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 September 30, 1998 Commission File Number: 0-5781
HAWKS INDUSTRIES, INC.
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(Exact name of registrant as specified in its charter)
Wyoming 83-0211955
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
913 Foster Road, Casper, Wyoming 82601
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(Address of principal executive offices)
Registrant's telephone number, including area code(307) 234-1593
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N/A
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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 September 30, 1998
- ------------------------ ------------------------------------
Capital Stock, $.01 par value 1,351,515
INDEX
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PAGE
PART I FINANCIAL INFORMATION 3
Consolidated Balance Sheets
September 30, 1998 and December 31, 1997 4
Consolidated Statements of Operations
Three months and Nine months ended
September 30, 1998 and 1997 5
Consolidated Statements of Cash Flows
Nine months ended September 30, 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
September 30, December 31,
1998 1997
(unaudited)
ASSETS
------
CURRENT ASSETS
Cash $ 32,000 $ 30,000
Accounts receivable 557,000 330,000
Short-term investments 202,000 205,000
Costs on uncompleted contracts in excess 34,000 12,000
of related billings
Other current assets 63,000 50,000
PROPERTY AND EQUIPMENT, net (successful
efforts method) 1,742,000 2,112,000
NOTE RECEIVABLE 34,000 38,000
LAND INVESTMENT 196,000 202,000
AVAILABLE FOR SALE INVESTMENTS 100,000 -
OTHER ASSETS 262,000 215,000
$ 3,222,000 $ 3,194,000
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES
Notes payable $ 303,000 $ 240,000
Current maturities of long-term debt 115,000 227,000
Accounts payable 241,000 275,000
Accrued liabilities 37,000 25,000
Total current liabilities 696,000 767,000
LONG-TERM DEBT 364,000 415,000
CONTINGENT LIABILITY (SEE NOTE 4) - -
SHAREHOLDERS' EQUITY
Capital stock:
Preferred stock, $.01 par value;
authorized 997,000shares;
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) (731,000) (881,000 )
2,162,000 2,012,000
$ 3,222,000 $ 3,194,000
<FN>
See Notes to Consolidated Financial Statements
HAWKS INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months and Nine Months Ended September 30, 1998 and 1997
(Unaudited)
Three Months Ended September Nine Months Ended
30, September 30,
1998 1997 1998 1997
---- ---- ---- ----
Operating revenue:
Oil and gas $ 34,000 $ 63,000 $ 176,000 $ 262,000
Environmental 560,000 494,000 1,680,000 1,385,000
Gain on sale of assets - 5,000 3,000 17,000
594,000 562,000 1,859,000 1,664,000
Operating expenses:
Oil and gas (8,000) 29,000 35,000 112,000
Environmental 462,000 462,000 1,384,000 1,362,000
Depreciation, depletion and
amortization 50,000 65,000 156,000 194,000
General and administrative 36,000 52,000 152,000 175,000
540,000 608,000 1,727,000 1,843,000
Operating Income (loss) from
operations 54,000 (46,000) 132,000 (179,000)
Other income (expense):
Other income 3,000 6,000 16,000 29,000
Interest income 3,000 6,000 10,000 17,000
Interest expense (17,000) (18,000) (56,000 ) (53,000)
Sale of buildings - - 48,000 -
Income (Loss) Before Taxes 43,000 (52,000) 150,000 (186,000)
Provision for taxes:
Current - - - -
Net income (loss) $ 43,000 $ (52,000) $ 150,000 $ (186,000)
Weighted average number of
common shares outstanding 1,351,515 1,351,410 1,351,515 1,351,059
Income (Loss) per common share $ 0.03 $ (0.04) $ 0.11 $ (0.13)
<FN>
See Notes to Consolidated Financial Statements
HAWKS INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
Nine Months Ended September 30, 1998 and 1997
(Unaudited)
1998 1997
---- ----
Cash flows from operating activities:
Income (Loss) from operations $ 150,000 $ (186,000)
Adjustment to reconcile net loss to net
cash provided:
Depreciation, depletion and amortization 156,000 194,000
Impairment of non-producing oil and gas
property 4,000 4,000
Gain on sale of assets (51,000) (17,000)
Changes in operating assets and
liabilities:
Increase in accounts receivable (227,000) (144,000)
Decrease (increase) in costs in excess
of billings and other current assets (35,000) 39,000
Decrease in accounts payable and accrued
expenses (22,000) (98,000)
Net cash flow used in operating activities (25,000) (208,000)
Cash flows from investing activities:
Purchases of property and equipment (196,000) (85,000)
Proceeds from sale of properties 457,000 33,000
Increase in other assets (47,000) (3,000)
Decrease in note receivable 4,000 3,000
Decrease in land investment 6,000 -
Increase in available for sale investments (100,000) -
Decrease in short-term investments 3,000 318,000
Net cash flow provided by investment
activities 127,000 266,000
Cash flows from financing activities:
Proceeds from debt obligations incurred 183,000 200,000
Reduction of debt obligations (283,000) (321,000)
Issuance of common stock - 39,000
Net cash provided by (used in) financing
activities (100,000) (82,000)
Increase (decrease) in cash and cash
equivalents 2,000 (24,000)
Cash and cash equivalents at beginning of
year 30,000 48,000
Cash and cash equivalents at end of period $ 32,000 $ 24,000
<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 September 30, 1998 and December 31, 1997 consists of
the following:
1998 1997
---- ----
Nonproducing oil and gas properties, net of
valuation allowance of $1,000 in 1998 and
$8,000 in 1997 $ 15,000 $ 19,000
Producing oil and gas properties 1,655,000 1,659,000
Furniture and fixtures 385,000 391,000
Transportation equipment 200,000 235,000
Buildings and leasehold improvements 369,000 816,000
Engineering and lab equipment 1,259,000 1,111,000
Other 59,000 118,000
3,942,000 4,349,000
Less accumulated depreciation and depletion 2,200,000 2,237,000
$ 1,742,000 $ 2,112,000
Note 2. Notes Payable, Long-Term Debt, and Pledged Assets
Notes payable at September 30, 1998 and December 31, 1997 are as follow:
1998 1997
---- ----
Revolving line of credit $230,000, interest at
Citibank Prime plus /%, (9.25% at September 30,
1998) maturing May 13, 1999, collaterized by oil and
gas properties $ 90,000 $ -
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
Short-term notes payable due bank, interest at 10%,
due October 25, 1998, collateralized by accounts
receivable 45,000 -
Revolving line of credit $200,000, interest at 6.6% -
7.0% maturing June 23, 1999, collateralized by 168,000 200,000
certificates of deposit
$ 303,000 $ 240,000
Long-Term debt at September 30, 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 collateralized by office building $ - $ 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, - 144,000
collateralized by office building and warehouse
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 96,000 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, (9.3% at September 30, 1998) payable
$1,213 per month including interest until March 22,
2009, collateralized by office building $ 97,000 $ 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 $26,000 and $22,000 at
1998 and 1997 - 2,000
Note payable, State of Wyoming, interest at 4%, due in
monthly installments of approximately $1,000
including interest until balance paid, unsecured 9,000 16,000
Installment loans payable, due August 1999 to May
2001, interest at 7% to 10%, secured by automotive
equipment 23,000 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. 166,000 192,000
Note payable Wyoming Industrial Development
Corporation, interest at 6.96%, payable $4,475 per
month including interest until June 15, 2000,
collateralized by equipment. 88,000 -
479,000 642,000
Less current maturities 115,000 227,000
$ 364,000 $ 415,000
Aggregate maturities of long-term debt are as follow:
1998 $ 29,000
1999 112,000
2000 84,000
2001 58,000
2002 47,000
Thereafter 149,000
$ 479,000
Actual cash payments for interest during the periods ended September 30, 1998
and 1997 were $56,000 and $49,000 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 $ 176,000 $ 273,000
Environmental testing and management
industry 1,683,000 1,391,000
$ 1,859,000 $ 1,664,000
Operating profit or (loss):
Oil and gas industry $ 29,000 $ 1,000
Environmental testing and management
industry 219,000 (48,000 )
Unallocated corporate expenses (116,000) (132,000 )
$ 132,000 $ (179,000 )
Identifiable assets:
Oil and gas industry $ 788,000 $ 859,000
Environmental testing and management
industry 1,247,000 1,005,000
Corporate assets 1,187,000 1,535,000
$ 3,222,000 $ 3,399,000
Capital expenditures:
Oil and gas industry $ 3,000 $ 70,000
Environmental testing and management
industry 193,000 15,000
$ 196,000 $ 85,000
Depreciation, depletion and amortization:
Oil and gas industry $ 70,000 $ 89,000
Environmental testing and management
industry 79,000 73,000
Other depreciation, depletion, and
amortization 11,000 36,000
$ 160,000 $ 198,000
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 were
purchased by the third party investor at $0.10 per share($2.00 post-split). 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, effective on
the same date, resigned as President of the Company and Chairman of the Board of
Directors. Mr. Bruce A. Hinchey, the Company's Vice President, was elected by
the Board of Directors to be the President of the Corporation and Mr. James E.
Meador, Jr., was selected to be the Vice-President. No replacement for Mr.
McQuade, on the Board of Directors, has been made as of the date of this report.
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.
Note 5. Sale of Buildings
On May 26, 1998, the Company signed an agreement to sell its buildings located
at 7345 6WN Road and 7383 6WN Road in Natrona County, Wyoming to WERCS, a
Wyoming Corporation. As set forth in the agreement, the closing date was June
1, 1998 and the total sales price for both buildings was $417,000.
The Company's cost in the buildings was $506,000. The Company's basis in the
buildings was $367,000. Therefore, the Company had an approximate $50,000 gain
resulting from the transaction.
The $417,000 was received as $317,000 cash and 10,000 shares of WERCS 4%
preferred convertible stock.
The majority owner of WERCS, a Wyoming Corporation, is Dr. Gail D. Zimmerman
whose spouse, through the Anne D. Zimmerman Revocable Trust, owns 11.2% of the
outstanding shares of Hawks Industries, Inc. stock.
HAWKS INDUSTRIES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Liquidity and Capital Resources:
- --------------------------------
As of September 30, 1998 the Company had working capital of $192,000. During
the first nine months of 1998 the following items contributed in increasing
working capital from a $140,000 deficit to the current $192,000 positive figure.
1. During the quarter ended September 30, 1998 the Company reported
earnings of $43,000 and earnings for the nine month period of $150,000. From
these earnings the Company has increased accounts receivable from year end by
$227,000. Reducing the $150,000 net income was $160,000 non-cash
depreciation, depletion and amortization. The Company purchased $196,000 of
property and equipment during the first nine months of 1998, including
$29,000 of property and equipment during the third quarter of 1998. This is
the amount anticipated to also be purchased in the fourth quarter of 1998.
2. The Company sold its buildings on 6WN Road in Natrona County, Wyoming.
This enabled the Company to pay off approximately $190,000 in current portion
of long-term debt and short-term notes payable, along with providing the
company with approximately $65,000 in cash and $100,000 available for sale
investment, which can be converted to cash upon request. The buildings had
been listed with a realtor for more than two years. They were sold by the
officers which saved approximately $28,000 in realtor fees.
3. Through local banks, the Company has been able to use accounts
receivable as collateral for short-term borrowings for current cash demands
in its environmental engineering business. This, along with a $200,000
revolving line of credit, has enabled the Company to perform on larger
contracts which would not have been possible in the past. Also, the company
has a $230,000 revolving line of credit for its oil and gas division. To
date, the Company has borrowed $100,000 of this line of credit to pay off
past drilling costs in its Brundage Canyon Field. The balance of that loan,
at September 30, 1998, is $90,000.
Results of Operations:
- ---------------------
In the third quarter of 1998, the Company reported $43,000 net income compared
to a $52,000 net loss in 1997. This $95,000 increase was due to increased
revenues in the environmental business.
Environmental Engineering :
- ---------------------------
Environmental engineering revenues for the third quarter increased by $66,000,
or 13% compared with the third quarter of 1997. Revenues for the nine months
ended September 30, 1998 were up by $295,000 or 21% over the same nine months of
1997.
The quarter and nine months of 1998 were aided by two large industrial contracts
that were not in existence in 1997. Environmental engineering expenses were the
same for the third quarter of 1998 and 1997. Expenses for the first nine months
of 1998 were up by $22,000 or 1.6% over the nine months ended September 30,
1998. The expense increase in 1998 was the result of additional work over the
corresponding nine months in 1997.
Oil and Gas:
- ------------
Oil and gas revenues declined from $262,000 in 1997 to $176,000 or 33% for the
nine months ended September 30, 1998. Revenues for the quarter were down by
$29,000 or 46%. These reductions were caused by lower oil prices, by as much as
50%. 1997 revenues were higher due to "flush" production from the Brundage
Canyon wells that were drilled late in 1996. The oil and gas expenses were
lowered by a refund of taxes from the State of Utah for credits from work-over
activities on several wells in the Brundage Canyon field, which reduced the
operating costs to a negative number. Also, expenses were lower due to a
reduction of the number of wells producing in the Brundage Canyon field.
Additional Information:
- -----------------------
The Company had depreciation, depletion, and amortization(DD&A) of $160,000 for
1998 compared to $198,000 in the nine months ended September 30, 1997. This
was a 19% reduction. For the quarter ended September 30, 1998, DD&A was $15,000
less compared to the quarter ended September 30, 1997 or a 23% reduction.
These DD&A declines were the result of less depreciation and depletion from the
Company's oil and gas properties due to lower production.
General and administrative costs were lower by $23,000 or 15% for the nine
months ended September 30, 1998 compared with the nine months ended September
30, 1997. General and administrative costs were lower by $16,000, or 31% for
the comparable quarters of 1998 and 1997. These reductions were due to cost
saving practices initiated by management.
Interest expense was higher by $3,000 or 6% for the nine months and
approximately the same for the quarter ended September 30, 1998. The slight
increase was due to increases in short-term borrowings for the periods in 1998.
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,
1998, 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 third quarter 1998 no
such income tax provision would have been necessary.
Year 2000 Compliant
- -------------------
The Company's computer systems, software, and related technologies are affected
by the Year 2000 compliance issue. We have been identifying and correcting
affected applications to ensure that all of our key computer systems will be
Year 2000 compliant by early 1999. We are also working with our vendors and
suppliers to ensure their compliance. Costs to modify such applications have
been, and are estimated to remain immaterial to our results of operations or
financial condition.
Part II OTHER INFORMATION
Item 6. None
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: October 28, 1998 By: /s/ Bruce A. Hincey
__________________________
Bruce A. Hinchey, President and
Chief Executive Officer
Date: October 28, 1998 By: /s/ Bill Ukele
_____________________
Bill Ukele, Controller and
Chief Financial Officer