SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934 (No Fee Required)
For the fiscal year ended December 31, 1997
Commission file number 0-5781
HAWKS INDUSTRIES, INC.
(Exact Name of Registrant as specified in its charter)
Delaware 83-0211955
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
913 Foster Road, Casper, Wyoming 82601
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (307) 234-1593
Securities registered pursuant to Section 12 (b) of the Act: None
Securities registered pursuant to Section 12 (g) of the Act:
Common Stock, $.01 Par Value
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
The aggregate market value of the voting stock held by non-affiliates of the
Registrant computed by reference to the average bid and asked prices of the
Common Stock, $.01 Par Value, on March 17, 1998, was $1,351,515.
As of March 17, 1998, Registrant had 1,351,515 shares of Common Stock, $.01 Par
Value outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Definitive Proxy Materials filed pursuant to Regulation 14 C by paper dated
November 17, 1997, and EDGAR, March 5, 1998, into Part III.
PART I.
ITEM 1 - BUSINESS
History - General
Except where the context otherwise requires, the term "the Company", as used in
this Report, refers to the Registrant and its subsidiaries.
The Company was incorporated on March 19, 1971 and through mid-1986 was solely
engaged in the business of oil and gas exploration, development and production,
and conducted its operations primarily in the Rocky Mountain region of the
United States.
In February, 1986, when the price of crude oil on the futures and spot markets
dropped below $12 per barrel, management determined that until such time as the
price of crude oil stabilized in the world markets and returned to higher
levels, exploration funds from industry and private investors would be further
curtailed and that economics, except in selected instances, would not justify
the drilling of further exploratory and development wells in the Rocky Mountain
area.
Consequently, the Company ceased the drilling of development wells on its
properties, the drilling of exploratory wells under which it would share in the
cost, and drastically reduced its exploration staff. Since that time the
Company has participated in one exploratory well and four development wells.
The Company does not anticipate any significant development drilling on its
properties. In mid 1992, the Company further de-emphasized its oil and gas
activities and determined to restrict their oil and gas business to buying and
selling of producing properties. In conjunction with this decision, the Company
sold most of the oil and gas interests wherein it acted as operator and reduced
technical staff accordingly.
In 1986, due to the instability in the oil and gas industry a program of
diversification was commenced and the Company acquired a controlling interest in
International Aviation Publishers, Inc., ("IAP"), a publishing company, and in a
light manufacturing facility, SanTech, Inc., ("SanTech"), funded partially by
the State of Wyoming and by local government grants and assistance. That
diversification was highly successful and International Aviation Publishers grew
to be a source of steady cash flow and profitability for the Company.
In 1992, in a continuing mode of diversification, the Company acquired 100% of
the outstanding shares of Western Environmental Services & Testing, Inc.
("W.E.S.T."), a privately held environmental testing and consulting firm.
In 1993, due to a downturn in the aviation industry and specifically to a nearly
45% decrease in student enrollment in aviation maintenance schools, IAP's sales
declined. Accordingly, the Company's growth in 1993 was directed at the
environmental business. Additional environmental staff was employed to meet the
increasing demand for the Company's services.
During late 1994, the Company received an unsolicited offer to buy its aviation
publishing assets (IAP). Accordingly, as of December 31, 1994, substantially
all of the publishing assets were sold for approximately $1,800,000. In this
report and in the accompanying financial statement, the results of operations of
IAP have been shown as "discontinued operations" in accordance with generally
accepted accounting principles.
As a result of the sale of IAP, it became impractical to continue the
navigational supplies business (SanTech) and the printing business (Hawks Book
Company). They are also included in discontinued operations. During 1995, all
the assets of the printing company were sold and a significant amount of the
"navigational supplies" assets were also sold.
In 1996, the Company made a significant investment in undeveloped real estate.
The Company plans on holding this real estate as a long term investment.
In 1997, the Company's principal operations consisted of Environmental Testing
and Oil and Gas operations.
The following industry segment information will give the reader a financial
overview of each of the Company's industry segments. A detailed description of
each segment follows thereafter.
1997 1996 1995
Sales to unaffiliated customers:
Oil and gas industry $ 333,000 $ 188,000 $ 196,000
Environmental testing and management
industry 1,798,000 1,958,000 3,097,000
$ 2,131,000 $ 2,146,000 $ 3,293,000
Discontinued operations $ - $ 44,000 $ 28,000
Operating profit or (loss):
Oil and gas industry $ (36,000) $ (43,000) $ (46,000)
Environmental testing and management
industry (51,000) (433,000) 323,000
Unallocated Corporate expenses (159,000) (247,000) (192,000)
$ (246,000) $ (723,000) $ 85,000
Discontinued operations $ - $ (13,000) $ (330,000)
Identifiable assets:
Oil and gas industry $ 854,000 $ 879,000 $ 619,000
Environmental testing and management
industry 893,000 1,080,000 1,203,000
Corporate assets 1,447,000 1,806,000 2,107,000
Discontinued operations - - 86,000
$ 3,194,000 $ 3,765,000 $ 4,015,000
Capital expenditures:
Oil and gas industry $ 92,000 $ 358,000 $ 189,000
Environmental testing and management
industry 30,000 207,000 214,000
Other capital expenditures - 49,000 7,000
Discontinued operations - - 1,000
$ 122,000 $ 614,000 $ 411,000
Depreciation, depletion and
amortization:
Oil and gas industry $ 111,000 $ 67,000 $ 39,000
Environmental testing and management
industry 103,000 116,000 98,000
Other depreciation, depletion and
amortization 40,000 56,000 57,000
$ 254,000 $ 239,000 $ 194,000
Discontinued operations - $ 2,000 $ 61,000
OIL AND GAS
To the date of this report the Company had participated in the drilling of 315
gross (63.47 net) wells of which 219 gross (39.17 net) have been successful. In
general terms, the Company has ceased its drilling and exploration activity.
The likelihood of the Company participating in additional wells in the near
future is remote. The Company does, however, have several oil and gas
properties which it will attempt to have drilling completed on where the Company
will have a non-operating interest.
The Company's oil and gas activity will be predominantly in the buying and
selling of existing producing properties.
Competition
The oil and gas industry is highly competitive. Domestic producers of oil and
gas must not only compete with each other, but must compete with producers of
imported oil and gas and alternative energy sources such as coal, atomic power
and hydroelectric power.
Markets
The availability of a ready market for oil and gas produced by the Company will
depend upon numerous factors beyond the control of the Company including the
extent of domestic production and importation of foreign oil and gas; the
proximity of the Company's properties to gas pipelines and other transportation
facilities; the availability, capacity and cost of such pipelines and other
transportation facilities; the marketing of other competitive fuels; fluctuation
in demand; state and federal governmental regulation of production, refining,
transportation and sales; general national and worldwide economic conditions,
pricing, and use; and allocation of oil and gas and their substitute fuels.
With the exception of brief periods when political and economic unrest in the
Middle East (such as the last half of 1990), or when short-term market
"interruptions" such as the Alaska oil spill caused prices to rise rapidly,
prices of crude oil and refined petroleum products generally have declined in
the last seven years as a result of an oversupply of petroleum products,
particularly gasoline and fuel oils, relative to the demand for such products.
The prices received for oil production have become increasingly volatile. This
has resulted in great uncertainty in the oil and gas industry and has led many
companies engaged in oil and gas exploration and production to substantially
curtail their activities. This situation of substantial oversupply relative to
demand is due in part to increased production and lower rates of consumption
caused by voluntary conservation efforts as well as increased competition from
alternative fuels.
No certainty exists as to the length of time that this situation of
substantially reduced prices will exist. However, as long as the supply of oil
available on a worldwide basis exceeds demand by a substantial margin, it is
likely that oil prices will remain subject to downward pressure.
In response to the current oversupply of natural gas, many purchasers have
unilaterally reduced the quantities of gas purchased under existing contracts,
and a number of purchasers have stated their intentions not to honor their
contractual commitments to purchase specified quantities of gas from producers
at the prices set out in their respective purchase contracts. In many instances
buyers cannot readily be located for gas production resulting in gas wells being
shut-in or curtailed for various periods of time. In addition, many gas
purchasers are refusing to honor obligations under so-called "take-or-pay" gas
contracts. There can be no assurance that markets for gas and oil will not
continue to decline.
The Company's contracts with its gas purchasers generally provide that they are
not obligated to purchase all of the gas which the wells are capable of
producing, and the Company has experienced curtailment problems to date. There
is also no assurance that the Company will not experience significant
curtailment problems in the future.
Regulation
The Company's operations will be affected from time to time in varying degrees
by political developments and federal and state laws and regulations. In
particular, oil and gas production operations and economics are affected by
price control, tax and other laws relating to the petroleum industry, by changes
in such laws and by constantly changing administrative regulations.
State statutory provisions relating to oil and gas generally require permits for
the drilling of wells and also cover the spacing of wells, the prevention of
waste, the rate of production, the prevention and clean-up of pollution and
other matters.
The wellhead sale of natural gas in the United States is subject, with certain
significant exceptions, to a regulatory scheme implemented pursuant to the
Natural Gas Policy Act of 1978 (the "NGPA") and overseen by the Federal Energy
Regulatory Commission (the "FERC"). The NGPA classified gas into various
categories in maximum permissible prices. However, none of the NGPA prices can
be collected unless purchasers willing to pay such prices can be located. As a
result of the general decline in prices for oil and gas, many of the contracts
for purchases of gas at NGPA maximum prices have been renegotiated. Contract
provisions allowing price reductions have been exercised or purchasers have
refused to accept production at such prices claiming, among other defenses,
force majeure and commercial impracticability. As a result, a larger and
increasing percentage of gas is sold at prices below NGPA maximum lawful rates.
Sales of gas at prices lower than such NGPA rates are common throughout the
natural gas industry.
Environmental Regulation
Various federal, state and local laws and regulations covering the discharge of
materials into the environment, or otherwise relating to the protection of the
environment, may affect the Company's operations and costs as a result of their
effect on oil and gas exploration, development and production activities.
Environmental protection laws to date have not required the Company to make any
significant additional capital outlays. It is not anticipated that the Company
will be required in the near future to expend amounts that are material in
relation to its total capital expenditure program by reason of environmental
laws and regulations. The Company believes that its operations comply with
environmental laws and regulations, but inasmuch as such laws and regulations
are constantly being revised and changed, the Company is unable to predict the
ultimate cost of complying with present and future environmental laws and
regulations.
Taxation
The Company's oil and gas operations are affected by certain provisions of the
federal income tax laws applicable to the petroleum industry. Current law
permits the Company to deduct currently, rather than capitalize, "intangible"
drilling and development costs incurred or borne by it. The Company, as an
independent producer, is also entitled to deduction for percentage depletion
with respect to the first 1,000 barrels per day of domestic crude oil (and/or
equivalent units of domestic natural gas) produced by it if such percentage
depletion exceeds cost depletion.
Generally, this deduction is a specified percentage (currently 15%) of gross
income from oil and gas property. Percentage depletion may not exceed 100% of
the net income, and is limited in the aggregate to 65% of the Company's taxable
income. Any depletion exceeding the 65% limitation, however, may be carried
over indefinitely. At December 31, 1997 this carryover was $2,119,000.
The Company's oil and gas activities are also subject to state and local income,
severance, property and other taxes. It is anticipated that the aggregate
burden of these taxes will increase in the future.
It is possible that subsequent legislation, court decisions and governmental
agency actions could further limit tax benefits and impose further tax burdens
on the oil and gas activities of the Company.
The Company at December 31, 1997 had a net operating loss ("NOL") carryforward
of $11,148,000.
The Tax Reform Act of 1986 made substantial changes with regard to NOL
carryforwards. After an "ownership change" the taxable income of a loss
corporation available for offset by pre-change NOL carryforwards is limited
annually to a prescribed rate times the value of the loss corporation's stock
immediately before the ownership change. In general, an ownership change occurs
if ownership of more than 50% in value of the stock of the loss corporation
changes during the three year period preceding the test date. Under federal tax
law, the amount and availability of loss carryforwards are subject to a variety
of interpretations and restrictive tests applicable to the Company. Under the
Code, the utilization of such loss carryforward could be limited or effectively
lost upon certain changes in ownership. The net operating loss carryforwards
expire between 1998 and 2011.
DISCONTINUED OPERATIONS
As of December 31, 1994 the Company sold substantially all of the assets of its
aviation publishing business for approximately $1,800,000. The Company had
purchased this business on July 1, 1986 for less than $300,000. During 1995,
the Company sold its printing assets for $221,000. Also the Company realized
$36,000 from the sale of navigational supply assets and from furniture and
fixtures.
In conjunction with the sale of its aviation publishing business, the Company
chose to discontinue its navigational products business in order to maximize
sales of existing inventory. This discontinuance involved the gradual
liquidation of inventory and sale of equipment. At December 31, 1996 this
discontinuance was completed.
ENVIRONMENTAL ENGINEERING
Competition
The Environmental Engineering industry is also highly competitive. Many of the
company's competitors both in its primary market areas and throughout the United
States are substantially larger and have significantly greater financial and
human resources.
Markets
The Company concentrates its activities primarily in the Rocky Mountains, the
mid-continent area and in Texas. However, during, 1995, 1996, and 1997, the
company provided services for customers in 14, 13, and 13 different states
respectively, and one foreign country (Indonesia). In the area of air quality
and air emissions the Company provides to its customers compliance testing for
air emissions in accordance with certain federal and state environmental
standards. In addition, they perform evaluations of process operations for the
users of emissions equipment; and to a lesser degree, the Company performs
"performance guarantees" for newly purchased abatement equipment for some of its
customers. The Company also provides ambient air surveys for new or renewable
air emission permits.
In addition, the Company also provides industrial hygiene and indoor air quality
evaluations, as well as corrective planning with a full-time professional
certified industrial hygienist on staff.
In the area of water waste, the Company performs analysis for virtually all
kinds of discharge of water waste. The company also evaluates all public and
private drinking water supplies for compliance with existing environmental
standards. The Company performs environmental analysis of real property for
customers involved in the transfer of real property. This includes the analysis
for lending institutions prior to funding the purchase of real property.
Lastly, the Company provides soil analysis primarily for the mining industry.
Regulation
The Clean Drinking Water Act mandates certification requirements for
laboratories who are engaged in the analysis of public drinking water. In
addition, the Company is subject to certain regulations of the Nuclear
Regulatory Commission governing testing standards for environmental
laboratories.
The Environmental Protection Agency (EPA) and Nuclear Regulatory Commission
perform periodic audits in the form of on-site walk throughs at testing
facilities and direct observation of test procedures. In addition, the EPA
submits "blind samples" for which the Company analyzes and submits its test
results. These results are measured against standardized testing performed by
the EPA on the same sample to determine a lab's ability to analyze samples.
In addition, most state environmental agencies conduct on-site evaluations for
compliance with established professional testing standards and techniques.
Taxation
The Company's environmental contracts are generally not individually
significant. To the degree that a contract is in process at year end, the
Company employs the completed contract method of accounting for income taxes.
Generally this method provides that no income or expense will be recognized on a
contract until such time as the contract is completed. In the environmental
testing business, there is no feasible way to determine the percentage of
completion for many types of contracts.
EMPLOYEES
As of the date of this report, the Company has 23 full-time employees.
(Administration and Accounting 3, Environmental 18 and Corporate Management 2).
All employees are provided with the opportunity to participate in a
comprehensive health and benefits package. All eligible employees participate
in the Company's Employee Stock Ownership Plan.
None of the employees are represented by a union and the Company believes that
its relationship with its employees is good.
ITEM 2 - PROPERTIES
PROPERTIES - REAL ESTATE
The Company owns facilities consisting of five separate buildings located on
approximately ten acres.
On March 22, 1994, the Company purchased a 10,600 square foot building on 4
acres in an industrial park in Casper. This facility will accommodate the
expected growth of the Company's environmental business and now houses the
Corporate oil and gas, environmental testing, and accounting offices.
The Company also owns one building, an office building of 10,600 square feet.
An adjacent building has 6,000 square feet. Next to it is an 11,500 square foot
warehouse. These buildings have been listed for sale and prior to the sale have
been periodically rented to outside parties.
The Company also owns a 5,000 sq. ft. building in San Marcos, Texas which housed
all environmental personnel and equipment for the Company's Texas operations.
This building has also been listed for sale.
In addition, W.E.S.T. rents office space in Evanston, Wyoming on a month-to-
month basis from a third party. In 1995 the Company also rented office space in
Cheyenne, Wyoming on a month-to-month basis.
Management believes that the existing facilities are now adequate for current
needs.
In late 1996 the Company purchased 33.7 acres of undeveloped commercial real
estate in Casper, Wyoming. The land is adjacent to and fronts Interstate 25
and is dissected by East Second Street (the main business thoroughfare in
Casper). The land was purchased for less than 18 cents per square foot. There
is no announced time table for development of the land.
Disclosures of Oil and Gas Producing Activities
The Financial Accounting Standards Board Statement of Financial Accounting
Standards No. 69, Disclosures about Oil and Gas Producing Activities, requires
certain disclosures about an entity's oil and gas producing operations. Those
disclosures are applicable if any one of revenues, results of operations, or
assets, generated or attributable to the oil and gas activities, are more than
10% of total revenues, operations, or total assets. The Company in recent years
has acquired significant non oil and gas operating assets. These are primarily
assets in the environmental testing and analysis industries.
Although technically required to do so, the Company has not presented the
required disclosure. Management feels that with the sale of its major oil and
gas producing property in 1992, and with the continually decreased emphasis on
oil and gas producing activities, the information is relatively meaningless. In
addition, based on costs of prior years, the estimated costs to obtain all of
such information would be at least $10,000. For these reasons the disclosure
has not been presented.
Net Quantities of Oil and Gas Produced
The net quantities of oil and gas produced by the Company during each of the
last three fiscal years are as follow:
Oil (bbls) Gas (Mcf)
1995 6,500 52,000
1996 4,500 57,000
1997 11,000 49,000
Average Sales Price and Production Costs
The following table reflects information concerning each of the last three
fiscal years:
1997 1996 1995
Average sales price per bbl $18.25 $20.84 $17.50
Average sales price per Mcf 2.30 1.47 1.30
Average production cost per
net equivalent bbl* 6.55 4.34 5.38
* Natural gas has been converted into equivalent bbls using a conversion ratio
of 6:1.
Drilling Activity
The Company has not participated in the drilling of exploratory wells in 1997,
1996, nor 1995. In late 1995, the Company participated in the drilling one
development well which was a productive well. In 1996 the Company participated
in the drilling of 3 developmental wells which were productive. The Company did
not participate in drilling any development wells in 1997.
Title to Properties
As is customary in the oil and gas industry, a preliminary title check is
conducted at the time properties believed to be suitable for drilling operations
are acquired by the Company. Prior to the commencement of drilling operations,
curative work determined to be appropriate as a result of a title examination is
customarily performed with respect to significant defects before the Company
commences such operations. The Company believes that the title to its
properties is marketable in accordance with standards generally acceptable in
the oil and gas industry.
ITEM 3 - LEGAL PROCEEDINGS
The Company is not involved in or aware of any pending or threatened material
legal proceedings, to which the Company is a party or which any of its property
is the subject.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
At the Company's annual meeting held on January 8, 1998, the Company submitted
the following items to a vote of security holders through the solicitation of
proxy or otherwise.
Proposal to affect a 20 for 1 reverse stock split. This reverse split changed
the number of shares outstanding from 27,028,194 to 1,351,515. Results of the
election were as follows:
For 20,742,315
Against 3,251,585
Abstain 262,869
The other proposal submitted to voters was to change the Company's State of
Domicile from the State of Delaware to the State of Wyoming. Results of the
election were as follows:
For 19,024,720
Against 246,100
Abstain 209,386
The Directors elected by the shareholders at the Annual Meeting were as follows:
Bruce A. Hinchey
Dwight B. Despain
PART II
ITEM 5 - MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED MATTERS
The Company's Common Stock is traded in the over-the-counter market and is
quoted by NASDAQ under the symbol "HAWK". The high and low closing bid
quotations for the calendar period indicated, as reported by NASDAQ and then
restated to reflect the February, 1998, 20 for 1 reverse stock split, are shown
in the following table:
Bid Price
HIGH LOW
1995:
First Quarter 1 1/4 1 1/4
Second Quarter 1 1/4 5/8
Third Quarter 5 5/8 1 1/4
Fourth Quarter 4 3/8 3 1/8
1996:
First Quarter 4 3/8 1 7/8
Second Quarter 4 3/8 1 7/8
Third Quarter 5 5/8 3 1/8
Fourth Quarter 5 3 1/8
1997:
First Quarter 3 3/4 3 1/8
Second Quarter 3 1/8 1 1/4
Third Quarter 4 3/8 1 7/8
Fourth Quarter 3 1/8 1 1/4
Bid quotations represent prices between dealers, do not include retail markup,
markdown, or commissions and do not necessarily represent actual transactions.
Number of Shareholders
As of March 6, 1998 there were 902 holders of record of the Company's Common
Stock.
Dividends
The Company has never paid any dividends on its common stock and does not have
any current plans to pay any dividends in the foreseeable future. Should the
Company determine at some future date that the payment of dividends would be
desirable, any such dividends would be dependent upon the earnings and financial
condition of the Company.
ITEM 6 - FINANCIAL DATA
Year Ended December 31,
1997 1996 1995 1994 1993
Operating revenues
from continuing
operations $ 2,131,000 $ 2,146,000 $ 3,293,000 $ 2,595,000 $ 2,602,000
Net income (loss)
from continuing
operations (264,000) (742,000) 117,000 (250,000) (275,000)
Net income (loss) (264,000) (755,000) (213,000) 268,000 (410,000)
Income (loss) from
continuing
operations per
share* (.20) (.55) .09 (.12) (.18)
Net income (loss) per
share* (.20) (.56) (.16) .14 (.29)
Total assets 3,194,000 3,765,000 4,015,000 4,883,000 4,461,000
Long-term debt 415,000 445,000 493,000 677,000 554,000
Shareholder's equity 2,012,000 2,237,000 2,992,000 3,175,000 2,912,000
Dividends declared
per share - - - - -
* As restated for 20:1 reverse stock split.
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Liquidity and Capital Resources:
In late 1994, the Company made decisions to expand the San Marcos, Texas office
and in 1996, decided to expand services further by opening an office in Salt
Lake City, Utah. These decisions came after the record breaking year of 1995.
The operational losses from 1996 were unacceptable. In order to correct the
corporate direction, management made several positive steps to improve the
financial condition of the Company. As a result, 1997 proved to be an eventful
year for the Company.
In 1997, the Company had a loss of $264,000. The Company has continued to
reduce their Texas and Utah offices and for year 1997, reduced the loss by 52
percent over the 1996 operating loss, of which approximately $20,000 was a
carryover from 1996 office reductions. The Company still plans to work in these
areas, but all jobs will be run out of the Casper office. Of the $264,000 loss
for 1997, the Company had non-cash depreciation, depletion and amortization
write-offs of $254,000.
Texas Office -- Management closely scrutinized and discovered that the operation
was not productive. It was decided to reduce the personnel expense by 78
percent. These changes reduced the revenues by 33%. Clients are now being
serviced and maintained by the Casper, Wyoming office personnel. Further cuts
and complete dissolution of the Texas office will be realized in 1998.
Salt Lake City Office -- The management of the Salt Lake City office has been
removed from employment with the Company. All clients are now being serviced
from the Casper and Evanston, Wyoming offices. This consolidation occurred mid
to late 1997, and resulted in a 75 percent decrease in losses.
Casper Office -- The Casper office houses the Hawks Corporate offices, as well
as maintaining the majority of the environmental equipment and personnel for the
organization.
In a cost savings move on May 1, management reduced the salaries of two of the
three executive officers employed by the Corporation: The salary reductions
were as follow:
Bruce A. Hinchey 24%
James E. Meador, Jr. 24%
On May 15, Joseph J. McQuade's salary was reduced by 10%.
These corrections were the keystone to a net $350,000 cost savings.
In the first quarter of 1998, Joseph J. McQuade, CEO, terminated his employment.
As a result a significant cost savings will result. (See Note 14, "Subsequent
Events" of the accompanying financial statements). Those negotiations were
successful and his departure will be effective in the first quarter of 1998.
It is important to note that the majority of funding for the Agreement with Mr.
McQuade will come from outside investors.
Evanston, Wyoming Office -- The operation of the Oil and Gas production
analytical laboratory realized an increase of more than 30% and the net income
increased 309%. The equipment remained in good operational condition, fewer
repairs were needed, and our major clients in the area increased our workload as
oil and gas production increased.
The industry wide reduction in environmental engineering and testing services
continued through mid-1997, however the trend reversed as evidenced by client
contact late in 1997 and early 1998. Environmental companies nationwide have
faced the downturn. Those remaining, such as W.E.S.T., have faired well by
increasing market share.
The Company purchased approximately $122,000 in property and equipment for 1997
compared to $614,000 in 1996 and $410,000 in 1995. Of the $122,000 purchased,
$92,000 was for equipment on the three development wells drilled in Brundage
Canyon. We are anticipating two additional development wells in 1998 and the
environmental testing business will require some additional equipment.
Purchases of equipment should be held to the 1997 figure.
The Company continues to attempt to sell its facilities on 6WN Road in Casper
and has leased two of the three facilities which amounts to approximately 75% of
the debt service on the buildings. The sale of either of the Casper properties
or the San Marcos property would have a significant positive impact on the
Company's liquidity and capital resources.
The following information is provided for the years ending December 31, 1997 and
1996:
1997 1996
Working capital $ (140,000)* $ (41,000)
Long-term debt to equity 1:4.9 1:5.0
Cash provided (utilized) by operations $ (148,000) $ 160,000
Cash and short-term investments available $ 235,000 $ 619,000
* $140,000 loan on office building listed as current liability.
In addition, in late 1996 the Company purchased 33.7 acres of undeveloped
commercial real estate in Casper, Wyoming. The land is adjacent to and fronts
Interstate 25 and is dissected by East Second Street (the main business
thoroughfare in Casper). The land was purchased for less than 18 cents per
square foot. Business real estate development has increased at adjoining
property. There is no announced time table for development of the land.
Management believes that the carrying value of producing oil and gas properties
is not in excess of the future revenues which will be recovered. Carrying value
of producing properties, net of depletion is $835,000. Oil and gas revenues,
net of expenses were $183,000 for the year. As many of the Company's producing
properties are natural gas properties with lives in excess of twenty-five years,
we believe the carrying value of the assets is fully recoverable.
In addition, the Company has carrying value of $19,000 on non-producing
properties which is net of an allowance for impairment of $8,000. Management
believes the allowance is adequate and the remaining costs in the assets will be
recovered.
Management knows of no environmental assessment problems nor of the potential of
any such environmental assessment. All purchased real estate has had
environmental studies done prior to purchase and our environmental lab has been
instructed on the appropriate procedures for disposals of various kinds of
waste. Such wastes (although relatively insignificant in amount) are tested
prior to disposal as part of an environmental assurance program.
Results of Operations:
This summarization of the Results of Operations will not include the activities
of the discontinued operations. The reader is referred to the section above
entitled Liquidity and Capital Resources and to Footnote No. 9 of the
Consolidated Financial Statements.
Environmental revenues decreased from $3,124,000 to $1,959,000 between 1995 and
1996, this was the result of the Company being able to acquire several large
clients in 1995 and the subsequent completion of some of those contracts. With
the completion of these jobs, and a general downturn in the demand for
environmental services, environmental revenues decreased by $167,000 or 8.5%,
from $1,959,000 in 1996 to $1,792,000 in 1997. This decrease was mainly due
from reducing the size of the Texas office. Environmental expenses decreased
from $2,674,000 in 1995 to $2,276,000 in 1996 but did not decrease
proportionately with the dramatic decrease in revenues. The reason for this is
the Company's inability to decrease its trained staff without jeopardizing its
ability to compete in the market. Between 1996 and 1997 the company was able to
reduce costs by $530,000 or 23% from $2,276,000 in 1996 to $1,746,000 in 1997,
this decrease was mainly due to decreases in staff in Texas, Utah, and Cheyenne
and the majority of the jobs being run from the Casper office.
Oil and gas sales declined slightly from $186,000 in 1995 to $181,000 in 1996.
Oil and gas sales increased from $181,000 in 1996 to $322,000 in 1997 or 78% due
to the drilling of three development wells in 1996 in the Brundage Canyon field.
Oil and gas expenses decreased by $50,000 to $73,000 from 1995 to 1996. This
decline reflects the Company's' acquisition of certain producing overriding
royalties as compared to the bulk of the sales being from more expensive
properties in prior years. Oil and gas expenses increased from $73,000 in 1996
to $139,000 in 1997, a 90% increase reflecting the additional wells drilled in
the Brundage Canyon Field.
Depreciation, depletion and amortization was $194,000 in 1995 compared to
$239,000 in 1996, a 45% increase. This increase reflects the depreciation on
the increased assets purchased in 1995 and 1996. Depreciation, depletion and
amortization increased from $239,000 in 1996 to $254,000 in 1997, a 6.2%
increase due to the depletion and depreciation in the Brundage Canyon Oil Field.
General and administrative costs increased from $217,000 in 1995 to $281,000 in
1996. This increase in overhead costs reflects an increased number of staff
from 1995 to 1996. General and administrative costs decreased by $43,000 from
$281,000 in 1996 to $238,000 in 1997, a 15.3% decrease due to decreases in staff
and other cost-cutting efforts.
Interest expense decreased from $76,000 in 1995 to $65,000 in 1996. This
decrease was due to a declining borrowing base between the years. Interest
expense increased in 1997 to $72,000 from $65,000 in 1996, a 10.7% increase due
to additional outstanding loans. Interest income decreased from $67,000 in 1995
to $43,000 in 1996 to $20,000 in 1997, a 35.8% decrease in 1996 and a 53.4%
decrease in 1997 reflecting the utilization of investments for operations.
Provision for income taxes reflect the amount of current income taxes payable.
No provision has been made for deferred taxes in 1995, 1996, or 1997.
Management believes that although disclosures mandated by SFAS No. 109 are
generally informative, that in the Company's case the application of SFAS No.
109 leads to disclosures which are confusing. To comply with SFAS No. 109 is to
record deferred income tax expense on the books of the Company, when in fact,
the Company has $11,148,000 of net operating loss carryforwards, $2,119,000 of
depletion carryforwards and $43,000 of various income tax credits. This issue
is derived from the application of the provisions of SFAS No. 109 to companies
who have had quasi reorganizations in the past. (Hawks Industries applied the
quasi reorganization provisions ARB #43, effective in 1988.) Specifically,
paragraphs 39 and 49 of SFAS No. 109 require that in cases where there has been
a quasi reorganization, that the tax benefits of loss carryforwards and credits,
earned prior to the date of the quasi reorganization, be ignored when
calculating deferred income tax benefits. Although management believes that
such obscure provisions may give rise to great fodder in the world of academia,
we believe that to apply the principles of SFAS No. 109, paragraphs 39 and 49,
is at variance with the economic realities of the present case. Accordingly, we
have not applied the provisions of SFAS No. 109, paragraphs 39 and 49.
It is management's intent to attempt to reflect the economic reality of our
present tax situation. Given all of the future tax benefits which will be
available to the Company to offset future net income, management believes that
the financial statements presented have accomplished our goal.
ITEM 8 - FINANCIAL STATEMENTS
Hawks Industries, Inc. and Subsidiaries
Index to Consolidated Financial Statements
Report of Certified Public Accountants on
the Financial Statements 16
Consolidated Balance Sheets 17
Consolidated Statements of Operations 18
Consolidated Statements of Shareholders' Equity 19
Consolidated Statements of Cash Flows 20
Notes to Consolidated Financial Statements 21
HOCKER, LOVELETT, HARGENS & SKOGEN, P.C.
Certified Public Accountants
INDEPENDENT AUDITORS' REPORT
To the Shareholders and Board of Directors
Hawks Industries, Inc.
Casper, Wyoming
We have audited the accompanying consolidated balance sheets of Hawks
Industries, Inc. and subsidiaries as of December 31, 1997 and 1996 and the
related consolidated statements of operations, shareholders' equity, and cash
flows for the years ended December 31, 1997, 1996 and 1995. 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 consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
consolidated financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
As described in Note 4, Statement of Financial Accounting Standards No. 109,
~Accounting~for~Income~Taxes~requires that deferred taxes be reflected for
temporary differences resulting from differences between the financial statement
and tax basis of assets and liabilities. SFAS No. 109 also precludes the use of
tax benefits resulting from the carryforward of net operating losses which
originated prior to the Company's quasi-reorganization to increase net income
and specifically requires that they be treated as direct additions to paid-in-
capital. The Company has not provided for recognition of deferred taxes in
accordance with generally accepted accounting principles. If such a provision
were made, net income for 1997, 1996 and 1995 would be increased/(decreased) by
approximately $(11,000), $11,000 and $(61,000), respectively.
In our opinion, except for the effects of omitting deferred income taxes, as
discussed in the third paragraph, the consolidated financial statements referred
to above present fairly, in all material respects, the financial position of
Hawks Industries, Inc. and subsidiaries as of December 31, 1997 and 1996 and the
results of their operations and their cash flows for the years ended December
31, 1997, 1996 and 1995, in conformity with generally accepted accounting
principles.
The Company has not presented the disclosures about oil and gas producing
activities that the Financial Accounting Standards Board has determined is
necessary to supplement, although not required to be part of, the basic
financial statements.
/s/ Hocker, Lovelett, Hargens & Skogen, P.C.
Casper, Wyoming
March 2, 1998
HAWKS INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1997 and 1996
ASSETS 1997 1996
CURRENT ASSETS
Cash (including certificates of deposit 1996 $2,000) $ 30,000 $ 48,000
Accounts receivable 330,000 320,000
Short-term investments 205,000 571,000
Costs on uncompleted contracts in excess of related
billings 12,000 51,000
Other current assets 50,000 52,000
Total current assets 627,000 1,042,000
PROPERTY AND EQUIPMENT, net
(successful efforts method) 2,112,000 2,266,000
NOTE RECEIVABLE 38,000 42,000
LAND INVESTMENT 202,000 202,000
OTHER ASSETS 215,000 213,000
$ 3,194,000 $ 3,765,000
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable $ 240,000 $ 485,000
Current maturities of long-term debt 227,000 101,000
Accounts payable 275,000 402,000
Accrued liabilities 25,000 95,000
Total current liabilities 767,000 1,083,000
LONG TERM DEBT 415,000 445,000
SHAREHOLDERS' EQUITY
Capital stock:
Preferred stock, $.01 par value; authorized 19,940,000
shares; no shares issued - -
Common stock, $.01 par value; authorized 100,000,000
shares; outstanding 1997 - 27,028,194 shares;
1996 - 26,788,858 270,000 268,000
Capital in excess of par value of common stock 2,623,000 2,586,000
Retained (deficit) (since elimination of deficit
at December 31, 1988) (881,000) (617,000)
2,012,000 2,237,000
$ 3,194,000 $ 3,765,000
<FN>
See Notes to Consolidated Financial Statements.
HAWKS INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended December 31, 1997, 1996 and 1995
1997 1996 1995
Operating revenue:
Oil and gas $ 322,000 $ 181,000 $ 186,000
Environmental 1,792,000 1,959,000 3,124,000
Gain (loss) on sale of assets 17,000 6,000 (17,000)
2,131,000 2,146,000 3,293,000
Operating expenses:
Oil and gas 139,000 73,000 123,000
Environmental 1,746,000 2,276,000 2,674,000
Depreciation, depletion and
amortization 254,000 239,000 194,000
General and administrative 238,000 281,000 217,000
2,377,000 2,869,000 3,208,000
Operating income (loss) from
continuing operations (246,000) (723,000) 85,000
Other income (expense):
Other income 34,000 3,000 -
Interest income 20,000 43,000 67,000
Interest expense (72,000) (65,000) (76,000)
Sale of Marketable Securities - - 41,000
Gain (loss) from continuing
operations before taxes (264,000) (742,000) 117,000
Provision for taxes:
Current - - -
Gain (loss) from continuing
operations (264,000) (742,000) 117,000
Discontinued operations - (13,000) (330,000)
Net income (loss) $ (264,000) $ (755,000) $ (213,000)
Weighted average number of
common shares outstanding as
restated for 20:1 reverse stock
split 1,351,147 1,339,443 1,328,915
Earnings (loss) per common share as
restated for 20:1 reverse stock
split:
Gain (loss) from continuing
operations $ (.20) $ (.55) $ .09
Discontinued operations (net) - (.01) (.25)
$ (.20) $ (.56) $ (.16)
<FN>
See Notes to Consolidated Financial Statements.
HAWKS INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Years Ended December 31, 1997, 1996 and 1995
Capital in Accumulated
Common Stock Issued Excess of Earnings
Shares Amount Par Value (Deficit)
Balance January 1, 1995 26,322,782 $ 263,000 $ 2,561,000 $ 351,000
Stock issued to Employee Stock Ownership
Plan Trust 461,076 5,000 24,000 -
Stock bonus granted employee 5,000 - 1,000 -
Net loss - - - (213,000)
Balance December 31, 1995 26,788,858 268,000 2,586,000 138,000
Net loss - - - (755,000)
Balance December 31, 1996 26,788,858 268,000 2,586,000 (617,000)
Stock issued to Employee Stock Ownership
Plan Trust 239,336 2,000 37,000 -
Net loss - - - (264,000)
Balance December 31, 1997 27,028,194 $ 270,000 $ 2,623,000 $ (881,000)
<FN>
See Notes to Consolidated Financial Statements.
HAWKS INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 1997, 1996 and 1995
1997 1996 1995
Cash flows from operating Activities:
Gain (loss) from continuing operations $ (264,000) $ (742,000) $ 117,000
Adjustments to reconcile net gain/loss to
net cash provided:
Depreciation, depletion and amortization 254,000 237,000 194,000
Gain on sale of assets (17,000) (6,000) (24,000)
Impairment of non-producing oil and gas
property 6,000 6,000 37,000
Changes in operating assets and
liabilities:
Decrease (increase) in accounts
receivable (10,000) 384,000 (269,000)
Decrease (increase) in costs in excess
of billings and other current assets 41,000 (45,000) 24,000
Increase (decrease) in accounts payable
and accrued expenses (158,000) 292,000 (202,000)
(148,000) 126,000 (123,000)
Operating cash flow from discontinued
operations - 34,000 (127,000)
Net cash flows provided by (used in) oper.
activities (148,000) 160,000 (250,000)
Cash flow from investing activities:
Purchases of property and equipment (122,000) (614,000) (410,000)
Proceeds from sale of properties 33,000 42,000 216,000
Decrease (increase) in other assets (2,000) 3,000 13,000
Increase in land investment - (202,000) -
Decrease (increase) in note receivable 4,000 4,000 (46,000)
Decrease (increase) in short-term
investments 366,000 236,000 (807,000)
279,000 (531,000) (1,034,000)
Investing cash flow from discontinued
operations - 1,000 285,000
Net cash provided by (used in) investing
activities 279,000 (530,000) (749,000)
Cash flows from financing activities:
Proceeds from sale of stock - - 30,000
Proceeds from debt obligations incurred 200,000 331,000 182,000
Reduction of debt obligations (349,000) (95,000) (307,000)
(149,000) 236,000 (95,000)
Financing cash flow from discontinued
operations - (15,000) (49,000)
Net cash provided by (used in) financing
activities (149,000) 221,000 (144,000)
Decrease in cash and cash equivalents (18,000) (149,000) (1,143,000)
Cash and cash equivalents at beginning of year 48,000 197,000 1,340,000
Cash and cash equivalents at end of year $ 30,000 $ 48,000 $ 197,000
<FN>
See Notes to Consolidated Financial Statements.
HAWKS INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Nature of Business and Significant Accounting Policies
Nature of business:
The Company, through its subsidiary, Western Environmental Services and
Testing, Inc. (WEST), acquired in 1992, is engaged in the environmental
testing business. WEST's emphasis and area of greatest expertise is in air
quality testing. Professional air quality evaluations are performed to
determine the emissions of pollutants into the atmosphere from industrial
sources. Industrial hygiene, along with indoor air quality for the general
public and private business sectors, is also provided.
The chemical laboratory, with analytical services for air, soils, and water
is located at the Casper facility. During 1993, WEST formed a subsidiary,
Western Environmental Services, Inc. to manage environmental remediation
and clean-ups. Due to the decline in the funding of clean-ups nationwide,
this subsidiary was substantially closed in September, 1996.
The Company provides services to the general public, although most clients
are industrial entities. Fees for services are due upon receipt of invoice
and normally collected within 30 days.
The Company is also presently engaged in investing in oil and gas producing
properties with an emphasis on non-operating interests. Previously the
Company had been involved in exploration and production activity but has
de-emphasized this part of the oil and gas business in the last five years.
Sales of oil and gas are made to domestic petroleum purchasing and refining
companies with payment normally received within thirty to sixty days of
date of sale.
The Company formed Central Wyoming Properties, Inc. (a wholly owned
subsidiary) in 1996 to acquire real estate investments. The Company,
through a joint venture with outside parties, to date has acquired an
ownership share of one property.
The Company had also been engaged in the business of aviation publishing
and navigational products assembly and sales through its subsidiary
International Aviation Publishers, Inc., acquired in 1986. During 1990 IAP
formed a new subsidiary, Hawks Books Company, which acquired printing
equipment to print IAP books and also to provide outside printing services.
Substantially all of the assets of IAP were sold as of December 31, 1994
and operations of IAP, Hawks Book Company and SanTech, Inc. are shown as
"Discontinued Operations".
On December 31, 1988 the Company effected a quasi-reorganization whereby
all of its assets (primarily those in the oil and gas industry segment)
were revalued to their estimated fair market value and the retained
earnings deficit was eliminated.
This summary of significant accounting policies of Hawks Industries, Inc.
and subsidiaries (the Company) is presented to assist in understanding the
Company's financial statements. The financial statements and notes are
representations of the Company's management. These accounting policies,
with the exception of the adoption of SFAS No. 109, conform to generally
accepted accounting principles and have been consistently applied in the
preparation of the financial statements.
Principles of consolidation:
The Consolidated Financial Statements include the accounts of the Company
and its subsidiaries. The Company's proportionate share of partnership and
joint venture assets, liabilities, revenue and expenses is consolidated in
the financial statements. In consolidation, all significant intercompany
accounts and transactions have been eliminated.
Note 1. Nature of Business and Significant Accounting Policies (continued)
The Company has one wholly-owned oil and gas subsidiary, Burton/Hawks
Exploration Co., Ltd. The Company also owned 100% of IAP. (All assets have
been sold or transferred to Hawks Industries, Inc. at December 31, 1995 and
operations have been discontinued). IAP had two wholly-owned subsidiaries,
SanTech, Inc., which assembled and sold navigational products, and Hawks
Book Company, formed to own and operate printing equipment. All of Hawks
Book Company's assets have been sold at December 31, 1995 and operations
have been discontinued. All of SanTech, Inc. assets and liabilities have
been sold or transferred to Hawks Industries, Inc. and operations have been
discontinued at December 31, 1996.
The Company also owns 100% of W.E.S.T. which does environmental services
and testing. W.E.S.T. has one wholly owned subsidiary, Western
Environmental Services, Inc. which managed environmental clean-up projects
and performs site evaluations.
The Company also owns 100% of Central Wyoming Properties, Inc. which has
real estate investments.
Cash equivalents:
For purposes of the Statement of Cash Flows, the Company considers highly
liquid debt instruments purchased with a maturity of three months or less
to be cash equivalents.
Concentration of credit risk for cash held at banks:
The Federal Deposit Insurance Corporation insures up to $100,000 of
deposits maintained at any one financial institution. On December 31,
1997, the Company had approximately $135,000 in excess of insured levels.
Accounts receivable:
Accounts receivable consists of regular receivables from customers and a
receivable from a loan to an officer of the Company. At December 31, 1997
and 1996, receivables consisted of the following:
Regular
Accounts Loan to
Total Receivable Officer
1997 $ 330,000 $ 318,000 $ 12,000
1996 $ 320,000 $ 305,000 $ 15,000
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Nature of Business and Significant Accounting Policies (continued)
Property and equipment:
The Company uses the successful efforts method of accounting for oil and
gas producing activities as prescribed by FASB Statement No. 19, "Financial
Accounting and Reporting by Oil and Gas Producing Companies". Under this
method, the costs of unsuccessful exploratory wells and delay rentals are
expensed as incurred. Lease acquisition costs and costs of drilling and
equipping productive exploratory and all development wells are capitalized.
Depreciation and depletion of producing properties and equipment is
computed by the unit-of-production method using Company estimates of
unrecovered proved producing oil and gas reserves. Total capitalized costs
for individual proved oil and gas properties are limited to the estimated
future net revenues from production of proved reserves. An allowance for
impairment has been established and expense charged for the estimated
impairment of non-producing leasehold interests.
Buildings and leasehold improvements, furniture and fixtures,
transportation equipment, and engineering and lab equipment are stated at
cost and depreciated over their estimated useful lives ranging from three
to forty-one years principally by the straight-line method.
The costs of maintenance and repairs are charged to operating expenses as
incurred. The costs of significant additions, renewals and betterment of
properties are capitalized and depreciated over the remaining or extended
useful lives of the properties.
Environmental testing revenue and cost recognition:
Income from environmental testing contracts is reflected in the financial
statements by the completed contract method whereby income and costs are
recognized when the testing has been completed and a report has been
issued. The Company is in the environmental testing business. Due to the
process involved, there is no way feasible to accurately determine the
percentage of completion at any time during the process.
Income taxes:
The Company has elected to omit deferred taxes as required by Statement of
Financial Accounting Standards Number 109, "Accounting for Income Taxes"
(SFAS No. 109).
Investment tax credits will be reflected in the Statement of Operations as
a reduction of income taxes in the year in which they become available for
use.
Earnings per share:
Earnings per common share were computed by dividing net earnings (loss) by
the weighted average number of shares outstanding during the year.
Computation of the weighted average number of outstanding shares excludes
common stock equivalents because their effect would be antidilutive. On
January 8, 1998, at the Company's Annual meeting, a proposal was submitted
to effect a 20 for 1 reverse stock split which reduced the company's
outstanding shares from 27,028,194 to 1,351,515. Therefore, throughout
these financial statements, earnings per share have been restated to
reflect the reverse split.
Bad debt:
Uncollectible accounts receivable are charged directly against earnings
when they are determined to be uncollectible. Use of this method does not
result in a material difference from the valuation method required by
generally accepted accounting principles.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Nature of Business and Significant Accounting Policies (continued)
Environmental costs:
Environmental expenditures that relate to current operations are expensed
or capitalized in accordance with generally accepted accounting principles.
Liabilities for these expenditures are recorded when it is probable that
obligations have been incurred and the amounts can be reasonably estimated.
At December 31, 1997 and 1996, no material liabilities have been recorded
as a range of loss cannot be reasonably estimated.
Use of 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 reporting period. Actual results could differ from those
estimates. The Company uses estimates to compute depreciation and
depletion on oil and gas properties and on other depreciable assets.
Fair value of financial instruments:
The carrying value of cash, receivables and accounts payable approximates
fair value due to the short maturity of these instruments. The carrying
value of short and long-term debt approximates fair value based on
discounting the projected cash flows using market rates available for
similar maturities. None of the financial instruments are held for trading
purposes.
Advertising costs:
The Company expenses advertising costs as incurred. Advertising costs are
deemed immaterial in amount.
Note 2. Property and Equipment
Property and equipment at December 31, 1997 and 1996 consists of the
following:
1997 1996
Non-producing oil and gas properties, net of
valuation allowance of $8,000 in 1997 and
$2,000 in 1996 $ 19,000 $ 26,000
Producing oil and gas properties 1,659,000 1,622,000
Furniture and fixtures 391,000 394,000
Transportation equipment 235,000 265,000
Buildings and leasehold improvements 816,000 816,000
Engineering and lab equipment 1,111,000 1,084,000
Other 118,000 118,000
4,349,000 4,325,000
Less accumulated depreciation and depletion 2,237,000 2,059,000
$ 2,112,000 $ 2,266,000
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 3. Notes Payable, Long-Term Debt and Pledged Assets
Notes payable were as follows at December 31, 1997 and 1996
1997 1996
Short-term notes payable due bank, interest at
8.0% $50,000 matured January 1, 1997 and
$150,000 matured June 23, 1997 collateralized
by certificate of deposit $ - $ 200,000
Revolving line of credit $200,000, interest at
7.25% maturing June 23, 1998 collateralized
by certificate of deposit 200,000 285,000
Short-term note payable due bank, interest at
11.5%, payable $700 per month including
interest until October 15, 1998, then balance
due in lump sum, collateralized by building 40,000 -
$ 240,000 $ 485,000
Long-term debt at December 31, 1997 and 1996 is as follows:
1997 1996
Mortgage note payable to bank, interest set at
3.125%
above U.S. Treasury Bill index for one year
each June 1st, (9.815% at December 31, 1997),
payable $1,490 per month including interest
until April 1, 2003, collateralized by office
building $ 74,000 $ 84,000
Mortgage note payable to City of Casper,
interest at 4%, payable $859 per month
including interest until June 8, 1998 then
balance due in lump sum, collateralized by
office building and warehouse 144,000 149,000
Mortgage notes payable to W.D. Hodges and Jim
Ferris Properties, interest at 9% payable
$971 per month until September 17, 2013,
collateralized by building 97,000 101,000
Mortgage note payable to bank, interest set at
4% above U.S. Treasury Bill index for one
year each April 1st, (9.99% at December 31,
1997) payable $1,251 per month including
interest until March 22, 2009, collateralized
by office building 102,000 106,000
Lease payable, Eaton Financial Corporation,
payable $1,227 per month including interest,
collateralized by computer equipment with
original cost of $49,000, accumulated
depreciation of $22,000 and $17,000 at 1997
and 1996 2,000 11,000
Note payable, State of Wyoming, interest at 4%,
due in quarterly installments of
approximately $4,000 including interest until
May 14, 1998, unsecured 16,000 23,000
Installment loans payable, due at various times
from March 1998 to August, 1999, interest
rates from 7.0% to 10%, secured by equipment 15,000 72,000
Note payable Wyoming Industrial Development
Corporation, interest at 7.33%, payable
$3,991 per month including interest until
October 5, 2002, collateralized by equipment 192,000 -
642,000 546,000
Less current maturities 227,000 101,000
$ 415,000 $ 445,000
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 3. Notes Payable, Long-Term Debt and Pledged Assets (continued)
Aggregate maturities of long-term debt are as follows:
1998 $ 227,000
1999 62,000
2000 64,000
2001 69,000
2002 64,000
Thereafter 156,000
$ 642,000
Actual cash payments for interest during the years ended December 31, 1997,
1996, and 1995 were $72,000, $66,000 and $78,000 respectively.
Note 4. Income Taxes, Accounting Change, Prior Period Restatement
Under SFAS 109 deferred income taxes arise from temporary differences
resulting from differences between the financial statement and tax basis of
assets and liabilities. In financial reporting for oil and gas properties,
the Company uses differing methods to compute depreciation on certain
equipment for financial statement purposes and tax purposes; the tax
depreciation deductions are larger than those for financial statement
purposes primarily due to accelerated depreciation methods and shorter
lives for tax purposes; for financial statement purposes, an allowance for
impairment is established for estimated impairment of non-producing leases;
however, no deduction is taken for taxes until the lease has expired or is
dropped; intangible drilling costs are capitalized for financial statement
purposes and may be expensed for tax purposes as the expenses are incurred;
and, the carrying value of certain equipment has been reduced to
approximate market value, but the loss will be recognized for tax purposes
upon disposition. The Company recognizes income and expense from some
investments on the accrual basis, but uses the cash basis for tax purposes.
Deferred taxes are classified as current and noncurrent depending on the
classification of the assets and liabilities to which they relate.
Deferred taxes arising from timing differences that are not related to an
asset or liability are classified as current or noncurrent depending on the
periods in which the timing differences are expected to reverse.
Management believes that although disclosures mandated by SFAS No. 109 are
generally informative, that in the Company's case the application of SFAS
No. 109 leads to disclosures which are confusing. To comply with SFAS No.
109 is to record deferred income tax expense (credit) on the books of the
Company, when in fact, the Company has $11,148,000 of net operating loss
carryforwards, $2,119,000 of depletion carryforwards and $43,000 of various
income tax credits. This issue is derived from the application of the
provisions of SFAS No. 109 to companies who have had quasi reorganizations
in the past. (Hawks Industries applied the quasi reorganization provisions
ARB #43, effective in 1988.) Specifically, paragraphs 39 and 49 of SFAS
No. 109 require that in cases where there has been a quasi reorganization,
that the tax benefits of loss carryforwards and credits, earned prior to
the date of the quasi reorganization, be ignored when calculating deferred
income tax benefits. Although management believes that such obscure
provisions may give rise to great fodder in the world of academia, we
believe that to apply the principles of SFAS No. 109, paragraphs 39 and 49,
is at variance with the economic realities of the present case.
Accordingly, we have not applied the provisions of SFAS No. 109, paragraphs
39 and 49.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 4. Income Taxes, Accounting Change, Prior Period Restatement (continued)
The following disclosures are provided to show a condensed version of the
financial statements had SFAS No. 109 been implemented.
Balance Sheet 1997 1996
Current assets $ 627,000 $ 1,053,000
Other assets 2,567,000 2,723,000
Total assets $ 3,194,000 $ 3,776,000
Current liabilities $ 767,000 $ 1,083,000
Other liabilities 415,000 445,000
Total liabilities 1,182,000 1,528,000
Capital stock 270,000 268,000
Capital in excess of par value 2,789,000 2,752,000
Retained earnings (deficit) (1,047,000) (772,000)
Total equity 2,012,000 2,248,000
Total liabilities and equity $ 3,194,000 $ 3,776,000
Income Statement 1997 1996 1995
Gain (loss) from continuing
operations before taxes $ (264,000) $ (742,000) $ 117,000
Provision for taxes:
Current - - -
Deferred (11,000) 11,000 (17,000)
(11,000) 11,000 (17,000)
Gain (loss) from continuing
operations (275,000) (731,000) 100,000
Discontinued operations (net of
taxes) - (13,000) (374,000)
Net income (loss) $ (275,000) $ (744,000) $ (274,000
If SFAS No. 109 was implemented, deferred tax (assets) liabilities would be
comprised of the following at December 31:
Tax effects of temporary
differences for: 1997 1996 1995
Accounting for oil & gas
properties $ 57,000 $ 75,000 $ 75,000
Total deferred tax
liabilities 57,000 75,000 75,000
Other liabilities - (11,000) -
Tax loss carryforwards (3,514,000) (3,432,000) (3,452,000)
Tax credit carryforwards (86,000) (126,000) (181,000)
Total deferred tax assets (3,600,000) (3,569,000) (3,633,000)
Net deferred asset (3,543,000) (3,494,000) (3,558,000)
Asset valuation allowances 3,543,000 3,483,000 3,558,000
Net deferred tax asset $ - $ (11,000) $ -
When subsequently recognized, approximately $2,600,000 of the 1997 deferred
tax assets' tax benefits will be allocated directly to contributed capital
as a result of the Company's quasi reorganization in 1988.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 4. Income Taxes, Accounting Change, Prior Period Restatement (continued)
At December 31, 1997, the Company's net operating loss and tax credits
available for carryforward to offset future taxable income and tax
liabilities for income tax reporting purposes expire as follows:
Net Investment
Operating Tax
Year Ending December 31,: Losses Credits
1998 1,653,000 24,000
1999 2,209,000 7,000
2000 1,713,000 12,000
2001 3,767,000 -
2003 101,000 -
2004 96,000 -
2009 265,000 -
2010 359,000 -
2011 744,000 -
2012 241,000 -
$ 11,148,000 $ 43,000
The Company also has approximately $43,000 in unused jobs tax credits and
$2,119,000 in percentage depletion carryforwards available to offset future
income tax liabilities. These items do not expire.
Note 5. Stockholders' Equity
The Company had an Incentive Stock Option Plan for key employees and had
reserved 50,000 shares of unissued common stock to be issued thereunder.
The plan expired on November 19, 1991. The option price was the market
value of the shares on the date the option ($2.80) is granted except for
beneficial holders of more than ten percent of the total outstanding shares
of the Company, whose option price was one hundred ten percent of said
market price. No option may be exercised by any employee until all
previously granted options still outstanding to the same employee are
exercised. There were 2,500 options outstanding and exercisable at
December 31, 1997 and 1996. SFAS No. 123, Accounting for Stock Based
Compensation, has no effect on the Consolidated Statement of Operations as
there have been no changes in the outstanding options.
The Company has an Employee Stock Ownership Plan-Trust. To be eligible to
participate, employees must be 21 years of age and have had at least one
year of continuous employment with the Company. The Company, at the
discretion of the board of directors, may contribute to the plan an amount
not to exceed 25 percent of total qualified compensation in any given year
for any individual to a maximum of $30,000. On occasion, when the Company
has contributed less than the amount allowed, the Company has made
additional contributions under the carryover provisions of the plan in
subsequent years. The total cost to the Company and its subsidiaries was
$8,000, $58,000, and $63,000 in 1997, 1996, and 1995, respectively. The
ESOP compensation expense was $901,000, $1,145,000, and $1,140,000 in 1997,
1996, and 1995, respectively.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 6. Related Parties
The Company, through its subsidiary W.E.S.T., rented an office and
laboratory in Casper, Wyoming from a company affiliated with two directors
(Bruce Hinchey and James Meador) of the Company. Rent paid was $12,000 in
1995. There is a remaining balance owed by the Company of $10,774.
During the year, the CEO, Joseph J. McQuade made multiple personal
transactions at various times on the corporate credit card issued to him.
All transactions were accounted for, and full reimbursement to the Company
has been made as of January 31, 1998. On other occasions CEO, Joseph J.
McQuade advanced funds to the Company for operations. Full reimbursement
to Mr. McQuade has been made as of January 31, 1998.
Note 7. Lease Commitments and Total Rental Expense
The Company rents equipment under various operating lease agreements. The
total minimum rental commitments at December 31, 1997 under the agreements
are $3,000 which is due during the year ending December 31, 1998.
The total equipment rental expense included in the Statements of Operations
for the years ended December 31, 1997, 1996, and 1995 is $43,000, $28,000,
and $198,000, respectively.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 8. Financial Information Relating to Industry Segments
1997 1996 1995
Sales to unaffiliated customers:
Oil and gas industry $ 333,000 $ 188,000 $ 196,000
Environmental testing and
management industry 1,798,000 1,958,000 3,097,000
$ 2,131,000 $ 2,146,000 $ 3,293,000
Discontinued operations $ - $ 44,000 $ 28,000
Operating profit or (loss):
Oil and gas industry $ (36,000) $ (43,000) $ (46,000)
Environmental testing and
management industry (51,000) (433,000) 323,000
Unallocated Corporate expenses (159,000) (247,000) (192,000)
$ (246,000) $ (723,000) $ 85,000
Discontinued operations $ - $ (13,000) $ (330,000)
Identifiable assets:
Oil and gas industry $ 854,000 $ 879,000 $ 619,000
Environmental testing and
management industry 893,000 1,080,000 1,203,000
Corporate assets 1,447,000 1,806,000 2,107,000
Discontinued operations - - 86,000
$ 3,194,000 $ 3,765,000 $ 4,015,000
Capital expenditures:
Oil and gas industry $ 92,000 $ 358,000 $ 189,000
Environmental testing and
management industry 30,000 207,000 214,000
Other capital expenditures - 49,000 7,000
Discontinued operations - - 1,000
$ 122,000 $ 614,000 $ 411,000
Depreciation, depletion and
amortization:
Oil and gas industry $ 111,000 $ 67,000 $ 39,000
Environmental testing and
management industry 103,000 116,000 98,000
Other depreciation, depletion
and amortization 40,000 56,000 57,000
$ 254,000 $ 239,000 $ 194,000
Discontinued operations - $ 2,000 $ 61,000
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 9. Discontinued Operations
On December 23, 1994, the Company adopted a formal plan to sell its
publishing segment for $1,800,000. The disposal date for a substantial
portion of the operations was December 23, 1994. Assets of the publishing
segment sold consisted of the following:
Accounts receivable $ 130,000
Inventory 293,000
Other current assets 205,000
Property and equipment 20,000
Book masters and copyright 50,000
Total assets $ 698,000
In 1995 the publishing company had a $142,000 loss which was $100,000
operating loss and $42,000 loss on the sale of the remaining equipment.
On December 23, 1994, the Company adopted a formal plan to sell its
navigational products segment. A portion of the product line was sold in
conjunction with the disposal of the publishing segment on December 23,
1994. The final disposal date was extended to December 31, 1996. The
assets of the navigational products segment were sold piece meal and
consisted primarily of inventory and property and equipment.
On December 23, 1994, the Company adopted a formal plan to sell its
printing segment. The disposal date was August 15, 1995. The assets of
the printing products segment to be sold as an operating unit, consisted
primarily of inventory and property and equipment. The printing company
assets were sold during 1995 resulting in a loss of $113,000 in addition
the company had a loss from operations of $80,000 prior to the sale.
In 1994, the Company estimated an additional loss on the disposal of all
discontinued operations of $128,000 to be incurred during the phase-out
period of January 1, 1995 through December 31, 1995. Due to the additional
operating losses incurred during the phase-out period and unanticipated
losses on the disposition of certain equipment sales, actual losses of
$458,000 were incurred during 1995 and $13,000 in 1996, exceeding the
original estimates by $340,000. Accordingly, the accompanying consolidated
statements of operations for 1996 and 1995 includes the additional loss.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 9. Discontinued Operations (continued)
Operating results of the publishing, navigational products, printing, and
environmental assembly segments for the period prior to disposal are shown
separately in the accompanying consolidated income statements.
Net sales of the discontinued segments for 1997, 1996, and 1995 were as
follows:
1997 1996 1995
Publishing $ - $ - $ 14,000
Navigational products - 44,000 92,000
Printing - - 81,000
$ - $ 44,000 $ 187,000
These amounts are not included in net sales in the accompanying
consolidated statements of operations.
Note 10. Short-term Investments
Short-term investments consisted of treasury bills and certificates of
deposits which are intended to be held until maturity. The following
schedule summarizes investment activity for the years ended December 31,
1997 and 1996.
1997 1996
Beginning balance, at cost $ 571,000 $ 807,000
Purchase of investments - 253,000
Redemption of investments (383,000) (518,000)
Earnings on investments 17,000 29,000
Ending balance, at cost $ 205,000 $ 571,000
Approximate market value $ 205,000 $ 571,000
At December 31, 1997 the investments are scheduled to mature during the
year ending December 31, 1998.
Note 11. Major Customers
The following companies are considered major customers which accounted for
ten percent or more of total revenues in 1997, 1996 and 1995.
Percentage Service
1997 1996 1995
Newmont Gold 9% 22% 23% Environmental testing
Dames and Moore - 15% 10% Environmental testing
Owens Corning 12% - - Environmental testing
Amoco Production 10% - - Environmental testing
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 12. Note Receivable
The note receivable on December 31, 1997, consisted of $42,000 due from
the sale of printing equipment, building and other assets, part of which
is shown in current assets. The note receivable is secured by above
assets. The note has an interest rate of 9%.
Maturities on this note are as follows:
1998 4,000
1999 4,000
2000 5,000
2001 5,000
2002 6,000
Thereafter 18,000
$ 42,000
Note 13. Subsequent Events
Effective February 1, 1998, Registrant, Hawks Industries, Inc., and a third
party investor, entered into an agreement with the Company's President,
Joseph J. McQuade, whereby Mr. McQuade and his immediate family's
stockholdings have been purchased by the third party investor at $.10 per
share. The Company has entered into a severance agreement with Mr. McQuade
which includes a covenant not to compete. Under the terms of the
Agreement, the Company will pay $50,000 per year for four (4) years,
payable in semi-monthly installments, to McQuade in exchange for the non-
compete provision. Mr. McQuade has, effective on the same date, resigned
as President of the Company and Chairman of the Board of Directors. Mr.
Bruce A. Hinchey, presently the Company's Vice President, has been elected
by the Board of Directors to be the President of the Corporation and James
E. Meador, Jr., was selected to be the new Vice-President. No replacement
for Mr. McQuade has been made as of yet on the Board of Directors.
The third party investor, the Anne D. Zimmerman Revocable Trust dated
November 14, 1991 ("the Trust"), by acquiring Mr. McQuade's and his
immediate family's shares, has 3,063,331 shares and therefore has acquired
11.2% of the outstanding shares of the Company. As such, the Trust is
deemed to be a controlling person. The Trustee of the Trust, Anne D.
Zimmerman, will not sit on the Company's Board of Directors, nor will she
be an employee or officer of the Company.
Reverse Stock Split
At the Company's Annual Meeting held on January 8, 1998, the Company
submitted to a vote of security holders, through the solicitation of
proxies or otherwise, a proposal to effect a 20 for 1 reverse split which
was approved. The reverse split changed the number of shares outstanding
from 27,028,194 to 1,351,515.
Note 14. Supplemental Disclosure
Noncash Financing Activities
The Company issued 239,336 shares of common stock with a market value of
$39,000 in exchange for amount payable to the Employee Stock Owner Plan &
Trust.
Other Disclosures
The Company paid no income taxes during the years ended December 31, 1997,
1996, and 1995.
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
-NONE-
PART III
The information called for by Items 10, 11, 12, and 13 is incorporated by
reference from the Company's Definitive Proxy Materials to be filed by paper
dated November 17, 1997 and EDGAR confirming copy March 5, 1998 pursuant to
Regulation 14 A.
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Related Transactions:
During the year, the CEO, Joseph J. McQuade made multiple personal transactions
at various times on the corporate credit card issued to him. All transactions
were accounted for, and full reimbursement to the Company has been made as of
January 31, 1998. On other occasions CEO, Joseph J. McQuade advanced funds to
the Company for operations. Full reimbursement to Mr. McQuade has been made as
of January 31, 1998.
PART IV
ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8K
(a) The following documents are filed as part of this Report:
1. Financial Statements:
Report of Certified Public Accountants
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Shareholders' Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
2. Financial Statement Schedules and Exhibits required to be filed by
Item 8 of this form and by paragraph (d) of this Item:
(b) Reports on Form 8-K
The Company filed no reports on form 8K for the fourth quarter.
SIGNATURES
Pursuant to the requirements of Section 13 and 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this Report to be signed on its
behalf by the undersigned thereunto duly authorized.
HAWKS INDUSTRIES, INC.
/s/ Bruce A. Hinchey
----------------------------
Bruce A. Hinchey, President
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report
has been signed below by the following persons on behalf and in the capacities
and on the dates indicated.
Signatures Date
/s/ Bruce A. Hinchey March 17, 1998
- ------------------------------
Bruce A. Hinchey, President,
Principal Executive Officer
and Director
/s/ James E. Meador, Jr. March 17, 1998
- ------------------------------
James E. Meador, Jr.
Vice President and Director
/s/ Bill Ukele March 17, 1998
- ------------------------------
Bill Ukele
Chief Financial Officer
/s/ Dwight B. Despain March 17, 1998
- ------------------------------
Dwight B. Despain
Secretary/Treasurer and Director
/s/ Gerald E. Moyle March 17, 1998
- ------------------------------
Gerald E. Moyle
Director
EXHIBIT 21.0
LIST OF SUBSIDIARIES OF REGISTRANT
HAWKS INDUSTRIES, INC. SUBSIDIARIES-STATE OF INCORPORATION
DECEMBER 31, 1997
Company Parent State
Burton-Hawks Exploration Co., Ltd. (Hawks Ind.) Colorado
Western Environmental Services Inc. (WEST, Inc.) Colorado
Western Environmental Services and Testing, Inc. (Hawks Ind.) Wyoming
Central Wyoming Properties, Inc. (Hawks Ind.) Wyoming