SECURITIES & EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended March 31, 1998 Commission File Number: 0-5781
HAWKS INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
Wyoming 83-0211955
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
913 Foster Road, Casper, Wyoming 82601
(Address of principal executive offices)
Registrant's telephone number, including area code(307) 234-1593
N/A
Former name, former address and former fiscal year, if changed since last report
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
----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the close of the period covered by this report.
Class Outstanding at March 31, 1998
- ------------------------ ------------------------------------
Capital Stock, $.01 par value 1,351,515
INDEX
PAGE
PART I FINANCIAL INFORMATION 3
Consolidated Balance Sheets
March 31, 1998 and December 31, 1997 4
Consolidated Statements of Operations
Three months ended March 31, 1998 and 1997 5
Consolidated Statements of Cash Flows
Three months ended March 31, 1998 and 1997 6
Notes to Consolidated Financial Statements 7
Management's Discussion and Analysis of
Financial Condition and Results of Operation 11
PART II OTHER INFORMATION 13
PART I: FINANCIAL INFORMATION
The accompanying unaudited Consolidated Financial Statements have been prepared
in accordance with the instructions to Form 10-Q and do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered necessary for a
fair presentation have been included.
These statements should be read in conjunction with the Financial Statements and
notes thereto included in the Company's Annual Report to Shareholders and Form
10-K for the year ending December 31, 1997.
HAWKS INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December
March 31, 31,
1998 1997
(unaudited)
ASSETS
CURRENT ASSETS
Cash $ 25,000 $ 30,000
Accounts receivable 350,000 330,000
Short-term investments 208,000 205,000
Costs on uncompleted contracts in excess of 10,000 12,000
related billings
Other current assets 54,000 50,000
Total current assets 647,000 627,000
PROPERTY AND EQUIPMENT, net (successful efforts
method) 2,085,000 2,112,000
NOTE RECEIVABLE 37,000 38,000
LAND INVESTMENT 196,000 202,000
OTHER ASSETS 264,000 215,000
$ 3,229,000 $ 3,194,000
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable $ 269,000 $ 240,000
Current maturities of long-term debt 217,000 227,000
Accounts payable 340,000 275,000
Accrued liabilities 28,000 25,000
Total current liabilities 854,000 767,000
LONG-TERM DEBT 402,000 415,000
SHAREHOLDERS' EQUITY
Capital stock:
Preferred stock, $.01 par value; authorized
997,000
shares; no shares issued - -
Common stock, $.01 par value; authorized
5,000,000 shares; outstanding 1998 -
1,351,515 shares;
1997 - 1,351,515 shares 13,000 13,000
Capital in excess of par value of common stock 2,880,000 2,880,000
Retained (deficit) (since elimination of deficit
at
December 31, 1988) (920,000) (881,000)
1,973,000 2,012,000
$ 3,229,000 $ 3,194,000
<FN>
See Notes to Consolidated Financial Statements
HAWKS INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31 1998 AND 1997
(UNAUDITED)
1998 1997
Operating revenue:
Oil and gas $ 97,000 $ 128,000
Environmental 404,000 405,000
Gain on sale of assets 3,000 12,000
504,000 545,000
Operating expenses:
Oil and gas 29,000 41,000
Environmental 397,000 463,000
Depreciation, depletion and amortization 54,000 65,000
General and
administrative 58,000 56,000
538,000 625,000
Operating loss from operations (34,000) (80,000)
Other income (expense):
Other income 10,000 15,000
Interest income 4,000 6,000
Interest expense (19,000) (18,000)
Loss from operations before taxes (39,000) (77,000)
Provision for taxes:
Current - -
Net loss (39,000) (77,000)
Weighted average number of common shares outstanding 1,351,515 1,350,346
Loss per common share $ (.03) $ (.06)
<FN>
See Notes to Consolidated Financial Statements
HAWKS INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 1998 AND 1997
(UNAUDITED)
1998 1997
Cash flows from operating activities:
Loss from operations $ (39,000) $ (77,000)
Adjustment to reconcile net loss to net cash
provided:
Depreciation, depletion and amortization 54,000 65,000
Impairment of non producing oil and gas
property 1,000 2,000
Gain on sale of assets (3,000) (12,000)
Changes in operating assets and liabilities:
Decrease (Increase) in accounts
receivable (20,000) 11,000
Decrease (Increase) in short-term
investments (3,000) 260,000
Decrease (increase) in costs in excess of
billings and other current assets (2,000) 39,000
(Decrease) increase in accounts payable
and accrued expenses 68,000 (113,000)
Net cash flow provided by operating activities 56,000 175,000
Cash flows from investing activities:
Purchases of property and equipment (60,000) (33,000)
Proceeds from sale of properties 35,000 23,000
Increase in other assets (49,000) (2,000)
Decrease in note receivable 1,000 1,000
Decrease in land investment 6,000 -
Net cash flow used in investing activities (67,000) (11,000)
Cash flows from financing activities:
Proceeds from debt obligations incurred 29,000 40,000
Reduction of debt obligations (23,000) (238,000)
Issuance of common stock - 40,000
Net cash provided by financing activities 6,000 (158,000)
Increase in cash and cash equivalents (5,000) 6,000
Cash and cash equivalents at beginning of year 30,000 48,000
Cash and cash equivalents at end of year $ 25,000 $ 54,000
<FN>
See Notes to Consolidated Financial Statements.
HAWKS INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Property and Equipment
Property and equipment at March 31, 1998 and December 31, 1997 consists of the
following:
1998 1997
Nonproducing oil and gas properties, net of valuation
allowance of $9,000 in 1998 and $8,000 in 1997 $ 18,000 $ 19,000
Producing oil and gas properties 1,655,000 1,659,000
Furniture and fixtures 382,000 391,000
Transportation equipment 181,000 235,000
Buildings and leasehold improvements 816,000 816,000
Engineering and lab equipment 1,167,000 1,111,000
Other 118,000 118,000
4,337,000 4,349,000
Less accumulated depreciation and depletion 2,252,000 2,237,000
$ 2,085,000 $ 2,112,000
Note 2. Notes Payable, Long-Term Debt and Pledged Assets
Notes payable at March 31, 1998 and December 31, 1997 are as follows:
1998 1997
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 $ 39,000 $ 40,000
Short-term notes payable due bank, interest at 10%,
due May 31, 1998, collateralized by accounts
receivable 54,000 -
Revolving line of credit $200,000, interest at 7.25%
maturing June 23, 1998, collateralized by
certificate of deposit 176,000 200,000
$ 269,000 $ 240,000
Long-Term debt at March 31, 1998 and December 31, 1997 is as follows:
1998 1997
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 March 31, 1998), payable
$1,490 per month including interest until April 1,
2003, collateralized by office building $ 72,000 $ 74,000
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 143,000 144,000
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 97,000
HAWKS INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 2. Notes Payable, Long-Term Debt and Pledged Assets (cont.)
1998 1997
Mortgage note payable to bank, interest set at 4%
above U.S. Treasury Bill index for one year each
April 1st, (9.99% at March 31, 1998) payable
$1,251 per month including interest until March
22, 2009, collateralized by office building $ 100,000 $ 102,000
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
$23,000 and $22,000 at 1998 and 1997 - 2,000
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 16,000
Installment loan payable, due August 1999, interest
at 7%, secured by equipment 8,000 15,000
Note payable Wyoming Industrial Development
Corporation, interest at 7.33%, payable $3,991 per
month including interest until October 5, 2002,
collateralized by equipment. 183,000 192,000
619,000 642,000
Less current maturities 217,000 227,000
$ 402,000 $ 415,000
Aggregate maturities of long-term debt are as follows:
1998 $ 204,000
1999 63,000
2000 64,000
2001 69,000
2002 63,000
Thereafter 156,000
$ 619,000
Actual cash payments for interest during the periods ended March 31, 1998 and
1997 were $19,000 and $18,000 respectively.
HAWKS INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 3. Financial Information Relating to Industry Segments
1998 1997
Sales to unaffiliated customers:
Oil and gas industry $ 97,000 $ 137,000
Environmental testing and management industry 407,000 408,000
$ 504,000 $ 545,000
Operating profit or (loss):
Oil and gas industry $ 21,000 $ 40,000
Environmental testing and management industry (14,000) (82,000)
Unallocated corporate expenses (41,000) (38,000)
$ (34,000) $ (80,000)
Identifiable assets:
Oil and gas industry $ 827,000 $ 845,000
Environmental testing and management industry 919,000 878,000
Corporate assets 1,483,000 1,694,000
$ 3,229,000 $ 3,417,000
Capital expenditures:
Oil and gas industry $ 3,000 $ 24,000
Environmental testing and management industry 57,000 9,000
$ 60,000 $ 33,000
Depreciation, depletion and amortization:
Oil and gas industry $ 22,000 $ 29,000
Environmental testing and management industry 23,000 26,000
Other depreciation, depletion and amortization 9,000 10,000
$ 54,000 $ 65,000
Note 4. Significant 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.
HAWKS INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 4. Significant Events (cont.)
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 (153,167 shares after
reverse split) 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.
HAWKS INDUSTRIES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Liquidity and Capital Resources:
The Company's current assets are $207,000 less than current liabilities at March
31, 1998. Included in current liabilities are $182,000 of loans on buildings
the company owns on 6 WN Road, Casper, Wyoming. These buildings are currently
up for sale. However, if they are not sold, the Company has found long-term
financing for these loans. The Company provided $56,000 of working capital from
operations during the first quarter of 1998 compared to $175,000 in the first
quarter of 1997. In the first quarter of 1998, the Company showed a loss of
$39,000. Of the $39,000 loss in the first quarter, the Company had non-cash
depreciation, depletion and amortization write-offs of $54,000. The Company
purchased approximately $60,000 of property and equipment in the first quarter
of 1998 and used working capital to retire $23,000 of debt obligations. $29,000
of new debt obligations were incurred for operational expense on new contracts.
Results of Operations:
In the first quarter of 1998, the Company reported a loss of $39,000 compared to
$77,000 loss in the first quarter of 1997. The primary reason for the $38,000
loss reduction was cost cutting efforts in the environmental engineering
business segment.
Environmental Engineering :
Environmental engineering revenues were approximately the same in 1998 and 1997,
with less than a 1% drop from $408,000 to $407,000. Environmental engineering
expenses were $397,000 in 1998, compared to $463,000 in 1997, this was a 14%
reduction from 1997. The decline was due to cost reductions as noted in the
company's year end report, from reducing the size of the Texas and Salt Lake
City offices and providing job support from the Casper office.
Oil and Gas:
Oil and gas revenues declined 24% from $128,000 in 1997 to $97,000 in 1998.
This decline was due to 1997 showing the flush production from the Brundage
Canyon wells drilled in late 1996. Also, the price per barrel of oil was
substantially lower in the first quarter of 1998 compared to the first quarter
of 1997. Oil and gas operating expenses decreased by 19% from $41,000 in 1997
to $29,000 in 1998. This decline was the result of the reduced costs on the
Brundage Canyon wells after they were initially completed.
Additional Information:
The Company had depreciation, depletion and amortization of $54,000 in 1998
compared to $65,000 in 1997, or a 17% reduction. This reduction in depreciation
and depletion was due to declining production in the Brundage Canyon Field in
Duchesne County, Utah.
General and administrative costs were $58,000 in 1998 compared to $56,000 in
1997. This 3% increase was mainly due to increases in professional fees due to
the buyout of the former CEO and President, Joseph J. McQuade, the reverse stock
split, and the change of Domicile from Delaware to Wyoming in the first quarter
of 1998.
HAWKS INDUSTRIES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATION
Results of Operations: continued
Interest expense was $19,000 in 1998 compared to $18,000 in 1997. Although debt
levels declined moderately, interest rates increased from levels of one year ago
and the corresponding $1,000 increase occurred.
Income taxes:
The Company has significant net operating loss carryforwards, investment tax
credit carryforwards, and other carryforward items, and accordingly will not be
liable for ordinary income taxes.
In addition, should the Company utilize certain loss carryforwards which were
earned prior to the date of the Company's quasi reorganization at December 31,
1988, Financial Accounting Statement No. 109 requires that deferred taxes be
provided. The Company has taken the position that to provide such disclosure is
not only meaningless but somewhat distortive. As of the first quarter 1998 no
such income tax provision would have been necessary.
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
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 (153,167 shares after
reverse split) 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.
SIGNATURES
Pursuant to the requirements 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.
(Registrant)
Date: May 14, 1997 By: /s/ Bruce A. Hinchey
Bruce A. Hinchey, President and
Chief Executive Officer
Date: May 14, 1997 By: /s/ Bill Ukele
Bill Ukele, Controller and
Chief Financial Officer