SECURITIES & EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)
OF THE SECURITITES EXCHANGE ACT OF 1934
For the Quarter Ended September 30,1999 Commission File Number: 0-5781
HAWKS INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
Wyoming 83-0211955
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
913 Foster Road, Casper, Wyoming 82601
(Address of principal executive offices)
Registrant's telephone number, including area code (307) 234-1593
N/A
Former name, former address and former fiscal year, if changed since last report
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
YES X NO_
-
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the close of the period covered by this report.
Class Outstanding at September 30, 1999
Capital Stock, $.01 par value 1,326,705
INDEX
-----
PAGE
PART I FINANCIAL INFORMATION 3
Consolidated Balance Sheets
September 30, 1999 and December 31, 1998 4
Consolidated Statements of Operations
Three months and nine months ended
September 30, 1999 and 1998 5
Consolidated Statements of Cash Flows
Nine months ended September 30, 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 15
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
10K 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
September December
30, 31,
1999 1998
---- ----
(Unaudited)
ASSETS
------
CURRENT ASSETS
Accounts Receivable $ 582,000 $ 425,000
Short-term investments 200,000 202,000
Cost on uncompleted contracts in excess of related billings 50,000 15,000
Other current assets 70,000 64,000
Total current assets 958,000 766,000
PROPERTY AND EQUIPMENT, net (successful efforts method) 1,620,000 1,703,000
INVESTMENTS AND OTHER ASSETS
Note receivable 30,000 35,000
Land investment 196,000 196,000
Available for sale investment 100,000 100,000
Other assets 237,000 257,000
563,000 588,000
$ 3,141,000 $ 3,057,000
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES
Notes payable $ 225,000 $ 203,000
Current maturities of long-term debt 89,000 128,000
Accounts payable 183,000 195,000
Accrued liabilities 66,000 36,000
Total current liabilities 563,000 562,000
LONG-TERM DEBT 310,000 340,000
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
issued 1,351,513 in 1999 and1998 13,000 13,000
Capital in excess of par value of common stock 2,879,000 2,880,000
Retained (deficit) (600,000 ) (731,000 )
Less Common Stock held in treasury at cost, 24,808 and 6,175
Shares in 1999 and 1998 respectively (24,000 ) (7,000 )
2,268,000 2,155,000
$ 3,141,000 $ 3,057,000
<FN>
See Notes to Consolidated Financial Statements
HAWKS INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months and Nine Months Ended September 30, 1999 and 1998
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
---- ---- ---- ----
Operating Revenue:
Oil and gas $ 45,000 $ 34,000 $ 116,000 $ 176,000
Environmental 555,000 560,000 2,054,000 1,680,000
Gain on sale of assets 8,000 - 9,000 3,000
608,000 594,000 2,179,000 1,859,000
Operating expenses:
Oil and gas 11,000 (8,000) 30,000 35,000
Environmental 572,000 462,000 1,647,000 1,384,000
Deprecation, depletion and amortization 53,000 50,000 243,000 156,000
General and administrative 28,000 36,000 98,000 152,000
664,000 540,000 2,018,000 1,727,000
Operating Income (Loss) from operations (56,000) 54,000 161,000 132,000
Other income (expense):
Other income 3,000 3,000 6,000 16,000
Interest Income 4,000 3,000 10,000 10,000
Interest expense (15,000) (17,000) (46,000) (56,000 )
Sales of Buildings - - - 48,000
Income (loss) Before Taxes (64,000) 43,000 131,000 150,000
Provision for taxes:
Current - - - -
Net Income (loss) $ (64,000) $ 43,000 $ 131,000 $ 150,000
Weighted average number of
Common shares outstanding 1,309,999 1,351,513 1,310,512 1,351,513
Income (loss) per common share $ (.05) $ .03 $ .10 $ .11
<FN>
See Notes to Consolidated Financial Statements
HAWKS INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
Nine Months Ended September 30, 1999 and 1998
(Unaudited)
1999 1998
---- ----
Cash flows from operating activities:
Income from operations $ 131,000 $ 150,000
Adjustment to reconcile net income to net cash provided:
Depreciation, depletion and amortization 243,000 156,000
Impairment of non producing oil and gas property - 4,000
Gain on sale of assets (9,000 ) (51,000 )
Change in operating assets and liabilities:
Increase in accounts receivable (157,000 ) (227,000 )
Decrease in short-term investments 2,000 3,000
Increase in cost in excess of billings and other current
assets (41,000 ) (35,000 )
Increase (Decrease) in accounts payable and accrued
expenses 18,000 (22,000 )
Net cash flow provided by (used in) operating activities 187,000 (22,000 )
Cash flows from investing activities:
Purchases of property and equipment (162,000 ) (196,000 )
Proceeds from sale of properties 11,000 457,000
Decrease (increase) in other assets 20,000 (47,000 )
Decrease in notes receivable 5,000 4,000
Decrease in land investment - 6,000
Increase in available for sale investments - (100,000 )
Net cash flow provided by (used in) investing activities (126,000 ) 124,000
Cash flows from financing activities:
Proceeds from debt obligations incurred 94,000 183,000
Reduction of debt obligations (141,000 ) (283,000 )
Purchase of common stock (18,000 ) -
Net cash used in financing activities: (65,000 ) (100,000 )
Increase (Decrease) in cash and cash equivalents (4,000 ) 2,000
Cash and cash equivalents at beginning of year 60,000 30,000
Cash and cash equivalents at end of nine months $ 56,000 $ 32,000
<FN>
See Notes of Consolidated Financial Statements
HAWKS INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1: Property and Equipment
Property and equipment at September 30, 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 1,656,000 1,655,000
Furniture and fixtures 377,000 369,000
Transportation equipment 207,000 200,000
Building and leasehold improvements 375,000 371,000
Engineering and lab equipment 1,359,000 1,258,000
Other 59,000 59,000
4,047,000 3,926,000
Less accumulated depreciation and depletion 2,427,000 2,223,000
$ 1,620,000 $ 1,703,000
Note 2. Notes Payable, Long-Term Debt and Pledged Assets
Notes payable at September 30, 1999 and December 31, 1998 are as follow:
1999 1998
---- ----
Revolving line of credit $200,000, interest at 6.25% maturing
October 22,1999 collateralized by certificate of deposit $ 160,000 $ 138,000
Revolving line of credit $155,000 interest at Citibank Prime plus
3/4%, (8.5% at September 30, 1999) maturing March 16, 2000,
collateralized by oil and gas properties 65,000 65,000
$ 225,000 $ 203,000
Long-term debt at September 30, 1999 and December 31, 1998 is as follows:
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 $ 92,000 $ 95,000
Mortgage note payable to bank, interest set at 4% above U.S.
Treasury bill index for one year each June 1st, (8.66% at
September 30, 1999), payable $1,181 per month including interest
until April 1, 2003, collateralized by office building 92,000 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 $ - $ 6,000
Installment loans payable, due at various times May 2001 to August
2002, interest rates from 9.0% to 10% secured by equipment 86,000 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 129,000 157,000
Note payable Wyoming Industrial Development Corporation, interest at
6.96%, payable $4,475 per month including interest. - 77,000
399,000 468,000
Less current maturities 89,000 128,000
$ 310,000 $ 340,000
Aggregate maturities of long-term debt as follow:
1999 $ 22,000
2000 91,000
2001 86,000
2002 52,000
2003 13,000
Thereafter 135,000
$ 399,000
Actual cash payment for interest during the periods ended September 30, 1999 and
1998 were $47,000 and $56,000 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 $ 116,000 $ 176,000
Environmental testing and management industry 2,063,000 1,683,000
$ 2,179,000 $ 1,859,000
Operating profit (loss):
Oil and gas industry $ (83,000) $ 29,000
Environmental testing and management industry 327,000 219,000
Unallocated corporate expenses (83,000) (116,000)
$ 161,000 $ 132,000
Identifiable assets:
Oil and gas industry $ 625,000 $ 788,000
Environmental testing and management industry 1,367,000 1,247,000
Corporate assets 1,149,000 1,187,000
$ 3,141,000 $ 3,222,000
Capital expenditures:
Oil and gas industry $ 1,000 $ 3,000
Environmental testing and management industry 161,000 193,000
$ 162,000 $ 196,000
Depreciation, depletion and amortization:
Oil and gas industry $ 142,000 $ 70,000
Environmental testing and management industry 89,000 79,000
Other depreciation, depletion and amortization 12,000 11,000
$ 243,000 $ 160,000
Interest Income:
Oil and gas industry $ - $ -
Environmental testing and management industry - -
Corporate interest 10,000 10,000
$ 10,000 $ 10,000
Interest Expense:
Oil and gas industry $ 4,000 $ 4,000
Environmental testing and management industry 29,000 25,000
Corporate interest 13,000 27,000
$ 46,000 $ 56,000
HAWKS INDUSTRIES, INC. AND SUBSIDIARIES
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
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 11.5% 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 issued 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 the
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. At September 30, 1999, the Company
holds as Treasury Stock 24,808 shares or 1.9% 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 sixteen cents for the nine months ended September
30, 1999 prior to write down and ten cents after the write down.
HAWKS INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 6. Sale of Buildings
On May 26, 1998, the Company signed an agreement to sell its buildings located
at 7345 6WN Road and 7383 6WN Road in Natrona County, Wyoming to WERCS, a 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
buildings was $367,000. Therefore, the Company had an approximate $50,000 gain
resulting from the transaction.
The $417,000 was received as $317,000 cash and 10,000 shares 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 11.5% of the
outstanding shares of Hawks Industries, Inc.
Note 7. Change in Control of Company
On June 10, 1999 Hawks Industries, Inc entered into an agreement with Universal
Equities LTD., David H. Piepers, The Cornerhouse Limited Partnership and Winsome
Limited Partnership (Collectively referred to as "Buyers") to secure a
controlling interest in Hawk's Common Stock through a private placement. The
value placed on Hawk's shares in the offer was $1.60 per share for at least
6,250,000 shares of common stock yielding the Company a consideration of
$10,000,000. The offer also included the right to buy an additional 14,375,000
shares at the same price. The maximum consideration to be received by Hawks is
$33,000,000 if all the additional shares are purchased.
The Terms of the offer require a payment of at least $5,000,000 in cash, with
the remainder of the considerations being paid in cash and/or transfer of buyers
rights to a debt obligation fromn North Star Exploration, Inc ("North Star"),
and/or North Star common stock, and/or Zeus Exploration, Inc. ("Zeus") common
stock. North Star is a private Nevada Corporation with options on mineral
rights covering approximately 7,000,000 acres in Alaska.
The Agreement also requires the redemption of shares in Hawks owned by Bruce A.
Hinchey, James E. Meador, Jr. and the Anne D. Zimmerman Revocable Trust in
exchange for certain assets of the Company.
The Private placement and redemption of shares described above will be subject
to Hawks Shareholders approval at its Annual Meeting December 1999 or January
2000.
As a result of this transaction, the controlling interest in Hawks would be
owned by the Buyer Group which will focus on its mineral claims in Alaska.
HAWKS INDUSTRIES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Liquidity and Capital Resources:
- --------------------------------
During the first nine months of 1999, net cash from operating activities was
$187,000, compared to a negative $22,000 in the comparable period in 1998. This
increase was the result of a 22% increase in sales from the Company's
environmental testing and management over the same period in 1998. The increase
in sales created $131,000 in net income compared to $150,000 in 1998. Included
in 1998 was a $48,000 gain from sale of buildings. Increases in accounts
receivable for both years reduced cash flows from operating activities by
$157,000 in 1999 and $227,000 in 1998. Depreciation, depletion and amortization
for the nine months ended September 30, 199 was $87,000 higher than the nine
month ended September 30, 1998, largely due to a one time write off of oil and
gas properties through depreciation, depletion and amortization. (See note 5-
Write down of impaired oil and properties).
Capital expenditures for the nine months ended September 30, 1999 were $162,000
compared to $196,000 in the first nine months of 1998. Equipment purchased in
the first nine months of 1999 was mainly for equipment needed on several large
jobs in the Company's environmental testing and management segment completed in
the first six months of the year.
Proceeds from debt obligations were $94,000 for 1999, while debt obligations
were reduced by $141,000 for the nine months ended September 30, 1999. The
company is still using accounts receivable as collateral for short-term loans
for current cash demands, as needed in its environmental testing and management
segment. As of September 30, 1999, no loans were outstanding.
1999 1998
---- ----
Working Capital $ 395,000 $ 192,000
Long-term debt to equity 1:7.3 1:5.9
Cash provided by (utilized by) operations $ 187,000 $ (22,000)
Cash and short-term investments available $ 256,000 $ 234,000
Results of operations:
- ----------------------
In the nine months ended September 30, 1999 the Company reported $131,000 net
income compared to $150,000 net income in the nine months September 30, 1998 or
a 13% decrease. For the nine months ended September 30, 1998, the Company
reported a $48,000 gain on the sale of buildings, which was included in net
income.
Environmental testing and management:
Environmental testing and management revenues increased to $2,054,000 in 1999
from $1,680,000 in 1998, a 22% increase for the nine months ended September 30,
1999 over the same period in 1998. Revenues for the quarter ended September 30,
1999 were $555,000 compared to $560,000 in 1998. The increase in 1999 was
largely due to the Company acquiring one large contract in the first six months
of 1999, while maintaining the Company's regular clients. Environmental testing
and management's operating expenses were also higher by $263,000, a 19% increase
over the nine months ended September 30, 1998. Operating expenses were $572,000
in the quarter ended September 30, 1999 compared to $462,000 in the same period
in 1998, a 24% increase. The increases in operating expenses were the result of
additional work as noted above. Below is a table showing net revenue and
operating expenses for the Company's environmental industry:
Nine Months Ended Quarter Ended
----------------- -------------
September 30, September 30,
------------- -------------
1999 1998 1999 1998
---- ---- ---- ----
Sales $ 2,054,000 1,680,000 $ 555,000 $ 560,000
Operating expenses 1,647,000 1,384,000 572,000 462,000
--------- --------- ------- -------
$ 407,000 296,000 $ (17,000) $ 98,000
========= ========= ======== =======
Oil and gas:
Oil and gas revenues declined from $176,000 in the nine months ended September
30, 1998 to $116,000 for the nine months ended September 30, 1999. Oil and gas
revenues increased by $11,000 in the quarter ended September 30, 1999 from the
corresponding quarter in 1998. The decrease in the nine months period was the
result of lower prices for most of the nine months and declining production.
During the first nine months of 1998 the Company also collected on an after
payout agreement, that covered several years. Oil and gas expenditures were
$30,000 in the nine months ended September 30, 1999 compared to $35,000 in the
nine months ended September 30, 1998. For the Quarter ended September 30, 1999
oil and gas expenditures were $11,000 compared to negative $8,000 in 1998, which
was a result of a refund of production taxes in 1998.
Below is a table showing revenues and operating expenses for the Company's oil
and gas segment:
Nine Months Quarter Ended
----------- -------------
Ended September 30, September 30,
------------------- -------------
1999 1998 1999 1998
---- ---- ---- ----
Sales $ 116,000 $ 176,000 $ 45,000 $ 34,000
Operating expenses 30,000 35,000 11,000 (8,000)
------- ------- -------- --------
$ 86,000 $ 141,000 $ 34,000 $ 42,000
======= ======= ======== =======
Additional information:
The Company had depreciation, depletion and amortization (DD&A) of $243,000 in
the first nine months of 1999 compared to $156,000 in the first nine months of
1998. Eighty thousand dollars of the $87,000 increase was from a write down of
impaired oil and gas properties (see Note 5-Write down of impaired oil and gas
properties). DD&A for the quarter ended September 30, 1999 was $3,000 higher
than the corresponding quarter in 1998 as DD&A was recorded on new purchases
acquired during the quarter.
General and administrative costs were $98,000 for the nine months ended
September 30, 199 compared to $152,000 for the nine months ended September 30,
1998. This decrease was due to decreases in staff and other cost cutting
efforts.
Interest expense was $46,000 for the nine months ended September 30, 1999,
compared to $56,000 for the nine months ended September 30, 1998. This decrease
was due to the Company selling its properties on 6WN Road in Natrona County,
Wyoming in 1998 and no longer having the associated notes payable on these
properties for the first six months of 1999. Interest expense for the quarter
ended September 30, 1999 and 1998 was relatively constant.
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 also somewhat distortive. As of the third quarter
1999, no such income tax provision would have been necessary.
Year 2000 compliant
- -------------------
The year 2000 compliance issue affects the Company computer systems, software
and related technologies. We have identified and are in the process of
correcting applications to ensure that all of our key computer systems will be
year 2000 compliant by December 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. Cost to modify such applications remains 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
None
Exhibits
On March 1, 1999 the Board of Directors of Hawks Industries, Inc. authorized an
additional repurchase of 30,000 shares.
Through September 30, 1999, The Company has 24,808 shares or 1.9% of the
outstanding common shares held as Treasury Stock.
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: November 1, 1999 BY: /s/ Bruce A. Hinchey
-----------------------
Bruce A. Hinchey, President and
Chief Executive Officer
Date: November 1, 1999 BY: /s/ Bill Ukele
------------
Bill Ukele, Controller and
Chief Financial Officer