, like all mutual funds, may increase or decrease due to marketvolatility.  The Company recorded a lossof $370,000 in the fiscal year ended March 30, 2003 due to declines in marketvalue that were deemed other than temporary.

 

CAPITAL EXPENDITURES

 

Capital expenditures in the fiscal year ended March30, 2003, the six-month transitional period ended March 31, 2002, and thefiscal years ended September 30, 2001 and October 1, 2000 were $2,348,124,$1,145,030, $7,056,226, and $7,216,301, respectively.  Capital expenditures during the fiscal year ended March 30, 2003consisted primarily of $1,000,000 for machinery and equipment, $550,000 fortransportation equipment, $450,000 for building improvements, and $350,000 forland and office furniture.

 

COMMON STOCK REPURCHASES

 

The Company did not acquire any common stock duringthe fiscal year ended March 30, 2003. During the six-month transitional period ended March 31, 2002, theCompany acquired and retired 32,100 shares of common stock for $251,790.

 

CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS

 

Future minimum lease payments due under operatingleases with an initial term of one year or more at March 30, 2003 are $164,362in 2004, $105,901 in 2005, $86,776 in 2006, $86,776 in 2007, $86,776 in 2008and $1,851,220 thereafter.  The Companydoes not have any other contractual obligations or commercial commitments.

 

OUTLOOK

 

Expectedfuture cash flows from operations, coupled with the Company’s strong financialposition, puts the Company in a position to fund both short and long-termworking capital and capital investment needs with internally generatedfunds.  Management does not, therefore,anticipate the need to engage in significant financing activities in either theshort or long term.  If the need toobtain additional capital does arise, however, management is confident that theCompany’s total debt to capital ratio puts it in a position to obtain debtfinancing on favorable terms.

 

Althoughmanagement continually reviews opportunities to enhance the value of theCompany through strategic acquisitions, other capital investments and strategicdivestitures, no material commitments for such investments or divestiturescurrently exist.

 

Other than as discussed above, management is not awareof any matters or trends that have materially affected the results ofoperations for the fiscal year ended March 30, 2003 that are not expected tohave either short or long-term implications, nor is it aware of any trends orother matters that have not materially affected results in the fiscal yearended March 30, 2003 but are expected to have a material effect on futureperiods.

 

CRITICAL ACCOUNTING POLICIES

 

Accounting policies whose application may have asignificant effect on the reported results of operations and financial positionof the Company, 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 theprobability and estimated amount of possible future contingent liabilities,including legal matters.  SFAS No. 144requires judgments regarding future operating or disposition plans formarginally performing assets and estimates of expected realizable values forassets to be sold.  Other accountingpolicies that are significant 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.

 

13

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Allowance for Doubtful Accounts - Accounts receivable are reduced by anallowance for amounts that may become uncollectible in the future.  Substantially all of the Company’sreceivables are due from customers located in the United States.  The estimated allowance for doubtful accountsis based upon the age of the outstanding receivables and the payment history andcredit worthiness of each customer. Management evaluates the adequacy of the reserve for doubtful accountson a quarterly basis.

 

Inventories - Inventories are valued at the lower of cost ormarket.  On a quarterly basis,management assesses the inventory quantities on hand to estimated future usageand sales and, if necessary, writes down the value of inventory deemed obsoleteor excess  to market.

 

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 improvements are capitalized, while maintenanceand repairs which do not improve or extend the useful lives of the respectiveassets are charged to operations.  Theassets and 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 aredescribed in Note 1 to the financial statements, are in accordance withgenerally accepted accounting principles. 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

 

InJuly 2001, the Financial Accounting Standards Board (FASB) issued SFAS No. 142,“Goodwill and Other Intangible Assets.” The Company adopted the provisions of SFAS No.142 on April 1, 2002.  Under SFAS No. 142, goodwill as well asother intangibles determined to have an infinite life will no longer beamortized; however, these assets will be reviewed for impairment on a periodicbasis.  SFAS No.142 also includesprovisions for the reclassification of certain existing recognized intangiblesas goodwill, reclassification of certain intangibles out of previously reportedgoodwill and the identification of reporting units for purposes of assessingpotential future impairments of goodwill. The implementation of SFAS No. 142 did not impact the Company’sfinancial statements since the Company does not have any goodwillrecorded.  As of March 30, 2003 theCompany had net intangible assets of $3,061,663.  Amortization expense was $283,485, $141,742, $283,485, and$136,561 during the fiscal year ended March 30, 2003, the six-monthtransitional period ended March 31, 2002, and the fiscal years ended September30, 2001 and October 1, 2000, respectively. The estimated amortization expense for each of the next five years isapproximately $284,000 per year.

 

In September 2001, the FASB issued SFAS No. 144,“Accounting for the Impairment or Disposal of Long-Lived Assets.”  SFAS No. 144 requires that long-lived assetsto be disposed of by sale, including discontinued operations, be measured atthe lower of the carrying cost or fair value less cost to sell, whetherreported in continuing operations or discontinued operations.  SFAS No. 144 also broadens the reporting ofdiscontinued operations to include all components of an entity with operationsthat can be distinguished from the rest of the entity and that will beeliminated from the ongoing operations of the entity in a disposaltransaction.  The provisions of SFAS No.144 are effective for financial statements issued for fiscal years beginningafter December 15, 2001 and, generally, are to be applied prospectively.  The adoption of SFAS No. 144 was effectivefor the Company beginning on April 1, 2002. The adoption of SFAS No. 144 didnot have a material effect on the Company’s historical results of operations orfinancial position.

 

In November 2002, the FASB issued FASB InterpretationNo. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees,Including Indirect Guarantees of Indebtedness of Others” (Interpretation No.45).  Interpretation No. 45 clarifiesthe disclosures to be made by a guarantor in its interim and annual financialstatements about its obligations under certain guarantees that it hasissued.  Interpretation No. 45 alsorequires a guarantor to recognize, at the inception of a guarantee, a liabilityfor the fair value of the obligation undertaken in issuing certain types ofguarantees.  The disclosure requirementsin Interpretation No. 45 are effective for interim or annual financialstatement periods ended after December 15, 2002.  The adoption of Interpretation No. 45 did not have an impact onthe Company’s results of operations or financial position.

 

In January 2003,the FASB issued Interpretation No. 46, “Consolidation of Variable InterestEntities (VIE), an Interpretation of ARB No. 51,” which requires all VIEs to beconsolidated by the primary beneficiary. The primary beneficiary is the entity that holds the majority of thebeneficial interests in the VIE.  Inaddition, the interpretation expands disclosure requirements for both VIEs thatare consolidated as well as VIEs from which the entity is the holder of asignificant amount of the beneficial interests, but not the majority.  The disclosure requirements of thisinterpretation are effective for all financial statements issued after January31, 2003.  The consolidationrequirements of this interpretation are effective for all periods beginningafter June 15, 2003.  The Company doesnot expect the adoption of this new standard to have any effect on its resultsof operations or financial position.

 

ITEM 7A.                                           QUANTITATIVEAND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.

 

Not applicable.

 

14

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ITEM 8.                                                     FINANCIALSTATEMENTS AND SUPPLEMENTARY DATA.

 

**INDEPENDENTAUDITORS’ REPORT**

 

To the Shareholders of Hawkins, Inc.:

 

We have audited the accompanying balance sheets of Hawkins, Inc. (theCompany) as of March 30, 2003 and March 31, 2002 and the related statements ofincome, shareholders’ equity, and cash flows for the fiscal year ended March30, 2003, the six-month transitional period ended March 31, 2002, and thefiscal years ended September 30, 2001 and October 1, 2000.  These financial statements are theresponsibility of the Company’s management. Our responsibility is to express an opinion on these financialstatements based on our audits.

 

We conducted our audits in accordance with auditing standards generallyaccepted in the United States of America. Those standards require that we plan and perform the audit to obtainreasonable assurance about whether the financial statements are free ofmaterial misstatement.  An auditincludes examining, on a test basis, evidence supporting the amounts anddisclosures in the financial statements. An audit also includes assessing the accounting principles used andsignificant estimates made by management, as well as evaluating the overallfinancial statement presentation.  Webelieve that our audits 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 30,2003 and March 31, 2002 and the results of its operations and cash flows forthe fiscal year ended March 30, 2003, the six-month transitional period endedMarch 31, 2002, and the fiscal years ended September 30, 2001 and October1, 2000, in conformity with accounting principles generally accepted in theUnited States of America.

 

 
| /s/ Deloitte & Touche LLP |   |
|-------------------------------|--------|
|                          |
|                          |
| Minneapolis, Minnesota        |
| June 13, 2003                 |

 

15

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**HAWKINS, INC.**

**BALANCE SHEETS**

 
|                                                                                                             |   | **March 30,  2003** |       | **March 31,  2002** |       |
|------------------------------------------------------------------------------------------------------------------|--------|---------------------|------------|---------------------|------------|
|                                                                                                             |   |                | ** ** |                | ** ** |
| **ASSETS**                                                                                                       |   |                |       |                |       |
| CURRENT ASSETS:                                                                                                  |   |                |       |                |       |
| Cash and cash  equivalents                                                                                       |   | $                   | 1,353,720  |                | $          | 7,339,895 |   |
| Investments  available-for-sale                                                                                  |   | 22,902,561          |       | 7,170,748           |       |
| Trade  receivables - less allowance for doubtful accounts:  2003, $275,000; 2002, $300,000                  |   | 11,253,571          |       | 10,610,386          |       |
| Inventories                                                                                                      |   | 9,398,338           |       | 9,397,541           |       |
| Prepaid expenses  and other current assets                                                                       |   | 2,502,496           |       | 1,977,667           |       |
| Total current  assets                                                                                            |   | 47,410,686          |       | 36,496,237          |       |
|                                                                                                             |   |                |       |                |       |
| PROPERTY, PLANT  AND EQUIPMENT:                                                                                  |   |                |       |                |       |
| Land                                                                                                             |   | 719,942             |       | 631,662             |       |
| Buildings and  improvements                                                                                      |   | 27,197,171          |       | 26,820,678          |       |
| Machinery and  equipment                                                                                         |   | 11,491,227          |       | 10,263,085          |       |
| Transportation  equipment                                                                                        |   | 7,520,148           |       | 7,347,470           |       |
| Office furniture  and equipment                                                                                  |   | 2,776,787           |       | 2,729,534           |       |
|                                                                                                             |   | 49,705,275          |       | 47,792,429          |       |
| Less accumulated  depreciation                                                                                   |   | 22,238,756          |       | 19,852,259          |       |
| Net property,  plant and equipment                                                                               |   | 27,466,519          |       | 27,940,170          |       |
|                                                                                                             |   |                |       |                |       |
| OTHER ASSETS:                                                                                                    |   |                |       |                |       |
| Intangible  assets - less accumulated amortization:   2003, $1,301,386; 2002, $1,017,901                    |   | 3,061,663           |       | 3,345,148           |       |
| Other                                                                                                            |   | 3,159,871           |       | 3,705,578           |       |
| Total other  assets                                                                                              |   | 6,221,534           |       | 7,050,726           |       |
|                                                                                                             |   | $                   | 81,098,739 |                | $          | 71,487,133 |   |
|                                                                                                             |   |                |       |                |       |
| **LIABILITIES AND SHAREHOLDERS’  EQUITY**                                                                   |   |                |       |                |       |
|                                                                                                             |   |                |       |                |       |
| CURRENT  LIABILITIES:                                                                                            |   |                |       |                |       |
| Accounts payable  - trade                                                                                        |   | $                   | 5,854,720  |                | $          | 4,095,820 |   |
| Current portion  of long-term debt                                                                               |   |                |       | 116,823             |       |
| Dividends  payable                                                                                               |   | 1,839,004           |       | 1,532,690           |       |
| Accrued payroll  and employee benefits                                                                           |   | 3,665,247           |       | 1,790,998           |       |
| Container  deposits                                                                                              |   | 1,444,040           |       | 1,358,100           |       |
| Other accruals                                                                                                   |   | 1,101,239           |       | 855,353             |       |
| Total current  liabilities                                                                                       |   | 13,904,250          |       | 9,749,784           |       |
|                                                                                                             |   |                |       |                |       |
| OTHER LONG-TERM  LIABILITIES                                                                                     |   | 226,336             |       | 353,063             |       |
|                                                                                                             |   |                |       |                |       |
| DEFERRED INCOME  TAXES                                                                                           |   | 1,254,649           |       | 953,851             |       |
|                                                                                                             |   |                |       |                |       |
| 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 (loss)                                                                   |   | 79,063              |       | (145,528            | )          |
| Retained  earnings                                                                                               |   | 27,376,115          |       | 22,317,637          |       |
| Total  shareholders’ equity                                                                                 |   | 65,713,504          |       | 60,430,435          |       |
|                                                                                                             |   | $                   | 81,098,739 |                | $          | 71,487,133 |   |

 

See accompanying notes to financial statements.

 

16

----

 

**HAWKINS,INC.**

**STATEMENTSOF INCOME**

 
|                                           |   | **Fiscal  Year Ended  March 30,  2003** |                     | **Six-Month  Transitional  Period Ended  March 31,  2002** |                 | **Fiscal  Years Ended** |   |
|------------------------------------------------|--------|-----------------------------------------|--------------------------|------------------------------------------------------------|----------------------|-------------------------|--------|
|                                           |   |                                    |                     |
|                                           |   |                                    |                     |
|                                           |   |                                    | **September  30,  2001** |                                                       | **October 1,  2000** |                    |
|                                           |   |                                    |                     |                                                       |
|                                           |   |                                    |                     |                                                       |                 |                    |   |   |   |
| Sales                                          |   | $                                       | 104,004,611              |                                                       | $                    | 49,868,179              |   | $ | 107,931,668 |   | $ | 98,021,731 |   |
|                                           |   |                                    |                     |                                                       |                 |                    |   |   |   |
| Cost of sales                                  |   | (76,046,759                             | )                        | (38,332,473                                                | )                    | (83,634,081             | )      | (73,219,555 | ) |
|                                           |   |                                    |                     |                                                       |                 |                    |   |   |   |
| Gross margin                                   |   | 27,957,852                              |                     | 11,535,706                                                 |                 | 24,297,587              |   | 24,802,176 |   |
|                                           |   |                                    |                     |                                                       |                 |                    |   |   |   |
| Selling, general  and administrative expenses  |   | (14,890,640                             | )                        | (6,924,750                                                 | )                    | (14,242,227             | )      | (11,765,758 | ) |
|                                           |   |                                    |                     |                                                       |                 |                    |   |   |   |
| Income from  operations                        |   | 13,067,212                              |                     | 4,610,956                                                  |                 | 10,055,360              |   | 13,036,418 |   |
|                                           |   |                                    |                     |                                                       |                 |                    |   |   |   |
| Investment  income                             |   | 367,049                                 |                     | 227,360                                                    |                 | 727,117                 |   | 1,073,823 |   |
|                                           |   |                                    |                     |                                                       |                 |                    |   |   |   |
| Interest expense                               |   | (4,089                                  | )                        | (6,152                                                     | )                    | (26,279                 | )      | (30,192 | ) |
|                                           |   |                                    |                     |                                                       |                 |                    |   |   |   |
| Income before  income taxes                    |   | 13,430,172                              |                     | 4,832,164                                                  |                 | 10,756,198              |   | 14,080,049 |   |
|                                           |   |                                    |                     |                                                       |                 |                    |   |   |   |
| Provision for  income taxes                    |   | (5,000,000                              | )                        | (1,748,393                                                 | )                    | (3,638,620              | )      | (5,512,350 | ) |
|                                           |   |                                    |                     |                                                       |                 |                    |   |   |   |
| Net income                                     |   | $                                       | 8,430,172                |                                                       | $                    | 3,083,771               |   | $ | 7,117,578 |   | $ | 8,567,699 |   |
|                                           |   |                                    |                     |                                                       |                 |                    |   |   |   |
| Weighted average  number of shares outstanding |   | 10,216,688                              |                     | 10,219,432                                                 |                 | 10,346,964              |   | 10,615,881 |   |
|                                           |   |                                    |                     |                                                       |                 |                    |   |   |   |
| Basic and  diluted earnings per share          |   | $                                       | .83                      |                                                       | $                    | 0.30                    |   | $ | 0.69 |   | $ | 0.81 |   |

 

See accompanying notes to financial statements.

 

17

----

 

**HAWKINS,INC.**

**STATEMENTS OF SHAREHOLDERS’ EQUITY**

 

 
|                                                                                 |   | **Common  Stock** |   | **Additional  Paid-in  Capital** |    | **Retained  Earnings** |   | **Accumulated  Other  Comprehensive  Income (Loss)** |   | **Total  Shareholders’  Equity** |       |
|--------------------------------------------------------------------------------------|--------|-------------------|--------|----------------------------------|---------|------------------------|--------|------------------------------------------------------|--------|---------------------------------------|------------|
| **Shares**                                                                           |   | **Amount**        |
|                                                                                 |   |              |   |                             |    |                   |   |                                                 |   |                                  |       |   |   |
| BALANCE AT  OCTOBER 3, 1999                                                          |   | 10,951,281        |   | $                                | 547,564 |                   | $      | 40,129,749                                           |   | $                                     | 14,897,903 |   |   |   | $ | 55,575,216 |   |
|                                                                                 |   |              |   |                             |    |                   |   |                                                 |   |                                  |       |   |   |
| Cash dividends                                                                       |   |              |   |                             |    |                   |   | (3,361,063                                           | )      |                                  |       | (3,361,063 | ) |
| Stock acquired  and retired                                                          |   | (608,900          | )      | (30,445                          | )       | (2,235,668             | )      | (2,754,253                                           | )      |                                  |       | (5,020,366 | ) |
| Stock issued in  conjunction with the acquisition of St. Mary’s Chemicals, Inc. |   | 75,358            |   | 3,768                            |    | 596,232                |   |                                                 |   |                                  |       | 600,000 |   |
| Income tax  savings from dividends paid on ESOP shares                               |   |              |   |                             |    |                   |   | 309,740                                              |   |                                  |       | 309,740 |   |
| Net and  comprehensive income                                                        |   |              |   |                             |    |                   |   | 8,567,699                                            |   |                                  |       | 8,567,699 |   |
|                                                                                 |   |              |   |                             |    |                   |   |                                                 |   |                                  |       |   |   |
| BALANCE AT  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 AT  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 AT 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 AT MARCH  30, 2003                                                           |   | 10,216,688        |   | $                                | 510,834 |                   | $      | 37,747,492                                           |   | $                                     | 27,376,115 |   | $ | 79,063 |   | $ | 65,713,504 |   |

 

See accompanying notes to financial statements.

 

18

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**HAWKINS,INC.**

**STATEMENTS OF CASH FLOWS**

** **
|                                                                                 |   | **Fiscal  Year Ended  March 30,  2003** |       | **Six-Month  Transitional  Period Ended  March 31, 2002** |       | **Fiscal  Years Ended** |       |
|--------------------------------------------------------------------------------------|--------|-----------------------------------------|------------|-----------------------------------------------------------|------------|-------------------------|------------|
| **September  30,  2001**                                                             |   | **October 1,  2000**                    |
|                                                                                 |   |                                    | ** ** |                                                      | ** ** |                    | ** ** |   | ** ** |
| CASH FLOWS FROM  OPERATING ACTIVITIES:                                               |   |                                    |       |                                                      |       |                    |       |   |   |
| Net income                                                                           |   | $                                       | 8,430,172  |                                                      | $          | 3,083,771               |       | $ | 7,117,578 |   | $ | 8,567,699 |   |
| Reconciliation  to cash flows:                                                       |   |                                    |       |                                                      |       |                    |       |   |   |
| Depreciation and  amortization                                                       |   | 2,958,975                               |       | 1,481,750                                                 |       | 2,727,577               |       | 2,259,864 |   |
| Deferred income  taxes                                                               |   | (121,770                                | )          | 322,585                                                   |       | 414,641                 |       | 177,320 |   |
| Impairment of  investments                                                           |   | 370,000                                 |       |                                                      |       |                    |       |   |   |
| Earnings on  other assets                                                            |   | (72,929                                 | )          | (45,750                                                   | )          | (104,386                | )          | (108,643 | ) |
| Loss (gain) from  property disposals                                                 |   | 34,713                                  |       | 6,144                                                     |       | 35,901                  |       | (4,266 | ) |
| Changes in  operating accounts (requiring) providing cash:                           |   |                                    |       |                                                      |       |                    |       |   |   |
| Trade  receivables                                                                   |   | (590,763                                | )          | 1,602,016                                                 |       | (601,796                | )          | (281,395 | ) |
| Inventories                                                                          |   | (797                                    | )          | 3,187,182                                                 |       | (3,654,766              | )          | (513,886 | ) |
| Accounts payable                                                                     |   | 1,758,900                               |       | (3,198,910                                                | )          | 2,288,150               |       | (25,688 | ) |
| Accrued  liabilities                                                                 |   | 2,079,348                               |       | (1,630,471                                                | )          | 602,677                 |       | (239,529 | ) |
| Other                                                                                |   | (256,741                                | )          | (948,241                                                  | )          | 1,125,169               |       | (137,997 | ) |
| Net cash  provided by operating activities                                           |   | 14,589,108                              |       | 3,860,076                                                 |       | 9,950,745               |       | 9,693,479 |   |
|                                                                                 |   |                                    |       |                                                      |       |                    |       |   |   |
| CASH FLOWS FROM  INVESTING ACTIVITIES:                                               |   |                                    |       |                                                      |       |                    |       |   |   |
| Additions to  property, plant, and equipment                                         |   | (2,348,124                              | )          | (1,145,030                                                | )          | (7,056,226              | )          | (7,216,301 | ) |
| Purchase of  investments                                                             |   | (21,395,228                             | )          | (3,600,099                                                | )          | (800,597                | )          | (2,247,230 | ) |
| Sale and  maturities of investments                                                  |   | 6,022,000                               |       | 8,797,736                                                 |       | 1,032,018               |       | 7,638,064 |   |
| Proceeds from  property disposals                                                    |   | 59,150                                  |       | 28,825                                                    |       | 93,453                  |       | 87,618 |   |
| Acquisition of  St. Mary’s Chemicals, Inc.                                      |   |                                    |       |                                                      |       |                    |       | (2,700,000 | ) |
| Payments  received on notes receivable                                               |   | 269,122                                 |       | 178,306                                                   |       | 356,106                 |       | 376,862 |   |
| Net cash (used  in) provided by investing activities                                 |   | (17,393,080                             | )          | 4,259,738                                                 |       | (6,375,246              | )          | (4,060,987 | ) |
|                                                                                 |   |                                    |       |                                                      |       |                    |       |   |   |
| CASH FLOWS FROM  FINANCING ACTIVITIES:                                               |   |                                    |       |                                                      |       |                    |       |   |   |
| Debt repayment                                                                       |   | (116,823                                | )          | (109,180                                                  | )          | (102,037                | )          | (95,362 | ) |
| Cash dividends  paid                                                                 |   | (3,065,380                              | )          | (1,537,805                                                | )          | (3,118,722              | )          | (3,109,181 | ) |
| Acquisition and  retirement of stock                                                 |   |                                    |       | (251,790                                                  | )          | (1,421,641              | )          | (5,020,366 | ) |
| Net cash used in  financing activities                                               |   | (3,182,203                              | )          | (1,898,775                                                | )          | (4,642,400              | )          | (8,224,909 | ) |
|                                                                                 |   |                                    |       |                                                      |       |                    |       |   |   |
| NET (DECREASE)  INCREASE IN CASH AND CASH EQUIVALENTS                                |   | (5,986,175                              | )          | 6,221,039                                                 |       | (1,066,901              | )          | (2,592,417 | ) |
|                                                                                 |   |                                    |       |                                                      |       |                    |       |   |   |
| CASH AND CASH  EQUIVALENTS AT BEGINNING OF PERIOD                                    |   | 7,339,895                               |       | 1,118,856                                                 |       | 2,185,757               |       | 4,778,174 |   |
|                                                                                 |   |                                    |       |                                                      |       |                    |       |   |   |
| CASH AND CASH  EQUIVALENTS AT END OF PERIOD                                          |   | $                                       | 1,353,720  |                                                      | $          | 7,339,895               |       | $ | 1,118,856 |   | $ | 2,185,757 |   |
|                                                                                 |   |                                    |       |                                                      |       |                    |       |   |   |
| SUPPLEMENTAL  DISCLOSURES OF CASH FLOW INFORMATION:                                  |   |                                    |       |                                                      |       |                    |       |   |   |
| Stock issued in  conjunction with the acquisition of St. Mary’s Chemicals, Inc. |   |                                    |       |                                                      |       |                    |       | $ | 600,000 |   |
| Cash paid during  the year for:                                                      |   |                                    |       |                                                      |       |                    |       |   |   |
| Interest                                                                             |   | $                                       | 8,177      |                                                      | $          | 17,884                  |       | $ | 33,422 |   | $ | 36,867 |   |
| Income taxes                                                                         |   | $                                       | 5,106,724  |                                                      | $          | 1,917,426               |       | $ | 2,078,071 |   | $ | 6,071,804 |   |

 

See accompanying notes to financial statements.

 

19

----

**HAWKINS,INC.**

**NOTES TO FINANCIAL STATEMENTS**

 

1.                                       NATUREOF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES

 

*Natureof Business*- Hawkins, Inc. (the Company) has two reportablesegments: Industrial and Water Treatment. The Industrial segment specializes in providing industrial chemicals andservices to the energy, electronics, and plating industries. In addition, theIndustrial segment provides products and services to food manufacturers,processing plants and the pharmaceutical industry.  The Water Treatment segment specializes in providing water andwaste-water treatment equipment, chemicals and service.

 

*FiscalYear*- In December 2001, the Company changed its fiscal yearend to a 52/53-week year ending on the Sunday closest to March 31 from a52/53-week fiscal year ending on the Sunday closest to September 30.  The change in year-end will better match theCompany’s annual reporting process to its natural business cycles.  This change resulted in a six-monthtransitional period ended March 31, 2002. The six-month transitional period was a 26-week period, the fiscal yearsended March 30, 2003, September 30, 2001, and October 1, 2000 were52-week years.

 

*CashEquivalents*- Cash equivalents include all liquid debtinstruments (primarily cash funds, certificates of deposits, and money marketaccounts) purchased with an original maturity of three months or less.  The balances maintained at financialinstitutions may, at times, exceed federally insured limits.

 

*InvestmentsAvailable-For-Sale*- In accordance with the provisions ofStatement of Financial Accounting Standards (SFAS) No. 115, “Accounting forCertain Investments in Debt and Equity Securities,” these investments arecarried at fair market value with unrealized gains and losses reported inshareholders’ equity as a component of other comprehensive income (loss).Investments classified as available-for-sale securities consist of fixed incomesecurities, primarily municipal bonds and U.S. Government agency securities(65%), mutual funds (29%), and variable rate marketable securities, primarilyannuity 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.  Grossunrealized gains, primarily within the mutual fund and fixed income portfolios,were $126,063 as of March 30, 2003 and gross unrealized losses, primarilywithin the mutual fund portfolio, were $231,528 as of March 31, 2002.  In the fiscal year ended March 30, 2003, thesix-month transitional period ended March 31, 2002, and the fiscal years endedSeptember 30, 2001 and October 1, 2000, proceeds from the sale of investmentsavailable-for-sale were $6,022,000, $8,797,736, $1,032,018 and $7,638,064,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 not material for the six-monthtransitional period ended March 31, 2002 and the fiscal years ended September30, 2001 and October 1, 2000.

 

*Inventories*- Inventories, consisting primarily of finished goods, areprimarily valued at the lower of cost or net realizable value, with cost beingdetermined using the last-in, first-out (LIFO) method.

 

*Property,Plant and Equipment*- Property is stated at cost anddepreciated over the lives of the assets using both straight-line anddeclining-balance methods.  Estimatedlives are: 10 to 50 years for buildings and improvements; 3 to 15 years formachinery and equipment; 3 to 10 years for transportation equipment; and 3 to10 years for office furniture and equipment.

 

*IntangiblesAssets*- Intangible assets consist primarily of customerlists, trademarks, and trade names acquired in previous businessacquisitions.  The values assigned tothe intangible assets are being amortized primarily over 15 years.

 

*InvestmentsHeld-To-Maturity*- Held-to-maturity securities consist ofMinnesota municipal bonds, which the Company has the intent and ability to holdto maturity, and are valued at amortized historical cost, increased foraccretion of discounts and reduced by amortization of premiums, computed by theconstant-yield method.  Investmentsheld-to-maturity, included within other assets, were $1,086,825 and $1,390,418at March 30, 2003 and March 31, 2002, respectively.

 

*Recoverabilityof Long-Lived Assets*- The Company reviews its long-livedassets whenever events or changes in circumstances indicate the carrying amountof the assets may not be recoverable. The Company determines potential impairment by comparing the carryingvalue of the assets with expected net cash flows expected to be provided byoperating activities of the business or related products.  Should the sum of the expected future netcash flows be less than the carrying value, the Company would determine whetheran impairment loss should be recognized. An impairment loss would be measured by comparing the amount by whichthe carrying value exceeds the fair value of the asset based on market valuethat is based on the discounted cash flows expected to be generated by theasset.

 

20

----

 

*RevenueRecognition*- 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.

 

*Shippingand Handling -* All shipping and handling amounts billed tocustomers are included in revenues. Costs incurred related to shipping and handling are included in costs ofgoods sold.

 

*IncomeTaxes*- The Company follows SFAS No. 109, “Accountingfor 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.

 

*EarningsPer Share*- Basic and diluted earnings per share are computedby dividing net income by the weighted average number of common sharesoutstanding.

 

*Concentrationsof Credit Risk*- Financial instruments which potentiallysubject the Company to a concentration of credit risk principally consist ofinvestments available-for-sale and trade receivables.  The Company sells its principal products to a large number ofcustomers in many different industries. To reduce credit risk, the Company routinely assesses the financialstrength of its customers.  The Companyinvests its excess cash balances in a money market account at a singlefinancial institution.

 

At March 30, 2003, the Company also had an investmentportfolio of fixed income securities and mutual funds, excluding $2,652,701 ofthose classified as cash and cash equivalents and variable rate securities, of$15,966,207 and $6,724,198, respectively. The fixed income securities, like all fixed income instruments, aresubject to interest rate risk and will decline in value if market interestrates increase.  However, the Companyhas the ability to hold its fixed income investments until maturity andtherefore the Company would not expect to recognize an adverse impact on netincome or cash flows.  The value ofmutual funds, like all mutual funds, may increase or decrease due to marketvolatility.

 

*DerivativeInstruments and Hedging Activities*- In fiscal 2001, theCompany 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. 133 establishes accounting andreporting standards for derivative instruments and for hedging activities.  It requires that all derivatives, includingthose embedded in other contracts, be recognized as either assets orliabilities and that those financial instruments be measured at fairvalue.  The accounting for changes inthe fair value of derivatives depends on their intended use anddesignation.  Management has reviewedthe requirements of SFAS No. 133 and has determined that the Company has nofreestanding or embedded derivatives. All contracts that contain provisions meeting the definition of aderivative also meet the requirements of, and have been designated as, normalpurchases and sales.  The Company’spolicy is to not use freestanding derivatives and to not enter into contractswith terms that cannot be designated as normal purchases or sales.

 

*Estimates*- The preparation of financial statements in conformity withaccounting principles generally accepted in the United States of America(generally accepted accounting principles) requires management to makeestimates and assumptions that affect the reported amounts of assets andliabilities and disclosure of contingent assets and liabilities at the date ofthe financial statements and the reported amounts of revenues and expensesduring the reported period.  Actual resultscould differ from those estimates.

 

*Riskand Uncertainties*- There are no concentrations of businesstransacted with a particular customer or supplier nor concentrations of salesfrom a particular service or geographic area that would severely impact theCompany in the near term.

 

*AccountingPronouncements*- In July 2001, the Financial AccountingStandards Board (FASB) issued SFAS No. 142, “Goodwill and Other IntangibleAssets.”  The Company adopted theprovisions of SFAS No. 142 on April 1, 2002. Under SFAS No. 142, goodwill as well as other intangibles determined tohave an infinite life will no longer be amortized; however, these assets willbe reviewed for impairment on a periodic basis.  SFAS No. 142 also includes provisions for the reclassification ofcertain existing recognized intangibles as goodwill, reclassification ofcertain intangibles out of previously reported goodwill, and the identificationof reporting units for purposes of assessing potential future impairments ofgoodwill.  The implementation ofSFAS No. 142 did not impact the Company’s financial statements since theCompany does not have any goodwill recorded. As of March 30, 2003, the Company had net intangible assets of$3,061,663.  Amortization expense was$283,485, $141,742, $283,485, and $136,561 during the fiscal year ended March30, 2003, the six-month transitional period ended March 31, 2002, and thefiscal years ended September 30, 2001 and October 1, 2000, respectively.  The estimated amortization expense for eachof the next five years is approximately $284,000 per year.

 

In September 2001, the FASB issued SFAS No. 144,“Accounting for the Impairment or Disposal of Long-Lived Assets.”  SFAS No. 144 requires that long-lived assetsto be disposed of by sale, including discontinued operations, be measured atthe 

 

21

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lower of the carrying cost or fair value less cost tosell, whether reported in continuing operations or discontinued operations.SFAS No. 144 also broadens the reporting of discontinued operations to includeall components of an entity with operations that can be distinguished from therest of the entity and that will be eliminated from the ongoing operations ofthe entity in a disposal transaction. The provisions of SFAS No. 144 are effective for financial statementsissued for fiscal years beginning after December 15, 2001 and, generally, areto be applied prospectively.  Theadoption of SFAS No. 144 was effective for the Company beginning on April 1,2002.  The adoption of SFAS No. 144 didnot have a material effect on the Company’s historical results of operations orfinancial position.

 

In November 2002, the FASB issued FASB InterpretationNo. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees,Including Indirect Guarantees of Indebtedness of Others” (Interpretation No.45). Interpretation No. 45 clarifies the disclosures to be made by a guarantorin its interim and annual financial statements about its obligations undercertain guarantees that it has issued. Interpretation No. 45 also requires a guarantor to recognize, at theinception of a guarantee, a liability for the fair value of the obligationundertaken in issuing certain types of guarantees.  The disclosure requirements in Interpretation No. 45 areeffective for interim or annual financial statements statement periods endedafter December 15, 2002.  The adoptionof Interpretation No. 45 did not have an impact on the Company’s results ofoperations or financial position.

 

In January 2003, the FASB issued Interpretation No.46, “Consolidation of Variable Interest Entities (VIE), an Interpretation ofARB No. 51,” which requires all VIEs to be consolidated by the primarybeneficiary.  The primary beneficiary isthe entity that holds the majority of the beneficial interests in the VIE. Inaddition, the interpretation expands disclosure requirements for both VIEs thatare consolidated as well as VIEs from which the entity is the holder of asignificant amount of the beneficial interests, but not the majority.  The disclosure requirements of thisinterpretation are effective for all financial statements issued after January31, 2003.  The consolidationrequirements of this interpretation are effective for all periods beginningafter June 15, 2003.  The Company doesnot expect the adoption of this new standard to have any effect on its resultsof operations or financial position.

 

2.                                       INVENTORIES

 

Inventories at March 30, 2003 and March 31, 2002consisted of the following:

 
|                         |   | **2003** |      | **2002**   |   |
|------------------------------|--------|----------|-----------|------------|--------|
|                         |   |     |      |       |   |
| Finished goods  (FIFO basis) |   | $        | 9,909,599 |       | $      | 10,699,070 |   |
| LIFO reserve                 |   | (511,261 | )         | (1,301,529 | )      |
| Net inventory                |   | $        | 9,398,338 |       | $      | 9,397,541 |   |

 

Inventories valued under the LIFO method at March 30,2003 and March 31, 2002 were approximately $8,204,400 and $9,405,315,respectively.  The balance of theinventory was valued under the FIFO method.

 

In fiscal 2003, the LIFO reserve decreased by$790,268.  The decrease in the LIFOreserve was caused by a significant decrease in the cost of a single,large-volume component of inventory. During the fiscal year ended March 30, 2003 and the six-monthtransitional period ended March 31, 2002, the Company liquidated LIFO inventorylayers that were at lower costs than current costs.  During the fiscal year ended September 30, 2001, there were noLIFO inventory layers liquidated.  Theimpact of the liquidation on cost of sales was not material for the fiscal yearended March 30, 2003 and was $300,000 for the six-month transitional periodended March 31, 2002.

 

3.                                       NOTESRECEIVABLE

 

The Company has three notes receivable related to thesales of Tessman Seed, Inc., land and building, and The Lynde Company.  At March 30, 2003 and March 31, 2002, thenet balances outstanding on the notes receivable were $1,965,744 and $2,234,866,respectively.  The current portion of$192,489 and $226,266 at March 30, 2003 and March 31, 2002, respectively, areincluded within prepaid expenses and other current assets and the remainingbalances are included within other assets. The notes receivable bear interest at 8% and are due in equal monthlyinstallments of $36,204 through September 1, 2010 at which time theremaining unpaid balance of $1,213,163 is due. The notes receivable are secured by land and building, and a personalguarantee.

 

4.                                       LONG-TERMDEBT

 

The final installment of$116,823 on the Company’s previously outstanding long-term debt was paid inOctober 2002.

 

22

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5.                                       SHAREHOLDERS’EQUITY

 

During the six-month transitional period ended March31, 2002 and the fiscal years ended September 30, 2001 and October 1,2000, the Company acquired and retired 32,100 shares, 168,951 shares, and608,900 shares of common stock, respectively, for $251,790, $1,421,641, and$5,020,366, respectively.  There were noshares acquired and retired during the fiscal year ended March 30, 2003.

 

6.                                       PENSIONAND EMPLOYEE STOCK OWNERSHIP PLANS

 

The Company has a defined contribution pension plancovering substantially all of its non-bargaining employees.  Pension expense for the fiscal year endedMarch 30, 2003, the six-month transitional period ended March 31, 2002, and thefiscal years ended September 30, 2001 and October 1, 2000 were $1,093,697,$504,349, $870,787, and $751,936, respectively.  The Company’s cost for the pension plan was determined as 11% ofeach employee’s covered compensation in the fiscal year ended March 30, 2003and the six-month transitional period ended March 31, 2002 and 10% in thefiscal years ended September 30, 2001 and October 1, 2000.  Amounts charged to pension expense andcontributed to union multi-employer pension plans (not included in the aboveamounts) were not material.  It is theCompany’s policy to fund all pension costs accrued.

 

The Company has an employee stock ownership plan coveringsubstantially all of its non-bargaining employees.  Contributions are made at the discretion of the Board ofDirectors subject to a maximum amount allowed under the Internal Revenue Code.  Contributions for the fiscal year endedMarch 30, 2003, the six-month transitional period ended March 31, 2002, and thefiscal years ended September 30, 2001 and October 1, 2000 were $901,922,$412,649, $1,027,828, and $787,667, respectively.

 

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

 

7.                                       COMMITMENTSAND CONTINGENCIES

 

*Leases*- The Company has various operating leases for land and buildings on which someof its operations are located.  Totalrental expense for the fiscal year ended March 30, 2003, the six-monthtransitional period ended March 31, 2002, and the fiscal years ended September30, 2001 and October 1, 2000 were $193,187, $98,034, $172,552, and $136,416,respectively.  Future minimum lease paymentsdue under operating leases with an initial term of one year or more atMarch 30, 2003 are $164,362 in 2004, $105,901 in 2005, $86,776 in 2006,$86,776 in 2007, $86,776 in 2008, and $1,851,220 thereafter.

 

*TerminationAgreements -*During fiscal 1999, the Company entered intotermination agreements with three former employees and recorded special chargesin the statement of income of $1,112,127. At March 30, 2003, the Company is required to make future payments toone individual for a period of 1.5 years. The present value of the future payments to be paid in fiscal 2004 isincluded in other accruals and the present value of the remaining payments isincluded in other long-term liabilities.

 

*Litigation*- The Company is involved in various legal actions arising from the normalcourse of business.  Management is ofthe opinion that any judgment or settlement resulting from pending orthreatened litigation would not have a material adverse effect on the financialposition, results of operations or cash flows of the Company.

 

8.                                       INCOMETAXES

 

The provisions (benefits) for income taxes are asfollows:

 
|                     |   | **Fiscal  Year  Ended  March 30,  2003** |       | **Six-Month  Transitional  Period Ended  March 31,  2002** |       | **Fiscal Years Ended** |       |
|--------------------------|--------|------------------------------------------|------------|------------------------------------------------------------|------------|------------------------|------------|
| **September  30,  2001** |   | **October 1,  2000**                     |
|                     |   |                                     | ** ** |                                                       | ** ** |                   | ** ** |   | ** ** |
|                     |   |                                     |       |                                                       |       |                   |       |   |   |
| Federal -  current       |   | $                                        | 4,057,347  |                                                       | $          | 1,122,058              |       | $ | 2,591,327 |   | $ | 4,094,040 |   |
| States - current         |   | 1,064,423                                |       | 303,750                                                    |       | 632,652                |       | 1,240,990 |   |
| Deferred                 |   | (121,770                                 | )          | 322,585                                                    |       | 414,641                |       | 177,320 |   |
| Total provision          |   | $                                        | 5,000,000  |                                                       | $          | 1,748,393              |       | $ | 3,638,620 |   | $ | 5,512,350 |   |

 

23

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Reconciliations of the provisions for income taxes,based on income from continuing operations, to the applicable federal statutoryincome tax rate of 35% are as follows:

 
|                                          |   | **Fiscal  Year  Ended  March 30,  2003** |      | **Six-Month  Transitional  Period Ended  March 31,  2002** |   | ****

**Fiscal  Years Ended** |   |
|-----------------------------------------------|--------|------------------------------------------|-----------|------------------------------------------------------------|--------|-------------------------------|--------|
| **September  30,  2001**                      |   | **October 1,  2000**                     |
|                                          |   |                                     |      |                                                       |   |                          |   |   |   |
| Statutory  federal income tax                 |   | $                                        | 4,700,560 |                                                       | $      | 1,691,257                     |   | $ | 3,764,669 |   | $ | 4,928,017 |   |
| State income  taxes, net of federal deduction |   | 702,552                                  |      | 225,773                                                    |   | 490,750                       |   | 806,644 |   |
| Tax-exempt  income                            |   | (74,163                                  | )         | (31,904                                                    | )      | (139,329                      | )      | (142,344 | ) |
| ESOP dividend  deduction on allocated shares  |   | (226,373                                 | )         | (112,345                                                   | )      | (235,902                      | )      |   |   |
| Other, net                                    |   | (102,576                                 | )         | (24,388                                                    | )      | (241,568                      | )      | (79,967 | ) |
| Total                                         |   | $                                        | 5,000,000 |                                                       | $      | 1,748,393                     |   | $ | 3,638,620 |   | $ | 5,512,350 |   |

 

The tax effects of items comprising the Company’s netdeferred tax asset (liability) as of March 30, 2003 and March 31, 2002 are asfollows:

 
|                                   |   | **2003**   |       | **2002** |   |
|----------------------------------------|--------|------------|------------|----------|--------|
|                                   |   |       |       |     |   |
| Current deferred  taxes:               |   |       |       |     |   |
| Trade  receivables                     |   | $          | 107,250    |     | $      | 117,000 |   |
| Inventory                              |   | 544,458    |       | 416,951  |   |
| Accruals                               |   | 448,115    |       | 276,304  |   |
| Total*                                 |   | $          | 1,099,823  |     | $      | 810,255 |   |
|                                   |   |       |       |     |   |
| Noncurrent  deferred taxes:            |   |       |       |     |   |
| Gain on sale of  The Lynde Company     |   | $          | (193,219   | )        | $      | (235,027 | ) |
| Property basis  difference             |   | (1,014,430 | )          | (804,824 | )      |
| Unrealized  (gain) loss on investments |   | (47,000    | )          | 86,000   |   |
| Total                                  |   | $          | (1,254,649 | )        | $      | (953,851 | ) |

 

----

*Included in prepaid expenses and other current assetson the balance sheet.

 

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

 

On May 26, 2000, the Company completed theacquisition of certain assets of St. Mary’s Chemicals, Inc. d.b.a. UniversalChemicals.  Universal Chemicals, aMinnesota-based company, was engaged in the business of marketing, selling, anddistributing pharmaceutical chemicals to pharmacies and pharmacywholesalers.  In connection with theacquisition, assets purchased, common stock issued, and cash consideration paidwere as follows:

 
| Assets acquired:                     |   |      |      |
|--------------------------------------|--------|-----------|-----------|
| Inventory                            |   | $         | 36,843    |   |
| Equipment                            |   | 12,692    |      |
| Intangible  assets                   |   | 3,250,465 |      |
|                                 |   | 3,300,000 |      |
| Common stock  issued (75,358 shares) |   | 600,000   |      |
| Cash  consideration paid             |   | $         | 2,700,000 |   |

 

The acquisition was accounted for using the purchasemethod of accounting.  The operations ofUniversal Chemicals are included in the Company’s statement of income beginningon May 26, 2000.  The pro formaeffect of this acquisition on prior periods’ sales, operating income, andearnings per share were not significant.

 

On May 26, 2000, the Company also entered into afive-year employment agreement with one of the previous owners of UniversalChemicals and consulting agreements with the other two previous owners ofUniversal Chemicals.  The employmentagreement and consulting agreements contain performance bonuses and non-competeprovisions.  The agreements are based onUniversal Chemicals’ operating results, as defined, for five years after theacquisition date and have a maximum payout of $3,520,000.  The non-compete provisions cover 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, for five years after the terminationdate.

 

24

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10.                                 SEGMENTINFORMATION

 

The Company has two reportable segments: Industrialand Water Treatment.  The Industrialsegment specializes in providing industrial chemicals and services to theenergy, electronics, and plating industries. In addition, the Industrial segment provides products and services tothe food manufacturers and processing plants and the pharmaceuticalindustry.  The Water Treatment segmentspecializes in providing water and waste-water treatment equipment andchemicals and in helping customers find solutions to system problems.

 

The accounting policies of the segments are the sameas those described in the summary of significant accounting policies.  Product costs and expenses for each segmentare based on actual costs incurred along with cost allocation of shared andcentralized functions.  The Companyevaluates performance based on profit or loss from operations before incometaxes not including nonrecurring gains and losses.  Reportable segments are defined by product and type of customer.  Segments are responsible for the sales,marketing and development of their products and services.  The segments do not have separateaccounting, administration, customer service or purchasing functions.

 
| **Reportable Segments**                             |   | **Industrial** |       | **Water  Treatment** |       | **Total**  |       |
|-----------------------------------------------------|--------|----------------|------------|----------------------|------------|------------|------------|
|                                                |   |           |       |                 |       |       |       |
| 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 |   |
|                                                |   |           |       |                 |       |       |       |
| Fiscal Year  Ended October 1, 2000                  |   |           |       |                 |       |       |       |
| Sales                                               |   | $              | 67,324,400 |                 | $          | 30,697,331 |       | $ | 98,021,731 |   |
| Cost of sales                                       |   | 52,088,658     |       | 21,130,897           |       | 73,219,555 |       |
| Gross margin                                        |   | 15,235,742     |       | 9,566,434            |       | 24,802,176 |       |
| Income from  operations                             |   | 7,526,740      |       | 5,509,678            |       | 13,036,418 |       |
|                                                |   |           |       |                 |       |       |       |
| Identifiable  assets                                |   | $              | 42,710,196 |                 | $          | 8,057,357  |       | $ | 50,767,553 |   |

 

25

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11.                                 TRANSITIONALPERIOD DISCLOSURE (UNAUDITED)

 

The following information for the twelve-month periodended March 31, 2002 and the six-month period ended March 31, 2001 is includedfor 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 |   | $                                             | 0.74        |                                       | $      | 0.25 |   |

 

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

 

Not Applicable.

 

PART III

 

ITEM 10.                                               DIRECTORSAND EXECUTIVE OFFICERS OF THE COMPANY.

 

The information under the captions “Election ofDirectors” and “Section 16 (a) Beneficial Ownership Reporting Compliance” inthe Proxy Statement for the fiscal year ended March 30, 2003 is incorporatedherein by this reference.

 

ITEM 11.                                               EXECUTIVECOMPENSATION.

 

The information under the caption “Compensation ofExecutive Officers and Directors” in the Proxy Statement for the fiscal yearended March 30, 2003 is incorporated herein by this reference.

 

ITEM 12.                                               SECURITYOWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDERMATTERS.

 

The information under the caption “Security Ownershipof Management and Beneficial Ownership” in the Proxy Statement for the fiscalyear ended March 30, 2003 is incorporated herein by this reference.  The Company does not have any equitycompensation plans as defined in Statement of Financial Accounting StandardsNo. 123, “Accounting for Stock-Based Compensation.”

 

ITEM 13.                                               CERTAINRELATIONSHIPS AND RELATED TRANSACTIONS.

 

The information under the captions “Election ofDirectors” and “Related Party Transactions” in the Proxy Statement for thefiscal year ended March 30, 2003 is incorporated herein by this reference.

 

ITEM 14.                                               CONTROLSAND PROCEDURES.

 

Underthe supervision and with the participation of our management, including ourprincipal executive officer and principal financial officer, we conducted anevaluation of the effectiveness of the design and operation of our disclosurecontrols and procedures (as defined in Rules 13a-14(c) and 15d-14(c) under theSecurities Exchange Act of 1934) within 90 days of the filing date of thisAnnual Report on Form 10-K (the Evaluation Date).  Based on this evaluation, our principal executive officer andprincipal financial officer concluded as of the Evaluation Date that ourdisclosure controls and procedures were effective such that the materialinformation required to be included in our SEC reports is recorded, processed,summarized and reported within the time periods specified in SEC rules andforms related to us.

 

Therewere no significant changes in our internal controls or in other factors thatcould significantly affect these controls subsequent to the EvaluationDate.  We have not identified anysignificant deficiencies or material weaknesses in our internal controls, andtherefore there were no corrective actions taken.

 

ITEM 15.                                               PRINCIPALACCOUNTANT FEES AND SERVICES.

 

Not applicable.

 

26

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PART IV

 

ITEM 16.                                               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 part of this Annual Report on Form 10-K.

 

Independent Auditors’Report.

 

Balance Sheets at March 30, 2003 and March31, 2002.

 

Statements of Income for the FiscalYear Ended March 30, 2003, the Six-Month Transitional Period Ended March 31, 2002,and for the Fiscal Years Ended September 30, 2001 and October 1, 2000.

 

Statements ofShareholders’ Equity for the Fiscal Year Ended March 30, 2003, the Six-MonthTransitional Period Ended March 31, 2002, and for the Fiscal Years EndedSeptember 30, 2001 and October 1, 2000.

 

Statements of Cash Flows for theFiscal Year Ended March 30, 2003, the Six-Month Transitional Period Ended March31, 2002, and for the Fiscal Years Ended September 30, 2001 and  October 1, 2000.

 

Notes to FinancialStatements.

 

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

 

The additional financial data listed below is includedas a schedule 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 additionalfinancial data have been omitted because they are not required or the requiredinformation is included in the financial statements or the notes.

 

Independent Auditors’ Report on Schedule.

 

The following financial statement schedule for thefiscal year ended March 30, 2003, the six-month transitional period ended March31, 2002, and for the fiscal years ended September 30, 2001 and October 1,2000.

 

Schedule II - Valuation and Qualifying Accounts.

 

(a)(3)                    EXHIBITS.

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         |   | Amended and Superseding By-Laws as amended through  February 15, 1995. (2)                                                                           |   | Incorporated by Reference |
| 10.1        |   | Asset purchase agreement dated May 26, 2000 among  St. Mary’s Chemicals, Inc., its shareholders, and the Company. (3)                           |   | Incorporated by Reference |
| 23.1        |   | Independent Auditors’ Consent.                                                                                                                  |   | Filed Electronically      |
| 99.1        |   | Certification by Chief Executive Officer pursuant to  18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002. |   | Filed Electronically      |
| 99.2        |   | Certification by Chief Financial Officer pursuant to  18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002. |   | Filed Electronically      |

 

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

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

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

 

27

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(b)                                 REPORTSON FORM 8-K.

 

On June 19, 2003, we furnished a Current Report onForm 8-K to the SEC, including the Company’s press release announcing financialresults for the fiscal year ended March 30, 2003.

 

28

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SIGNATURES

 

Pursuant to the requirements of Section 13 or 15(d) ofthe Securities Exchange Act of 1934, the Company has duly caused this report tobe signed on its behalf by the undersigned on June 27, 2003.

 
|   | HAWKINS, INC. |
|--------|---------------|
|   | By            | /s/ John R. Hawkins |   |
|   |          | John R. Hawkins, Chief Executive Officer |
|   |          |   |
|   | By            | /s/ Marvin E. Dee |   |
|   |          | Marvin E. Dee, Chief Financial Officer,  Vice President, Secretary, Treasurer |

 

Pursuant to the requirements of the SecuritiesExchange Act of 1934,this report has also been signed below by the followingpersons on behalf of the Company and in the capacities indicated on June 27,2003.

 

 
| By     | /s/ John R.  Hawkins    |                         |
|--------|-------------------------|------------------------------|
|   |                    | John R. Hawkins, Director    |   |
|   |                    |                         |
| By     | /s/ Kurt R.  Norman     |                         |
|   |                    | Kurt R. Norman, Director     |   |
|   |                    |                         |
| By     | /s/ Dean L. Hahn        |                         |
|   |                    | Dean L. Hahn, Director       |   |
|   |                    |                         |
| By     | /s/ Donald L.  Shipp    |                         |
|   |                    | Donald L. Shipp, Director    |   |
|   |                    |                         |
| By     | /s/ Howard M.  Hawkins  |                         |
|   |                    | Howard M. Hawkins, Director  |   |
|   |                    |                         |
| By     | /s/ John S.  McKeon     |                         |
|   |                    | John S. McKeon, Director     |   |
|   |                    |                         |
| By     | /s/ Duane M.  Jergenson |                         |
|   |                    | Duane M. Jergenson, Director |   |
|   |                    |                         |
| By     | /s/ G. Robert  Gey      |                         |
|   |                    | G. Robert Gey, Director      |   |
|   |                    |                         |
| By     | /s/ Daryl I.  Skaar     |                         |
|   |                    | Daryl I. Skaar, Director     |   |

 

29

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**CERTIFICATIONPURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002**

 

**CERTIFICATION**

 

I, John R. Hawkins, Chief Executive Officer of Hawkins, Inc., certifythat:

 

1.                               Ihave reviewed this annual report on Form 10-K of Hawkins, Inc.;

 

2.                               Basedon my knowledge, this annual report does not contain any untrue statement of amaterial fact or omit to state a material fact necessary to make the statementsmade, in light of the circumstances under which such statements were made, notmisleading with respect to the period covered by this annual report;

 

3.                               Basedon my knowledge, the financial statements, and other financial informationincluded in this annual report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant asof, and for, the periods presented in this annual report;

 

4.                               Theregistrant’s other certifying officers and I are responsible for establishingand maintaining disclosure controls and procedures (as defined in Exchange ActRules 13a-14 and 15d-14) for the registrant and we have:

 

a.               Designed suchdisclosure controls and procedures to ensure that material information relatingto the registrant, including its consolidated subsidiaries, is made known to usby others within those entities, particularly during the period in which thisannual report is being prepared;

 

b.              Evaluated theeffectiveness of the registrant’s disclosure controls and procedures as of adate within 90 days prior to the filing date of this annual report (theEvaluation Date); and

 

c.               Presented in thisannual report our conclusions about the effectiveness of the disclosurecontrols and procedures based on our evaluation as of the Evaluation Date;

 

5.                               Theregistrant’s other certifying officers and I have disclosed, based on our mostrecent evaluation, to the registrant’s auditors and the audit committee of theregistrant’s board of directors (or persons performing the equivalentfunctions):

 

a.               All significantdeficiencies in the design or operation of internal controls which couldadversely affect the registrant’s ability to record, process, summarize andreport financial data and have identified for the registrant’s auditors anymaterial weaknesses in internal controls; and

 

b.              Any fraud, whetheror not material, that involves management or other employees who have asignificant role in the registrant’s internal controls; and

 

6.                                        Theregistrant’s other certifying officer and I have indicated in this annualreport whether or not there were significant changes in internal controls or inother factors that could significantly affect internal controls subsequent tothe date of our most recent evaluation, including any corrective actions withregard to significant deficiencies and material weaknesses.

 
|   | /s/ John R. Hawkins     |   |
|--------|-------------------------|--------|
|   |                    |
|   |                    |
|   | John R. Hawkins         |
|   | Chief Executive Officer |
|   | June 27, 2003           |

 

30

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**CERTIFICATIONPURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002**

 

**CERTIFICATION**

 

I, Marvin E. Dee, Chief Financial Officer of Hawkins, Inc., certifythat:

 

1.               I have reviewedthis annual report on Form 10-K of Hawkins, Inc.;

 

2.               Based on myknowledge, this annual report does not contain any untrue statement of amaterial fact or omit to state a material fact necessary to make the statementsmade, in light of the circumstances under which such statements were made, notmisleading with respect to the period covered by this annual report;

 

3.               Based on myknowledge, the financial statements, and other financial information includedin this annual report, fairly present in all material respects the financialcondition, results of operations and cash flows of the registrant as of, andfor, the periods presented in this annual report;

 

4.               The registrant’sother certifying officers and I are responsible for establishing and maintainingdisclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and15d-14) for the registrant and we have:

 

a.               Designed suchdisclosure controls and procedures to ensure that material information relatingto the registrant, including its consolidated subsidiaries, is made known to usby others within those entities, particularly during the period in which thisannual report is being prepared;

 

b.              Evaluated theeffectiveness of the registrant’s disclosure controls and procedures as of adate within 90 days prior to the filing date of this annual report (theEvaluation Date); and

 

c.               Presented in thisannual report our conclusions about the effectiveness of the disclosurecontrols and procedures based on our evaluation as of the Evaluation Date;

 

5.               The registrant’sother certifying officers and I have disclosed, based on our most recentevaluation, to the registrant’s auditors and the audit committee of theregistrant’s board of directors (or persons performing the equivalentfunctions):

 

a.               All significantdeficiencies in the design or operation of internal controls which couldadversely affect the registrant’s ability to record, process, summarize andreport financial data and have identified for the registrant’s auditors anymaterial weaknesses in internal controls; and

 

b.              Any fraud, whetheror not material, that involves management or other employees who have asignificant role in the registrant’s internal controls; and

 

6.                       Theregistrant’s other certifying officer and I have indicated in this annualreport whether or not there were significant changes in internal controls or inother factors that could significantly affect internal controls subsequent tothe date of our most recent evaluation, including any corrective actions withregard to significant deficiencies and material weaknesses.

 
|   | /s/ Marvin E. Dee       |   |
|--------|-------------------------|--------|
|   |                    |
|   | Marvin E. Dee           |
|   | Chief Financial Officer |
|   | June 27, 2003           |

 

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**INDEPENDENTAUDITORS’ REPORT ON SCHEDULE**

 

We have audited the financial statements of Hawkins, Inc. (the Company)as of March 30, 2003 and March 31, 2002 and for the fiscal year ended March 30,2003, the six-month transitional period ended March 31, 2002, and the fiscalyears ended September 30, 2001 and October 1, 2000 and have issued ourreport thereon dated June 13, 2003; such report is included elsewhere in thisForm 10-K.  Our audits also included thefinancial statement schedule of the Company, listed in Item 16(a)(2).  This financial statement schedule is theresponsibility of the Company’s management. Our responsibility is to express an opinion based on our audits.  In our opinion, this financial statementschedule, when considered in relation to the basic financial statements takenas a whole, presents fairly in all material respects the information set forththerein.

 

 
| /s/ Deloitte & Touche LLP |   |
|-------------------------------|--------|
|                          |
|                          |
| Minneapolis, Minnesota        |
| June 13, 2003                 |
|                          |
|                          |
| **SCHEDULE II**               |

 

 

**HAWKINS,INC.**

 

**VALUATIONAND QUALIFYING ACCOUNTSFOR THE FISCAL YEAR ENDED MARCH 30, 2003, THE SIX-MONTH TRANSITIONAL PERIODENDEDMARCH 31, 2002 AND THE FISCAL YEARS ENDED SEPTEMBER 30, 2001 AND OCTOBER1, 2000**

 
|                                                                                |   |                               |       | **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 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 | ** ** |
|                                                                                |   |                               | ** ** |                                | ** ** |                            | ** ** |                       | ** ** |   | ** ** |
| YEAR ENDED:  October 1, 2000                                                        |   | $                                  | 380,000    |                                |       |                            |       |                       | $          | 3,000 | ** ** | $ | 377,000 | ** ** |

 

32

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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         |   | Amended and Superseding By-Laws as amended through  February 15, 1995. (2)                                                                           |   | Incorporated by Reference |
| 10.1        |   | Asset purchase agreement dated May 26, 2000 among  St. Mary’s Chemicals, Inc., its shareholders, and the Company. (3)                           |   | Incorporated by Reference |
| 23.1        |   | Independent Auditors’ Consent.                                                                                                                  |   | Filed Electronically      |
| 99.1        |   | Certification by Chief Executive Officer pursuant to  18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002. |   | Filed Electronically      |
| 99.2        |   | Certification by Chief Financial Officer pursuant to  18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002. |   | Filed Electronically      |

 

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

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

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

 

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