ITEM 1. BUSINESS.
(a) GENERAL
DEVELOPMENT OF THE BUSINESS. Hawkins,
Inc. was incorporated in Minnesota in 1955 and has its principal executive
offices 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 its
predecessors.
In fiscal 1998, the Company combined three of its former subsidiaries,
Feed-Rite Controls, Inc., Mon-Dak Chemical, Inc., and Dakota Chemical, Inc. and
its Arrowhead Chemical Division together to form a single wholly-owned
subsidiary known as Hawkins Water Treatment Group, Inc. (HWTG). In fiscal 1999, the Company merged HWTG into
the Company. During fiscal 2000, the
Company acquired certain assets of St. Mary’s Chemicals, Inc. (discussed more
fully in paragraph (c)(i)(B) below). In
fiscal 2001, the Company changed its corporate name to Hawkins, Inc.,
reflecting the fact the Company has expanded its original business beyond the
distribution of chemicals.
(b) FINANCIAL
INFORMATION ABOUT INDUSTRY SEGMENTS.
The Company’s principal business is the formulation, blending and
distribution of bulk and specialty chemicals, which it conducts in two
principal segments: Water Treatment and Industrial. Financial information regarding these segments is reported in the
Company’s audited financial statements.
See Items 7 and 8 below.
(c) NARRATIVE
DESCRIPTION OF THE BUSINESS.
(i) PRODUCTS
AND MARKETS. The Company’s business is
conducted in two segments, Water Treatment and Industrial, which are more fully
described below:
(A) WATER
TREATMENT. The Water Treatment segment
specializes in providing equipment, chemicals and solutions to problems for
potable water, municipal and industrial wastewater, industrial process water
and non-residential swimming pool water.
The Water Treatment Group has warehouses in eleven cities and utilizes a
Driver/Technician/Salesperson approach in supplying products and service to
customers in Minnesota, Wisconsin, Iowa, North Dakota, South Dakota, Nebraska,
Illinois, Michigan, Montana, Kansas and Wyoming. In December 2000, operations in the Minneapolis/St. Paul area
relocated to a new 59,000 square-foot facility, “the Red Rock facility.” The
Red Rock facility, located on the Mississippi River in St. Paul, Minnesota, has
improved operational efficiencies, as the Water Treatment operations are now
located at the facility where several key products are produced and the
consolidated warehouse space has reduced the amount of time required to load
trucks between deliveries.
(B) INDUSTRIAL. The Industrial segment specializes in
providing industrial chemicals and services to the energy, electronics,
chemical processing, pulp and paper, medical device and plating
industries. In addition, the Industrial
segment provides products and services to food manufacturers and processing
plants. The Industrial segment also
distributes a variety of pharmaceutical products, manufactures and sells
certain 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 the
Company. This segment conducts its
business primarily through distribution centers and terminal operations.
The Industrial segment
receives, stores and distributes various chemicals in bulk, including liquid
caustic soda, phosphoric acid, potassium hydroxide and aqua ammonia;
manufactures sodium hypochlorite (bleach) and agricultural products; repackages
liquid chlorine; and performs custom blending of certain chemicals for customers
according to customer formulas. The
Industrial segment operates liquid caustic soda barge terminals to receive
shipments during the period the Mississippi River is open to barge traffic
(approximately April 1 through November 15).
During the remainder of the year the Company relies on stockpiles, as
well as supplies shipped in by railroad tank car. Approximately 80% of the terminal operations business is related
to liquid caustic soda. Pursuant to
operating agreements it has with other chemical companies, the Company receives
and 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 Mississippi
River in St. Paul, Minnesota. The chlorine
repackaging and bleach manufacturing operations, formerly located at Terminal
1, were moved to the Red Rock facility during fiscal 2001.
Since 1963, flooding of
the Mississippi River has required the Company’s terminal operations to be
temporarily shifted out of its buildings four times, the most recent being in
the spring of 2001. From approximately
April 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 were
adequately protected by dikes.
Additionally,
the high water interrupted barge traffic on the
Mississippi River and no caustic soda barges were received from the closing of
the river in the fall of 2000 until the end of May 2001. No substantial interruptions to sales
resulted from the flooding as trucks and railroad tank cars were used as an
alternative means of supply. However,
the Company incurred additional shipping, labor, and other costs and was not
able to pass through all of these costs to its customers. This had a negative impact on earnings in
the third quarter of fiscal 2001 of approximately $200,000. No assurance can be given that flooding will
not recur or that there will not be material damage or interruption to the
Company’s operations in the future from flooding. In September 2001, a 1.5 million-gallon caustic soda storage tank
was completed at the Red Rock facility allowing it to serve as an additional
terminal for bulk chemicals.
Historically, the property on which the Red Rock facility is located has
not been subject to flooding when Terminals 1 and 2 were not usable due to high
water and the facility was not affected by the flooding in 2001. The Company believes the impact of future
flooding, if any, will be reduced as the Red Rock facility is expected to allow
the Company to continue normal shipping to customers during periods of high
water levels.
The Industrial segment
also includes a manufacturing, blending and sales distribution center for
industrial chemicals, food grade chemicals, high-purity electronic chemicals
and laboratory chemicals and supplies.
Bulk industrial chemicals are generally repackaged and sold in smaller
quantities to the Company’s customers.
Sales are concentrated primarily in Wisconsin, Minnesota, northern Iowa,
and North and South Dakota. The
principal products are acids and alkalis and industrial and food grade
salts. The Industrial segment also
specializes in sales to the plating and electronic industries, for which it
relies on a specially trained sales staff that works directly with customers on
their surface finishing needs.
On May 26, 2000, the
Company completed the acquisition of certain assets of St. Mary’s Chemicals,
Inc. d.b.a. Universal Chemicals.
Universal Chemicals, a Minnesota-based company, was engaged in the
business of marketing, selling, and distributing pharmaceutical chemicals to
pharmacies and pharmacy wholesalers. On
May 26, 2000, the Company also entered into a five-year employment
agreement with one of the previous owners and consulting agreements with the
other two previous owners of Universal Chemicals. The employment agreement and consulting agreements contain
performance bonuses and non-compete provisions. The agreements are based on Universal Chemicals’ operating
results, as defined, for five years after the acquisition date and have a
maximum payout of $3,520,000. The
non-compete provisions extend for a period of five years after the termination
of the employment or consulting agreements, and require annual payments of
$100,000 to $200,000 depending on Universal Chemicals’ operating results, as
defined in the agreements, for five years after the termination date.
(ii) NEW
PRODUCTS. The Company did not have any
significant new products during the fiscal year ended March 30, 2003.
(iii) RAW
MATERIALS. The Company’s segments have
approximately 300 suppliers, including many of the major chemical producers in
the United States, of which approximately 20 account for a majority of the
Company’s purchases. The Company’s
segments typically have written distributorship agreements or supply contracts
with their suppliers that are renewed from time to time. Although there is no assurance that any
contract or understanding with any supplier will not be terminated in the
foreseeable future, most of the products purchased can be obtained from
alternative sources should existing relationships be terminated.
(iv) PATENTS,
TRADEMARKS, LICENSES, FRANCHISES, AND CONCESSIONS. There are no patents, trademarks, licenses, franchises or
concessions that are currently material to the successful operation of the
Company’s business. The Company has,
however, obtained a patent on a liquid form of sodium phosphate for use in the
processed food industry, as described below.
The patent was granted on October 17, 1995 and will expire on November
8, 2013. The Company’s patented
Cheese-Phos®, a two-component liquid
sodium phosphate, is stored at room temperature. Other competing liquid sodium phosphates must be stored at
elevated temperatures to prevent crystallization because they are single
component. Liquid delivery systems, in
general, are more economical than dry delivery systems and are easier to automate,
measure, monitor and control. As a
two-component liquid process, Cheese-Phos®,
when mixed with varied amounts of sodium hydroxide, can create all of the
ratios of sodium phosphates that process cheese makers use. This minimizes inventories for producers. Cheese-Phos® has not and is not expected to materially increase the
Company’s sales or profits.
(v) SEASONAL
ASPECTS. The Water Treatment segment
has historically experienced higher sales during the April to September
timeframe, which is due primarily to an increase in chemicals used by municipal
water treatment facilities.
(vi) WORKING
CAPITAL ITEMS. As a bulk distributor of
chemicals, the Company is required to carry significant amounts of inventory to
meet rapid delivery requirements of customers.
Working capital requirements vary on a seasonal basis as a result of the
seasonality of the water treatment business.
(vii) DEPENDENCE
ON LIMITED NUMBER OF CUSTOMERS. No one
customer represents more than approximately 5% of the Company’s sales, but the
loss of its five largest customers could have a material adverse effect on the
Company’s results of operations.
Additionally, no one customer represents 10% or more of either the Water
Treatment segment or Industrial segment sales.
(viii) BACKLOG. Backlog is not material to an understanding
of the Company’s business.
(ix) GOVERNMENT
CONTRACTS. No material portion of the
Company’s business is subject to renegotiation of profits or termination of
contracts at the election of any state or federal governmental subdivision or
agency.
(x) COMPETITIVE
CONDITIONS. The Company operates in a
competitive industry and competes with producers, distributors and sales agents
offering chemicals equivalent to all of the products handled by the
Company. Many such producers and
distributors are substantially larger than the Company. No one competitor, however, is dominant in
the Company’s market. Price and service
are the principal factors affecting competition in the industry.
(xi) RESEARCH
AND DEVELOPMENT. The Company does not
have a formal research and development function. Employees are assigned to research and development projects as
the need arises. During the fiscal year
ended March 30, 2003, expenditures for research and development were negligible
and not material to the Company’s business.
(xii) ENVIRONMENTAL
MATTERS. The Company is primarily a
compounder and distributor, rather than a manufacturer, of chemical
products. As such, compliance with
current federal, state and local provisions regarding discharge of materials
into the environment, or otherwise relating to the protection of the
environment, is not anticipated to have any material effects upon the capital
expenditures, earnings or competitive position of the Company. The Company does not currently anticipate
making any material capital expenditures for environmental control facilities
during fiscal 2004.
(xiii) EMPLOYEES. The number of persons employed by the
Company as of March 30, 2003 was 201.
(d) FINANCIAL
INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS AND EXPORT SALES. Because the Company deals primarily in one
geographic area of the United States, a breakdown of sales, profitability or
assets attributable to different geographic areas is not meaningful to an
understanding of the Company’s business.
(e) AVAILABLE
INFORMATION. Our Internet website is:
http://www.hawkinsinc.com. We have made
available, free of charge, through our Internet website, our Annual Reports on
Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and
amendments to those reports, as soon as reasonably practicable after we
electronically file such materials with, or furnish them to, the SEC.
ITEM 2.
ITEM 2. PROPERTIES.
The Company owns its principal location, which
consists of approximately 11 acres of land in Minneapolis, Minnesota, with six
buildings containing a total of 160,000 square feet of office and warehouse
space. The Company’s principal office
is located in one of these buildings, at 3100 East Hennepin Avenue. As of the date hereof, the Company has
installed sprinkler systems in substantially all of its warehouse facilities
for fire protection. The Company
carries insurance covering the replacement of property damaged by fire or flood.
As noted above, in December 2000 the Company completed
the Red Rock facility, which consists of a 59,000 square-foot building located
on approximately 10 acres of land. This
facility has outside storage capacity of approximately 1.5 million gallons for
the storage of liquid caustic soda, as well as numerous smaller tanks for
storing and mixing chemicals. The land
is leased from the Port Authority of the City of St. Paul, Minnesota for a
basic rent plus an amount based on the annual tonnage unloaded at the site
through May 31, 2029. The basic
rent and annual tonnage rent are to be renegotiated every five years beginning
June 1, 2004.
In addition to the facilities described above, the
Company’s other facilities are described below. These facilities, together with those described above, are
adequate and suitable for the purposes they serve. Unless noted, each facility is owned and is fully utilized by the
Company.
(1) The
Company’s terminal operations are located at two sites on opposite sides of the
Mississippi River, made up of three buildings, nine outside storage tanks with
a total capacity of approximately 8,900,000 gallons for the storage of liquid
caustic soda, as well as numerous smaller tanks for storing and mixing
chemicals. The land is leased from the
Port Authority of the City of St. Paul, Minnesota for a basic rent plus an
amount based on the annual tonnage unloaded at each site. The applicable leases run until December 31,
2003, at which time the Company has an option to renew the leases for an
additional five-year period on the same terms and conditions subject to
renegotiation of rent. The Company also
has options to renew these leases for additional successive five-year renewal
periods (extending until 2018) for which the rent may be adjusted pursuant to
the rental renegotiation provisions contained in the leases.
(2) Part
of this facility is leased to a third party (5,000 square feet).
(3) Part
of this facility is leased to a third party (2,500 square feet).
(4) Part
of this facility is leased to a third party (6,000 square feet).
(5) This
facility is leased from a third party.
The Company also owns several trucks, tractors,
trailers and vans.
ITEM 3.
ITEM 3. LEGAL
PROCEEDINGS.
Not Applicable.
ITEM 4.
ITEM 4. SUBMISSION
OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not Applicable.
ITEM 4A. The executive
officers of the Company, their ages and offices held, as of May 31, 2003 are
set forth below:
John R. Hawkins has been the Company’s Chairman and
Chief Executive Officer since February 16, 2000. He was President and Chief Operating Officer from December 1998
to February 2000 and was Secretary from 1991 to December 1999. He was an Executive Vice President from 1997
to December 1998 and Vice President of Sales from 1987 to 1997.
Kurt R. Norman has been the Company’s President and
Chief Operating Officer since February 16, 2000. He was a Vice President of the Company from February 1999 until
February 2000, the Vice President of the Water Treatment segment from 1996 to
February 1999 and was the Water Treatment General Manager from 1988 to 1996.
Marvin E. Dee has been the Company’s Vice President
and Chief Financial Officer since September 1999 and its Secretary and
Treasurer since December 1999. He was
the Chief Financial Officer of Nath Companies from 1997 to September 1999, the
Vice President of Finance and Treasurer of Tricord Systems, Inc. from 1993 to
1997 and Senior Director of Accounting of NordicTrack, Inc. in 1993 and
the Controller of NordicTrack from 1991 to 1992.
Keenan A. Paulson has been the Company’s Vice
President - Water Treatment Group since May 2000. Prior to attaining this position, Ms. Paulson held various
positions during her 30-year career with the Company, most recently as its
Water 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 of
Manufacturing from 1998 to May 2000 and was a Sales Representative with the
Company from 1989 to 1998.
Daniel E. Soderlund has been the Company’s Vice
President - Pharmaceuticals since May 2000.
He was the Business Unit Manager of Pharmaceuticals from April 1999 to
May 2000 and was a Sales Representative with the Company from 1992 to April
1999.
PART II
ITEM 5.
ITEM 5. MARKET
FOR THE COMPANY’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company’s common shares are traded on The Nasdaq
Stock Marketâ under the symbol
“HWKN.” The price information
represents closing sale prices as reported by Nasdaq. As of March 30, 2003, there were approximately 700 registered
common stockholders. Additionally, the
Depository Trust Company, the principal central securities depository in the
United States, held the shares of approximately 1,400 stockholders that were
counted as owned by one holder.
The Company first started paying cash dividends in
1985 and has done so consecutively since that time. Future dividend levels will be dependent upon Hawkins’ results of
operations, financial position, cash flows and other factors, and will be
evaluated by the Hawkins Board of Directors.
ITEM 6.
ITEM 6. SELECTED
FINANCIAL DATA.
SELECTED FINANCIAL DATA TABLES
The Company changed its fiscal year end from the Sunday closest to
September 30 to the Sunday closest to March 31, beginning after a
six-month transitional period ended on March 31, 2002. See “Management’s Discussion and Analysis of
Financial Condition and Results of Operations - General.”
ITEM 7.
ITEM 7. MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
FORWARD-LOOKING INFORMATION
The information contained in this Annual Report on
Form 10-K for the year ended March 30, 2003 contains statements that we believe
to be “forward-looking statements” within the meaning of the Private Securities
Litigation Reform Act of 1995. Forward-looking
statements give our current expectations or forecasts of future events.
Forward-looking statements generally can be identified by the use of
forward-looking terminology such as “may,” “will,” “expected,” “intend,”
“estimate,” “anticipate,” “believe,” “project,” or “continue,” or the negative
thereof or similar words. From time to time, we also may provide oral or
written 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 materially
different from actual results. They can be affected by assumptions we might
make or by known or unknown risks or uncertainties, including those described
below under “Risk Factors” and other factors disclosed throughout this Annual
Report on Form 10-K and the Company’s other filings with the Securities and
Exchange Commission. Consequently, we
cannot guarantee any forward-looking statements and undertake no obligation to
revise any forward-looking statements in order to reflect events or
circumstances that may arise after the date of this Annual Report on
Form 10-K. Investors are
cautioned not to place undue reliance on any forward-looking statements. Investors should also understand that it is
not possible to predict or identify all such factors and should not consider
the following list to be a complete statement of all potential risks and
uncertainties.
RISK FACTORS
In addition to specific factors which may be described
in connection with any of the Company’s forward-looking statements, factors
which could cause actual results to differ materially include, but are not
limited to, the following items.
• Reduced profit
margins due to the cyclical nature of commodity chemical prices. The
cyclicality of commodity chemical markets, such as caustic soda, primarily
results from changes in the balance between supply and demand and the level of
general economic activity. The Company
cannot predict with any certainty whether the markets for its commodity
chemicals will favorably impact the Company’s operations or whether the Company
will experience losses due to excess production resulting in oversupply and
hence lower prices.
• Unforeseen
liabilities arising from litigation, particularly liabilities that may arise
from claims under environmental laws which may impose liability for the release
of hazardous materials whether or not the Company had knowledge of or was
responsible for such release.
• Changes in
governmental and regulatory policies that affect the Company which may entail
significant cost increases relating to the handling, storage, transportation,
treatment or disposal of hazardous materials.
• Increased
competition which could affect our ability to raise prices or successfully
enter certain markets.
• Changes in
customer demand which may significantly reduce revenues and income.
• Changes in product
costs or operating expenses which may reduce our operating margins.
• The financial
condition of our customers and their ability to purchase our products at
comparable prices.
• Significant
changes in our business strategies, including acquisition, divestiture and
restructuring activities which may affect our ability to focus on operating
activities or increase costs.
• General economic
and political conditions, such as political instability or the rate of economic
growth in our principal geographic or product markets.
• Changes in
operating factors, such as our ability to make continued improvements in
distribution efficiencies and inventory risks due to shifts in market demand.
• Unforeseen or
recurring operational problems or natural disasters at any of our facilities
causing significant lost production and/or increased costs.
• Technology risks,
such as failure to continue to make process improvements to reduce costs or to
analyze our business.
• Loss of senior
management or other key personnel and our ability to hire suitable replacements
in a timely manner.
These factors are not exhaustive and new factors may emerge or existing
factors may change in a manner that impacts our business. We assume no obligation and disclaim any
duty to update the forward-looking statements in this Annual Report on Form
10-K or any other public statement.
GENERAL
In December 2001, the Company changed its fiscal year
end to a 52/53-week year ending on the Sunday closest to March 31 from a
52/53-week fiscal year ending on the Sunday closest to September 30. The change in year-end better matches the
Company’s annual reporting process to its natural business cycles. This change resulted in a six-month
transitional period ended March 31, 2002.
This discussion compares the Company’s fiscal year ended March 30, 2003
with the six-month transitional period ended March 31, 2002, the six-month
transitional period ended March 31, 2002 with the fiscal year ended September
30, 2001, and the fiscal year ended September 30, 2001 with the fiscal year
ended October 1, 2000. Due to the
seasonality of the Company’s business, management feels it would be more
meaningful to the readers of these statements to compare results of operations
to 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 ended
March 31, 2002 and $107,931,668 for the fiscal year ended September 30,
2001. Net income for the fiscal year
ended March 30, 2003 was $8,430,172, or $.83 per share, $3,083,771, or $.30 per
share 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% for
the six-month transitional period ended March 31, 2002 and 12.3% for the fiscal
year ended September 30, 2001. Book
value per share was $6.43 at March 30, 2003, $5.91 at March 31, 2002, and $5.77
at September 30, 2001.
SALES
For the fiscal year ended March 30, 2003, sales for
the Industrial segment were $67,674,289 and for the Water Treatment segment
were $36,330,322. For the six-month
transitional 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 a
difference in period lengths and the seasonal nature of the Water Treatment
segment’s business as its sales during April through September are greater than
its sales during October through March.
For the fiscal year ended September 30, 2001, sales
for the Industrial segment were $73,818,768 and for the Water Treatment segment
were $34,112,900. The decrease in sales
for the six-month transitional period ended March 31, 2002 as compared to the
fiscal year ended September 30, 2001 was due to the difference in length of
periods compared and to the seasonal nature of the Water Treatment segment’s
business as mentioned above.
For the fiscal year ended September 30, 2001, sales
increased $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 sales
and an increase of $3,415,569, or 11.1%, in Water Treatment segment sales. The Industrial segment increase was mainly
due to an increase in the selling price of caustic soda and volume increases in
other product lines, which were partially offset by a decrease in the volume of
caustic soda sold. The Water Treatment
segment increase is due mainly to an increase in volumes of products sold.
GROSS MARGIN
Gross margin, as a percentage of sales, was 26.9% for
the fiscal year ended March 30, 2003 compared to 23.1% for the six-month
transitional period ended March 31, 2002 and was 22.5% and 25.3% for the fiscal
years ended September 30, 2001 and October 1, 2000, respectively. The gross margin variations are due to a
number of variables as explained below.
Gross margin, as a percentage of sales, for the
Industrial 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% and
22.6% for the fiscal years ended September 30, 2001 and October 1, 2000,
respectively. The increases over the
previous year in the fiscal year ended March 30, 2003 and the six-month
transitional period ended March 31, 2002 are mainly due to improved margins in
most product lines and to fluctuations in the cost and selling price of caustic
soda. During calendar 2002, the cost of
caustic soda was increasing and continued to increase through the end of the
2003 fiscal year. Due to the large
quantities of caustic soda inventory that are maintained to meet customer
requirements and because the Company is on the last-in, first out (LIFO) method
of valuing inventories, any cost fluctuations can impact gross margins. The Company attempts to maintain relatively
constant dollar margins as the cost of caustic soda increases or decreases. The cost of this product is normally subject
to fluctuations, which are expected to continue in future periods. By maintaining relatively stable dollar
margins, the gross margin percentage will decrease when the cost of the product
is increasing and will increase when the cost of the product is
decreasing. The Company has generally
been able to, and expects to continue to, adjust its selling price as the cost
of materials and other expenses change.
The decrease in gross margin for the fiscal year ended
September 30, 2001 compared to the fiscal year ended October 1, 2000 was
primarily due to the cost of caustic soda, which began to increase at the
beginning of fiscal year 2001 but then started to decrease and continued to
decrease through the end of the fiscal year.
Due to the large quantities of caustic soda that the Company had on hand
at the beginning of fiscal 2001 and because of the LIFO method of valuing
inventories, this increase negatively impacted gross margins. The Company implemented caustic soda price
increases during the year; however, market pressures prevented the Company from
recovering all of the increased caustic soda costs. Additionally, an increase over the prior year in the volume of
caustic soda in the year-end inventory combined with the increase in cost of
caustic soda resulted in an increase in the LIFO reserve, all of which
negatively affected earnings by $1.4 million or $.14 per share.
Gross margin, as a percentage of sales, for the Water
Treatment segment was 32.7% for the fiscal year ended March 30, 2003, 27.6% for
the six-month transitional period ended March 31, 2002, and 30.7% and 31.2% for
the fiscal years ended September 30, 2001 and October 1, 2000,
respectively. The gross margin increase
for the fiscal year ended March 30, 2003 as compared to the six-month
transitional period ended March 31, 2002 was due to the fiscal year end change
and to the nature of the Water Treatment segment business. During the months of April to September, the
sales for this segment are greater and have higher profit margins than the
sales for October to March.
Additionally, there are certain fixed costs included in cost of sales
that do not fluctuate with sales volumes.
The decrease for the six-month transitional period ended March 31, 2002
in comparison to the fiscal year ended September 30, 2001 was due to the
aforementioned fiscal year end change and the seasonality of the Water
Treatment segment. The decrease for the
fiscal year ended September 30, 2001 in comparison to the fiscal year ended
October 1, 2000 was attributable to the aforementioned changes in caustic soda
costs and costs associated with the new Red Rock facility.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expenses, as a
percentage 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 the
fiscal year ended March 30, 2003 over the six-month transitional period ended
March 31, 2002 was primarily attributable to the Company’s investment in
infrastructure 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 ended
September 30, 2001 was primarily attributable to increases in sales staff and
insurance expense. The fiscal year
ended September 30, 2001 increase over the fiscal year ended October 1, 2000 was
mainly due to increases in the sales staff, consulting fees, amortization of
intangibles related to the acquisition of Universal Chemicals, and employee
benefit costs.
INVESTMENT INCOME
Investment income increased $139,689 to $367,049 for
the fiscal year ended March 30, 2003 compared to $227,360 for the six-month
transitional period ended March 31, 2002 due to increased amounts of cash
available for investment and the aforementioned change in our fiscal year end
that resulted in the six-month transitional period. The increase was partially offset by a $370,000 loss recognized
in the fiscal year ended March 30, 2003 due to declines in market value on
investments which were deemed other than temporary. Investment income for the fiscal year ended March 30, 2003 was
comparable to the fiscal year ended September 30, 2001, excluding the
aforementioned $370,000 loss, as the increased amounts of cash available for
investment during the fiscal year ended March 30, 2003 was offset by a lower
rate of return. Interest income for the
fiscal year ended September 30, 2001 decreased by $346,706 in comparison to the
fiscal year ended October 1, 2000 due to less cash available for investment and
a lower rate of return.
PROVISION FOR INCOME TAXES
The effective income tax rate was 37.2% for the fiscal
year ended March 30, 2003, 36.2% for the six-month transitional period ended
March 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 the
six-month transitional period ended March 31, 2002 was primarily due to less
tax-exempt interest income. The
increase in the effective rate for the six-month transitional period compared
to the fiscal year ended September 30, 2001 was due to changes in state
apportionment 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 state
apportionment factors and a deduction for dividends paid on allocated shares
held in the Employee Stock Ownership Plan and Trust.
INFLATION
Inflation did not have a significant impact on the
Company during the fiscal year ended March 30, 2003, the six-month transitional
period ended March 31, 2002, and the fiscal years ended September 30, 2001 and
October 1, 2000, as selling prices have generally been adjusted as the cost of
materials and other expenses have changed.
On occasion, slight fluctuations in the cost of a single, large-volume
product have not been reflected in the selling price of that product.
SELECTED QUARTERLY FINANCIAL DATA
FINANCIAL CONDITION
LIQUIDITY
Cash provided by operations in the fiscal year ended
March 30, 2003 was $14,589,108 compared to $3,860,076 during the six-month
transitional period ended March 31, 2002, $9,950,745 in the fiscal year ended
September 30, 2001 and $9,693,479 in the fiscal year ended October 1,
2000. The increase in the fiscal year
ended March 30, 2003 compared to the six-month period ended March 31, 2002 was
due primarily to timing of retirement plan payments and the increase in net
income, which was offset by fluctuations in inventory values and
quantities. The decrease in the
six-month transitional period ended March 31, 2002 compared to the fiscal year
ended September 30, 2001 was due primarily to fluctuations in inventory and
timing of liability payments and a decrease in net income due to the six-month
period.
Cash and investments available-for-sale increased by
$9,745,638 from March 31, 2002 to $24,256,281 as of March 30, 2003. The
increase was primarily attributable to cash generated by operations in excess
of capital expenditures and financing uses.
Cash and investments available-for-sale increased by $1,909,772 from
September 30, 2001 to $14,510,643 at the end of the six-month transitional
period. This increase was primarily
attributable to cash generated by operations in excess of capital expenditures
and financing uses and the maturity of investments from investments held to
maturity, which were invested in available-for-sale investments. Cash equivalents consist of money market
accounts at a financial institution.
Investments consist of investment contracts with high-rated, stable
insurance companies, marketable securities consisting of variable rate
municipal bonds, U.S. Government agency securities and mutual funds carried at
fair value. Investments are highly
liquid and are available upon demand generally with only a minor penalty. Additionally, cash and cash equivalents
increased by $6,221,039 from September 30, 2001 to
March 31, 2002 as the Company was in process at March 31, 2002 of
transitioning investments into higher rate of return investments. Subsequent to March 31, 2002 a significant
portion of the cash equivalents were invested in the aforementioned investment
options.
As of March 30, 2003, the Company had an investment
portfolio 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 and
variable rate securities. The fixed
income securities, like all fixed income instruments, are subject to interest
rate risk and will decline in value if market interest rates increase. However, while the value of the investment
may fluctuate in any given period, the Company intends to hold its fixed income
investments until maturity.
Consequently the Company would not expect to recognize an adverse impact
on net income or cash flows or the amount ultimately realized on the
investment. The value of the mutual
funds, like all mutual funds, may increase or decrease due to market
volatility. The Company recorded a loss
of $370,000 in the fiscal year ended March 30, 2003 due to declines in market
value that were deemed other than temporary.
CAPITAL EXPENDITURES
Capital expenditures in the fiscal year ended March
30, 2003, the six-month transitional period ended March 31, 2002, and the
fiscal 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, 2003
consisted primarily of $1,000,000 for machinery and equipment, $550,000 for
transportation equipment, $450,000 for building improvements, and $350,000 for
land and office furniture.
COMMON STOCK REPURCHASES
The Company did not acquire any common stock during
the fiscal year ended March 30, 2003.
During the six-month transitional period ended March 31, 2002, the
Company acquired and retired 32,100 shares of common stock for $251,790.
CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS
Future minimum lease payments due under operating
leases with an initial term of one year or more at March 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. The Company
does not have any other contractual obligations or commercial commitments.
OUTLOOK
Expected
future cash flows from operations, coupled with the Company’s strong financial
position, puts the Company in a position to fund both short and long-term
working capital and capital investment needs with internally generated
funds. Management does not, therefore,
anticipate the need to engage in significant financing activities in either the
short or long term. If the need to
obtain additional capital does arise, however, management is confident that the
Company’s total debt to capital ratio puts it in a position to obtain debt
financing on favorable terms.
Although
management continually reviews opportunities to enhance the value of the
Company through strategic acquisitions, other capital investments and strategic
divestitures, no material commitments for such investments or divestitures
currently exist.
Other than as discussed above, management is not aware
of any matters or trends that have materially affected the results of
operations for the fiscal year ended March 30, 2003 that are not expected to
have either short or long-term implications, nor is it aware of any trends or
other matters that have not materially affected results in the fiscal year
ended March 30, 2003 but are expected to have a material effect on future
periods.
CRITICAL ACCOUNTING POLICIES
Accounting policies whose application may have a
significant effect on the reported results of operations and financial position
of the Company, and that can require judgments by management that affect their
application, include Statement of Financial Accounting Standards (SFAS) No. 5,
“Accounting for Contingencies,” and SFAS No. 144, “Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of.”
SFAS No. 5 requires management judgments regarding the
probability and estimated amount of possible future contingent liabilities,
including legal matters. SFAS No. 144
requires judgments regarding future operating or disposition plans for
marginally performing assets and estimates of expected realizable values for
assets to be sold. Other accounting
policies that are significant to the Company include the following:
Revenue Recognition - The Company recognizes revenue when the product
has been shipped to the customer if there is evidence that the customer has
agreed to purchase the products, delivery and performance has occurred, the
price and terms of sale are fixed, and collection of the receivable is
expected.
Allowance for Doubtful Accounts - Accounts receivable are reduced by an
allowance for amounts that may become uncollectible in the future. Substantially all of the Company’s
receivables are due from customers located in the United States. The estimated allowance for doubtful accounts
is based upon the age of the outstanding receivables and the payment history and
credit worthiness of each customer.
Management evaluates the adequacy of the reserve for doubtful accounts
on a quarterly basis.
Inventories - Inventories are valued at the lower of cost or
market. On a quarterly basis,
management assesses the inventory quantities on hand to estimated future usage
and sales and, if necessary, writes down the value of inventory deemed obsolete
or excess to market.
Property, Plant and Equipment - Property, plant and equipment are
stated at cost and depreciated over the lives of the assets using both the
straight-line and declining balance methods.
Major replacements and improvements are capitalized, while maintenance
and repairs which do not improve or extend the useful lives of the respective
assets are charged to operations. The
assets and related accumulated depreciation accounts are adjusted for asset
retirements and disposals with the resulting gain or loss, if any, recorded in
the statement of income at the time of disposal.
The Company’s policies for these matters, which are
described in Note 1 to the financial statements, are in accordance with
generally accepted accounting principles.
Management believes that their application results in a fair
presentation in the financial statements of the Company’s operating results and
financial position.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In
July 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 as
other intangibles determined to have an infinite life will no longer be
amortized; however, these assets will be reviewed for impairment on a periodic
basis. SFAS No.142 also includes
provisions for the reclassification of certain existing recognized intangibles
as goodwill, reclassification of certain intangibles out of previously reported
goodwill and the identification of reporting units for purposes of assessing
potential future impairments of goodwill.
The implementation of SFAS No. 142 did not impact the Company’s
financial statements since the Company 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 March 30, 2003, the six-month
transitional period ended March 31, 2002, and the fiscal years ended September
30, 2001 and October 1, 2000, respectively.
The estimated amortization expense for each of 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 assets
to be disposed of by sale, including discontinued operations, be measured at
the lower of the carrying cost or fair value less cost to sell, whether
reported in continuing operations or discontinued operations. SFAS No. 144 also broadens the reporting of
discontinued operations to include all components of an entity with operations
that can be distinguished from the rest of the entity and that will be
eliminated from the ongoing operations of the entity in a disposal
transaction. The provisions of SFAS No.
144 are effective for financial statements issued for fiscal years beginning
after December 15, 2001 and, generally, are to be applied prospectively. The adoption of SFAS No. 144 was effective
for the Company beginning on April 1, 2002. The adoption of SFAS No. 144 did
not have a material effect on the Company’s historical results of operations or
financial position.
In November 2002, the FASB issued FASB Interpretation
No. 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 guarantor in its interim and annual financial
statements about its obligations under certain guarantees that it has
issued. Interpretation No. 45 also
requires a guarantor to recognize, at the inception of a guarantee, a liability
for the fair value of the obligation undertaken in issuing certain types of
guarantees. The disclosure requirements
in Interpretation No. 45 are effective for interim or annual financial
statement periods ended after December 15, 2002. The adoption of Interpretation No. 45 did not have an impact on
the Company’s results of operations or financial position.
In January 2003,
the FASB issued Interpretation No. 46, “Consolidation of Variable Interest
Entities (VIE), an Interpretation of ARB No. 51,” which requires all VIEs to be
consolidated by the primary beneficiary.
The primary beneficiary is the entity that holds the majority of the
beneficial interests in the VIE. In
addition, the interpretation expands disclosure requirements for both VIEs that
are consolidated as well as VIEs from which the entity is the holder of a
significant amount of the beneficial interests, but not the majority. The disclosure requirements of this
interpretation are effective for all financial statements issued after January
31, 2003. The consolidation
requirements of this interpretation are effective for all periods beginning
after June 15, 2003. The Company does
not expect the adoption of this new standard to have any effect on its results
of operations or financial position.
ITEM 7A.
ITEM 7A. QUANTITATIVE
AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.
Not applicable.
ITEM 8.
ITEM 8. FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA.
INDEPENDENT
AUDITORS’ REPORT
To the Shareholders of Hawkins, Inc.:
We have audited the accompanying balance sheets of Hawkins, Inc. (the
Company) as of March 30, 2003 and March 31, 2002 and the related statements of
income, shareholders’ equity, and cash flows for the fiscal year ended March
30, 2003, the six-month transitional period ended March 31, 2002, and the
fiscal years ended September 30, 2001 and October 1, 2000. These financial statements are the
responsibility of the Company’s management.
Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America.
Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all
material respects, the financial position of Hawkins, Inc. at March 30,
2003 and March 31, 2002 and the results of its operations and cash flows for
the fiscal year ended March 30, 2003, the six-month transitional period ended
March 31, 2002, and the fiscal years ended September 30, 2001 and October
1, 2000, in conformity with accounting principles generally accepted in the
United States of America.
HAWKINS, INC.
BALANCE SHEETS
See accompanying notes to financial statements.
HAWKINS,
INC.
STATEMENTS
OF INCOME
See accompanying notes to financial statements.
HAWKINS,
INC.
STATEMENTS OF SHAREHOLDERS’ EQUITY
See accompanying notes to financial statements.
HAWKINS,
INC.
STATEMENTS OF CASH FLOWS
See accompanying notes to financial statements.
HAWKINS,
INC.
NOTES TO FINANCIAL STATEMENTS
1. NATURE
OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
Nature
of Business - Hawkins, Inc. (the Company) has two reportable
segments: Industrial and Water Treatment.
The Industrial segment specializes in providing industrial chemicals and
services to the energy, electronics, and plating industries. In addition, the
Industrial segment provides products and services to food manufacturers,
processing plants and the pharmaceutical industry. The Water Treatment segment specializes in providing water and
waste-water treatment equipment, chemicals and service.
Fiscal
Year - In December 2001, the Company changed its fiscal year
end to a 52/53-week year ending on the Sunday closest to March 31 from a
52/53-week fiscal year ending on the Sunday closest to September 30. The change in year-end will better match the
Company’s annual reporting process to its natural business cycles. This change resulted in a six-month
transitional period ended March 31, 2002.
The six-month transitional period was a 26-week period, the fiscal years
ended March 30, 2003, September 30, 2001, and October 1, 2000 were
52-week years.
Cash
Equivalents - Cash equivalents include all liquid debt
instruments (primarily cash funds, certificates of deposits, and money market
accounts) purchased with an original maturity of three months or less. The balances maintained at financial
institutions may, at times, exceed federally insured limits.
Investments
Available-For-Sale - In accordance with the provisions of
Statement of Financial Accounting Standards (SFAS) No. 115, “Accounting for
Certain Investments in Debt and Equity Securities,” these investments are
carried at fair market value with unrealized gains and losses reported in
shareholders’ equity as a component of other comprehensive income (loss).
Investments classified as available-for-sale securities consist of fixed income
securities, primarily municipal bonds and U.S. Government agency securities
(65%), mutual funds (29%), and variable rate marketable securities, primarily
annuity contracts (6%) that will be held for indefinite periods of time,
including securities that may be sold in response to changes in market interest
or prepayment rates, needs for liquidity, or changes in the availability or
yield of alternative investments. Gross
unrealized gains, primarily within the mutual fund and fixed income portfolios,
were $126,063 as of March 30, 2003 and gross unrealized losses, primarily
within the mutual fund portfolio, were $231,528 as of March 31, 2002. In the fiscal year ended March 30, 2003, the
six-month transitional period ended March 31, 2002, and the fiscal years ended
September 30, 2001 and October 1, 2000, proceeds from the sale of investments
available-for-sale were $6,022,000, $8,797,736, $1,032,018 and $7,638,064,
respectively. A loss of $370,000 was
recorded in the fiscal year ended March 30, 2003 due to declines in market
value that were deemed other than temporary.
Realized gains and losses were not material for the six-month
transitional period ended March 31, 2002 and the fiscal years ended September
30, 2001 and October 1, 2000.
Inventories
- Inventories, consisting primarily of finished goods, are
primarily valued at the lower of cost or net realizable value, with cost being
determined using the last-in, first-out (LIFO) method.
Property,
Plant and Equipment - Property is stated at cost and
depreciated over the lives of the assets using both straight-line and
declining-balance methods. Estimated
lives are: 10 to 50 years for buildings and improvements; 3 to 15 years for
machinery and equipment; 3 to 10 years for transportation equipment; and 3 to
10 years for office furniture and equipment.
Intangibles
Assets - Intangible assets consist primarily of customer
lists, trademarks, and trade names acquired in previous business
acquisitions. The values assigned to
the intangible assets are being amortized primarily over 15 years.
Investments
Held-To-Maturity - Held-to-maturity securities consist of
Minnesota municipal bonds, which the Company has the intent and ability to hold
to maturity, and are valued at amortized historical cost, increased for
accretion of discounts and reduced by amortization of premiums, computed by the
constant-yield method. Investments
held-to-maturity, included within other assets, were $1,086,825 and $1,390,418
at March 30, 2003 and March 31, 2002, respectively.
Recoverability
of Long-Lived Assets - The Company reviews its long-lived
assets whenever events or changes in circumstances indicate the carrying amount
of the assets may not be recoverable.
The Company determines potential impairment by comparing the carrying
value of the assets with expected net cash flows expected to be provided by
operating activities of the business or related products. Should the sum of the expected future net
cash flows be less than the carrying value, the Company would determine whether
an impairment loss should be recognized.
An impairment loss would be measured by comparing the amount by which
the carrying value exceeds the fair value of the asset based on market value
that is based on the discounted cash flows expected to be generated by the
asset.
Revenue
Recognition - The Company recognizes revenue when the product
has been shipped to the customer if there is evidence that the customer has
agreed to purchase the products, delivery and performance has occurred, the
price and terms of sale are fixed, and collection of the receivable is
expected.
Shipping
and Handling - All shipping and handling amounts billed to
customers are included in revenues.
Costs incurred related to shipping and handling are included in costs of
goods sold.
Income
Taxes - The Company follows SFAS No. 109, “Accounting
for Income Taxes.” Under SFAS
No. 109, the deferred tax assets and liabilities are recognized based on
differences between the financial statements and the tax bases of assets and
liabilities using presently enacted tax rates.
Earnings
Per Share - Basic and diluted earnings per share are computed
by dividing net income by the weighted average number of common shares
outstanding.
Concentrations
of Credit Risk - Financial instruments which potentially
subject the Company to a concentration of credit risk principally consist of
investments available-for-sale and trade receivables. The Company sells its principal products to a large number of
customers in many different industries.
To reduce credit risk, the Company routinely assesses the financial
strength of its customers. The Company
invests its excess cash balances in a money market account at a single
financial institution.
At March 30, 2003, the Company also had an investment
portfolio of fixed income securities and mutual funds, excluding $2,652,701 of
those 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, are
subject to interest rate risk and will decline in value if market interest
rates increase. However, the Company
has the ability to hold its fixed income investments until maturity and
therefore the Company would not expect to recognize an adverse impact on net
income or cash flows. The value of
mutual funds, like all mutual funds, may increase or decrease due to market
volatility.
Derivative
Instruments and Hedging Activities - In fiscal 2001, the
Company adopted SFAS No. 133, “Accounting for Derivative Instruments and
Hedging Activities,” as amended by SFAS No. 138, “Accounting for Certain
Derivative Instruments and Certain Hedging Activities.” SFAS No. 133 establishes accounting and
reporting standards for derivative instruments and for hedging activities. It requires that all derivatives, including
those embedded in other contracts, be recognized as either assets or
liabilities and that those financial instruments be measured at fair
value. The accounting for changes in
the fair value of derivatives depends on their intended use and
designation. Management has reviewed
the requirements of SFAS No. 133 and has determined that the Company has no
freestanding or embedded derivatives.
All contracts that contain provisions meeting the definition of a
derivative also meet the requirements of, and have been designated as, normal
purchases and sales. The Company’s
policy is to not use freestanding derivatives and to not enter into contracts
with terms that cannot be designated as normal purchases or sales.
Estimates
- The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of America
(generally accepted accounting principles) requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reported period. Actual results
could differ from those estimates.
Risk
and Uncertainties - There are no concentrations of business
transacted with a particular customer or supplier nor concentrations of sales
from a particular service or geographic area that would severely impact the
Company in the near term.
Accounting
Pronouncements - In July 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 as other intangibles determined to
have an infinite life will no longer be amortized; however, these assets will
be reviewed for impairment on a periodic basis. SFAS No. 142 also includes provisions for the reclassification of
certain existing recognized intangibles as goodwill, reclassification of
certain intangibles out of previously reported goodwill, and the identification
of reporting units for purposes of assessing potential future impairments of
goodwill. The implementation of
SFAS No. 142 did not impact the Company’s financial statements since the
Company 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 March
30, 2003, the six-month transitional period ended March 31, 2002, and the
fiscal years ended September 30, 2001 and October 1, 2000, respectively. The estimated amortization expense for each
of 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 assets
to be disposed of by sale, including discontinued operations, be measured at
the
lower of the carrying cost or fair value less cost to
sell, whether reported in continuing operations or discontinued operations.
SFAS No. 144 also broadens the reporting of discontinued operations to include
all components of an entity with operations that can be distinguished from the
rest of the entity and that will be eliminated from the ongoing operations of
the entity in a disposal transaction.
The provisions of SFAS No. 144 are effective for financial statements
issued for fiscal years beginning after December 15, 2001 and, generally, are
to be applied prospectively. The
adoption of SFAS No. 144 was effective for the Company beginning on April 1,
2002. The adoption of SFAS No. 144 did
not have a material effect on the Company’s historical results of operations or
financial position.
In November 2002, the FASB issued FASB Interpretation
No. 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 guarantor
in its interim and annual financial statements about its obligations under
certain guarantees that it has issued.
Interpretation No. 45 also requires a guarantor to recognize, at the
inception of a guarantee, a liability for the fair value of the obligation
undertaken in issuing certain types of guarantees. The disclosure requirements in Interpretation No. 45 are
effective for interim or annual financial statements statement periods ended
after December 15, 2002. The adoption
of Interpretation No. 45 did not have an impact on the Company’s results of
operations or financial position.
In January 2003, the FASB issued Interpretation No.
46, “Consolidation of Variable Interest Entities (VIE), an Interpretation of
ARB No. 51,” which requires all VIEs to be consolidated by the primary
beneficiary. The primary beneficiary is
the entity that holds the majority of the beneficial interests in the VIE. In
addition, the interpretation expands disclosure requirements for both VIEs that
are consolidated as well as VIEs from which the entity is the holder of a
significant amount of the beneficial interests, but not the majority. The disclosure requirements of this
interpretation are effective for all financial statements issued after January
31, 2003. The consolidation
requirements of this interpretation are effective for all periods beginning
after June 15, 2003. The Company does
not expect the adoption of this new standard to have any effect on its results
of operations or financial position.
2. INVENTORIES
Inventories at March 30, 2003 and March 31, 2002
consisted of the following:
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 the
inventory was valued under the FIFO method.
In fiscal 2003, the LIFO reserve decreased by
$790,268. The decrease in the LIFO
reserve 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-month
transitional period ended March 31, 2002, the Company liquidated LIFO inventory
layers that were at lower costs than current costs. During the fiscal year ended September 30, 2001, there were no
LIFO inventory layers liquidated. The
impact of the liquidation on cost of sales was not material for the fiscal year
ended March 30, 2003 and was $300,000 for the six-month transitional period
ended March 31, 2002.
3. NOTES
RECEIVABLE
The Company has three notes receivable related to the
sales of Tessman Seed, Inc., land and building, and The Lynde Company. At March 30, 2003 and March 31, 2002, the
net 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, are
included within prepaid expenses and other current assets and the remaining
balances are included within other assets.
The notes receivable bear interest at 8% and are due in equal monthly
installments of $36,204 through September 1, 2010 at which time the
remaining unpaid balance of $1,213,163 is due.
The notes receivable are secured by land and building, and a personal
guarantee.
4. LONG-TERM
DEBT
The final installment of
$116,823 on the Company’s previously outstanding long-term debt was paid in
October 2002.
5. SHAREHOLDERS’
EQUITY
During the six-month transitional period ended March
31, 2002 and the fiscal years ended September 30, 2001 and October 1,
2000, the Company acquired and retired 32,100 shares, 168,951 shares, and
608,900 shares of common stock, respectively, for $251,790, $1,421,641, and
$5,020,366, respectively. There were no
shares acquired and retired during the fiscal year ended March 30, 2003.
6. PENSION
AND EMPLOYEE STOCK OWNERSHIP PLANS
The Company has a defined contribution pension plan
covering substantially all of its non-bargaining employees. Pension expense for the fiscal year ended
March 30, 2003, the six-month transitional period ended March 31, 2002, and the
fiscal 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% of
each employee’s covered compensation in the fiscal year ended March 30, 2003
and the six-month transitional period ended March 31, 2002 and 10% in the
fiscal years ended September 30, 2001 and October 1, 2000. Amounts charged to pension expense and
contributed to union multi-employer pension plans (not included in the above
amounts) were not material. It is the
Company’s policy to fund all pension costs accrued.
The Company has an employee stock ownership plan covering
substantially all of its non-bargaining employees. Contributions are made at the discretion of the Board of
Directors subject to a maximum amount allowed under the Internal Revenue Code. Contributions for the fiscal year ended
March 30, 2003, the six-month transitional period ended March 31, 2002, and the
fiscal 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 any
post-retirement benefits, deferred stock or stock-based compensation plans.
7. COMMITMENTS
AND CONTINGENCIES
Leases
- The Company has various operating leases for land and buildings on which some
of its operations are located. Total
rental expense for the fiscal year ended March 30, 2003, the six-month
transitional period ended March 31, 2002, and the fiscal years ended September
30, 2001 and October 1, 2000 were $193,187, $98,034, $172,552, and $136,416,
respectively. Future minimum lease payments
due under operating leases with an initial term of one year or more at
March 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.
Termination
Agreements - During fiscal 1999, the Company entered into
termination agreements with three former employees and recorded special charges
in the statement of income of $1,112,127.
At March 30, 2003, the Company is required to make future payments to
one individual for a period of 1.5 years.
The present value of the future payments to be paid in fiscal 2004 is
included in other accruals and the present value of the remaining payments is
included in other long-term liabilities.
Litigation
- The Company is involved in various legal actions arising from the normal
course of business. Management is of
the opinion that any judgment or settlement resulting from pending or
threatened litigation would not have a material adverse effect on the financial
position, results of operations or cash flows of the Company.
8. INCOME
TAXES
The provisions (benefits) for income taxes are as
follows:
Reconciliations of the provisions for income taxes,
based on income from continuing operations, to the applicable federal statutory
income tax rate of 35% are as follows:
The tax effects of items comprising the Company’s net
deferred tax asset (liability) as of March 30, 2003 and March 31, 2002 are as
follows:
*Included in prepaid expenses and other current assets
on the balance sheet.
9. ST.
MARY’S CHEMICALS, INC. ACQUISITION
On May 26, 2000, the Company completed the
acquisition of certain assets of St. Mary’s Chemicals, Inc. d.b.a. Universal
Chemicals. Universal Chemicals, a
Minnesota-based company, was engaged in the business of marketing, selling, and
distributing pharmaceutical chemicals to pharmacies and pharmacy
wholesalers. In connection with the
acquisition, assets purchased, common stock issued, and cash consideration paid
were as follows:
The acquisition was accounted for using the purchase
method of accounting. The operations of
Universal Chemicals are included in the Company’s statement of income beginning
on May 26, 2000. The pro forma
effect of this acquisition on prior periods’ sales, operating income, and
earnings per share were not significant.
On May 26, 2000, the Company also entered into a
five-year employment agreement with one of the previous owners of Universal
Chemicals and consulting agreements with the other two previous owners of
Universal Chemicals. The employment
agreement and consulting agreements contain performance bonuses and non-compete
provisions. The agreements are based on
Universal Chemicals’ operating results, as defined, for five years after the
acquisition date and have a maximum payout of $3,520,000. The non-compete provisions cover a period of
five years after the termination of the employment or consulting agreements,
and require annual payments of $100,000 to $200,000 depending on Universal
Chemicals’ operating results, as defined, for five years after the termination
date.
10. SEGMENT
INFORMATION
The Company has two reportable segments: Industrial
and Water Treatment. The Industrial
segment specializes in providing industrial chemicals and services to the
energy, electronics, and plating industries.
In addition, the Industrial segment provides products and services to
the food manufacturers and processing plants and the pharmaceutical
industry. The Water Treatment segment
specializes in providing water and waste-water treatment equipment and
chemicals and in helping customers find solutions to system problems.
The accounting policies of the segments are the same
as those described in the summary of significant accounting policies. Product costs and expenses for each segment
are based on actual costs incurred along with cost allocation of shared and
centralized functions. The Company
evaluates performance based on profit or loss from operations before income
taxes not including nonrecurring gains and losses. Reportable segments are defined by product and type of customer. Segments are responsible for the sales,
marketing and development of their products and services. The segments do not have separate
accounting, administration, customer service or purchasing functions.
11. TRANSITIONAL
PERIOD DISCLOSURE (UNAUDITED)
The following information for the twelve-month period
ended March 31, 2002 and the six-month period ended March 31, 2001 is included
for comparison purposes.
ITEM 9.
ITEM 9. CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
Not Applicable.
PART III
ITEM 10.
ITEM 10. DIRECTORS
AND EXECUTIVE OFFICERS OF THE COMPANY.
The information under the captions “Election of
Directors” and “Section 16 (a) Beneficial Ownership Reporting Compliance” in
the Proxy Statement for the fiscal year ended March 30, 2003 is incorporated
herein by this reference.
ITEM 11.
ITEM 11. EXECUTIVE
COMPENSATION.
The information under the caption “Compensation of
Executive Officers and Directors” in the Proxy Statement for the fiscal year
ended March 30, 2003 is incorporated herein by this reference.
ITEM 12.
ITEM 12. SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS.
The information under the caption “Security Ownership
of Management and Beneficial Ownership” in the Proxy Statement for the fiscal
year ended March 30, 2003 is incorporated herein by this reference. The Company does not have any equity
compensation plans as defined in Statement of Financial Accounting Standards
No. 123, “Accounting for Stock-Based Compensation.”
ITEM 13.
ITEM 13. CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS.
The information under the captions “Election of
Directors” and “Related Party Transactions” in the Proxy Statement for the
fiscal year ended March 30, 2003 is incorporated herein by this reference.
ITEM 14.
ITEM 14. CONTROLS
AND PROCEDURES.
Under
the supervision and with the participation of our management, including our
principal executive officer and principal financial officer, we conducted an
evaluation of the effectiveness of the design and operation of our disclosure
controls and procedures (as defined in Rules 13a-14(c) and 15d-14(c) under the
Securities Exchange Act of 1934) within 90 days of the filing date of this
Annual Report on Form 10-K (the Evaluation Date). Based on this evaluation, our principal executive officer and
principal financial officer concluded as of the Evaluation Date that our
disclosure controls and procedures were effective such that the material
information required to be included in our SEC reports is recorded, processed,
summarized and reported within the time periods specified in SEC rules and
forms related to us.
There
were no significant changes in our internal controls or in other factors that
could significantly affect these controls subsequent to the Evaluation
Date. We have not identified any
significant deficiencies or material weaknesses in our internal controls, and
therefore there were no corrective actions taken.
ITEM 15.
ITEM 15. PRINCIPAL
ACCOUNTANT FEES AND SERVICES.
Not applicable.
PART IV
ITEM 16. EXHIBITS,
FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a)(1) FINANCIAL
STATEMENTS 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 March
31, 2002.
Statements of Income for the Fiscal
Year 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 of
Shareholders’ Equity for the Fiscal Year 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 of Cash Flows for the
Fiscal Year 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.
Notes to Financial
Statements.
(a)(2) FINANCIAL
STATEMENT SCHEDULES OF THE COMPANY.
The additional financial data listed below is included
as a schedule to this Annual Report on Form 10-K and should be read in
conjunction with the financial statements presented in Part II, Item 8. Schedules not included with this additional
financial data have been omitted because they are not required or the required
information is included in the financial statements or the notes.
Independent Auditors’ Report on Schedule.
The following financial statement schedule for the
fiscal year 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.
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
(1) Incorporated by
reference to Exhibit 3.1 to the Company’s Annual Report on Form 10-K for the
year ended September 30, 2001.
(2) Incorporated by
reference to Exhibit 3.2 to the Company’s Annual Report on Form 10-K for the
year ended October 1, 1995.
(3) Incorporated by
reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for
the quarter ended June 30, 2000.
(b) REPORTS
ON FORM 8-K.
On June 19, 2003, we furnished a Current Report on
Form 8-K to the SEC, including the Company’s press release announcing financial
results for the fiscal year ended March 30, 2003.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of
the Securities Exchange Act of 1934, the Company has duly caused this report to
be signed on its behalf by the undersigned on June 27, 2003.
Pursuant to the requirements of the Securities
Exchange Act of 1934,this report has also been signed below by the following
persons on behalf of the Company and in the capacities indicated on June 27,
2003.
CERTIFICATION
PURSUANT TO
SECTION 302 OF
THE SARBANES-OXLEY ACT OF 2002
CERTIFICATION
I, John R. Hawkins, Chief Executive Officer of Hawkins, Inc., certify
that:
1. I
have reviewed this annual report on Form 10-K of Hawkins, Inc.;
2. Based
on my knowledge, this annual report does not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this annual report;
3. Based
on my knowledge, the financial statements, and other financial information
included in this annual report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this annual report;
4. The
registrant’s other certifying officers and I are responsible for establishing
and maintaining disclosure controls and procedures (as defined in Exchange Act
Rules 13a-14 and 15d-14) for the registrant and we have:
a. Designed such
disclosure controls and procedures to ensure that material information relating
to the registrant, including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the period in which this
annual report is being prepared;
b. Evaluated the
effectiveness of the registrant’s disclosure controls and procedures as of a
date within 90 days prior to the filing date of this annual report (the
Evaluation Date); and
c. Presented in this
annual report our conclusions about the effectiveness of the disclosure
controls and procedures based on our evaluation as of the Evaluation Date;
5. The
registrant’s other certifying officers and I have disclosed, based on our most
recent evaluation, to the registrant’s auditors and the audit committee of the
registrant’s board of directors (or persons performing the equivalent
functions):
a. All significant
deficiencies in the design or operation of internal controls which could
adversely affect the registrant’s ability to record, process, summarize and
report financial data and have identified for the registrant’s auditors any
material weaknesses in internal controls; and
b. Any fraud, whether
or not material, that involves management or other employees who have a
significant role in the registrant’s internal controls; and
6. The
registrant’s other certifying officer and I have indicated in this annual
report whether or not there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
CERTIFICATION
PURSUANT TO
SECTION 302 OF
THE SARBANES-OXLEY ACT OF 2002
CERTIFICATION
I, Marvin E. Dee, Chief Financial Officer of Hawkins, Inc., certify
that:
1. I have reviewed
this annual report on Form 10-K of Hawkins, Inc.;
2. Based on my
knowledge, this annual report does not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this annual report;
3. Based on my
knowledge, the financial statements, and other financial information included
in this annual report, fairly present in all material respects the financial
condition, results of operations and cash flows of the registrant as of, and
for, the periods presented in this annual report;
4. The registrant’s
other certifying officers and I are responsible for establishing and maintaining
disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and
15d-14) for the registrant and we have:
a. Designed such
disclosure controls and procedures to ensure that material information relating
to the registrant, including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the period in which this
annual report is being prepared;
b. Evaluated the
effectiveness of the registrant’s disclosure controls and procedures as of a
date within 90 days prior to the filing date of this annual report (the
Evaluation Date); and
c. Presented in this
annual report our conclusions about the effectiveness of the disclosure
controls and procedures based on our evaluation as of the Evaluation Date;
5. The registrant’s
other certifying officers and I have disclosed, based on our most recent
evaluation, to the registrant’s auditors and the audit committee of the
registrant’s board of directors (or persons performing the equivalent
functions):
a. All significant
deficiencies in the design or operation of internal controls which could
adversely affect the registrant’s ability to record, process, summarize and
report financial data and have identified for the registrant’s auditors any
material weaknesses in internal controls; and
b. Any fraud, whether
or not material, that involves management or other employees who have a
significant role in the registrant’s internal controls; and
6. The
registrant’s other certifying officer and I have indicated in this annual
report whether or not there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
INDEPENDENT
AUDITORS’ 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 fiscal
years ended September 30, 2001 and October 1, 2000 and have issued our
report thereon dated June 13, 2003; such report is included elsewhere in this
Form 10-K. Our audits also included the
financial statement schedule of the Company, listed in Item 16(a)(2). This financial statement schedule is the
responsibility of the Company’s management.
Our responsibility is to express an opinion based on our audits. In our opinion, this financial statement
schedule, when considered in relation to the basic financial statements taken
as a whole, presents fairly in all material respects the information set forth
therein.
HAWKINS,
INC.
VALUATION
AND QUALIFYING ACCOUNTS
FOR THE FISCAL YEAR ENDED MARCH 30, 2003, THE SIX-MONTH TRANSITIONAL PERIOD
ENDED
MARCH 31, 2002 AND THE FISCAL YEARS ENDED SEPTEMBER 30, 2001 AND OCTOBER
1, 2000
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
(1) Incorporated by
reference to Exhibit 3.1 to the Company’s Annual Report on Form 10-K for the
year ended September 30, 2001.
(2) Incorporated by
reference to Exhibit 3.2 to the Company’s Annual Report on Form 10-K for the
year ended October 1, 1995.
(3) Incorporated by
reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for
the quarter ended June 30, 2000.