<PAGE>
U. S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(MARK ONE)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1996
-----------------------------------------------
[ ] TRANSITION REPORT UNDER TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO .
---------------------- -----------------------
COMMISSION FILE NUMBER 0-18205
-----------------
HAWKINS ENERGY CORPORATION
- -------------------------------------------------------------------------------
(EXACT NAME OF SMALL BUSINESS ISSUER AS SPECIFIED IN ITS CHARTER)
OKLAHOMA 73-1345732
- -------------------------------------------------------------------------------
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
TWENTY EAST FIFTH STREET, SUITE 1500, TULSA, OKLAHOMA 74103
- -------------------------------------------------------------------------------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
918-587-5815
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(ISSUER'S TELEPHONE NUMBER)
CHECK WHETHER THE ISSUER (1) FILED ALL REPORTS REQUIRED TO BE FILED BY
SECTION 13 OR 15(D) OF THE EXCHANGE ACT DURING THE PAST 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
----- -----
NUMBER OF SHARES OF COMMON STOCK OUTSTANDING ON NOVEMBER 4, 1996 - 13,040,168
TRANSITIONAL SMALL BUSINESS ISSUER FORMAT (CHECK ONE): YES NO X
----- -----
1
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HAWKINS ENERGY CORPORATION
TABLE OF CONTENTS
Page
----
PART I
FINANCIAL INFORMATION:
Item 1 -- Financial Statements
Consolidated Balance Sheets
September 30, 1996 and December 31, 1995....................... 3
Consolidated Statements of Operations
Three and Nine Months Ended September 30, 1996 and 1995........ 4
Consolidated Statements of Cash Flows
Nine Months Ended September 30, 1996 and 1995.................. 5
Notes to Consolidated Financial Statements....................... 7
Item 2 -- Management's Discussion and Analysis
Management's Discussion and Analysis of
Financial Condition and Results of Operations.................. 8
PART II
OTHER INFORMATION:
Item 6 - Exhibits and Reports on Form 8-K............................. 11
Signatures............................................................ 12
Table................................................................. 13
2
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HAWKINS ENERGY CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1996 1995
UNAUDITED
------------ ------------
(In thousands)
<S> <C> <C>
Current Assets:
Cash and cash equivalents.................................... $ 16 $ 177
Accounts receivable, less allowance for doubtful accounts
of $63 and $25 in 1996 and 1995, respectively............... 827 1,377
Accounts receivable -- related party......................... -- 25
Notes receivable............................................. 7 262
Income tax receivable........................................ -- 58
Compressors and compressor parts inventory................... 1,477 1,458
Other........................................................ 28 121
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Total current assets........................................ 2,355 3,478
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Property and Equipment, net (Note 2).......................... 21,597 21,399
------- -------
Goodwill and other intangibles, net of amortization of
$1,787 in 1996 and $1,729 in 1995.......................... 919 849
Notes receivable.............................................. -- 315
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Total Assets.................................................. $24,871 $26,041
======= =======
Current Liabilities:
Current portion of long-term debt............................ $ 1,609 $ 682
Accounts payable and accrued liabilities..................... 1,353 1,778
Account payable affiliate.................................... -- 88
Income tax payable........................................... 23 --
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Total current liabilities................................... 2,985 2,548
Long-term debt................................................ 7,364 9,000
Deferred income taxes......................................... 3,631 3,697
Other......................................................... 98 98
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Total Liabilities............................................. 14,078 15,343
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Commitments (Note 4)
Stockholders' Equity:
Preferred stock, $1.00 par value, 1,000,000
shares authorized, none issued.............................. -- --
Common stock, $.01 par value, 20,000,000 shares authorized,
13,049,235 and 13,049,235 shares issued and 13,040,168 and
12,961,968 outstanding in 1996 and 1995, respectively....... 130 130
Additional paid-in capital................................... 12,114 12,114
Retained earnings (deficit).................................. (1,442) (1,448)
Treasury stock, at cost (9,067 and 87,267 shares in
1996 and 1995, respectively)................................ (9) (98)
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Total stockholders' equity.................................... 10,793 10,698
------- -------
Total Liabilities and Stockholders' Equity.................... $24,871 $26,041
======= =======
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
3
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HAWKINS ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
UNAUDITED
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
------------------- -------------------
1996 1995 1996 1995
------- ------- ------- -------
(In thousands, except for per share amounts)
<S> <C> <C> <C> <C>
Revenues:
Oil & gas sales.............................. $ 428 $ 396 $ 1,278 $ 1,124
Compressor sales............................. 207 352 1,036 1,491
Compressor rentals........................... 1,571 1,669 4,793 5,224
Interest and other income.................... 4 16 27 87
------- ------- ------- -------
Total revenues............................. 2,210 2,433 7,134 7,926
------- ------- ------- -------
Expenses:
Operating costs - oil and gas................ 139 171 394 442
Cost of sales - compressors.................. 171 141 789 1,071
Operating costs - compressors................ 331 871 1,913 2,641
Depreciation, depletion and amortization..... 578 608 1,649 1,770
General and administrative................... 423 437 1,317 1,377
Loss on sale of assets....................... 359 25 298 18
Interest..................................... 222 262 702 784
------- ------- ------- -------
Total expenses.......................... 2,223 2,515 7,062 8,103
------- ------- ------- -------
Income (loss) before income taxes.............. (13 ) (82 ) 72 (177)
Income tax benefit (expense)................... 1 20 (40) 53
------- ------- ------- -------
Net income (loss).............................. $ (12 ) $ (62 ) $ 32 $ (124)
======= ======= ======= =======
Income (loss) per common share:................ $ -- $ -- $ -- $ (.01)
======= ======= ======= =======
Weighted average number of shares outstanding.. 13,040 12,949 13,014 12,921
======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
4
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HAWKINS ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
1996 1995
-------- --------
(In thousands)
<S> <C> <C>
Cash flows from operating activities:
Net income (loss)........................................ $ 32 $ (124)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depletion, depreciation, and amortization............ 1,649 1,770
Loss (gain) on sale of equipment..................... 298 18
Deferred taxes....................................... (66) (393)
Changes in operating assets and liabilities:
Accounts receivable and other........................ 722 (203)
Notes receivable..................................... 570 53
Compressor and compressor parts inventory............ (19) (252)
Accounts payable and accrued liabilities............. (490) (230)
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Net cash provided by operating activities.......... 2,696 639
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Cash flows from investing activities:
Acquisitions of compressor and other equipment........... (2,559) (1,021)
Proceeds from dispositions of compressor and
other equipment........................................ 534 358
Additions to oil and gas properties...................... (209) (2,512)
Proceeds of disposition of oil and gas properties........ 174 --
Cash held for reinvestment in oil and gas properties..... -- 2,513
Increase in organization costs and other intangibles..... (128) (6)
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Net cash used in investing activities.............. (2,188) (668)
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Cash flows from financing activities:
Proceeds of long-term debt............................... 130 1,475
Payments on long-term debt............................... (839) (1,220)
Sale of treasury stock................................... 40 40
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Net cash provided by (used in) financing activities.. (669) 295
------- ------
Net increase in cash
and cash equivalents..................................... (161) 266
Cash and cash equivalents,
beginning of period...................................... 177 115
------- ------
Cash and cash equivalents,
end of period............................................ $ 16 $ 381
======= ======
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
5
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HAWKINS ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
UNAUDITED
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
1996 1995
-------- --------
(In thousands)
<S> <C> <C>
Supplemental disclosure of cash flow information:
Interest paid.................................... $ 786 $ 784
======= ======
Income taxes paid................................ $ 16 $ 150
======= ======
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
6
<PAGE>
HAWKINS ENERGY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 ORGANIZATION AND BASIS OF PRESENTATION
The accompanying consolidated financial statements present the
financial position and results of operations of Hawkins Energy Corporation (the
"Company") and its wholly owned subsidiary, Equity Compressors, Inc. ("Equity
Compressors").
The Company is engaged in the production of natural gas and oil, and
in the leasing, remanufacturing and direct sale of gas compression equipment to
operators of producing natural gas wells and gas gathering systems as well as to
other equipment leasing companies. Its principal geographical operating areas
lie within the states of Alabama, Arkansas, Kansas, Mississippi, Louisiana,
Oklahoma and Texas.
In the opinion of the Company, the accompanying financial statements
contain all adjustments necessary (all of which are of a normal recurring
nature) to present fairly the financial position of Hawkins Energy Corporation
as of September 30, 1996, and the results of its operations and cash flows for
the periods ended September 30, 1996 and 1995.
The financial statements should be read in conjunction with the
Company's Form 10-KSB for the year ended December 31, 1995. The year end
Consolidated Balance Sheet data was derived from audited financial statements,
but does not include all disclosures required by generally accepted accounting
principles.
NOTE 2 PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1996 1995
------ -------
(In thousands)
<S> <C> <C>
Land and building................................. $ 304 $ 299
Oil and gas properties, on the full cost method 34,579 34,544
Compressor equipment.............................. 22,886 21,446
Other equipment................................... 477 469
------ ------
58,246 56,758
Less accumulated depreciation, depletion and
amortization..................................... 36,649 35,359
------ ------
Net property and equipment........................ $21,597 $21,399
======= =======
</TABLE>
On January 1, 1996, the Company sold interests in certain wells. The
Company received $157,300 for the well interests and related production
equipment. The proceeds from the sale were placed in trust and utilized by
management to purchase oil and gas properties in 1996 resulting in a "like kind
exchange" for tax purposes, with the tax gain on sale being deferred.
During the third quarter the Company reviewed its capitalization of costs
with respect to its compressor operations, including the review of certain of
its estimates associated with its overhead capitalization rates, resulting in a
reduction of operating costs of $266,000 previously expensed in the first two
quarters.
7
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NOTE 3 TRANSACTIONS WITH RELATED PARTIES
Amounts paid in the nine months ended September 30 by the Company to an
affiliate for production and drilling overhead is as follows: $53,000 in 1996
and $100,000 in 1995.
Equity Compressors received compressor rental revenues from an affiliate
and a related party in the amount of $92,000 for the nine months ended September
30, 1996 and $189,000 for the same period 1995.
NOTE 4 COMMITMENTS
The Company leases compressor equipment under contracts with terms ranging
from month to month to one year. The future revenues to be received under
contracts at September 30, 1996 are $187,000, $472,000, $388,000 and $65,000 in
1996, 1997, 1998 and 1999, respectively.
The Company leases facilities for its corporate and field offices with
lease terms ranging from month to month to two years. The Company's rental
expense amounted to $98,000 and $92,000 in the nine months ended September 30,
1996 and 1995, respectively.
The Company has certain other operating leases for office equipment and
automobiles. Future minimum rental payments under these leases total $37,000,
$115,000, $72,000, $25,000 and $2,000 for 1996, 1997, 1998, 1999 and 2000,
respectively.
NOTE 5 SUBSEQUENT EVENTS
In October, 1996 the Company signed a definitive stock purchase agreement
with a private investment group under which the Company would issue 8 million
shares of its common stock (which would represent 38% of the then outstanding
shares) and warrants to purchase an additional 8 million shares (which, upon
issuance, would increase the investment group's ownership to 55%) at an exercise
price of $.91 per share, for a total cash consideration of $4,400,000 plus a
commitment by the purchaser to use its reasonable efforts to provide certain
business development opportunities to the Company. The warrants would have a
four year term but would become exercisable only in the event the purchaser
satisfies specific business development objectives set forth in such warrant.
Consummation of the transaction is subject to approval by the Company's
shareholders of an increase in the authorized shares of common stock of the
Company.
The private investment group will be entitled to select directors who would
represent a majority of the seats on the Company's board of directors, and the
shareholders will be asked to approve a change in the name of the Company.
Management expects the closing of the transaction to occur on or about December
16, 1996.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following is Management's discussion and analysis of certain
significant factors which have affected the Company's earnings and financial
condition during the periods included in the accompanying Consolidated Balance
Sheets, Statements of Operations and Cash Flows.
RESULTS OF OPERATIONS
- ---------------------
1996 VERSUS 1995
In the three months ended September 30, 1996, the Company had a net loss of
$12,000 compared to a net loss of $62,000 in the three months ended September
30, 1995. For the nine months ended September 30, 1996, the Company reported
net income of $32,000 compared to a net loss of $124,000 for the same period
ended September 30, 1995. Included in the third quarter is a loss on sale of
assets of $358,000 related to the sale of compressor equipment. Additionally,
during the third quarter the
8
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Company reviewed its capitalization of costs with respect to its compressor
operations, including the review of certain of its estimates associated with its
overhead capitalization rates, resulting in a reduction of operating costs of
$266,000 previously expensed in the first two quarters of 1996.
Revenues from oil and gas sales increased by $32,000 in the three months
ended September 30, 1996 from the same period in 1995. Higher prices for both
gas and oil offset the lesser volumes sold during the 1996 three month period.
Oil and gas revenues increased 14% in the nine months ended September 30, 1996
from the same period in 1995 from the combined effect of higher product prices
in 1996 and the timing of the acquisition of properties during the 1995 period.
For product sold by the Company, the average price per Mcf of gas increased 14%
to $1.91 for the nine months of 1996 compared to the same period in 1995, while
the average price per Bbl of oil increased 15% to $20.43. Operating costs
decreased 19% and 11% in the three and nine months ended September 30, 1996 from
the same periods in 1995.
Revenues from the sale of compressors and remanufacturing services
decreased 41% and 31% in the three and nine months ended September 30, 1996,
when compared to the same periods in 1995. Compressor rental revenues decreased
6% and 8% in the three and nine months ended September 30, 1996 when compared to
1995, as the average overall compressor utilization rate decreased to 69% for
the nine months ended September 30, 1996 compared to 73% in the same period
1995. The average number of units rented during the nine months ended September
30, 1996 decreased by 25 units when compared to the average number of units
rented during the first nine months of 1995, generally the result of lagging
demand and increased competition.
The cost of compressor and remanufacturing sales increased 22% and
decreased 26% in the three and nine months ended September 30, 1996 from the
same periods in 1995. The increase in the three months ended September 30, 1996
is primarily due to an additional warranty cost of $18,000. Due to the
Company's effort to minimize operating costs, and the adjustment for the change
in capitalization of cost estimates previously discussed, compressor operating
costs incurred on rental units decreased 62% in the three months ended September
30, 1996 from the same period in 1995. Compressor operating costs decreased 28%
in the nine months ended September 30, 1996 from the same periods in 1995.
Total depreciation, depletion and amortization decreased 5% and 7% in the
three and nine months ended September 30, 1996 when compared to the same periods
in 1995. Depletion, depreciation and amortization of the composite cost of
evaluated oil and gas properties is computed on the units-of-production method
based on estimated proved reserves. Such expense for the three and nine months
ended September 30, 1996 is 16% and 13% lower than the same periods in 1995,
respectively, due to lower production volumes and an upward revision of reserve
estimates at year end 1995. Depreciation of the compressor fleet decreased 2%
and 6% in the three and nine months ended September 30, 1996 from the same
periods in 1995.
General and administrative expense decreased 3% and 4% in the three and
nine months ended September 30, 1996 compared to the same periods in 1995, due
to the Company's ongoing efforts to control such costs.
Interest expense decreased by 15% and 10% in the three and nine months
ended September 30, 1996 compared to the same periods in 1995 as a result of
lower debt balances in 1996.
FINANCIAL CONDITION AND LIQUIDITY
- ---------------------------------
In September 1995, the Company refinanced its existing debt in order to
increase the amounts available for new investment and working capital. The debt
is structured as three separate notes and is collateralized by substantially all
of the assets of the Company. One note has an initial loan balance of $1.2
million and is being amortized at $35,000 per month, plus interest. The
outstanding balance of the loan at November 3, 1996 is $736,000. Another note,
with an initial principal amount of $425,000 is
9
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amortized at $8,854 per month, over 48 months, plus interest. The outstanding
balance of this loan was $97,000 on July 31, 1996 on which date the note was
repaid. A third note, an 18 month revolving line of credit with a $12 million
cap to allow for financing of asset acquisitions, has an initial borrowing base
of $8.5 million available for general business purposes. This borrowing base was
adjusted to $8.8 million on September 30, 1996. At November 3, 1996, the Company
had utilized $7.82 million of the credit line. Under the terms of the credit
line, the outstanding balance at March 31, 1997 will be converted to a term note
payable over 36 months. Accordingly, $1.1 million has been included in the
Company's current portion of long-term debt. As such, amounts of long-term debt
due in the next twelve months total $1.6 million.
Net cash provided by operating activities increased to $2.7 million in the
third quarter of 1996 from $639,000 in the same period of 1995, primarily due to
a decrease in accounts receivable, notes receivable and deferred taxes. During
the third quarter, the Company received full payment of a note receivable in the
amount of $414,000 which related to a sale of compressors in 1993. Net cash
used in investing activities increased to $2.1 million in 1996 from $668,000,
due to additions to the compressor rental fleet. Net cash used in financing
activities is $669,000 in 1996 compared to net cash provided of $295,000 in 1995
as a result of the pay down on the revolving line of credit.
In October, 1996 the Company signed a definitive stock purchase agreement
with a private investment group under which the Company would issue 8 million
shares of its common stock (which would represent 38% of the then outstanding
shares) and warrants to purchase an additional 8 million shares (which, upon
issuance, would increase the investment group's ownership to 55%) at an exercise
price of $.91 per share, for a total cash consideration of $4,400,000 plus a
commitment by the purchaser to use its reasonable efforts to provide certain
business development opportunities to the Company.
At September 30, 1996, the Company had current assets of $2.4 million and
current liabilities of $2.9 million. The Company anticipates that 1996 cash
flow from operations, together with credit line borrowings, and the anticipated
$4.4 million equity investment will be sufficient to fund the Company's working
capital and capital expenditure needs, as well as debt repayment.
On January 1, 1996, the Company sold interests in certain wells. The
Company received $157,300 for the well interests and related production
equipment. The proceeds from the sales were placed in trust and utilized by
management to purchase oil and gas properties in 1996 resulting in a "like kind
exchange" for tax purposes, with the gain on sale being deferred.
As disclosed in the Company's Form 10-KSB, the Company intended to dispose
of certain compressor equipment. Accordingly, the book value of the equipment
was reduced in the fourth quarter of 1995 to its estimated fair value resulting
in a provision to reduce the carrying value of the equipment. During the third
quarter the Company sold certain of this compression equipment which resulted in
an additional $358,000 loss on sale. The proceeds of this sale of equipment
have been used to acquire other compression equipment more suited to the current
marketplace.
10
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EXHIBIT INDEX
EXHIBIT
NO. DESCRIPTION
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27 Financial Data Schedule
11
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SIGNATURES
Pursuant to the requirements of Sections 13 of 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.
HAWKINS ENERGY CORPORATION
DATE: November 13, 1996 By: /s/ Thomas F. Ostrye
--------------------------------------------
THOMAS F. OSTRYE
Chairman, President and Treasurer
(Principal Financial and Accounting Officer)
12
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 16
<SECURITIES> 0
<RECEIVABLES> 897
<ALLOWANCES> 63
<INVENTORY> 1,477
<CURRENT-ASSETS> 2,355
<PP&E> 58,246
<DEPRECIATION> 36,649
<TOTAL-ASSETS> 24,871
<CURRENT-LIABILITIES> 2,985
<BONDS> 0
0
0
<COMMON> 130
<OTHER-SE> 10,663
<TOTAL-LIABILITY-AND-EQUITY> 24,871
<SALES> 2,314
<TOTAL-REVENUES> 7,134
<CGS> 1,183
<TOTAL-COSTS> 7,062
<OTHER-EXPENSES> 4,879
<LOSS-PROVISION> 298
<INTEREST-EXPENSE> 702
<INCOME-PRETAX> 72
<INCOME-TAX> (40)
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 32
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
