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 June 30, 1998 Commission File Number: 0-5781
HAWKS INDUSTRIES, INC.
- ------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Wyoming 83-0211955
- ------------------------ ------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
913 Foster Road, Casper, Wyoming 82601
- ------------------------------------------------------------------------------
(Address of principal executive offices)
Registrant's telephone number, including area code(307) 234-1593
----------------------------
N/A
- ------------------------------------------------------------------------------
Former name, former address and former fiscal year, if changed since last report
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
---- ----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the close of the period covered by this report.
Class Outstanding at June 30, 1998
- ------------------------ ------------------------------------
Capital Stock, $.01 par value 1,351,515
<PAGE>
INDEX
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PAGE
PART I FINANCIAL INFORMATION 3
Consolidated Balance Sheets
June 30, 1998 and December 31, 1997 4
Consolidated Statements of Operations
Three months and Six months ended
June 30, 1998 and 1997 5
Consolidated Statements of Cash Flows
Six months ended June 30, 1998 and 1997 6
Notes to Consolidated Financial Statements 7
Management's Discussion and Analysis of
Financial Condition and Results of Operation 11
PART II OTHER INFORMATION 13
<PAGE>
PART I: FINANCIAL INFORMATION
The accompanying unaudited Consolidated Financial Statements have been prepared
in accordance with the instructions to Form 10-Q and do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered necessary for a
fair presentation have been included.
These statements should be read in conjunction with the Financial Statements and
notes thereto included in the Company's Annual Report to Shareholders and Form
10-K for the year ending December 31, 1997.
<PAGE>
<TABLE>
HAWKS INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<CAPTION>
June 30, December 31,
1998 1997
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash $ 40,000 $ 30,000
Accounts receivable 653,000 330,000
Short-term investments 200,000 205,000
Costs on uncompleted contracts in excess of
related billings 16,000 12,000
Other current assets 63,000 50,000
Total current assets 972,000 627,000
PROPERTY AND EQUIPMENT, net (successful efforts
method) 1,760,000 2,112,000
NOTE RECEIVABLE 36,000 38,000
LAND INVESTMENT 196,000 202,000
AVAILABLE FOR SALE INVESTMENTS 100,000 -
OTHER ASSETS 265,000 215,000
$ 3,329,000 $ 3,194,000
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable $ 428,000 $ 240,000
Current maturities of long-term debt 118,000 227,000
Accounts payable 239,000 275,000
Accrued liabilities 35,000 25,000
Total current liabilities 820,000 767,000
LONG-TERM DEBT 390,000 415,000
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; outstanding 1998 -
1,351,515 shares; 1997 - 1,351,515 shares 13,000 13,000
Capital in excess of par value of common stock 2,880,000 2,880,000
Retained (deficit) (since elimination of deficit
at December 31, 1988) (774,000) (881,000)
2,119,000 2,012,000
$ 3,329,000 $ 3,194,000
<FN>
See Notes to Consolidated Financial Statements
</TABLE>
<PAGE>
<TABLE>
HAWKS INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months and Six Months Ended June 30, 1998 and 1997
(Unaudited)
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Operating revenue:
Oil and gas $ 45,000 $ 71,000 $ 142,000 $ 199,000
Environmental 716,000 486,000 1,120,000 891,000
Gain on sale of assets - - 3,000 12,000
761,000 557,000 1,265,000 1,102,000
Operating expenses:
Oil and gas 14,000 42,000 43,000 83,000
Environmental 525,000 437,000 922,000 900,000
Depreciation, depletion
and amortization 52,000 64,000 106,000 129,000
General and
administrative 58,000 67,000 116,000 123,000
649,000 610,000 1,187,000 1,235,000
Operating Income (loss)
from operations 112,000 (53,000) 78,000 (133,000)
Other income (expense):
Other income 3,000 8,000 13,000 23,000
Interest income 3,000 5,000 7,000 11,000
Interest expense (20,000) (17,000) (39,000) (35,000)
Sale of buildings 48,000 - 48,000 -
Income (Loss) Before Taxes 146,000 (57,000) 107,000 (134,000)
Provision for taxes:
Current - - - -
Net income (loss) $ 146,000 $ (57,000) $ 107,000 $ (134,000)
Weighted average number of
common shares outstanding 1,351,515 1,351,410 1,351,515 1,350,880
Income (Loss) per common
share $ 0.11 $ (0.04) $ 0.08 $ (0.10)
<FN>
See Notes to Consolidated Financial Statements
</TABLE>
<PAGE>
<TABLE>
HAWKS INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
Six Months Ended June 30, 1998 and 1997
(Unaudited)
<CAPTION>
1998 1997
<S> <C> <C>
Cash flows from operating activities:
Income (Loss) from operations $ 107,000 $ (134,000)
Adjustment to reconcile net loss to net cash
provided:
Depreciation, depletion and amortization 106,000 129,000
Impairment of non-producing oil and gas property 3,000 3,000
Gain on sale of assets (51,000) (12,000)
Changes in operating assets and liabilities:
(Increase) in accounts receivable (323,000) (132,000)
Decrease (increase) in costs in excess of
billings and other current assets (17,000) 37,000
(Decrease) increase in accounts payable and
accrued expenses (26,000) 17,000
Net cash flow used in operating activities (201,000) (92,000)
Cash flows from investing activities:
Purchases of property and equipment (161,000) (80,000)
Proceeds from sale of properties 455,000 25,000
Increase in other assets (50,000) (2,000)
Decrease in note receivable 2,000 2,000
Decrease in land investment 6,000 -
Increase in available for sale investments (100,000) -
Decrease in short-term investments 5,000 271,000
Net cash flow provided by investment activities 157,000 216,000
Cash flows from financing activities:
Proceeds from debt obligations incurred 308,000 -
Reduction of debt obligations (254,000) (193,000)
Issuance of common stock - 39,000
Net cash provided by (used in) financing activities 54,000 (154,000)
Increase (decrease) in cash and cash equivalents 10,000 (30,000)
Cash and cash equivalents at beginning of year 30,000 48,000
Cash and cash equivalents at end of period $ 40,000 $ 18,000
<FN>
See Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
HAWKS INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Property and Equipment
Property and equipment at June 30, 1998 and December 31, 1997 consists of the
following:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Nonproducing oil and gas properties, net of valuation
allowance of $11,000 in 1998 and $8,000 in 1997 $ 17,000 $ 19,000
Producing oil and gas properties 1,655,000 1,659,000
Furniture and fixtures 382,000 391,000
Transportation equipment 206,000 235,000
Buildings and leasehold improvements 369,000 816,000
Engineering and lab equipment 1,228,000 1,111,000
Other 59,000 118,000
3,916,000 4,349,000
Less accumulated depreciation and depletion 2,156,000 2,237,000
$ 1,760,000 $ 2,112,000
</TABLE>
Note 2. Notes Payable, Long-Term Debt, and Pledged Assets
Notes payable at June 30, 1998 and December 31, 1997 are as follow:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Revolving line of credit $230,000, interest at Citibank Prime plus /%,
(9.25% at June 30, 1998) maturing May 13, 1999, collaterized by oil
and gas properties $ 100,000 $ -
Short-term note payable due bank, interest at 11.5% payable $700 per
month including interest until October 15, 1998, then balance due
in lump sum, collateralized by building - 40,000
Short-term notes payable due bank, interest at 10%, due July 20, 1998
and July 26, 1998 collateralized by accounts receivable 135,000 -
Revolving line of credit $200,000, interest at 6.6% - 7.0% maturing
June 23, 1999, collateralized by certificates of deposit 193,000 200,000
$ 428,000 $ 240,000
</TABLE>
Long-Term debt at June 30, 1998 and December 31, 1997 is as follows:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
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 96,000 97,000
</TABLE>
<PAGE>
HAWKS INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 2. Notes Payable, Long-Term Debt and Pledged Assets (cont.)
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Mortgage note payable to bank, interest set at 4% above U.S. Treasury
Bill index for one year each April 1st, (9.3% at June 30, 1998)
payable $1,213 per month including interest until March 22, 2009,
collateralized by office building $ 99,000 $ 102,000
</TABLE>
<TABLE>
<S> <C> <C>
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 $25,000 and
$22,000 at 1998 and 1997 - 2,000
</TABLE>
<TABLE>
<S> <C> <C>
Note payable, State of Wyoming, interest at 4%, due in monthly
installments of approximately $1,000 including interest until
balance paid, unsecured 12,000 16,000
</TABLE>
<TABLE>
<S> <C> <C>
Installment loans payable, due August 1999 to May 2001, interest at 7%
to 10%, secured by automotive equipment 26,000 15,000
</TABLE>
<TABLE>
<S> <C> <C>
Note payable Wyoming Industrial Development Corporation, interest at
7.33%, payable $3,991 per month including interest until October 5,
2002, collateralized by equipment. 175,000 192,000
Note payable Wyoming Industrial Development Corporation, interest at
6.96%, payable $4,475 per month including interest until June 15,
2000, collateralized by equipment. 100,000 -
508,000 642,000
Less current maturities 118,000 227,000
$ 390,000 $ 415,000
</TABLE>
Aggregate maturities of long-term debt are as follow:
<TABLE>
<S> <C>
1998 $ 58,000
1999 112,000
2000 84,000
2001 58,000
2002 47,000
Thereafter 149,000
$ 508,000
</TABLE>
Actual cash payments for interest during the periods ended June 30, 1998 and
1997 were $37,000 and $35,000 respectively.
<PAGE>
HAWKS INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 3. Financial Information Relating to Industry Segments
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Sales to unaffiliated customers:
Oil and gas industry $ 142,000 $ 208,000
Environmental testing and management industry 1,123,000 894,000
$ 1,265,000 $ 1,102,000
Operating profit or (loss):
Oil and gas industry $ 18,000 $ 15,000
Environmental testing and management industry 148,000 (57,000)
Unallocated corporate expenses (88,000) (91,000)
$ 78,000 $ (133,000)
Identifiable assets:
Oil and gas industry $ 808,000 $ 886,000
Environmental testing and management industry 1,285,000 1,000,000
Corporate assets 1,236,000 1,608,000
$ 3,329,000 $ 3,494,000
Capital expenditures:
Oil and gas industry $ 3,000 $ 69,000
Environmental testing and management industry 158,000 11,000
$ 161,000 $ 80,000
Depreciation, depletion and amortization:
Oil and gas industry $ 40,000 $ 61,000
Environmental testing and management industry 52,000 51,000
Other depreciation, depletion, and amortization 14,000 20,000
$ 106,000 $ 132,000
</TABLE>
Note 4. Significant Events
Effective February 1, 1998, Registrant, Hawks Industries, Inc., and a third
party investor, entered into an agreement with the Company's President,
Joseph J. McQuade, whereby Mr. McQuade and his immediate family's
stockholdings have been purchased by the third party investor at $.10 per
share. The Company has entered into a severance agreement with Mr. McQuade
which includes a covenant not to compete. Under the terms of the
Agreement, the Company will pay $50,000 per year for four (4) years,
payable in semi-monthly installments, to McQuade in exchange for the non-
compete provision. Mr. McQuade has, effective on the same date, resigned
as President of the Company and Chairman of the Board of Directors. Mr.
Bruce A. Hinchey, presently the Company's Vice President, has been elected
by the Board of Directors to be the President of the Corporation and Mr.
James E. Meador, Jr., was selected to be the new Vice-President. No
replacement for Mr. McQuade has been made as of yet on the Board of
Directors.
<PAGE>
HAWKS INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 4. Significant Events (cont.)
The third party investor, the Anne D. Zimmerman Revocable Trust dated
November 14, 1991 ("the Trust"), by acquiring Mr. McQuade's and his
immediate family's shares, has 3,063,331 shares (153,167 shares after
reverse split) and therefore has acquired 11.2% of the outstanding shares
of the Company. As such, the Trust is deemed to be a controlling person.
The Trustee of the Trust, Anne D. Zimmerman, will not sit on the Company's
Board of Directors, nor will she be an employee or officer of the Company.
Reverse Stock Split
At the Company's Annual Meeting held on January 8, 1998, the Company
submitted to a vote of security holders, through the solicitation of
proxies or otherwise, a proposal to effect a 20 for 1 reverse split which
was approved. The reverse split changed the number of shares outstanding
from 27,028,194 to 1,351,515.
Note 5. Sale of Buildings
On May 26, 1998, the Company signed an agreement to sell its buildings
located at 7345 6WN Road and 7383 6WN Road in Natrona County, Wyoming to
WERCS, a Wyoming Corporation. As set forth in the agreement, the closing
date was June 1, 1998 and the total sales price for both buildings was
$417,000.
The Company's cost in the buildings was $506,000. The Company's basis in
the buildings was $367,000. Therefore, the Company had an approximate
$50,000 gain resulting from the transaction.
The $417,000 was received as $317,000 cash and 10,000 shares of WERCS 4%
preferred convertible stock.
The majority owner of WERCS, a Wyoming Corporation, is Dr. Gail D.
Zimmerman whose spouse, through the Anne D. Zimmerman Revocable Trust, owns
11.2% of the outstanding shares of Hawks Industries, Inc. stock.
<PAGE>
HAWKS INDUSTRIES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Liquidity and Capital Resources:
- --------------------------------
As of June 30, 1998 the Company had working capital of $152,000. During the
first six months of 1998 the following items contributed in increasing working
capital from a $140,000 deficit to the current $152,000 positive figure.
1.During the quarter ended June 30, 1998 the Company reported earnings of
$146,000 and earnings for the six month period of $107,000. From these
earnings the Company has increased accounts receivable from year end by
$223,000. Reducing the $107,000 net income was $109,000 non-cash
depreciation, depletion and amortization. The company purchased
$161,000 of property and equipment during the first six months of 1998.
It is not anticipated the Company will require this in the next six
months of the year.
2.The Company sold its buildings on 6WN Road in Natrona County, Wyoming.
This enabled the Company to pay off approximately $190,000 in current
portion of long-term debt and short-term notes payable, along with
providing the company with approximately $65,000 in cash and $100,000
available for sale investment, which can be converted to cash upon
request. The buildings had been listed with a realtor for more than two
years. They were sold by the officers which saved approximately $28,000
in realtor fees.
3.Through local banks, the Company has been able to use accounts
receivable as collateral for short-term borrowings for current cash
demands in its environmental engineering business. This, along with a
$200,000 revolving line of credit, has enabled the Company to perform on
larger contracts which would not have been posssible in the past.
Also, the company has a $230,000 revolving line of credit for its oil
and gas industry. To date, the Company has borrowed $100,000 of this
line of credit to pay off past drilling costs in its Brundage Canyon
Field.
Results of Operations:
- ---------------------
In the second quarter of 1998, the Company reported $146,000 net income. This
was partly due to the sale of office buildings on 6WN Road in Natrona County,
Wyoming but also due to increased revenues from the environmental engineering
business.
Environmental Engineering :
Environmental engineering revenues for the second quarter increased by $230,000,
or 47% compared with the second quarter of 1997. Revenues for the six months
ended June 30, 1998 were up by $229,000 or 26% over the same six months of 1997.
The quarter and six months of 1998 were aided by two large industrial contracts
that were not in existence in 1997. Environmental engineering expenses for the
second quarter were up by $88,000 or 20% in 1998 over the comparable quarter in
1997. Expenses in the first six months of 1998 were up by $22,000 or 2% over
the six months ended June 30, 1998. The expense increase in 1998 was the result
of the additional work over the prior quarter and corresponding six months
period in 1997.
<PAGE>
Oil and Gas:
Oil and gas revenues declined from $199,000 in 1997 to $142,000 in 1998 or 29%
for the six months ended June 30, 1998. Revenues for the quarter were down by
$26,000 or 37%. These reductions were caused by lower oil prices, by as much as
40%,. 1997 revenues were higher due to "flush" production from the Brundage
Canyon wells that were drilled late in 1996. Correspondingly, the oil and gas
expenses were lower by 48% for the six months and lower by 67% for the quarter
ended June 30, 1998.
Additional Information:
The Company had depreciation, depletion, and amortization(DD&A) of $106,000 for
1998 compared to $129,000 in the six months ended June 30, 1997. This was an
18% reduction. For the quarter ended June 30, 1998, DD&A was $8,000 less
compared to the quarter ended June 30, 1997 or a 12% reduction. This was the
result of less depreciation from oil and gas properties due to lower production.
General and administrative costs were lower by $7,000 or 5% for the six months
ended June 30, 1998 compared with the six months ended June 30, 1997. General
and administrative costs were lower by $9,000, or 13% for the comparable
quarters of 1998 and 1997. These reductions were due to cost saving practices
initiated by management.
Interest expense was higher by $4,000 for the six months and $3,000 for the
quarter ended June 30, 1998 compared to 1997. This was the result of increases
in short-term borrowings for the periods.
Income taxes:
The Company has significant net operating loss carryforwards, investment tax
credit carryforwards, and other carryforwards items, and accordingly will not be
liable for ordinary income taxes.
In addition, should the Company utilize certain loss carryforwards which were
earned prior to the date of the Company's quasi reorganization at December 31,
1998, Financial Accounting Statement No. 109 requires that deferred taxes be
provided. The Company has taken the position that to provide such disclosure is
not only meaningless but somewhat distortive. As of the second quarter 1998 no
such income tax provision would have been necessary.
<PAGE>
Part II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
NASDAQ Compliance--8K dated May 28, 1998
----------------------------------------
On the Company's First Quarter 10Q for the period ended March 31, 1998, the
Company did not satisfy NASDAQ's small cap market requirement of $2,000,000
net assets. As of April 30, 1998, this requirement has been met per the
Consolidated Balance Sheet. The Company does not anticipate any problem
meeting this requirement in future periods.
Disposition of Assets--8K dated June 2, 1998
---------------------------------------------
On May 26, 1998, the Company signed an agreement to sell its buildings
located at 7345 6WN Road and 7383 6WN Road in Natrona County, Wyoming to
WERCS, a Wyoming Corporation. As set forth in the agreement, the closing
date was June 1, 1998 and the total sales price for both buildings was
$417,000.
The Company's cost in the buildings was $506,000. The Company's basis in
the buildings was $367,000. Therefore, the Company had an approximate
$50,000 gain resulting from the transaction.
The $417,000 was received as $317,000 cash and 10,000 shares of WERCS 4%
preferred stock.
The majority owner of WERCS, a Wyoming Corporation, is Dr. Gail D.
Zimmerman whose spouse, through the Anne D. Zimmerman Revocable Trust, owns
11.2% of the outstanding shares of Hawks Industries, Inc. stock.
<PAGE>
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: July 28, 1998 By:/s/ Bruce A. Hinchey
Bruce A. Hinchey, President and
Chief Executive Officer
Date: July 28, 1998 By:/s/ Bill Ukele
Bill Ukele, Controller and
Chief Financial Officer
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from Hawks
Industries, Inc. 2nd quarter 1998 10Q and is qualified in its entirety by
reference to such 10Q
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 40,000
<SECURITIES> 200,000
<RECEIVABLES> 653,000
<ALLOWANCES> 0
<INVENTORY> 16,000
<CURRENT-ASSETS> 972,000
<PP&E> 3,916,000
<DEPRECIATION> 2,156,000
<TOTAL-ASSETS> 3,329,000
<CURRENT-LIABILITIES> 820,000
<BONDS> 0
0
0
<COMMON> 13,000
<OTHER-SE> 2,106,000
<TOTAL-LIABILITY-AND-EQUITY> 3,329,000
<SALES> 1,262,000
<TOTAL-REVENUES> 1,265,000
<CGS> 965,000
<TOTAL-COSTS> 1,187,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 39,000
<INCOME-PRETAX> 107,000
<INCOME-TAX> 0
<INCOME-CONTINUING> 107,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 107,000
<EPS-PRIMARY> .08
<EPS-DILUTED> .08
</TABLE>
