MANAGEMENT'S DISCUSSION AND ANALYSIS

- -------------------------------------------------------------------------------

THE INFORMATION CONTAINED IN THIS ANNUAL REPORT INCLUDES
FORWARD-LOOKING STATEMENTS AS DEFINED IN SECTION 21E OF THE SECURITIES
EXCHANGE ACT OF 1934, AS AMENDED. THESE FORWARD-LOOKING STATEMENTS INVOLVE A
NUMBER OF RISKS AND UNCERTAINTIES, INCLUDING DEMAND FROM MAJOR CUSTOMERS,
COMPETITION, CHANGES IN PRODUCT OR CUSTOMER MIX OR REVENUES, CHANGES IN
PRODUCT COSTS AND OPERATING EXPENSES, AND OTHER FACTORS DISCLOSED THROUGHOUT
THIS ANNUAL REPORT AND THE COMPANY'S OTHER FILINGS WITH THE SECURITIES AND
EXCHANGE COMMISSION. THE ACTUAL RESULTS THAT THE COMPANY ACHIEVES MAY DIFFER
MATERIALLY FROM ANY FORWARD-LOOKING STATEMENTS DUE TO SUCH RISKS AND
UNCERTAINTIES. THE COMPANY UNDERTAKES NO OBLIGATION TO REVISE ANY
FORWARD-LOOKING STATEMENT IN ORDER TO REFLECT EVENTS OR CIRCUMSTANCES THAT
MAY ARISE AFTER THE DATE OF THIS REPORT. READERS ARE URGED TO CAREFULLY
REVIEW AND CONSIDER THE VARIOUS DISCLOSURES MADE BY THE COMPANY IN THIS
REPORT AND IN THE COMPANY'S OTHER REPORTS FILED WITH THE SECURITIES AND
EXCHANGE COMMISSION THAT ATTEMPT TO ADVISE INTERESTED PARTIES OF THE RISKS
AND UNCERTAINTIES THAT MAY AFFECT THE COMPANY'S FINANCIAL CONDITION, RESULTS
OF OPERATIONS OR CASH FLOWS.

OVERALL SUMMARY

Net sales in fiscal 1997 increased 8.5% to $87,745,980 from
$80,886,062 in fiscal 1996. Net income in fiscal 1997 increased 20.3% to
$7,790,487 from $6,476,410 in fiscal 1996. Net earnings per share in fiscal
1997 were $.67 compared to $.56 in fiscal 1996. Return on average
shareholders' equity was 16.9% for 1997, compared to 16.0% for 1996. Book
value per share at September 28, 1997 was $4.22 compared to $3.71 one year
ago. Book value per share for fiscal 1996 has been restated to reflect the
1997 stock dividend.

RESULTS OF OPERATIONS

The general economic environment in our markets has improved slightly
with the overall improvement in the economy. While this improvement had a
favorable impact on earnings, management will continue to focus efforts on
programs aimed at improving profitability and controlling costs.

NET SALES

For the year ended September 28, 1997, sales increased $6,859,918, an
8.5% increase from 1996, due to volume increases of caustic soda, increasing
business in food grade products and pharmaceutical chemicals and overall
volume increases in all divisions and subsidiaries. For the year ended
September 29, 1996, sales decreased $2,446,562, a 2.9% decrease from 1995,
due mainly to management's decision to discontinue sales to mass
merchandisers by The Lynde Company subsidiary, as that business involved high
volumes and high inventory levels with a low and decreasing profit margin.
Also contributing to the sales decrease in 1996 was a slight decrease in the
selling price of a single, large-volume product and extremely cold weather
conditions during the second quarter of the fiscal year, which caused some
customers to have limited operations or to close down temporarily, thereby
decreasing their volumes. The above decreases were partially offset by
volume increases in 1996 in most of the Company's divisions and subsidiaries.

GROSS MARGINS

Gross margin, as a percentage of sales, was 24.3% in 1997, 22.4% in
1996 and 21.3% in 1995. The 1997 increase was due mainly to better profit
margins on a portion of the sales volume increase and the Company's ability
to retain relatively constant dollar profit margins of a major product line
while the cost of the materials

8 HAWKINS CHEMICAL, INC. AND SUBSIDIARIES

MANAGEMENT'S DISCUSSION AND ANALYSIS

decreased. By maintaining relatively stable dollar margins, the gross margin
percentage will increase when the cost of the product is decreasing. The
1996 margin increase was due mainly to discontinuing the lower margin sales
to mass merchandisers previously mentioned and, to a lesser extent, better
profit margins on a few product lines. The Company has also generally been
able to, and expects to continue to, adjust its selling prices as the cost of
materials and other expenses change, thereby maintaining relatively stable
gross margins.

The Company's caustic soda operations are located on the Mississippi
River, enabling the Company to receive caustic soda through barge
transportation. When the river has flooded, the Company has been able to
receive caustic soda by tank cars. Although the use of tank cars has
resulted in additional costs, results of operations have not been materially
impacted. Based on this experience, the Company does not expect any future
flooding to have a material impact on the Company's financial condition,
results of operations, or cash flows.

SELLING, GENERAL AND ADMINISTRATIVE

Selling, general and administrative expenses increased 7.3% and 3.2%
in 1997 and 1996, respectively, over the previous year. The 1997 increase
was due to increasing the sales staff, which resulted in higher employee
salaries and benefits costs and to general inflation in all other areas. The
1996 increase over the previous year was due mainly to increased costs of
operation, which approximated the inflation rate.

LITIGATION AND SETTLEMENT COSTS RELATED TO 1995 FIRE

The charge of $1,771,439 in 1997 and $750,000 in 1995 was recorded to
cover settlement costs in connection with the Company's defense of a lawsuit
filed against it. The lawsuit alleged that the plaintiffs sustained damages
resulting from a fire at an office/warehouse facility used by The Lynde
Company, a former wholly owned subsidiary of the Company. Through September
28, 1997, the Company had paid $1.5 million in settlement and legal costs
relating to the fire and based upon a settlement agreement, expects to pay
approximately $1 million of known legal and settlement costs in the future in
connection with this suit. The Company will incur additional future
obligations relating to the settlement of this lawsuit pursuant to a matrix
and plan of distribution which is a part of the settlement. The Company is
not able to estimate the magnitude of this potential exposure at this time.
Management of the Company believes the final disposition of this matter will
not have a material adverse effect on the Company's financial position,
results of operations or cash flows. Management believes that all or a
portion of the costs associated with this suit may be recoverable from the
Company's insurers.

The Company's primary and umbrella insurers have denied coverage of
any liability which might arise in connection with this lawsuit and rejected
the tender of the defense of the lawsuit. The Company has commenced lawsuits
against its insurers, seeking a finding that the Company's liability exposure
and defense costs are covered by the applicable policies. The Company
prevailed on its claims in Federal District Court. The insurers have
appealed the District Court's decision to the Eighth Circuit Court of
Appeals. Therefore, it is not possible to determine what recovery, if any,
may be obtained by the Company at this time, and no amount has been recorded
at September 28, 1997. A decision on the appeal is expected in late 1998.

OTHER INCOME

Interest income was up 16% in 1997 as compared to 1996 due to more
cash available for investment and to additional interest earned on the notes
receivable relating

9 HAWKINS CHEMICAL, INC. AND SUBSIDIARIES

MANAGEMENT'S DISCUSSION AND ANALYSIS

to the sale of The Lynde Company (Note 3). Interest income was up 7% in 1996
as compared to 1995 due to more cash available for investment. Interest
expense decreased in 1997 and 1996 as compared to the previous year. Most of
the interest expense is the result of the Company issuing a note payable to
the seller in connection with the acquisition of the assets of Industrial
Chemical & Equipment Company. The gain on the sale of The Lynde Company
relates to the Company's sale of the subsidiary on May 29, 1997. Other
miscellaneous income (deductions) increased in 1997 and 1996 as compared to
the previous years due to the gain on the sale of land in 1997 and to the
gain on the sale of a building in 1996.

PROVISION FOR INCOME TAXES

The effective income tax rate was 38.8% for 1997, 38.0% for the year
ended September 29, 1996 and 39.7% for the year ended October 1, 1995. The
differences are due mainly to variations in tax-free income on investments in
municipal bonds.

INFLATION

Inflation has not had a significant impact on the Company, as selling
prices have generally been adjusted as the cost of materials and other
expenses have changed. On occasion, however, slight fluctuations in the cost
of a single, large-volume product have not been reflected in the selling
price of that product.

DISCONTINUED OPERATIONS

Effective March 1, 1995, the Company sold the inventory, equipment and
operations of Tessman Seed. As a result of the sale transaction, the Company
recorded a loss on the disposal in the second quarter of 1995 of $321,266,
net of a tax benefit totaling $214,200, to write down Tessman's assets to the
amount realized. Revenues for Tessman were $931,105 for fiscal year 1995.

FINANCIAL CONDITION

LIQUIDITY

Cash provided by operations in fiscal 1997 was $5,675,264 compared
with $7,241,783 in fiscal 1996 and $8,812,004 in fiscal 1995. The decrease
in fiscal 1997 over 1996 was due primarily to an increase in trade
receivables caused by the sales increase, an increase in inventories to meet
expected future sale increases, and to a decrease in accounts payable caused
by the timing of year-end purchases. The decrease in cash provided by
operations in fiscal 1996, as compared to 1995, was due primarily to
decreases in accounts payable related to differences in timing of cash
payments related to year-end purchases, which was partially offset by an
increase in cash collections related to trade receivables.

Cash and investments available-for-sale increased by $608,371 to
$20,045,099 at the end of fiscal 1997. The Company is investing excess cash
primarily in conservative investments. Cash equivalents consist of bank
certificates of deposit. Investments consist of investment contracts with
high-rated, stable insurance companies and marketable securities consisting
of municipal bonds carried at fair value which approximates cost. Cash
equivalents and investments are highly liquid and are available upon demand
with a minor penalty.

On May 29, 1997, the Company sold the inventory and operations of The
Lynde Company, a wholly owned subsidiary which specialized in swimming pool
chemicals, for $2,590,000, effective March 1, 1997. The Company recorded a
gain on the sale of approximately $1.3 million. At closing, Hawkins received
$500,000 cash and a note receivable for the balance. The note receivable is
due over the next six years plus interest at 8%.

10 HAWKINS CHEMICAL, INC. AND SUBSIDIARIES

MANAGEMENT'S DISCUSSION AND ANALYSIS

On March 1, 1995, the inventory, equipment and operations of the
Company's Tessman Seed subsidiary was sold for $1,144,714. At closing
Hawkins received $100,000 and a note receivable for the balance. The note
receivable is due over the next nine years plus interest at 8%.

CAPITAL RESOURCES

Capital expenditures in fiscal years 1997, 1996 and 1995 were
$4,017,543, $4,299,071 and $3,650,719, respectively. The new food chemical
production facility accounted for approximately $1.2 million of the 1997
capital expenditures. Other warehouse, laboratory and office machinery and
equipment accounted for $1.2 million, other building improvements and
additions amounted to $1.1 million and additions to transportation equipment
accounted for $.5 million of the 1997 fiscal year capital expenditures.

OUTLOOK

Management does not anticipate the need for stock or debt issuances in
the short or long-term, as cash, investments and cash flows from operations
have been more than adequate to fund working capital, capital investments and
dividend needs. If the need for additional financing arises, however,
management will consider issuance of debt or equity if such financing can be
obtained on favorable terms. Although management continually looks for
companies to acquire and for ways to modernize its warehouse facilities and
equipment, no material commitments for acquisitions or capital expenditures
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 fiscal
1997 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 fiscal 1997 but are expected to have a material effect on
future periods.

ACCOUNTING PRONOUNCEMENTS

In October 1996, the American Institute of Certified Public
Accountants issued Statement of Position 96-1, "Environmental Remediation
Liabilities." The statement is effective for fiscal years beginning after
December 15, 1996. Management does not believe this statement will have a
significant impact on the financial statements.

In February 1997, the Financial Accounting Standards Board issued SFAS
No. 128, "Earnings per Share." This statement specifies the computation,
presentation, and disclosure requirements for earnings per share. This
statement is effective for financial statements issued for periods ending
after December 15, 1997, including interim periods. The Company does not
believe the adoption of SFAS No. 128 will have a material impact on earnings
per share.

11 HAWKINS CHEMICAL, INC. AND SUBSIDARIES

CONSOLIDATED BALANCE SHEETS

SEPTEMBER 28, September 29,
1997 1996
- -----------------------------------------------------------------------------------------------------------------------------
ASSETS

CURRENT ASSETS:
Cash and cash equivalents ................................................................... $ 8,065,021 $ 8,932,125
Investments available-for-sale .............................................................. 11,980,078 10,504,603
Trade receivables - less allowance for doubtful
accounts: 1997, $361,830; 1996, $344,002 ................................................ 11,117,991 9,740,285
Notes receivable ............................................................................ 222,946 170,988
Inventories ................................................................................. 8,580,705 8,584,034
Prepaid expenses and other .................................................................. 1,912,325 924,457
--------------------------
Total current assets ..................................................................... 41,879,066 38,856,492
PROPERTY, PLANT AND EQUIPMENT:
Land ........................................................................................ 655,194 673,733
Buildings and improvements .................................................................. 14,716,226 13,242,152
Machinery and equipment .................................................................. 6,173,501 4,392,562
Transportation equipment .................................................................... 5,051,518 4,803,768
Office furniture and equipment .............................................................. 1,668,849 1,471,737
--------------------------
28,265,288 24,583,952
Less accumulated depreciation ............................................................... 12,777,743 11,396,274
--------------------------
Net property, plant and equipment ........................................................ 15,487,545 13,187,678
OTHER ASSETS:
Intangible assets - less accumulated
amortization: 1997, $329,917; 1996, $307,602 ............................................. 727,297 817,559
Investments held-to-maturity ................................................................ 1,750,658 1,670,132
Notes receivable - noncurrent ............................................................... 3,639,712 1,797,707
Other ....................................................................................... 168,338 157,788
--------------------------
Total other assets ....................................................................... 6,286,005 4,443,186
--------------------------
TOTAL ASSETS .................................................................................. $63,652,616 $56,487,356
--------------------------
--------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable - trade .................................................................... $ 5,729,584 $ 6,709,434
Current portion of long-term debt ........................................................... 59,928 56,008
Dividends payable ........................................................................... 1,044,351 884,135
Accrued payroll and employee benefits ....................................................... 2,452,746 2,617,670
Container deposits .......................................................................... 1,539,585 1,684,362
Other accruals .............................................................................. 2,389,123 521,362
--------------------------
Total current liabilities ................................................................ 13,215,317 12,472,971
LONG-TERM DEBT ................................................................................ 512,525 572,453
DEFERRED INCOME TAXES ......................................................................... 983,000 426,800
COMMITMENTS AND CONTINGENCIES (NOTES 4, 6 AND 8) ..............................................
SHAREHOLDERS' EQUITY:
Common stock - authorized: 15,000,000 shares of $.05 par value;
issued: 1997 - 11,603,895 shares; 1996 - 11,051,690 shares ............................... 580,195 552,585
Additional paid-in capital .................................................................. 42,517,455 38,679,630
Retained earnings ........................................................................... 5,844,124 3,782,917
--------------------------
Total shareholders' equity ............................................................... 48,941,774 43,015,132
--------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY..................................................... $63,652,616 $56,487,356
--------------------------
--------------------------

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

12 HAWKINS CHEMICAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME & RETAINED EARNINGS

For the Fiscal Years Ended
-------------------------------------------
SEPTEMBER 28, September 29, October 1,
1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------------------------

Net sales............................................................................ $87,745,980 $80,886,062 $83,332,624
Cost of sales........................................................................ 66,413,954 62,789,554 65,555,938
-----------------------------------------
Gross profit......................................................................... 21,332,026 18,096,508 17,776,686
Selling, general and administrative expenses......................................... 9,499,558 8,853,319 8,580,805
Litigation and settlement costs relating to 1995 fire................................ 1,771,439 750,000
-----------------------------------------
Income from operations............................................................... 10,061,029 9,243,189 8,445,881
Other income (deductions):
Interest income.................................................................... 1,153,322 995,012 930,580
Interest expense................................................................... (47,439) (53,170) (55,341)
Gain on sale of The Lynde Company.................................................. 1,324,827
Miscellaneous...................................................................... 234,518 262,020 167,243
-----------------------------------------
Total other income, net......................................................... 2,665,228 1,203,862 1,042,482
-----------------------------------------
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES................................ 12,726,257 10,447,051 9,488,363
Provision for income taxes from continuing operations................................ 4,935,770 3,970,641 3,764,400
-----------------------------------------
INCOME FROM CONTINUING OPERATIONS.................................................... 7,790,487 6,476,410 5,723,963
Loss from operations of Tessman Seed, Inc.(less
applicable income tax benefit of $46,500)....................................... (69,905)
Loss on disposal of assets of Tessman Seed, Inc. (less
applicable income tax benefit of $214,200)....................................... (321,266)
-----------------------------------------
Loss from discontinued operations.................................................... (391,171)
-----------------------------------------
NET INCOME........................................................................... 7,790,487 6,476,410 5,332,792
-----------------------------------------
Retained earnings, beginning of year................................................. 3,782,917 3,356,710 7,424,930
Stock dividend....................................................................... (3,865,435) (4,470,303) (7,413,464)
Cash dividend (1997 - $.18 per share;
1996 - $.15 per share; 1995 - $.19 per share)..................................... (2,041,623) (1,729,200) (2,174,448)
Income tax savings from dividends paid on ESOP shares................................ 177,778 149,300 186,900
-----------------------------------------
RETAINED EARNINGS, END OF YEAR....................................................... $ 5,844,124 $ 3,782,917 $ 3,356,710
-----------------------------------------
Weighted average number of shares outstanding........................................ 11,603,895 11,603,895 11,603,895
-----------------------------------------
EARNINGS PER SHARE:
Continuing operations.............................................................. $.67 $.56 $.49
Discontinued operations............................................................ (.03)
-----------------------------------------
Net................................................................................ $.67 $.56 $.46
-----------------------------------------

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

13 HAWKINS CHEMICAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

CASH FLOWS FROM OPERATING ACTIVITIES:
Net income........................................................................ $7,790,487 $6,476,410 $5,332,792
Loss on disposal of assets of Tessman Seed, Inc................................... 321,266
Loss on discontinued operations of Tessman Seed, Inc.............................. 69,905
Gain on sale of The Lynde Company................................................. (1,324,827)
Litigation and settlement costs relating to 1995 fire............................. 1,175,286 415,000
Reconciliation to cash flows:
Depreciation and amortization .................................................. 1,686,622 1,477,228 1,368,778
Deferred income taxes........................................................... (307,800) 230,511 (28,800)
Earnings on other assets........................................................ (91,076) (81,093) (82,036)
Gain from property disposals.................................................... (110,807) (160,212) (4,821)
Changes in operating accounts providing (requiring) cash:
Trade receivables............................................................. (1,377,706) 771,975 (1,002,452)
Inventories................................................................... (1,221,750) 79,925 (819,368)
Accounts payable.............................................................. (979,850) (1,981,770) 2,944,584
Accrued liabilities........................................................... 383,058 (262,185) 280,617
Other......................................................................... 53,627 690,994 (49,627)
Change in net assets of discontinued operations............................... 66,166
-------------------------------------------
Net cash provided by operating activities......................................... 5,675,264 7,241,783 8,812,004
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment........................................ (4,017,543) (4,299,071) (3,650,719)
Purchase of investments........................................................... (1,475,475) (3,183,787) (2,282,044)
Sale of investments............................................................... 647,945 890,026
Proceeds from property disposals.................................................. 191,946 198,069 494,670
Cash received on sale of assets and business of Tessman Seed, Inc................. 220,726
Cash received on sale of assets and business of The Lynde Company................. 500,000
Payments received on notes receivable............................................. 196,120 55,293
-------------------------------------------
Net cash used in investing activities............................................. (4,604,952) (6,581,551) (4,327,341)
CASH FLOWS FROM FINANCING ACTIVITIES:
Debt repayment.................................................................... (56,008) (52,344) (48,919)
Cash dividends paid............................................................... (1,881,408) (1,581,870) (1,437,644)
-------------------------------------------
Net cash used in financing activities............................................. (1,937,416) (1,634,214) (1,486,563)
-------------------------------------------
Net (decrease) increase in cash and cash equivalents................................. (867,104) (973,982) 2,998,100
Cash and cash equivalents at beginning of year....................................... 8,932,125 9,906,107 6,908,007
-------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF YEAR............................................. $8,065,021 $8,932,125 $9,906,107
-------------------------------------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Note receivable on sale of Tessman Seed, Inc....................................... $1,044,714
-------------------------------------------
Note receivable on sale of land and building....................................... $1,100,000
-------------------------------------------
Note receivable on sale of The Lynde Company....................................... $2,090,083
-------------------------------------------
Cash paid during the year for:
Interest......................................................................... $ 51,359 $ 56,834 $ 58,389
-------------------------------------------
Income taxes..................................................................... $4,334,567 $3,942,596 $2,717,611
-------------------------------------------

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

14 HAWKINS CHEMICAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. NATURE OF BUSINESS AND
SIGNIFICANT ACCOUNTING POLICIES

NATURE OF BUSINESS
Hawkins Chemical, Inc. and its subsidiaries are engaged in the wholesale trade
of chemicals and chemical feeding and control equipment and the formulating and
blending of specialty chemicals.

BASIS OF CONSOLIDATION
The financial statements include the consolidated accounts of Hawkins Chemical,
Inc. and its wholly owned subsidiaries (the Company). All significant
inter-company transactions and balances have been eliminated. The Company's
fiscal year is a 52/53-week year ending on the Sunday closest to September 30.

CASH EQUIVALENTS
Cash equivalents include all liquid debt instruments (primarily cash funds and
certificates of deposits) purchased with an original maturity of three months or
less. Cash equivalents are carried at cost, which approximates market value.

INVESTMENTS AVAILABLE-FOR-SALE
Investments classified as available-for-sale securities consist of insurance
contracts and marketable securities (primarily municipal bonds and annuity
contracts) that will be held for indefinite periods of time, including
securities that may be sold in response to changes in market interest or
prepayment rates, needs for liquidity or changes in the availability or yield of
alternative investments. These securities are carried at market value which
approximates cost.

INVENTORIES
Inventories, consisting primarily of finished goods, are valued at the lower of
cost or net realizable value, with cost being determined using the last-in,
first-out (LIFO) method for Hawkins Chemical, Inc. and most subsidiaries. The
majority of the inventories for two subsidiaries are valued using the first-in,
first-out (FIFO) cost method (see Note 2).

PROPERTY, PLANT AND EQUIPMENT
Property is stated at cost and depreciated over the lives of the assets using
both straight-line and declining-balance methods. Estimated lives are: 10 to 50
years for buildings and improvements; 3 to 15 years for machinery and equipment;
3 to 10 years for transportation equipment; and 3 to 10 years for office
furniture and equipment.

INTANGIBLES
The excess of cost of investments in subsidiaries over equity in net assets of
$177,198 is being amortized over forty years. Additionally, goodwill associated
with the purchase of Industrial Chemical & Equipment in the amount of $880,016
is being amortized over 15 years.

INVESTMENTS HELD-TO-MATURITY
From October 1, 1985 through September 30, 1989, the Company was self-insured
for the risk of losses from product liability. The Company deposited amounts in
a self-insurance trust account to fund any losses (none have been incurred since
1985). Since October 1989, the Company has had insurance coverage for product
liability for up to $1,000,000 in claims made annually. In March 1997, the trust
was dissolved and the assets were retained. These 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.

INCOME TAXES
The Company utilizes Statement of Financial Accounting Standard (SFAS) No. 109,
"Accounting for Income Taxes." Under SFAS No. 109, the deferred tax assets and
liabilities are recognized based on differences between the financial statements
and the tax bases of assets and liabilities using presently enacted tax rates.

REVENUE RECOGNITION
The Company recognizes revenues upon shipment of the product.

EARNINGS PER SHARE
The earnings per share computation is based on the weighted average number of
common shares outstanding during the year. The average number of common shares,
earnings per share and cash dividends per share for the years ended September
29, 1996 and October 1, 1995 have been restated to reflect the 1997 stock
dividend (see Note 5).

CONCENTRATION OF CREDIT RISK
Financial instruments which potentially subject the Company to a concentration
of credit risk principally consist of cash, investments available-for-sale and
trade receivables. The Company sells its principal products to a large number of
customers in many different industries. To reduce credit risk, the Company
routinely assesses the financial strength of its customers. The Company invests
its excess cash balances in certificates of deposit at a single financial
institution. At September 28, 1997, the Company had certificates of deposits in
excess of federally insured limits of approximately $4,876,000.

ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reported period. Actual
results could differ from those estimates.

15 HAWKINS CHEMICAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

RISK AND UNCERTAINTIES
There are no concentrations of business transacted with a particular customer or
supplier nor concentrations of revenue from a particular service or geographic
area that would severely impact the Company in the near term.

ACCOUNTING PRONOUNCEMENTS
In October 1996, the American Institute of Certified Public Accountants issued
Statement of Position 96-1, "Environmental Remediation Liabilities." The
statement is effective for fiscal years beginning after December 15, 1996.
Management does not believe this statement will have a significant impact on the
financial statements.

In February 1997, the Financial Accounting Standards Board issued SFAS No. 128,
"Earnings per Share." This statement specifies the computation, presentation,
and disclosure requirements for earnings per share. This Statement is effective
for financial statements issued for periods ending after December 15, 1997,
including interim periods. The Company does not believe the adoption of SFAS No.
128 will have a material impact on earnings per share.

2. INVENTORIES

Inventories consist of the following:

SEPTEMBER 28, September 29,
1997 1996
- --------------------------------------------------------------------
Finished goods (FIFO basis) ...... $ 9,025,817 $ 9,957,665
LIFO reserve ..................... (445,112) (1,373,631)
--------------------------------
Net inventory .................... $ 8,580,705 $ 8,584,034
--------------------------------
--------------------------------

Inventories valued under the LIFO method for the fiscal years ended September
28, 1997 and September 29, 1996, were approximately $7,796,000 and $7,652,000,
respectively. The balance of the inventory was valued under the FIFO method.

In fiscal 1997, the LIFO reserve decreased by $928,519. As a result, the ending
LIFO cost was less than the ending cost determined using the first-in, first-out
(FIFO) method by $445,112. The decrease in the LIFO reserve was caused by a
significant decrease in the cost of a single, large-volume component of
inventory.

3. NOTES RECEIVABLE

At September 28, 1997 and September 29, 1996, the net balance outstanding on the
note receivable from the sale of Tessman Seed was $733,432 and $883,988,
respectively. On March 1, 1996, the balance of the note receivable was
refinanced at the request of the borrower. The note receivable is due in nine
equal installments of $146,466 with interest at 8%.

During 1996, the Company sold the building that was formerly rented to the
Company's discontinued subsidiary (see Note 10). The Company realized a gain of
approximately $142,000 on the sale. The Company received a $1,100,000 note
receivable and cash of $108,188 at the time of the sale. The note receivable is
secured by the building and is due in monthly installments of $9,201 including
interest at 8% through January 1, 2004, when the remaining balance of $849,985
is due. At September 28, 1997 and September 29, 1996, the balance outstanding
was $1,060,186 and $1,084,706, respectively.

On May 29 1997, the Company sold the inventory and operations of The Lynde
Company (Lynde), a wholly owned subsidiary which specialized in swimming pool
chemicals, for approximately $2,590,000, effective March 1, 1997. The Company
recorded a gain on the sale of approximately $1,300,000. At closing, Hawkins
received $500,000 cash and a note receivable for the balance. The note
receivable is due over the next 6 years plus interest at 8%. At September 28,
1997, the balance outstanding on the note receivable was $2,069,040. Revenues
from Lynde for the fiscal years ended September 28, 1997, September 29, 1996 and
October 1, 1995 were $725,500, $3,413,200 and $9,008,600, respectively. Lynde
recorded a net loss of $19,600 through the effective date of the sale and net
income for the years ended September 29, 1996 and October 1, 1995 of $195,300
and $275,500, respectively.

4. LONG-TERM DEBT

Long-term debt at September 28, 1997 and September 29, 1996 is summarized as
follows:

1997 1996
- ------------------------------------------------------------------------
Note payable, due in annual
installments to 2002....................... $ 572,453 $ 628,461
Less current portion.......................... 59,928 56,008
----------------------
Total......................................... $ 512,525 $ 572,453
----------------------
----------------------

Long-term debt maturities for the five fiscal years subsequent to 1997 are:
1998 - $59,928, 1999 - $89,123, 2000 - $95,362, 2001 - $102,037, 2002 - $109,180
and thereafter $116,823.

5. COMMON STOCK

Common Stock Add'l Paid-in
Shares Amount Capital
- ----------------------------------------------------------------------------
Balance, October 2, 1994 9,569,196 $ 478,460 $26,869,988
10% stock dividend 956,576 47,829 7,365,635
- ----------------------------------------------------------------------------
Balance, October 1, 1995 10,525,772 526,289 34,235,623
5% stock dividend 525,918 26,296 4,444,007
- ----------------------------------------------------------------------------
Balance, September 29, 1996 11,051,690 552,585 38,679,630
5% stock dividend 552,205 27,610 3,837,825
- ----------------------------------------------------------------------------
Balance, September 28,1997 11,603,895 $ 580,195 $42,517,455
- ----------------------------------------------------------------------------

16 HAWKINS CHEMICAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The stock dividends in 1997, 1996 and 1995 were accounted for by transferring
the fair value of the issued stock from retained earnings to the categories of
permanent capitalization as common stock (par value) and additional paid-in
capital.

6. LEASES

The Company has various operating leases for land and buildings on which some of
its operations are located. Total rental expense for the years ended September
28, 1997, September 29, 1996 and October 1, 1995 was $46,003, $60,955 and
$41,042, respectively. Future minimum lease payments due under operating leases
with an initial term of one year or more at September 28, 1997 were: 1998 -
$34,385; 1999 - $8,596.

7. PENSION AND EMPLOYEE STOCK OWNERSHIP PLANS

The Company has a defined contribution pension plan covering substantially all
of its non-union employees. Pension expense for the years ended September 28,
1997, September 29, 1996 and October 1, 1995 was $459,367, $425,398, and
$363,498, respectively. The Company's cost for the pension plan is determined as
7% of each employee's covered compensation. Amounts charged to pension expense
and contributed to union multi-employer pension plans (not included in the above
amounts) were not material. It is the Company's policy to fund all pension costs
accrued.

The Company has an employee stock ownership plan covering substantially all of
its non-union employees. Contributions are made at the discretion of the Board
of Directors subject to a maximum amount allowed under the Internal Revenue
Code. Contributions for the years ended September 28, 1997, September 29, 1996
and October 1, 1995 were $889,979, $824,955 and $793,244, respectively. The
Company does not currently offer any post-retirement benefits, deferred stock or
stock-based compensation plans.

8. CONTINGENCIES

The Company is subject to various federal, state and local provisions regarding
discharge of materials into the environment or otherwise relating to the
protection of the environment. The Company was defending certain legal and
administrative proceedings in connection with landfill sites in which products
distributed by the Company were ultimately disposed of by other parties. During
fiscal 1997, the Company has not been notified of any further matters regarding
these landfills. While the outcome of such matters is particularly difficult to
predict, management does not expect that these matters will have a material
adverse effect on the Company's consolidated financial condition, results of
operations or cash flows.

During 1995, the Company had a fire in the office/warehouse of The Lynde
Company, a former wholly owned subsidiary. The charge of $1,771,439 in 1997 and
$750,000 in 1995 has been recorded to cover estimated settlement costs
incurred by the Company in connection with a lawsuit filed against the Company
as a result of the fire. As of September 28, 1997, the Company has paid
$1,499,700 in settlement and legal costs relating to the fire and, based upon
a settlement agreement, expects to incur additional legal and settlement costs
of approximately $1 million. The Company will incur additional future
obligations relating to the settlement of this lawsuit pursuant to a matrix and
plan of distribution which is a part of the settlement. The Company is not able
to estimate the magnitude of this potential exposure at this time. Management of
the Company believes the final disposition of this matter will not have a
material adverse effect on the Company's financial position, results of
operations, or cash flows. Based on two favorable lower court rulings,
management believes that all or a portion of the settlement costs incurred to
date related to the Lynde fire may be recoverable from their insurers. The
Company's insurers have appealed the lower courts' decisions to the Eighth
Circuit Court of Appeals. It is not possible, therefore, to determine at this
time what recovery, if any, may be obtained by the Company and no amount has
been recorded at September 28, 1997.

9. INCOME TAXES

The provisions for income taxes are as follows:

1997 1996 1995
- ------------------------------------------------------------------------------
Continuing Operations:
Federal - current.................. $4,143,883 $3,011,755 $2,972,203
States - current................... 1,099,687 799,010 820,997
Deferred........................... (307,800) 159,876 (28,800)
---------------------------------------
Total (benefit) provision........ $4,935,770 $3,970,641 $3,764,400
---------------------------------------

Discontinued Operations:
Federal - current.................. $(190,300)
States - current................... (70,400)
---------------------------------------
Total benefit.................... $(260,700)
---------------------------------------

A reconciliation of the provision for income taxes, based on income from
continuing operations, to the applicable federal statutory income tax rate of
35% is as follows:

1997 1996 1995
- ------------------------------------------------------------------------------
Statutory federal income tax........ $4,454,190 $3,656,468 $3,320,927
State income taxes, net of
federal deduction.................. 687,454 549,531 520,955
Tax-exempt income................... (108,856) (97,325) (90,925)
Other, net.......................... (97,018) (138,033) 13,443
---------------------------------------
Total........................... $4,935,770 $3,970,641 $3,764,400
---------------------------------------

17 HAWKINS CHEMICAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The tax effects of items comprising the Company's net deferred tax asset
(liability) are as follows:

1997 1996
- ---------------------------------------------------------------------
Current deferred taxes:
Accruals............................... $ 544,000 $ 55,000
Inventory.............................. 750,000 401,000
Trade receivables...................... 154,000 128,000
------------------------
Total*................................ $1,448,000 $ 584,000
------------------------

Noncurrent deferred taxes:
Gain on sale of
The Lynde Company..................... $ (456,000)
Property basis differences............. (527,000) $(426,800)
------------------------
Total................................. $( 983,000) $(426,800)
------------------------

*Included in prepaid expenses and other on the consolidated balance
sheets.

10. DISCONTINUED OPERATIONS

Effective March 1, 1995, the Company sold the inventory, equipment and
operations of Tessman Seed, Inc., which sold a wide range of horticulture and
pest control products. As a result of the sale, the Company recorded a loss on
the disposal of $321,166, net of a tax benefit of $214,200, to write down
Tessman's assets to the amount realized.

Operating results of Tessman Seed, Inc., for the year ended October 1, 1995 was
as follows:

1995
----------
Operating revenues $ 931,105
Costs and expenses $1,047,510

The inventory, equipment and operations of Tessman were sold for $1,144,714. At
closing Hawkins received $100,000 and a note receivable for the balance (see
Note 3).

INDEPENDENT AUDITORS' REPORT

To the Shareholders of Hawkins Chemical, Inc.:

We have audited the accompanying consolidated balance sheets of Hawkins
Chemical, Inc. and its subsidiaries (the Company) as of September 28, 1997 and
September 29, 1996 and the related consolidated statements of income and
retained earnings and of cash flows for each of the three years in the period
ended September 28, 1997. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated 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 consolidated financial statements present fairly, in all
material respects, the financial position of Hawkins Chemical, Inc. and its
subsidiaries at September 28, 1997 and September 29, 1996 and the results of
their operations and their cash flows for each of the three years in the period
ended September 28, 1997 in conformity with generally accepted accounting
principles.

DELOITTE & TOUCHE LLP
Minneapolis, Minnesota
December 9, 1997

18 HAWKINS CHEMICAL, INC. AND SUBSIDIARIES

SELECTED FINANCIAL DATA

Year ended September 1997 1996 1995 1994 1993
- --------------------------------------------------------------------------------------------------------------

Sales from continuing operations $ 87,745,980 $ 80,886,062 $ 83,332,624 $ 71,423,471 $ 60,913,575
- --------------------------------------------------------------------------------------------------------------
Income from continuing operations 7,790,487 6,476,410 5,723,963 5,044,410 4,793,064
- --------------------------------------------------------------------------------------------------------------
Earnings per common share
from continuing operations .67 .56 .49 .44 .41
- --------------------------------------------------------------------------------------------------------------
Cash dividends declared per common share .18 .15 .19 .11 .08
- --------------------------------------------------------------------------------------------------------------
Cash dividends paid per common share .16 .14 .12 .11 .08
- --------------------------------------------------------------------------------------------------------------
Total assets 63,652,616 56,487,356 53,690,814 45,974,984 38,962,586
- --------------------------------------------------------------------------------------------------------------
Long-term debt 512,525 572,453 628,461 680,805
- --------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------
All per share data has been restated to reflect the 5% stock dividends in 1997, 1996, 1994 and 1993 and the
10% stock dividend in 1995.

SECURITIES MARKET MAKERS - Herzog, Heine, Geduld, Inc., New York, NY; John G. Kinnard and Company, Inc., Minneapolis, MN;
S.J. Wolfe and Co., Dayton, OH

SUMMARY OF OPERATIONS BY QUARTER (UNAUDITED)

First Quarter Second Quarter Third Quarter Fourth Quarter Total Year
(DOLLARS IN THOUSANDS
EXCEPT PER SHARE DATA) 1997 1996 1997 1996 1997 1996 1997 1996 1997 1996
- ------------------------------------------------------------------------------------------------------------------------

Net sales $19,936 $17,423 $20,673 $18,439 $23,867 $22,275 $23,270 $22,749 $87,746 $80,886
- ------------------------------------------------------------------------------------------------------------------------
Gross profit 4,165 3,764 4,426 3,853 5,900 5,458 6,841 5,022 21,332 18,097
- ------------------------------------------------------------------------------------------------------------------------
Net income 1,456 1,242 1,478 1,218 2,963 2,015 1,893 2,001 7,790 6,476
- ------------------------------------------------------------------------------------------------------------------------
Earnings per share .13 .11 .13 .10 .26 .17 .16 .17 .67 .56
- ------------------------------------------------------------------------------------------------------------------------

19 HAWKINS CHEMICAL, INC. AND SUBSIDIARIES

SHAREHOLDER INFORMATION

QUARTERLY STOCK DATA

High Low
- -----------------------------------
FISCAL 1997
4th Quarter 10 1/4 7 7/8
- -----------------------------------
3rd Quarter 9 6 1/2
- -----------------------------------
2nd Quarter 7 6
- -----------------------------------
1st Quarter 8 5 1/2
- -----------------------------------
FISCAL 1996
4th Quarter 7 3/4 6 3/4
- -----------------------------------
3rd Quarter 8 5/8 7 3/8
- -----------------------------------
2nd Quarter 8 5/8 7
- -----------------------------------
1st Quarter 8 3/8 6 5/8
- -----------------------------------

The common stock of Hawkins Chemical, Inc. is as quoted on the NASDAQ National
Market System. The price information represents closing sale prices reported in
the NASDAQ/NMS Monthly Statistical Report. There were 825 common shareholder
accounts on September 28, 1997. The prices are adjusted to reflect the 5% stock
dividend that occurred on April 11, 1997 and March 29, 1996.

STOCK EXCHANGE

Hawkins Chemical, Inc. common stock is traded on the NASDAQ National Market
System under the symbol HWKN.

FORM 10-K AVAILABLE

Hawkins Chemical, Inc. will provide to each person whose proxy is solicited,
upon the written request by such person, a copy of its Annual Report on Form
10-K as filed with the Securities and Exchange Commission, including financial
statements and schedules. Such request should be directed to Hawkins Chemical,
Inc., Attention: Corporate Secretary, 3100 East Hennepin Avenue, Minneapolis,
Minnesota 55413.

REGISTRAR AND TRANSFER AGENT

Shareholder inquires concerning the transfer of shares, lost certificates, or
address changes should be directed to:
Norwest Shareowner Services
P.O. Box 64854
St. Paul, MN 55164-0854
(800) 468-9716
(612) 450-4064

CASH DIVIDENDS

Declared Paid
- ----------------------------------------
FISCAL 1998
1st Quarter $.090
- ----------------------------------------
FISCAL 1997
4th Quarter $.090
- ----------------------------------------
3rd Quarter $.086
- ----------------------------------------
2nd Quarter $.086
- ----------------------------------------
1st Quarter $.076
- ----------------------------------------
FISCAL 1996
4th Quarter $.076
- ----------------------------------------
3rd Quarter $.073
- ----------------------------------------
2nd Quarter $.073
- ----------------------------------------
1st Quarter $.063
- ----------------------------------------

Cash dividends have been restated to reflect the 5% stock dividends declared
February 12, 1997 and February 7, 1996.

ANNUAL MEETING

The annual meeting of the shareholders of Hawkins Chemical, Inc. will be held on
Wednesday, February 11, 1998, at the Sheraton Minneapolis Metrodome, 1330
Industrial Boulevard, Minneapolis, Minnesota, at 3:00 p.m.

CORPORATE HEADQUARTERS

3100 East Hennepin Avenue
Minneapolis, Minnesota 55413
(800) 328-5460
(612) 331-6910
http://www.hawkinschemical.com

DIVIDEND REINVESTMENT PLAN

A plan is available to shareholders for the automatic reinvestment of dividends
to purchase additional shares of Hawkins Chemical, Inc. common stock. A brochure
describing this service may be obtained by writing or calling:
Norwest Bank Minnesota, N.A.
Dividend Reinvestment Department
161 North Concord Exchange
P.O. Box 539
South Saint Paul, MN 55075-0539
(800) 468-9716
(612) 450-4064

21 HAWKINS CHEMICAL, INC. AND SUBSIDIARIES