UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 10-QSB
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended JUNE 30, 1997 Commission File Number 333-4686-A
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HIREL HOLDINGS, INC.
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(Exact name of registrant as specified in its charter)
DELAWARE 65-0666239
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
650 S.W. 16TH TERRACE
POMPANO BEACH, FLORIDA 33069
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (954) 942-5390
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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 and 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 latest practicable date: At August 11, 1997, there were
5,208,750 shares of the Registrant's $.001 par value Common Stock outstanding.
<PAGE>
HIREL HOLDINGS, INC. AND SUBSIDIARIES
INDEX TO 10-QSB
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PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheet as of June 30, 1997 (Unaudited) 1
Consolidated Statements of Operations for the three months and 2
six months ended June 30, 1997 and 1996 (Unaudited)
Consolidated Statements of Cash Flows for the six months ended 3...4
June 30, 1997 and 1996 (Unaudited)
Notes to Consolidated Financial Statements 5...7
ITEM 2. Management's Discussion and Analysis of Financial 8...13
Condition and Results of Operations
PART II. OTHER INFORMATION 14
Signature Page 15
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HIREL HOLDINGS, INC. AND SUBSIDIARIES
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CONSOLIDATED BALANCE SHEET AS OF JUNE 30, 1997
(UNAUDITED)
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ASSETS:
CURRENT ASSETS:
Cash and cash equivalents $ 1,448,842
Restricted cash 218,095
Accounts Receivable (Net of Allowance for
Doubtful Accounts of $151,000) 1,969,361
Accounts Receivable- related party 323,267
Inventory 4,975,851
Other current assets 121,055
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TOTAL CURRENT ASSETS 9,056,471
PROPERTY AND EQUIPMENT-NET 1,569,225
OTHER ASSETS:
Loans receivable-related parties-net 874,147
Bond issue costs 640,866
Other assets 94,829
Goodwill 2,550,794
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TOTAL OTHER ASSETS 4,160,636
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TOTAL ASSETS $ 14,786,332
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LIABILITIES AND STOCKHOLDERS' EQUITY:
CURRENT LIABILITIES:
Checks drawn in excess of bank's balances 316,688
Current poriton of long-term debt 83,328
Current portion of obligation under capital lease 8,451
Line of credit 1,764,559
Accounts payable 2,387,626
Other current liabilities 497,574
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TOTAL CURRENT LIABILITIES 5,058,226
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BONDS PAYABLE 2,438,929
LONG-TERM DEBT, less current portion included above 1,435,405
OBLIGATION UNDER CAPITAL LEASE, less
current portion included above 77,441
OTHER LIABILITIES 52,859
COMMITMENTS AND CONTINGENCIES --
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STOCKHOLDERS' EQUITY:
Preferred stock, $.001 par value, 1,000,000 shares
authorized, none issued or outstanding --
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Common stock, $.001 par value, 24,000,000 shares
authorized, 5,208,750 shares issued and outstanding 5,209
Paid-in capital 8,636,148
Accumulated deficit (2,917,885)
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TOTAL STOCKHOLDERS' EQUITY 5,723,472
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 14,786,332
============
See notes to consolidated financial statements.
1
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<TABLE>
<CAPTION>
HIREL HOLDINGS, INC. AND SUBSIDIARIES
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CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
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THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
1997 1996 1997 1996
----------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
NET SALES:
Computer Equipment $ 2,983,621 $ 5,834,427 $ 5,770,051 $ 12,497,056
Marine Power Engines 3,353,353 -- 6,320,447 --
Fuel Injection Systems 228,272 604,954 590,488 929,394
----------- ----------- ------------ ------------
TOTAL NET SALES 6,565,246 6,439,381 12,680,986 13,426,450
----------- ----------- ------------ ------------
COST OF GOODS SOLD:
Computer Equipment 2,466,994 5,674,124 5,122,179 11,852,878
Marine Power Engines 3,302,904 -- 5,890,872 --
Fuel Injection Systems 227,457 427,991 497,739 606,586
----------- ----------- ------------ ------------
TOTAL COST OF GOODS SOLD 5,997,355 6,102,115 11,510,790 12,459,464
----------- ----------- ------------ ------------
GROSS PROFIT 567,891 337,266 1,170,196 966,986
----------- ----------- ------------ ------------
EXPENSES:
General and administrative expenses 1,411,476 472,353 2,515,200 914,154
Research and development 3,705 71,124 56,015 79,936
----------- ----------- ------------ ------------
TOTAL EXPENSES 1,415,181 543,477 2,571,215 994,090
----------- ----------- ------------ ------------
OPERATING LOSS (847,290) (206,211) (1,401,019) (27,104)
----------- ----------- ------------ ------------
OTHER INCOME (EXPENSE):
Interest expense (103,830) (12,964) (190,509) (63,901)
Interest income 22,323 -- 51,534 --
Interest income- related parties 16,325 7,645 16,325 14,750
Loss on sale of asset (4,804) -- (4,804) (41,574)
Rental income- related party -- 9,000 -- 9,000
Other income 10,774 -- 26,108 --
Bond amortization (200,437) -- (200,437) --
----------- ----------- ------------ ------------
TOTAL OTHER INCOME (259,649) 3,681 (301,783) (81,725)
----------- ----------- ------------ ------------
(EXPENSE)
NET LOSS BEFORE PRO
FORMA INCOME TAX
ADJUSTMENT (1,106,939) (202,530) (1,702,802) (108,829)
PROFORMA INCOME TAX ADJUSTMENTS -- -- -- --
NET LOSS $(1,106,939) $ (202,530) $ (1,702,802) $ (108,829)
=========== =========== ============ ============
LOSS PER SHARE $ (0.21) $ (0.05) $ (0.33) (0.03)
=========== =========== ============ ============
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING 5,208,750 3,750,000 5,208,750 3,750,000
=========== =========== ============ ============
See notes to consolidated financial statements.
</TABLE>
2
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<TABLE>
<CAPTION>
HIREL HOLDINGS, INC. AND SUBSIDIARIES
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CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
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SIX MONTHS ENDED JUNE 30,
1997 1996
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<S> <C> <C>
OPERATING ACTIVITIES:
NET LOSS
Adjustments to reconcile net loss to net cash $(1,702,802) $(108,829)
used in operating activities: ----------- ---------
Depreciation 204,757 51,653
Amortization 288,395 44,652
Loss on sale of assets 4,804 41,574
Provision for losses on accounts receivable -- 20,439
Changes in assets and liabilities:
(Increase) decrease in:
Accounts receivable (1,050,775) (247,158)
Inventory (1,433,815) (375,008)
Other current assets 9,314 (13,432)
Other assets (10,415) --
Increase (decrease) in:
Accounts payable (948,685) (198,641)
Other current liabilities (14,526) (64,220)
Other liabilities 52,859 --
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Total Adjustments (2,898,087) (740,141)
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NET CASH- OPERATING ACTIVITIES (4,600,889) (848,970)
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INVESTING ACTIVITIES:
Purchase of property and equipment (314,927) (11,611)
Proceeds from sale of equipment 27,000 85,000
Loans receivable- related party -- (119,782)
Decrease in restricted cash 569,905 --
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NET CASH- INVESTING ACTIVITIES 281,978 (46,393)
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FINANCING ACTIVITIES:
Increase in bond issue costs (175,000) --
Increase in deferred offering costs -- (302,328)
Increase in checks drawn in excess of banks' balances 316,688 --
Distributions -- (384,317)
Advances from line of credit-net 169,469 649,533
Principal payments on long-term debt (105,330) --
Principal paid on obligation under capital lease (23,108) --
Net advances from (to) related parties (341,416) 175,146
Proceeds from equity sales -- 649,000
Proceeds form bond issues 2,500,000 --
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</TABLE>
3
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HIREL HOLDINGS, INC. AND SUBSIDIARIES
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CONSOLIDATED STATEMENTS OF CASH FLOWS-Continued
(UNAUDITED)
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NET CASH-FINANCING
ACTIVITIES 2,341,303 787,034
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NET DECREASE IN CASH (1,977,608) 108,329)
CASH AND CASH EQUIVALENTS-
BEGINNING OF PERIOD 3,426,450 558,241
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CASH AND CASH EQUIVALENTS-
END OF PERIODS $ 1,448,842 $449,912
=========== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
CASH PAID DURING THE YEAR FOR:
Interest $ 170,000 $ 64,000
=========== ========
SUPPLEMENTAL SCHEDULE OF NON-CASH
INVESTING AND FINANCING ACTIVITIES:
Notes payable executed on new equipment $ 125,000 $ --
=========== ========
Capital lease obligation on
new equipment $ 109,000 $ --
=========== ========
Value assigned to additional
paid-in capital for debentures
conversion feature and common
stock warrants
$ 727,000 $ --
=========== ========
See notes to consolidated financial statements.
4
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HIREL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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(1) BASIS OF PRESENTATION
The unaudited consolidated financial statements as of June 30, 1997 and for the
three month and six month periods ended June 30, 1997, include the results from
operations of the parent company, Hirel Holdings, Inc. ("HHI") and its
wholly-owned subsidiaries Hirel Marketing, Inc. ("HMI") and Hirel Technologies,
Inc. ("HTI"). Effective December 31, 1996, HTI acquired substantially all of the
assets and certain liabilities of Marine Power, Inc. ("MPI") and its operations
are included with the Company's from December 31, 1996. The unaudited financial
statements for the three month and six month periods ended June 30, 1996, are
based on the historical financial statements of HHI, HMI, and HTI, and have been
combined on a basis consistent with that of consolidated financial statements
giving retroactive effect to the issuance of 2,750,000 shares of HHI Common
Stock to the stockholders of HMI, and 1,000,000 shares of HHI Common Stock to
the stockholders of HTI. All intercompany balances and transactions have been
eliminated.
In the opinion of management, the accompanying unaudited financial statements
included in the Form 10-QSB reflect all adjustments (consisting only of normal
recurring accruals) necessary to make the interim financial statements not
misleading. The results of operations for the interim periods presented are not
necessarily indicative of the results to be expected for the full year.
For further information, refer to the financial statements and footnotes
included in the Company's Form 10-KSB for the year ended December 31, 1996.
(2) BUSINESS COMBINATION
On January 24, 1997, the Company completed its acquisition of substantially all
of the assets of MPI effective December 31, 1996, and its operations are
included with the Company's from December 31, 1996.
The following unaudited pro forma combined results of operations reflect the
acquisition as if it had occurred at the beginning of the period presented.
These pro forma results may not be indicative of the results that actually would
have occurred if the combination had been in effect on the date indicated.
5
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<TABLE>
<CAPTION>
HIREL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMETS
(UNAUDITED)
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(2) BUSINESS COMBINATION (CONTINUED)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
1996 1996
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<S> <C> <C>
Computer Equipment $ 5,834,428 $ 12,497,056
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Fuel Injection Systems $ 604,956 $ 929,394
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Marine Power Engines $ 3,567,990 $ 6,335,405
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Total Revenues $ 10,007,374 $ 19,761,855
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Net Loss $ (959,484) $ (912,386)
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Loss Per Common Share $ (.23) $ (.22)
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Weighted Average Common Shares Outstanding 4,140,000 4,140,000
============== ============
</TABLE>
(3) INVENTORY
The components of inventory as of June 30, 1997, are as follows:
Raw Materials $3,804,691
Work-in-Process -
Finished Goods $1,171,160
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$4,975,851
==========
(4) INCOME TAXES
For the three and six month periods ended June 30, 1996, pro forma income taxes
are provided, where necessary, to reflect income tax expense had the
consolidated companies been subject to federal and state income taxes for that
period.
6
<PAGE>
HIREL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMETS
(UNAUDITED)
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(5) LOSS PER SHARE
Loss per share of common stock is based on the weighted average number of common
shares outstanding for each period presented, after giving retroactive effect
for the shares issued in the business combination discussed in Note (1). Common
stock equivalents are included if dilutive.
(6) BOND OFFERING
On June 5, 1997, pursuant to an offering under Regulation D of the Securities
Act of 1933, the Company issued $2,500,000 face value of 5% Convertible
Debentures (the "Debentures"). The Debentures are convertible into the Company's
common stock at 79% of market value, as defined in the agreement, with certain
maximum conversion rates, and mature on June 5, 2000. This conversion feature
gave rise to $644,557 of offering costs which will be amortized through the
conversion date of the related Debentures which ranges from 90 to 120 days. In
addition, the Company issued 35,710 warrants to purchase 35,710 shares of the
Company's common stock for a period of three years at an exercise price of 125%
of the market price on the date of exercise. The warrants gave rise to a bond
discount of $62,816 which will be amortized over the life of the Debentures.
Pursuant to the Debentures, the Debenture holders can receive a maximum of
1,041,666 shares under the conversion feature; after such maximum is reached the
Company must repay the remaining balance in four months at 120% of face value.
The Company has the right to redeem the Debentures at 120% of face value.
(7) PROPOSED ACQUISITION
On July 8, 1997 the Company entered into an agreement to acquire all of the
assets and liabilities of Jerry's Marine Services, Inc. ("JMS") for $8,000,000,
payable in cash of $5,000,000 and a $3,000,000 promissory note due in annual
installments of $1,000,000 plus interest at prime plus 1%, due at the end of
each of the three years following the closing date. The closing is contingent on
JMS achieving certain net asset requirements in its financial statements now
under audit and the agreement can be terminated if the net asset requirements
are not met. If the net asset requirements are exceeded the purchase price will
be increased by the amount of such excess, not to exceed $2,000,000 and will
increase the cash portion of the purchase price. The Company also anticipates
entering into short term employment contracts with various JMS employees.
7
<PAGE>
ITEM 2. HIREL HOLDINGS, INC. AND SUBSIDIARIES MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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GENERAL
The following discussion should be read in conjunction with the Company's report
on Form 10-KSB for the year ended December 31, 1996, including the consolidated
financial statements of the Company and the notes thereto appearing on Pages F-1
through F-20 thereof.
The parent company Hirel Holdings, Inc. ("HHI") and its wholly-owned
subsidiaries, Hirel Marketing, Inc. ("HMI") and Hirel Technologies, Inc.
("HTI"), are collectively referred to as "the Company". The unaudited financial
statements as of June 30, 1997 and for the three month and six month periods
ended June 30, 1997, include HHI and its wholly-owned subsidiaries HMI and HTI.
Effective December 31, 1996, HTI acquired substantially all of the assets and
certain liabilities of Marine Power, Inc. ("MPI") and its operations are
included with the Company's from December 31, 1996. The unaudited financial
statements for the three month and six month periods ended June 30, 1996, are
based on the historical financial statements of HHI, HMI, and HTI, and have been
combined on a basis consistent with that of consolidated financial statements
giving retroactive effect to the issuance of 2,750,000 shares of HHI Common
Stock to the stockholders of HMI and 1,000,000 shares of HHI Common Stock to the
stockholders of HTI.
The Company operates in three business segments through its operating
subsidiaries. HMI is a wholesale seller to retailers and end users throughout
the United States and internationally of personal computers, primarily
manufactured by Apple Computer, Inc. and related peripherals. In addition,
during March 1997, a division of HMI known as Hirel Marine & Industrial Supply
("HMIS") was formed to distribute marine hard parts, primarily engines
manufactured by MPI, from its facility located in Lakewood, New Jersey. HTI
develops, manufactures and sells fuel injection systems for marine engines to
customers throughout the United States. Both HMI and HTI operate out of the
Company's single location in Pompano Beach, FL. Effective December 31, 1996, MPI
was acquired as a division of HTI. MPI manufactures engines for marine
applications for sale throughout the United States at its location in
Ponchatoula, LA. HMI and HTI (including MPI) accounted for approximately 46% and
54%, respectively, of total sales for the six months ended June 30, 1997. For
the six months ended June 30, 1996, HMI was the predominant business segment.
THREE MONTHS ENDED JUNE 30, 1997 COMPARED TO THREE MONTHS ENDED JUNE 30, 1996
The Combined Statement of Operations for the three months ended June 30, 1997
reflects Total Net Sales of $6,565,246, and Gross Profit of $567,891. This
resulted in a Gross
8
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HIREL HOLDINGS, INC. AND SUBSIDIARIES MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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Profit Margin of 8.6% and a Pro Forma Net loss of $1,106,939. The Combined
Statement of Operations for the three months ended June 30, 1996 reflected Total
Net Sales of $6,439,381 and Gross Profit of $337,266, resulting in a Gross
Profit Margin of 5.2%.
The Loss Before Income Taxes for the three months ended June 30, 1997 and June
30, 1996 was $1,106,939 and $202,530 respectively.
During the three months ending June 30, 1997 the Company incurred substantial
legal, accounting and brokerage expenses associated with the $2,500,000
convertible debentures which expenses were included in the SG&A section.
Any comparisons between the Combined Statement of Operations for the three
months ended June 30, 1997 and the three months ended June 30, 1996 must be made
in light of the discussion that follows. The Combined Statement of Operations
for the three months ended June 30, 1997 includes the results from operations
for both of its subsidiaries, Hirel Marketing, Inc. and Hirel Technologies, Inc.
including Marine Power. The Combined Statement of Operations for the three
months ended June 30, 1996 only includes the operations of HMI and HTI, and does
not include the operations of Marine Power, which did not become part of the
Company until December 31, 1996. The sections below compare the operations of
HMI and HTI for the three months ended June 30, 1997 and June 30, 1996
separately.
HIREL MARKETING, INC.
Hirel Marketing, Inc. ("HMI") is the subsidiary of the Company that is a
distributor of microcomputer hardware, peripherals and related communications
products. The HMIS division is a distributor of marine hard parts, primarily
engines manufactured by MPI. Net sales decreased by $2,850,806, which is a
decrease of 49% during the second quarter 1997, as compared to the second
quarter 1996. Gross Profit decreased by approximately $643,676, which is a
decrease of 55%. The Gross Profit margin for the second quarter 1997 was 17.3%,
which is an increase from the Gross Profit margin of 2.75% for the second
quarter 1996. There are two major reasons for the increase in the Gross Margin
percentage; first is the new strategic focus on the marine distribution business
which has significantly higher margins and secondly the receipt of price
protection credits from key computer suppliers. With the exception of the
manufacturer's credits the trend toward higher gross profit margins versus 1996
margins should continue.
On June 21, 1995, HMI obtained a $1,000,000 line of credit. This line of credit
is used to finance letters of credit used by HMI to purchase inventory for the
computer distribution business. The line of credit allows HMI the option of
paying upon presentation or financing the inventory purchases for up to 90 days.
The line of credit carries interest at
9
<PAGE>
HIREL HOLDINGS, INC. AND SUBSIDIARIES MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- -------------------------------------------------------------------------------
the Citibank prime rate (8.5% at June 30, 1997) plus 2% to a maximum of 18%. The
line of credit is subject to renewal annually, is collateralized by all
corporate assets and is guaranteed by Vincent Montelione. The line of credit was
increased to $2,000,000 on December 26, 1995. As of June 30, 1997, borrowing
under this line of credit were $1,043,759, as compared to $1,310,339 as of June
30, 1996. Letters of credit which have not yet been presented for payment, are
included on the financial statements under the caption "Accounts Payable," and
totaled $0 as of June 30, 1997, as compared to $437,349 as of June 30, 1996. The
interest expense associated with the line of credit was $36,320 for the three
months ended June 30, 1997. Management intends to continue to seek favorable
opportunities to purchase inventory using, where appropriate, financing
available through the line of credit.
In the second quarter 1997, total General and Administrative Expenses
attributable to HMI were $261,951 vs. $205,192 for the second quarter ended June
30, 1996. This increase of approximately $56,759 in General and Administrative
Expenses is primarily attributable to increases in salaries and payroll taxes
from the HMIS division in the North Eastern United States as well as the costs
associated with the new Division President.
The Pro Forma Net Loss attributable to the operations of HMI was $159,730 for
the fiscal quarter ended June 30, 1997, as compared to Pro Forma Net Loss of
$50,206 for the fiscal quarter ended June 30, 1996. This increase in loss is
primarily the result of a decrease in sales and increased General and
Administrative Expenses during the fiscal quarter ended June 30, 1997.
HIREL TECHNOLOGIES, INC.
Hirel Technologies, Inc. ("HTI"), through its predecessor entity, Hirel
Technologies, Ltd. ("HTL") began operation on October 24, 1995. HTI is a
subsidiary of the Company that develops and sells fuel injection systems,
related components and other products designed to enhance the performance of
gasoline powered engines. For the fiscal quarter ended June 30, 1997, HTI had
total revenue of $228,272, of which $54,606 came from original equipment
manufacturer ("OEM") customers and the remaining $173,666 resulted from sales to
after market purchasers. A singe OEM customer accounted for approximately 12% of
revenues for the fiscal quarter ended June 30, 1997, and although the disruption
or loss of that customer may have a material adverse effect on the total
revenues of HTI, Management believes that the relationship with this and other
OEM customers will strengthen and broaden in the future.
Total General and Administrative Expenses for the fiscal quarter ended June 30,
1997 totaled $223,089 and consisted primarily of salaries and payroll taxes of
approximately $94,461. Research and Development Expenses incurred during the
fiscal quarter ended
10
<PAGE>
HIREL HOLDINGS, INC. AND SUBSIDIARIES MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- -------------------------------------------------------------------------------
June 30, 1997 were $56,015. Management believes that HTI will continue to incur
Research and Development Expenses as it endeavors to develop new products and
enhancements of existing products that are consistent with the current product
line. The loss from operations for the fiscal quarter ended June 30, 1997, was
$115,322.
SIX MONTHS ENDED JUNE 30, 1997 COMPARED TO SIX MONTHS ENDED JUNE 30, 1996
The Combined Statement of Operations for the six months ended June 30, 1997
reflects Total Net Sales of $12,680,986, and Gross Profit of $1,170,196. This
resulted in a Gross Profit Margin of 9.2% and Pro Forma Net Loss of $1,702,802.
The Combined Statement of Operations for the six month ended June 30, 1996
reflected Total Net Sales of $13,426,450 and Gross Profit of $966,986, resulting
in a Gross Profit Margin of 7.2%. Income Before Pro Forma Income Tax Adjustments
for the six months ended June 30, 1996 was $108,829, and Pro Forma Net Loss was
$108,829.
As noted previously, and comparisons between the Combined Statement of
Operations for the six months ended June 30, 1997 and the six months ended June
30, 1996 must be made in light of the discussion that follows. The Combined
Statement of Operations for the six months ended June 30, 1997 includes the
results from operations for both HMI, HTI and MPI. The Combined Statement of
Operations for the six months ended June 30, 1996 only includes the operations
of HMI and HTI, and does not include the operations of MPI. These sections below
compare the operations of HMI, HTI and MPI for the six months ended June 30,
1997 and June 30, 1996 separately.
HIREL MARKETING, INC.
Net Sales were $5,770, 051 for the six months ended June 30, 1997, which
reflects a decrease of approximately $6,727,005 or 53% as compared to the six
months ended June 30, 1996. The Gross Profit Margin for the six months ended
June 30, 1997 increased to 11.9%, as compared to 5.2% for the six months ended
June 30, 1996. Management believes that this increase in Gross Profit Margin
was, in part, reflective of higher margin product sold by the HMIS division in
the North Eastern United States.
General and Administrative Expenses for the six months ended June 30, 1997
totaled $447,790, as compared to $450,340 of General and Administrative Expenses
incurred during the six months ended June 30, 1996. The increase in General and
Administrative Expenses as a % of sales was primarily attributable to the
increase in payroll and related employee taxes resulting from the start up of
the HMIS.
Income before Income Taxes attributable to HMI for the six months ended June 30,
1997 was ($229,545) as compared to $151,100 for the six months ended June 30,
1996.
11
<PAGE>
HIREL HOLDINGS, INC. AND SUBSIDIARIES MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- -------------------------------------------------------------------------------
HIREL TECHNOLOGIES, INC.
For the six months ended June 30, 1997, HTI had total sales of $638,737 in Fuel
Injection Systems, of which $68,311 came from OEM customers and $570,425 were
from sales to after-market purchasers. In 1996, the total sales were $929,394 of
which $500,660 came from OEM customers and $428,734 were after-market sales. In
1997, the Gross Profit attributable to such systems was $140,998, a Gross Profit
margin of 22% vs. 35%for 1996. The General and Administrative expenses for HTI
(exclusive of the MPI division) during the six months ended June 30, 1997
totaled $465,826 vs. $426,814 in 1996. The General and Administrative Expenses
consisted primarily of salary and payroll taxes of $188,922, rent of $26,775,
and depreciation of $82,594. The total loss of HTI for the six months ended June
30, 1997 was $328,767, of which $324,828 was the loss from operations, interest
expense of $7,280 and other interest income of $3,341.
As noted previously, the Pro Forma Combined Statement of Operations for the six
month period ended June 30, 1996, does not reflect the operations of Marine
Power, Inc. As set forth in footnote 2, had the operations of Marine Power been
included in the statement of operations for HHI for the six months ended June
30, 1996, the loss before income taxes would have been $824,428. This compares
to the loss before income taxes of HHI for the six months ended June 30, 1997 of
$1,702,802.
MARINE POWER DIVISION
Net Sales of marine engines and parts for the six months ended June 30, 1997
were $6,320,447 versus $6,335,405 for the six months ended June 30, 1996. This
decrease of $14,958 represents less than a 1% change. The Gross Profit for the
six months ended June 30, 1997 is $429,575 or 6.8% compared to $1,065,221 or
16.8% for 1996. This decrease in Gross Margin is attributable to an increase in
engine costs from General Motors due to model changes as well as increased costs
in variable production and warranty costs.
General and Administrative Expenses were $751,666 and $752,590 for the six
months ended June 30, 1997 and June 30, 1996 respectively.
Income (Loss) before Income Taxes for the six months ended June 30, 1997 was
($221,193) as compared to $94,709 for the six months ended June 30, 1996.
LIQUIDITY AND CAPITAL RESOURCES
Cash at June 30, 1997 was $1,448,842 compared to $449,912 at June 30, 1996.
12
<PAGE>
HIREL HOLDINGS, INC. AND SUBSIDIARIES MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- -------------------------------------------------------------------------------
Net cash used for operating activities was $4,600,898 for the six months ended
June 30,1997, compared to net cash used in operating activities of $848,970 for
the six months ended June 30, 1996. In 1997, the net loss adjusted for non-cash
charges was $1,209,650 which along with increases in accounts receivable of
$1,050,775, inventory of $1,433,815 and a decrease in accounts payable of
$948,685 were the primary reasons for net cash used in operating activities for
the six months ended June 30, 1997. In 1996, net income adjusted for non-cash
charges was $12,524 which along with decrease in accounts payable of $198,641
and increases in accounts receivable of $247,158 and inventory of $375,008 were
the primary reasons for net cash used in operating activities for the six months
ended June 30, 1996.
Net cash provided by investing activities was $281,978 for the six months ended
June 30, 1997 compared to net cash used by investing activities of $46,393 for
the six months ended June 30, 1996. In 1997, transfers from restricted cash to
cash available for operations of $569,905 was offset by purchases of property
and equipment of $314,927. In 1996, proceeds from the sale of equipment of
$85,000 was offset by purchases of property and equipment of $11,611 and net
advances to related parties of $119,782.
Net cash provided by financing activities was $2,341,303 for the six months
ended June 30, 1997, compared to $787,034 for the six months ended June 30,
1996. In 1997, the primary source of cash provided by financing activities was
$2,500,000 from the sale of a bond issue and $169,469 in net advances from the
line of credit partially offset by $175,000 in bond issue costs and $341,416 in
net advances from related party transactions. In 1996, net advances from the
Company's line of credit of $649,533 and proceeds from equity sales of $650,000
were offset by distributions to shareholders and partners of $384,317.
As a result of the losses from operations and the Company's continued investment
in MPI, the Company experienced a decline in liquidity throughout the quarter
prior to the $2,500,000 bond proceeds that occurred on June 5, 1997, and
subsequent thereto. Management is not aware, however, of any known demands,
commitments, events, or uncertainties except as described above as well as the
maturity of HMI's line of credit on October 10, 1997, that may result in
material changes in liquidity, although management believes there will be
additional losses from operations in the quarter ended September 30, 1997.
IMPACT OF INFLATION
Inflation has not been a major factor in the company's business since inception.
There can be no assurances that this will continue.
13
<PAGE>
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS.
Not applicable
Item 2. CHANGES IN SECURITIES.
Not applicable
Item 3. DEFAULTS UPON SENIOR SECURITIES.
Not applicable
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS.
Not applicable
Item 5. OTHER INFORMATION.
Not applicable
Item 6. EXHIBITS AND REPORTS ON FORM 8-K.
EXHIBITS.
27 Financial Data Schedule (for SEC use only).
REPORTS.
Incorporated by reference from the Company's annual report on Form
10-KSB for the year ended December 31, 1996.
14
<PAGE>
SIGNATURE
- -------------------------------------------------------------------------------
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this report on Form 10-QSB to signed on its behalf by
the undersigned thereon duly authorized.
HIREL HOLDINGS, INC.
By:
---------------------------
Vincent Montelione
Duly Authorized and
President, CEO
August 11, 1997
15
<PAGE>
EXHIBIT INDEX
EXHIBIT PAGE
- ------- ----
27 Financial Data Schedule (for SEC use only).
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 1,448,842
<SECURITIES> 0
<RECEIVABLES> 1,969,361
<ALLOWANCES> 0
<INVENTORY> 4,975,851
<CURRENT-ASSETS> 9,056,471
<PP&E> 1,569,225
<DEPRECIATION> 0
<TOTAL-ASSETS> 14,786,332
<CURRENT-LIABILITIES> 5,058,226
<BONDS> 2,438,929
0
0
<COMMON> 5,209
<OTHER-SE> 5,718,263
<TOTAL-LIABILITY-AND-EQUITY> 14,786,332
<SALES> 12,680,986
<TOTAL-REVENUES> 12,680,986
<CGS> 11,510,790
<TOTAL-COSTS> 2,578,215
<OTHER-EXPENSES> 111,274
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 190,509
<INCOME-PRETAX> (1,702,802)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,702,802)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,702,802)
<EPS-PRIMARY> (.33)
<EPS-DILUTED> 0
</TABLE>
