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, 1998
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 February 25, 1999, was $1,335,338.
As of February 25, 1999, Registrant had 1,335,338 shares of Common Stock, $.01
Par Value outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Definitive Proxy Materials filed pursuant to Regulation 14(a) by EDGAR,
September 25, 1998
PART I.
ITEM 1 - BUSINESS
Forward-Looking Statements
This Form 10-K includes "forward-looking statements" within the meaning of
Section 27A of the Securities Act Of 1933, as amended ( the " Securities Act" ),
and Section 21E of the Securities Exchange Act Of 1934, as amended ( the
"Exchange Act"). All statements other than statements of historical fact
included in this Form 10-K are forward looking statements. These forward
looking statements include, without limitations, statements under "ITEM 7.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS-Financial Condition, Lquidity and
Capital Resources", and notes to the Financial Statements located elsewhere
herein regarding the Company's financial position and liquidity, the amount
of and its liability to make debt service payments, its strategies, financial
instruments, and other matters, are forward looking statements. Although the
Company believes that the expectations reflected in such forward-looking
statements are reasonable, it can give no assurance that such expectations
will prove to have been correct. Important factors that could cause actual
results to differ materially from the Company's expectations are disclosed in
this Form 10K including without limitation in conjunction with the forward-
looking statements included in this Form 10-K.
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
ThepCompany pdoescnotteanticipateeanyorsignificant developmentevdrilling onelits
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.
2
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.
3
In 1998, the Company's principal operations consisted of Environmental Testing
and Management 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.
1998 1997 1996
Sales to unaffiliated customers:
Oil and gas industry $ 236,000 $ 333,000 $ 188,000
Environmental testing and management
industry 2,209,000 1,798,000 1,958,000
$ 2,445,000 $ 2,131,000 $ 2,146,000
Discontinued Operations $ - $ - $ 44,000
Operating profit or (loss):
Oil and gas industry $ 33,000 $ (36,000) $ (43,000)
Environmental testing and management
industry 246,000 (51,000) 433,000)
Unallocated Corporate expenses (151,000) (159,000) (247,000)
$ 128,000 $ (246,000) $ (723,000)
Identifiable assets:
Oil and gas industry $ 750,000 $ 854,000 $ 879,000
Environmental testing and management
industry 1,127,000 893,000 1,080,000
Corporate assets 1,180,000 1,447,000 1,806,000
$ 3,057,000 $ 3,194,000 $ 3,765,000
Capital expenditures:
Oil and gas industry $ 3,000 $ 92,000 $ 358,000
Environmental testing and management
industry 213,000 30,000 207,000
Other capital expenditures - - 49,000
$ 216,000 $ 122,000 $ 614,000
Depreciation, depletion and
amortization:
Oil and gas industry $ 79,000 $ 111,000 $ 67,000
Environmental testing and management
industry 106,000 103,000 116,000
Other depreciation, depletion and
amortization 23,000 40,000 56,000
$ 208,000 $ 254,000 $ 239,000
Discontinued Operations $ - $ - $ 2,000
Interest Income:
Oil and gas industry $ 10,000 $ - -
Environmental testing and management
industry - 2,000 -
Corporate interest 13,000 18,000 43,000
$ 23,000 $ 20,000 $ 43,000
Interest Expense:
Oil and gas industry $ 5,000 $ - $ -
Environmental testing and management
industry 36,000 26,000 25,000
Corporate Interest 29,000 46,000 40,000
$ 70,000 $ 72,000 $ 65,000
4
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 eight 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 subsantial 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.
5
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
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, 1998 this carryover was $2,143,000.
6
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, 1998 had a net operating loss ("NOL") carryforward
of $8,520,000.
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 2012.
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 Decemberd 31,1996 this
discontinuance was completed.
ENVIRONMENTAL TESTING AND MANAGMENT
Competition
The Environmental Testing and Management 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, 1996, 1997 and 1998, the
company provided services for customers in 14, 14, 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.
7
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 25 full-time employees.
(Administration and Accounting 3, Environmental 20 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 three separate buildings located on
approximately seven acres.
On March 22, 1994, the Company purchased a 7,600 square foot office building and
3,000 square foot laboratory 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.
8
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 been listed for sale
The Company also owned one building, an office building of 10,600 square feet.
An adjacent building had 6,000 square feet. Next to it was an 11,500 square
foot warehouse. These buildings were sold on June 1, 1998, see Note 8 in the
financial statements.
In addition, W.E.S.T. rents office space in Evanston, Wyoming on a month-to-
month basis from a third party.
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.
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
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 Gas (Mcf)
(bbls)
1996 4,500 57,000
1997 11,000 49,000
1998 8,300 68,000
Average Sales Price and Production Costs
The following table reflects information concerning each of the last three
fiscal years:
1998 1997 1996
Average sales price per bbl $12.03 $18.25 $20.84
Average sales price per MCF 1.99 2.30 1.47
Average production cost per
net equivalent bbl* 2.32 6.55 4.34
<FN>
* Natural gas has been converted into equivalent bbls using a conversion ratio
of 6:1.
9
Drilling Activity
The Company has not participated in the drilling of exploratory wells in 1998,
1997 nor 1996. 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 1998.
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
James E. Meador, Jr. was elected by the shareholders at the annual meeting held
on November 4, 1998 to continue to serve on the board of directors.
No matters were submitted during the Fourth Quarter of the fiscal year covered
by this report to a vote of security holders.
10
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
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 1/2 3 1/8
Second Quarter 3 1/8 1 1/4
Third Quarter 4 3/8 1 7/8
1998: Fourth Quarter 3 1/8 1 1/4
First Quarter 2 1/2 5/8
Second Quarter 1 5/8 7/8
Third Quarter 1 11/16 1
Fourth Quarter 1 29/32 1 1/8
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 February 22, 1999 there were 828 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.
11
ITEM 6 - FINANCIAL DATA
Year Ended December 31,
1998 1997 1996 1995 1994
Operating revenues from
continuing operations 2,445,000 2,131,000 2,146,000 3,293,000 2,595,000
Net income (loss) from
continuing operations 128,000 (264,000) (742,000) 117,000 (250,000)
Net income (loss) 150,000 (264,000) (755,000) (213,000) 268,000
Income (loss) from continuing
operations per share* .11 (.20) (.55) .09 (.12)
Net income (loss per share:) .11 (.20) (.55) (.16) .14
Total assets 3,057,000 3,194,000 3,765,000 4,015,000 4,883,000
Long-term debt 340,000 415,000 445,000 493,000 677,000
Shareholders' equity 2,155,000 2,012,000 2,237,000 2,992,000 3,175,000
Dividends declared per share - - - - -
<FN>
* As restated for 20:1 reverse stock split.
12
ITEM 7- MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Liquidity and Capital Resources
During 1998, Management continued to make positive steps to improve the
financial condition of the Company. Operations in the Salt Lake City, Utah
office were curtailed and the San Marcos, Texas office was operated with a
manpower and equipment were provided by the Casper, Wyoming office. The Casper
operations increased in workload within its region also.
The Company improved its financial position considerably in 1998. The $264,000
loss in 1997 was reversed to a $150,000 net income in 1998. This was a turn-
around of $414,000. A negative working capital position of $140,000 in 1997 was
reversed to positive working capital of $204,000 in 1998, another substantial
turn-around of $344,000. Items contributing to these positive moves were as
follow:
1. During 1998, total revenues increased by 15% while operating expenses
decreased by 2.5%. These changes resulted in accounts receivable increases by
$95,000 and accounts payable decreases by $80,000.
2. The Company sold its buildings on 6 WN 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 in 4% convertible preferred
stock. That stock is convertible to cash or common stock upon request. The
buildings had been listed with a realtor for more than two years. They were
sold by the officers of the corporation, which saved approximately $28,000 in
realtor fees. The buildings were sold to a related party. (See Note 8, "Sale of
Buildings", in the accompanying financial statements.
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 December 31, 1998 was $65,000.
4. As noted in the December 31, 1997 10K, Joseph J. McQuade, former CEO,
terminated his employment in the first quarter of 1998. This results in
significant cost savings. (see note 14, "Significant Events", concerning the
contingent liability associated with this termination, of the accompanying
financial statements). It is important to note that the majority of the funding
for this agreement with Mr. McQuade came from outside investors.
The Company purchased $216,000 in property and equipment for 1998 compared to
$122,000 in 1997, and $614,000 in 1996. Of the $216,000 purchased in 1998,
$213,000 was environmental testing equipment, of which approximately one half of
this for a portable Fourier Transmission Infra-Red Spectrometer (FTIR). The
FTIR has allowed the Company to perform over $500,000 worth of contracts during
1998 for a major international manufacturer. More work for that leading edge
technology is anticipated for 1999 and beyond.
The Company continues to attempt to sell its facilities in San Marcos, Texas.
The sale of this property would have a significant positive impact on the
Company's liquidity and capital resources.
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 Highway 25 and is bisected 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, with major corporations moving into the area. There is no announced
timetable for development of the land.
13
The following information is provided for the years ending December 31, 1998 and
1997:
1998 1997
Working Capital $ 204,000 $ (140,000)*
Long-term debt to equity 1:6.3 1:4.9
Cash provided (utilized by operations) 136,000 (148,000)
Cash and short-term investments available 262,000 235,000
<FN>
*$140,000 loan on office building listed as current liability.
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 $736,000. 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 $14,000 on non-producing
properties, which is net of an allowance for impairment of $2,000. Management
believes, since the majority of the non-producing properties are mineral
interests, 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 had environmental
studies performed prior to purchase and our environmental laboratory has been
instructed on the appropriate procedures for disposal of various kinds of waste.
Such wastes (although relatively insignificant in amount) are tested prior to
legal disposal as part of a continual environmental assurance program.
Environmentalerevenues increased to $2,211,000 in 1998 from $1,792,000 in 1997
and $1,959,000 in 1996, demonstrating a 23% increase from 1997 and a 13%
increase above 1996. This was the result of the Company acquiring several large
clients in 1998 while maintaining the Company's regular clients. The decrease
of $167,000 in revenues from 1996 to 1997 was a result of the reduction in the
operational size of the Texas office. Environmental expenses increased from
$1,746,000 in 1997 to $1,856,000 in 1998 or a 6% increase, this was the result
of a 23% increase in sales as noted above. Environmental expenses decreased by
$530,000 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. Also
contributing to this decrease was the decision to provide service of most all
jobs from the Casper headquarters. Shown below is a table showing net revenues
and operating expense for the Company's environmental industry:
1998 1997 1996
Sales $ 2,211,000 $ 1,792,000 $ 1,959,000
Operating expenses 1,856,0000 1,746,000 2,276,000
$ 355,0000 $ 46,000 $ (317,000)
Oil and gas sales declined from $322,000 in 1997 to $236,000 in 1998 or 27%.
This decline was caused by two activities:
(1) Average oil prices declined by 34% and average gas prices declined by
13% and
(2) Flush production in 1997 received on the three Brundage Canyon, Utah
well drilled in 1996.
Oil and gas sales increased from $181,000 in 1996 to $322,000 in 1997. As noted
above, this increase in 1997 was due to the productive wells drilled in late
1996. Oil and gas expenses declined from $139,000 in 1997 to $53,000 in 1998.
This decline was largely due to less maintenance beingp erformed on the
Company's working interest properties by operators. Less maintenance was
performed due to the lower prices received for oil during 1998. Oil and gas
expenses increased from $73,000 in 1996 to 139,000 in 1997, a 90% increase
reflecting additional wells drilled in the Brundage Canyon Field. Below is a
table showing revenues and operating expense per year for the Company's oil and
gas industry:
14
1998 1997 1996
Sales $ 236,000 $ 322,000 $ 181,000
Operating expenses 53,000 139,000 73,000
$ 183,000 $ 183,000 $ 108,000
Depreciation, depletion, and amortization were $208,000 in 1998 compared to
$254,000 in 1997 or an 18% decrease. This decrease was a result of less
depreciation, depletion, and amortization on oil and gas properties, results of
a decline in production from prior years in the Brundage Canyon Field and the
sale of the building located at 6WN Road located in Natrona County, Wyoming.
Depreciation, depletion, and amortization increased from $239,000 in 1996 to
$254,000 in 1997, a 6% increase which as noted above was a result of the "flush"
production in 1997 from the Brundage Canyon field. Depreciation from the
environmental testing industry has remained relatively flat over the three
years.
General and administrative costs decreased from $238,000 in 1997 to $200,000 in
1998, a 16% decrease which was the result of decreases in staff and other cost
cutting efforts. General and administrative costs decreased by $43,000 from
$281,000 in 1996 to $238,000 in 1997,a 15.3% decrease. These decreases were
due to decreases in staff, salary reductions, and other cost cutting efforts.
Interest expense was approximately the same for the years 1998 and 1997.
Interest expense decreased by $2,000 from $72,000 in 1997 to $70,000 in 1998 as
new notes with lower interest rates have replaced some of the debt paid off.
Interest expense increased in 1997 to $72,000 from $65,000 in 1996, a 10.7%
increase due to additional outstanding loans.
Interest income increased from $20,000 in 1997 to $23,000 in 1998. This
increase was the result of collecting interest on royalties of $10,000 that were
not paid within the period allowed. Interest income would have been less due to
lower interest rates on certificates of deposit. Interest income decreased from
$43,000 in 1996 to $20,000 in 1997 reflecting the utilization of investments for
operations. No provision has been made for deferred taxes in 1996, 1997 or 1998
and no provision for income taxes is required due to the utilization of net
operating loss carryforwards.
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 $8,500,000 of net operating loss carryforwards, $2,143,000 of
depletion carryforwards and $61,000 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 realty 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.
15
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. It appears that the Company will have no
trouble meeting this goal. Costs to modify such applications have been, and are
estimated, to remain immaterial to our results of operations or financial
condition.
Hawks8Industries,LInc.TandNSubsidiaries
Index to Consolidated Financial Statements
Report of Certified Public Accountants on
the Financial Statements 17
Consolidated Balance Sheets 18
Consolidated Statements of Operations 18
Consolidated Statements of Shareholders' Equity 20
Consolidated Statements of Cash Flows 21
Notes to Consolidated Financial Statements 22
16
----------------------------------------
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, 1998 and 1997 and the
related consolidated statements of operations, shareholders' equity, and cash
flows for the years ended December 31, 1998, 1997 and 1996. 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 1998, 1997 and 1996 would be increased/(decreased) by
approximately $0, $(11,000), $11,000, 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, 1998 and 1997 and the
results of their operations and their cash flows for the years ended December
31, 1998, 1997 and 1996, in conformity with generally accepted accounting
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
February 12, 1999
17
HAWKS INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1998 and 1997
ASSETS 1998 1997
CURRENT ASSETS
Cash $ 60,000 $ 30,000
Accounts receivable 425,000 330,000
Short-term investments 202,000 205,000
Costs on uncompleted contracts in excess of related billings 15,000 12,000
Other current assets 64,000 50,000
Total current assets 766,000 627,000
PROPERTY AND EQUIPMENT, net
(successful efforts method) 1,703,000 2,112,000
INVESTMENTS AND OTHER ASSETS
Note Receivable 35,000 38,000
Land Investment 196,000 202,000
Available for sale investment 100,000 -
Other Assets 2588,000 2455,000
$ 3,057,000 $ 3,194,000
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable $ 203,000 $ 240,000
Current maturities of long-term debt 128,000 227,000
Accounts payable 195,000 275,000
Accrued liabilities 36,000 25,000
Total current liabilities 562,000 767,000
LONG TERM DEBT 340,000 415,000
CONTINGENT LIABILITY (See Note 14) - -
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;
shares issued 1,351,513 in 1998 and 1997 13,000 13,000
Capital in excess of par value of common stock 2,880,000 2,880,000
Retained (deficit) (731,000 ) (881,000)
Less Common Stock held in treasury at cost, 6,175 and 0
shares in 1998 and 1997, respectively (7,000 ) -
2,155,000 2,012,000
$ 3,057,000 $ 3,194,000
<FN>
See Notes to Consolidated Financial Statements.
18
HAWKS INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended December 31, 1998, 1997 and 1996
1998 1997 1996
Operating revenue:
Oil and gas $ 236,000 $ 322,000 $ 181,000
Environmental testing and 2,211,000 1,792,000 1,959,000
management
Gain (loss) on sale of assets (2,000 ) 17,000 6,000
2,445,000 2,131,000 2,146,000
Operating expenses:
Oil and gas 53,000 139,000 73,000
Environmental testing and 1,856,000 1,746,000 2,276,000
management
Depreciation, depletion and 208,000 254,000 239,000
amortization
General and administrative 200,000 238,000 281,000
2,317,000 2,377,000 2,869,000
Operating income (loss) from
continuing
operations 128,000 (246,000 ) (723,000 )
Other income (expense):
Other income 21,000 34,000 3,000
Interest income 23,000 20,000 43,000
Interest expense (70,000 ) (72,000 ) (65,000 )
Sale of buildings 48,000 - -
Gain (loss) from continuing
operations before
taxes 150,000 (264,000 ) (742,000 )
Provision for taxes:
Current - - -
Gain (loss) from continuing 150,000 (264,000 ) (742,000 )
operations
Discontinued operations - (13,000 )
Net income (loss) $ 150,000 $ (264,000 ) $ (755,000 )
Weighted average number of
common shares outstanding 1,351,451 1,351,147 1,339,443
Earnings (loss) per common
share :
Gain (loss) from continuing $ .11 $ (.20 ) $ (.55 )
operations
Discontinued operations (net) - (.01 )
-
$ .11 $ (.20 ) $ (.56 )
<FN>
See Notes to Consolidated Financial Statements.
19
CONSOLIDATEDDSTATEMENTSNOF SHAREHOLDERS'IEQUITY
Years Ended December 31, 1998, 1997 and 1996
Capital
in Excess Accumulated Common Stock
Common Stock Issued of Par Earnings Held in Treasury
Shares Amount Value (Deficit) Shares Amount
Balance January 1, 1996 1,339,443 $ 13,000 $ 2,841,000 $ 138,000 - $ -
Net loss - - - (755,000) - -
Balance December 31, 1996 1,339,443 13,000 2,841,000 (617,000) - -
Stock issued to Employee Stock
Ownership Plan Trust 11,967 - 39,000 - - -
Net loss - - - (264,000) - -
Balance December 31, 1997 1,351,410 13,000 2,880,000 (881,000) - -
Purchase of Treasury Stock - - - - 6,175 7,000
Additional Shares issued
in 20 for 1 Reverse Split 103 - - - - -
Net Income - - - 150,000 - -
Balance December 31, 1998 1,351,513 $ 13,000 $ 2,880,000 $ (731,000) 6,175 $ 7,000
<FN>
See Notes to Consolidated Financial Statements.
20
HAWKS INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 1998, 1997 and 1996
1998 1997 1996
Cash flows from operating
activities:
Gain (loss) from continuing $ 150,000 $ (264,000) $ (742,000 )
operations
Adjustments to reconcile net
gain (loss) to net cash
provided by (used in)
operating activities
Depreciation, depletion and 208,000 254,000 237,000
amortization
Net gain on sale of assets (46,000 ) (17,000) (6,000 )
Impairment of non-producing
oil and gas property 5,000 6,000 6,000
Changes in operating assets
and liabilities:
Decrease (increase) in (95,000 ) (10,000) 384,000
accounts receivable
Decrease (increase) in
costs in excess of (17,000 ) 41,000 (45,000 )
billings and other
Increaset(decrease) in
accounts payable and (69,000 ) (158,000) 292,000
accrued expenses
136,000 (148,000) 126,000
Operating cash flow from - - 34,000
discontinued operations
Net cash flows provided by (used 136,000 (148,000) 160,000
in) oper. activities
Cash flow from investing
activities:
Purchases of property and (216,000 ) (122,000) (614,000 )
equipment
Proceeds from sale of 358,000 33,000 42,000
properties
Decrease (increase) in other (42,000 ) () 3,000
assets 2,000
Decrease (increase) in land 6,000 (202,000 )
investment -
Decrease in note receivable 3,000 4,000 4,000
Decrease in short-term 3,000 366,000 236,000
investments
112,000 279,000 (531,000 )
Investing cash flow from - 1,000
discontinued operations -
Net cash provided by (used in) 112,000 279,000 (530,000 )
investing activities
Cash flows from financing
aPurchases:of Treasury Stock (7,000 ) -
-
Proceeds from debt obligations 137,000 200,000 331,000
incurred
Reduction of debt obligations (348,000 ) (349,000) (95,000 )
(218,000 ) (149,000) 236,000 )
Financing cash flow from - (15,000 )
discontinued operations -
Net cash provided by (used in) (218,000 ) (149,000) 221,000
financing activities
Increase (decrease) in cash and 30,000 (18,000) (149,000 )
cash equivalents
Cash and cash equivalents at 30,000 48,000 197,000
beginning of year
Cash and cash equivalents at end$ 60,000 $ 30,000 $ 48,000
of year
<FN>
See Notes to Consolidated Financial Statements.
21
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 sixty to ninety 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 operationslof IAP, Hawks
Book Company, and SanTech, Inc. are shown as "Discontinued Operations".
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.
22
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 owns 100% of W.E.S.T. which provides 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, 1998, the Company
had approximately $160,000 in excess of insured levels.
Accounts receivable:
Accounts receivable consist of regular receivables from customers and a
receivable from a loan to an officer of the Company. At December 31, 1998 and
1997, receivables consisted of the following:
Regular
Accounts Loan to
Total Receivable Officer
1998 $ 425,000 $ 425,000 $ -
1997 $ 330,000 $ 318,000 $ 12,000
Property and equipment:
The Company uses the successful efforts method of accounting for oil and gas
producing activities as prescribed by Statement of Financial Accounting
Standards (SFAS) 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.
23
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Nature of Business and Significant Accounting Policies (continued)
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 Statements 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 they have no effect for 1998. 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
1,351,513. 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.
Theecovenant notctopcompete is being amortized over the life of the agreement on
the straight line method.
24
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, 1998 and 1997, 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.
The carrying value of the available for sale investment is the guaranteed
redemption price of the 4% preferred stock.
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, 1998 and 1997 consists of the
following:
1998 1997
Non-producing oil and gas properties, net of valuation
allowance of $2,000 in 1998 and $8,000 in 1997 $ 14,000 $ 19,000
Producing oil and gas properties 1,655,000 1,659,000
Furniture and fixtures 369,000 391,000
Transportation equipment 200,000 235,000
Buildings and leasehold improvements 371,000 816,000
Engineering and lab equipment 1,258,000 1,111,000
Other 59,000 118,000
3,926,000 4,349,000
Less accumulated depreciation and depletion 2,223,000 2,237,000
$ 1,703,000 $ 2,112,000
25
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 3. Notes Payable, Long-Term Debt and Pledged Assets
Notes payable were as follow at December 31, 1998 and 1997
1998 1997
Revolving line of credit $230,000, interest at Citibank Prime
plus /%, (8.5% at December 31, 1998) Maturing
May 13, 1999, collateralized by oil and gas properties $ 65,000 $ -
Revolving lines of credit $200,00, interest at 6.35% to 7%
maturing March 23, 1999 and June 22, 1999 collateralized by
certificates of deposit 138,000 200,000
Short-term note payable due bank, interest at 11.5%, payable
$700 per month including interest - 40,000
$ 203,000 $ 240,000
Long-term debt at December 31, 1998 and 1997 is as follow:
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,
collateralized by office building and warehouse - 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 95,000 97,000
Mortgage note payable to bank, interest set at 4% above U.S.
Treasury Bill index for one year each April 1st, (9.3% at
December 31, 1998) payable $1,213 per month including
interest until March 22, 2009, collateralized by office
building 96,000 102,000
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
$27,000 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
paid, unsecured 6,000 16,000
Installment loans payable, due at various times from June 1999
to May, 2001, interest rates from 7.5% to 10%, secured by
equipment 37,000 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 157,000 192,000
Note payable Wyoming Industrial Development Corporation,
interest at 6.96%, payable $4,475 per month including
interest until June 15, 2000, collateralized by equipment 77,000 -
468,000 642,000
Less current maturities 128,000 227,000
$ 340,000 $ 415,000
26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 3. Notes Payable, Long-Term Debt and Pledged Assets (continued)
Aggregate maturities of long-term debt are as follow:
1999 $ 128,000
2000 86,000
2001 57,000
2002 48,000
2003 13,000
Thereafter 136,000
$ 468,000
Actual cash payments for interest during the years ended December 31, 1998, 1997
and 1996 were $70,000, $72,000 and $66,000 respectively.
Note 4. Income Taxes, Accounting Change, Prior Period Restatement
Under SFAS No.109, (accounting for income taxes) 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 maybbe 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 $8,500,000 of net operating loss carryforwards, $2,143,000
of depletion carryforwards and $61,000 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.
27
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 1998 1997
Current assets $ 766,000 $ 627,000
Other assets 2,291,000 2,567,000
Total assets $ 3,057,000 $ 3,194,000
Current liabilities $ 562,000 $ 767,000
Other liabilities 340,000 415,000
Total liabilities 902,000 1,182,000
Capital stock 13,000 13,000
Capital in excess of par value 3,046,000 3,046,000
Retained earnings (deficit) (897,000 ) (1,047,000
Less Treasury stock (7,000 ) -
Total equity 2,155,000 2,012,000
Total liabilities and equity $ 3,057,000 $ 3,194,000
Income Statement 1998 1997 1996
Gain (loss) from continuing operations
before taxes $ 150,000 $ (264,000 ) $ (742,000 )
Provision for taxes:
Current - - -
Deferred - (11,000 ) 11,000
- (11,000 ) 11,000
Gain (loss) from continuing operations 150,000 (275,000 ) (731,000 )
Discontinued operations (net of taxes) - - (13,000 )
Net income (loss) $ 150,000 $ (275,000 ) $ (744,000 )
If SFAS No. 109 was implemented, deferred tax (assets) liabilities would be
comprised of the following at December 31:
Tax effects of temporary differences 1998 1997 1996
for:
Accounting for oil & gas properties $ 54,000 $ 57,000 $ 75,000
Total deferred tax liabilities 54,000 57,000 75,000
Other liabilities - - (11,000 )
Tax loss carryforwards (2,896,000 ) (3,514,000 ) (3,432,000 )
Tax credit carryforwards (62,000 ) (86,000 ) (126,000 )
Total deferred tax assets (2,958,000 ) (3,600,000 ) (3,569,000 )
Net deferred asset (2,904,000 ) (3,543,000 ) (3,494,000 )
Asset valuation allowances (2,904,000 ) 3,543,000 3,483,000
Net deferred tax asset $ - $ - $ (11,000 )
When subsequently recognized, approximately $2,379,000 of the 1998 deferred tax
assets' tax benefits will be allocated directly to contributed capital as a
result of the Company's quasi reorganization in 1988.
28
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 4. Income Taxes, Accounting Change, Prior Period Restatement (continued)
At December 31, 1998, 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
Operating Investment
Year Ending December 31, Losses Tax Credits
1999 1,234,000 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 -
$ 8,520,000 $ 19,000
The Company also has approximately $43,000 in unused jobs tax credits and
$2,143,000 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, 1998 and 1997. 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 $19,000, $8,000, and $58,000 in 1998, 1997 and
1996, respectively. The ESOP compensation expense was $806,000, $901,000, and
and $1,145,000 in 1998, 1997 and 1996, respectively.
On November 9, 1998 the Board of Directors of Hawks Industries, Inc. authorized
the repurchase of up to forty thousand shares of Hawks Industries, Inc. common
stock on the open market or in negotiated transactions, depending upon market
conditions. Through February 25, 1999 the Company has acquired 16,175 shares or
1.2% of the outstanding common shares.
29
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. There is a remaining balance owed by the Company
of $7,274.
During 1997, the former 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 had 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 had been
made as of January 31, 1998.
During 1998, Officer and Board of Dsirector, Dwight B. Despain provided legal
services to the Company. Total billings to the Company from Mr. Despain in 1998
were $34,400. Total payments to Mr. Despain during 1998 were $8,700.
Note 7. Lease Commitments and Total Rental Expense
At times the Company rents equipment under various operating lease agreements,
however at December 31, 1998 there were no outstanding lease agreements.
The total equipment rental expenses included in the Statements of Operations for
the years ended December 31, 1998, 1997 and 1996 were $29,000, $43,000 and
$28,000, respectively.
Note 8. Sale of Buildings
On May 26, 1998, the Company signed an agreement to sell its building located at
7345 6WN Road and 7383 6WN Road in Natrona County, Wyoming to WERCS, a non-
public 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 building was $506,000. The Company's basis in the
building 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 WERCS 4% preferred
convertible stock, with a guaranteed resale value of $100,000.
The majority owner of WERCS, A Wyoming Corporation, is Dr. Gail D. Zimmerman
whose spouse, through the Anne D. Zimmerman Revocable Trust, owns 11.4% of the
outstanding shares of Hawks industries, Inc. stock.
30
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 9. Financial Information Relating to Industry Segments
1998 1997 1996
Sales to unaffiliated
customers:
Oil and gas industry $ 236,000 $ 333,000 $ 188,000
Environmental testing and
management industry 2,209,000 1,798,000 1,958,000
$ 2,445,000 $ 2,131,000 $ 2,146,000
Discontinued operations $ - $ - $ 44,000
Operating profit or (loss):
Oil and gas industry $ 33,000 $ (36,000) $ (43,000 )
Environmental testing and
management industry 246,000 (51,000) (433,000 )
Unallocated Corporate (151,000 (159,000) (247,000 )
expenses
$ 128,000 $ (246,000) $ (723,000 )
Identifiable assets:
Oil and gas industry $ 750,000 $ 854,000 $ 879,000
Environmental testing and
management industry 1,127,000 893,000 1,080,000
Corporate assets 1,180,000 1,447,000 1,806,000
$ 3,057,000 $ 3,194,000 $ 3,765,000
Capital expenditures:
Oil and gas industry $ 3,000 $ 92,000 $ 358,000
Enmanagementlindustry and 213,000 30,000 207,000
Other capital - 49,000
expenditures -
$ 216,000 $ 122,000 $ 614,000
Depreciation, depletion and
amortization:
Oil and gas industry $ 79,000 $ 111,000 $ 67,000
Environmental testing and
management industry 106,000 103,000 116,000
Other depreciation,
depletion and 23,000 40,000 56,000
amortization
$ 208,000 $ 254,000 $ 239,000
Discontinued operations $ - $ - $ 2,000
Interest Income:
Oil and gas industry $ 10,000 $ - $ -
Environmental testing and
management industry - 2,000 -
Corporate intrest 13,000 18,000 43,000
$ 23,000 $ 20,000 $ 43,000
Interest Expense:
Oil and gas industry $ 5,000 $ - $ -
Environmental testing and
management industry 36,000 26,000 25,000
Corporate Interest $ 270,000 $ 472,000 $ 465,000
31
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 10. Discontinued Operations
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.
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 $13,000 occurred in 1996. Accordingly, the accompanying consolidated
statements of operations for 1996 includes the additional loss.
Operating results of the navigational products, segment for the period prior to
disposal are shown in the accompanying consolidated income statements.
Net sales of the discontinued segments for 1998, 1997 and 1996 were as follow:
1998 1997 1996
Navigational products - - $ 44,000
These amounts are not included in net sales in the accompanying consolidated
Statements of Operations.
Note 11. Short-term Investments
Short-term investments consisted of certificates of deposits which are intended
to be held until maturity. The following schedule summarizes investment
activity for the years ended December 31, 1998 and 1997.
1998 1997
Beginning balance, at cost $ 205,000 $ 571,000
Purchase of investments -
-
Redemption of investments (12,000 ) (383,000 )
Earnings on investments 9,000 17,000
Ending balance, at cost $ 202,000 $ 205,000
Approximate market value $ 202,000 $ 205,000
At December 31, 1998 the investments are scheduled to mature during the year
ending December 31, 1999.
Note 12. Major Customers
The following companies are considered major customers which accounted for ten
percent or more of total revenue or accounts receivable in 1998, 1997 and 1996.
1998 1997 1996
Accounts Accounts Accounts
Company Revenue Receivable Revenue Receivable Revenue Receivable
A - 2% 9% - 22% 22%
B - - - - 15% -
C 28% 18% 12% 12% - -
D 8% 4% 10% 17% - 3%
E 16% 22% - - - -
32
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 13. Note Receivable
The note receivable on December 31, 1998, consisted of $38,000 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 the above noted assets. The
note has an interest rate of 9%.
Maturities on this note are as follow:
1999 $ 4,000
2000 5,000
2001 5,000
2002 6,000
2003 6,000
Thereafter 12,000
$ 38,000
Note 14. 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 $.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, presently the Company's Vice President, was
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, on the Board of Directors, has been made as of the date of this
report.
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 153,167 shares and therefore has acquired 11.4% 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 1,351,513.
Note 15. Supplemental Disclosure
Noncash Financing and Investing Activities
As reported in Note 8, in the sale of Corporate assets the Company received
10,000 shares of preferred stock valued at $100,000.
Other Disclosures
The Company paid no income taxes during the years ended December 31, 1998, 1997
and 1996.
33
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 pursuant to
Regulation 14 (a).
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Related Transactions:
During the prior 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.
During 1998, the Company sold its properties on 6WN Road in Natrona County,
Wyoming to WERCS, a Wyoming Corporation. The majority owner of WERCS is Dr.
Gail D. Zimmerman whose spouse, through the Anne D. Zimmerman Revocable Trust,
owns 11.4% of the outstanding stock of Hawks Industries, Inc. (See Note 8 of the
consolidated financial statements).
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 as required by Item 8 above
The following documents are incorporated by reference:
3. Exhibits
21.List of Subsidiaries of Registrant
3.1a Certificate of Incorporation filed with the Delaware Secretary of State on
3.1b Certificate of98Registration and Articles of Continuance filed with the
Wyoming Secretary of State on April 15, 1998.
34
ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8K
(continued)
(b) Reports on Form 8-K
On January 7, 1999, the Company filed an 8K as of December 31, 1998, notifying
the public that the Company's Board of Directors authorized the purchase of
forty thousand share of Hawks Industries, Inc., Common Stock on the open market
or in negotiated transactions, depending on market conditions.
35
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
Signatures dates indicated. Date
__/s/ Bruce A. Hinchey February 25, 1999
Bruce A. Hinchey, President,
Principal Executive Officer
and Director
__/s/ James E. Meador, Jr. February 25, 1999
James E. Meador, Jr.
Vice President and Director
__/s/ Bill Ukele February 25, 1999
Bill Ukele
Chief Financial Officer
__/s/ Dwight B. Despain February 25, 1999
Dwight B. Despain
Secretary/Treasurer and Director
__/s/ Gerald E. Moyle February 25, 1999
Gerald E. Moyle
Director
36
EXHIBIT 21.0
LIST OF SUBSIDIARIES OF REGISTRANT
HAWKS INDUSTRIES, INDECEMBERD31,I1998TATE OF INCORPORATION
Company Parent State
Burton-Hawks Exploration Co., Ltd. (Hawks Ind.) Colorado
Western Environmental Services Inc. (WEST, Inc.) Colorado
Western Environmental Services and (Hawks Ind.) Wyoming
Testing, Inc.
Central Wyoming Properties, Inc. (Hawks Ind.) Wyoming
37