SECURITIES & EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended March 31, 1999 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 ___
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Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the close of the period covered by this report.
Class Outstanding at March 31, 1999
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Capital Stock, $.01 par value 1,285,338
INDEX
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PAGE
PART I FINANCIAL INFORMATION 3
Consolidated Balance Sheets
March 31, 1999 and December 31, 1998 4
Consolidated Statements of Operations
Three months ended March 31, 1999 and 1998 5
Consolidated Statements of Cash Flows
Three months ended March 31, 1999 and 1998 6
Notes to Consolidated Financial Statements 7
Management's Discussion and Analysis of
Financial Condition and Results of Operation 12
PART II OTHER INFORMATION 14
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, 1998.
This quarterly report contains some forward-looking statements about future
operations and expectations of Hawks Industries, Inc. and its subsidiaries.
Management believes they are reasonable representations of Hawks Industries,
Inc., expected performance at this time. Actual results may vary from
Management's stated expectations and projections.
HAWKS INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
March 31, December 31,
1999 1998
(unaudited)
ASSETS
CURRENT ASSETS
Cash 9,000 $ 60,000
Accounts receivable 727,000 425,000
Short-term investments 205,000 202,000
Costs on uncompleted contracts in excess of related billings 41,000 15,000
Other current assets 60,000 64,000
Total current assets 1,042,000 766,000
PROPERTY AND EQUIPMENT, net (successful efforts method) 1,630,000 1,703,000
INVESTMENTS AND OTHER ASSETS
Note receivable 32,000 35,000
Land investment 196,000 196,000
Available for sale investment 100,000 100,000
Other assets 256,000 257,000
584,000 588,000
3,256,000 $ 3,057,000
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable 350,000 $ 203,000
Current maturities of long-term debt 123,000 128,000
Accounts payable 279,000 195,000
Accrued liabilities 37,000 36,000
Total current liabilities 789,000 562,000
LONG-TERM DEBT 337,000 340,000
CONTINGENT LIABILITY ( See Note 4) - -
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 1999 and 1998 13,000 13,000
Capital in excess of par value of common stock 2,880,000 2,880,000
Retained (deficit) (697,000 ) (731,000
Less Common Stock held in treasury at cost, 66,175 and 6,175
Shares in 1999 and 1998 , respectively (66,000 ) (7,000
2,130,000 2,155,000
3,256,000 $ 3,057,000
<FN>
See Notes to Consolidated Financial Statements
HAWKS INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended March 31, 1999 and 1998
(Unaudited)
1999 1998
Operating revenue:
Oil and gas $ 34,000 $ 97,000
Environmental 712,000 404,000
Gain on sale of assets - 3,000
746,000 504,000
Operating expenses:
Oil and gas 12,000 29,000
Environmental 527,000 397,000
Depreciation, depletion and amortization 132,000 54,000
General and administrative 32,000 58,000
703,000 538,000
Operating Income (Loss) from operations 43,000 (34,000 )
Other income (expense):
Other income 2,000 10,000
Interest income 3,000 4,000
Interest expense (14,000 ) (19,000 )
Income(Loss) from operations before taxes 34,000 (39,000 )
Provision for taxes:
Current - -
Net Income (Loss) 34,000 (39,000 )
Weighted average number of common shares outstanding 1,331,949 1,351,513
Income (Loss) per common share $ .03 $ (.03 )
<FN>
See Notes to Consolidated Financial Statements
HAWKS INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
Three Months Ended March 31, 1999 and 1998
(Unaudited)
1999 1998
Cash flows from operating activities:
Income (Loss) from operations $ 34,000 $ (39,000 )
Adjustment to reconcile net loss to net cash provided:
Depreciation, depletion and amortization 132,000 54,000
Impairment of non producing oil and gas property - 1,000
Gain on sale of assets - (3,000 )
Changes in operating assets and liabilities:
Increase in accounts receivable (302,000 ) (20,000 )
Increase in short-term investments (3,000 ) (3,000 )
Increase in costs in excess of billings and other current
assets (22,000 ) (2,000 )
Increase in accounts payable and accrued expenses 85,000 68,000
Net cash flow provided by (used in) operating activities (76,000 ) 56,000
Cash flows from investing activities:
Purchases of property and equipment (59,000 ) (60,000 )
Proceeds from sale of properties - 35,000
Decrease (increase) in other assets 1,000 (49,000 )
Decrease in note receivable 3,000 1,000
Decrease in land investment - 6,000
Net cash flow used in investing activities (55,000 ) (67,000 )
Cash flows from financing activities:
Proceeds from debt obligations incurred 172,000 29,000
Reduction of debt obligations (33,000 ) (23,000 )
Purchase of common stock (59,000 ) -
Net cash provided by financing activities 80,000 6,000
Decrease in cash and cash equivalents (51,000 ) (5,000 )
Cash and cash equivalents at beginning of year 60,000 30,000
Cash and cash equivalents at end of quarter $ 9,000 $ 25,000
<FN>
See Notes to Consolidated Financial Statements.
HAWKS INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Property and Equipment
Property and equipment at March 31, 1999 and December 31, 1998 consists of the
following:
1999 1998
Nonproducing oil and gas properties, net of valuation
allowance of $2,000 in 1999 and $2,000 in 1998 $ 14,000 $ 14,000
Producing oil and gas properties 1,655,000 1,655,000
Furniture and fixtures 372,000 369,000
Transportation equipment 200,000 200,000
Buildings and leasehold improvements 371,000 371,000
Engineering and lab equipment 1,314,000 1,258,000
Other 59,000 59,000
3,985,000 3,926,000
Less accumulated depreciation and depletion 2,355,000 2,223,000
$ 1,630,000 $ 1,703,000
Note 2. Notes Payable, Long-Term Debt and Pledged Assets
Notes payable at March 31, 1999 and December 31, 1998 are as follow:
1999 1998
Short-term note payable due bank, interest at 9.75% to 10% due April
20, 1999 to May 23, 1999 collateralized by accounts receivable $ 95,000 $ -
Revolving lines of credit $200,000, interest at 6.55 to 7% maturing
June 23, 1999, collateralized by certificate of deposit 190,000 138,000
Revolving line of credit $230,000 interest at Citibank Prime plus /%,
(8.5% at March 31, 1999) maturing May 13, 1999, collaterialized by
oil and gas properties 65,000 65,000
$ 350,000 $ 203,000
Long-Term debt at March 31, 1999 and December 31, 1998 is as follow:
1999 1998
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 $ 94,000 $ 95,000
Mortgage note payable to bank, interest set at 4% above U.S. Treasury
Bill index for one year each June 1st, (9.3% at March 31, 1999),
payable $1,213 per month including interest until April 1, 2003,
collateralized by office building 95,000 96,000
HAWKS INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 2. Notes Payable, Long-Term Debt and Pledged Assets (cont.)
1999 1998
Note payable, State of Wyoming, interest at 4%, due in monthly
installments of approximately $1,000 including interest until paid,
unsecured $ 3,000 $ 6,000
Installment loan payable, due at various times from June 1999 to
May,2001, interest rates from 7.5% to 10%, secured by equipment 55,000 37,000
Note payable Wyoming Industrial Development Corporation, interest at
7.33%, payable $3,991 per month including interest until October 5,
2002, collateralized by equipment. 148,000 157,000
Note payable Wyoming Industrial Development Corporation, interest at
6.96%, payable $4,475 per month including interest until June 15,
2000, collateralized by equipment. 65,000 77,000
460,000 468,000
Less current maturities 123,000 128,000
$ 337,000 $ 340,000
Aggregate maturities of long-term debt are as follow:
1999 $ 93,000
2000 98,000
2001 72,000
2002 48,000
2003 13,000
Thereafter 136,000
$ 460,000
Actual cash payments for interest during the periods ended March 31, 1999 and
1998 were $14,000 and $19,000 respectively.
HAWKS INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 3. Financial Information Relating to Industry Segments
1999 1998
Sales to unaffiliated customers:
Oil and gas industry $ 34,000 $ 97,000
Environmental testing and management industry 712,000 407,000
$ 746,000 $ 504,000
Operating profit or (loss):
Oil and gas industry $ (90,000)$ 21,000
Environmental testing and management industry 157,000 (14,000 )
Unallocated corporate expenses (24,000) (41,000 )
$ 43,000 $ (34,000 )
Identifiable assets:
Oil and gas industry $ 667,000 $ 827,000
Environmental testing and management industry 1,448,000 919,000
Corporate assets 1,141,000 1,483,000
$ 3,256,000 $3,229,000
Capital expenditures:
Oil and gas industry $ - $ 3,000
Environmental testing and management industry 59,000 57,000
$ 59,000 $ 60,000
Depreciation, depletion and amortization:
Oil and gas industry $ 100,000 $ 22,000
Environmental testing and management industry 28,000 23,000
Other depreciation, depletion and amortization 4,000 9,000
$ 132,000 $ 54,000
Interest Income:
Oil and gas industry $ - $ -
Environmental testing and management industry - -
Corporate interest 3,000 4,000
$ 3,000 $ 4,000
Interest Expense:
Oil and gas industry $ 1,000 $ -
Environmental testing and management industry 8,000 11,000
Corporate interest 5,000 8,000
$ 14,000 $ 19,000
HAWKS INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 a 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, 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 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 11.9% 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.
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. On March 1, 1999 the Board of Directors of Hawks Industries, Inc.
authorized the repurchase of an additional thirty thousand shares of Hawks
Industries, Inc. stock. Through March 31, 1999 the Company has acquired 66,175
shares or 5.1% of the outstanding common shares.
Note 5. Write Down of impaired oil and gas properties
During the first quarter of 1999, the Company recorded an $80,000 write down of
its producing oil and gas properties. This write down was recorded to
depreciation, depletion and amortization expense. The Company determined the
carrying value of these properties was more than future cash flows from the
properties due to performance and prices received for oil and gas at the present
time. Earnings per share were nine cents prior to write down and three cents
after the write down.
HAWKS INDUSTRIES, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 6. Sales 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 buildings 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 11.9% of the
outstanding shares of Hawks Industries, Inc.
HAWKS INDUSTRIES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Liquidity and Capital Resources:
During the first quarter of 1999 net cash from operating activities decreased
$76,000 compared to a $56,000 increase in 1998. This decrease in 1999 was
largely due to an increase in accounts receivables of $302,000 from year end
December 31, 1998. The increase in accounts receivables was the result of an
increase in sales in the Company's environmental testing and management segment
from $404,000 in the first quarter of 1998 to $712,000 in the first quarter of
1999. Partially offsetting the $302,000 in increased receivables was net income
for the first quarter of 1999 of $34,000 and depreciation, depletion and
amortization of $132,000. Depreciation, depletion and amortization was $78,000
higher than the previous quarter, largely due to a write off of producing oil
and gas properties. (See Note 5 Write down of impaired oil and gas properties).
Capital expenditures for the first quarter of 1999 were approximately the same
as the first quarter of 1998 as $59,000 was expended for property and equipment
in 1999 compared to $60,000 in 1998.
Proceeds from debt obligations increased from $29,000 in the first quarter of
1998 to $172,000 in 1999, this resulted from the Company using accounts
receivables as collateral for short-term loans for current cash demands in its
environmental testing and management segment.
The following information is provided for the quarter ended March 31, 1999 and
1998:
1999 1998
Working Capital $ 253,000 $ (207,000)
Long-term debt to equity 1:6.3 1:4.9
Cash provided by (utilized by operations) (76,000) 56,000
Cash and short-term investments available 214,000 233,000
Results of Operations:
In the first quarter of 1999, the Company reported $34,000 in net income
compared to $39,000 loss in the first quarter of 1998.
Environmental testing and management:
Environmental testing and management revenues increased to $712,000 in 1999 from
$404,000 in 1998 a 76.2% increase. This increase was largely due to the Company
acquiring one large client in the first quarter of 1999, while maintaining the
Company's regular clients. Environmental testing and management's operating
expenses were also higher by $130,000 for the quarter ended March 31, 1999 over
the quarter ended March 31, 1998. This is a 32.7% increase which was the result
of additional work. Shown below is a table showing net revenue and operating
expenses for the Company's environmental industry:
1999 1998
Sales $ 712,000 $ 404,000
Operating expenses 527,000 397,000
$ 185,000 7,000
Oil and Gas:
Oil and gas revenues declined from $97,000 in the first quarter of 1998 to
$34,000 in 1999, this was a 64.9% decrease. This decrease was the result of
lower prices for the Company's oil and gas sales and declining production.
During the first quarter of 1998 the company collected on an after payout
agreement for the past several years. Oil and gas expenditures were also down
from $29,000 in 1998 to $12,000 in 1999, a 58.6% decline. This decline was
mainly due to fewer wells producing due to lower oil and gas prices.
Below is a table showing revenues and operating expense per quarter for the
Company's oil and gas segment.
1999 1998
Sales $ 34,000 $ 97,000
Operating expenses 12,000 29,000
$ 22,000 $ 68,000
Additional Information:
The Company had depreciation, depletion and amortization (DD&A) of $132,000 in
the first quarter of 1999 compared to $54,000 in the first quarter of 1998.
Eighty thousand dollars of this increase was from a write down of impaired oil
and gas properties (see Note 5- Write down of impaired oil and gas properties).
General and administrative costs were $32,000 for the first quarter of 1999
compared to $58,000 in 1998 or a 44.8% decrease. This decrease was due to
decrease in staff and other cost cutting efforts.
Interest expense was lower by $5,000 from the first quarter of 1998. This
decrease was due to the Company selling it properties on 6WN Road, Natrona
County, Wyoming in 1998 and no longer having the associated notes payable on
these properties in the first quarter of 1999.
Income taxes:
The Company has significant net operating loss carryforwards, investment tax
credit carryforwards, and other carryforward items, and accordingly should not
be liable for ordinary income taxes.
In addition, should the Company utilize certain loss carryforwards which were
earned prior to the date of the Company's quasi reorganization at December 31,
1988, Financial Accounting Statement No. 109 requires that deferred taxes be
provided. The Company has taken the position that to provide such disclosure is
not only meaningless but somewhat distortive. As of the first quarter 1999 no
such income tax provision would have been necessary.
Year 2000 Complaint
The Company 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 199. The Company is also in the process of determining if
some of its accounting software should be replaced or updated. 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. Cost 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. Exhibits and Reports on Form 8-K
Items filed on 8-K.
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.
Exhibits
On March 1, 1999, the Board of Directors of Hawks Industries, Inc. authorized an
additional repurchase of 30,000 shares.
Through March 31, 1999, The Company has acquired 66,175 shares or 5.1% of the
outstanding common shares.
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: April 30, 1999 By: /s/ Bruce A. Hinchey
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Bruce A. Hinchey, President and
Chief Executive Officer
Date: April 30, 1999 By: /s/ Bill Ukele
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Bill Ukele, Controller and
Chief Financial Officer