UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
---------
FORM 10-QSB
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the quarter ended March 31, 1997 Commission File Number 0-28524
HIREL HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
Delaware 65-0666239
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
650 S.W. 16th Terrace
Pompano Beach, Florida 33069
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (954) 942-5390
----------------------
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 May 14, 1997, there were
5,208,750 shares of the Registrant's $.001 par value common stock outstanding.
<PAGE>
HIREL HOLDINGS, INC. AND SUBSIDIARIES
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INDEX TO 10-QSB
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Part I: Financial Information
Item 1. Financial Statements
Consolidated Balance Sheet as of March 31, 1997 [Unaudited]...1
Consolidated Statements of Operations for the three months ended
March 31, 1997 and 1996 [Unaudited]...........................2
Consolidated Statements of Cash Flows for the three months ended
March 31, 1997 and 1996 [Unaudited]...........................3
Notes to Consolidated Financial Statements [Unaudited]........4......5
Item 2: Management's Discussion and Analysis of Financial Condition
and Results of Operations.............................6......8
Part II. Other Information...................................9
Signature Page................................................10
. . . . . . . . . . . .
<PAGE>
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements
HIREL HOLDINGS, INC. AND SUBSIDIARIES
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CONSOLIDATED BALANCE SHEET AS OF MARCH 31, 1997.
[UNAUDITED]
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Assets:
Current Assets:
Cash and Cash Equivalents $ 1,062,685
Accounts Receivable [Net of Allowance for Doubtful Accounts
of $192,000] 1,781,596
Accounts Receivable - Related Party 280,034
Inventory 4,409,614
Other Current Assets 114,102
-----------
Total Current Assets 7,648,031
Property and Equipment - Net 1,353,643
-----------
Other Assets:
Loans Receivable - Related Parties - Net 512,766
Other Assets 288,771
Goodwill 2,594,773
-----------
Total Other Assets 3,396,310
Total Assets $12,397,984
Liabilities and Stockholders' Equity:
Current Liabilities:
Line of Credit $ 2,141,351
Accounts Payable 2,061,359
Notes Payable 71,226
Other Current Liabilities 657,284
-----------
Total Current Liabilities 4,931,220
Note Payable 1,363,727
Commitments and Contingencies --
Stockholders' Equity:
Preferred Stock - $.001 Par Value, 1,000,000 Shares Authorized,
None Issued or Outstanding --
Common Stock, $.001 Par Value, 24,000,000 Shares Authorized,
5,208,750 Shares Issued and Outstanding 5,209
Paid-in Capital 7,908,774
Retained Earnings [Deficit] (1,810,946)
Total Stockholders' Equity 6,103,037
Total Liabilities and Stockholders' Equity $12,397,984
See Notes to Consolidated Financial Statements.
1
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HIREL HOLDINGS, INC. AND SUBSIDIARIES
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CONSOLIDATED STATEMENTS OF OPERATIONS
[UNAUDITED]
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Three months ended
March 31,
1 9 9 7 1 9 9 6
------ -------
Net Sales:
Computer Equipment 86,430 $ 6,662,628
Marine Power Engines 2,967,094 --
Fuel Injection Systems 362,216 324,438
---------- -----------
Total Net Sales 6,115,740 6,987,066
---------- -----------
Cost of Goods Sold:
Computer Equipment 2,655,185 6,178,754
Marine Power Engines 2,587,968 --
Fuel Injection Systems 270,282 178,595
---------- -----------
Total Cost of Goods Sold 5,513,435 6,357,349
---------- -----------
Gross Profit 602,305 629,717
---------- -----------
Expenses:
General and Administrative Expenses 1,103,724 479,298
Research and Development 52,310 8,813
---------- -----------
Total Expenses 1,156,034 488,111
---------- -----------
Operating [Loss] Income (553,729) 141,606
---------- -----------
Other Income [Expense]:
Interest Expense (86,679) (47,085)
Interest Income 29,211 7,104
Other Income [Expense] 15,334 (41,574)
---------- -----------
Total Other Income [Expense] (42,134) (81,555)
---------- -----------
[Loss] Income Before Pro Forma Income Tax Adjustments (595,863) 60,051
Pro Forma Income Tax Adjustments -- 20,247
---------- -----------
Pro Forma Net [Loss] Income $ (595,863) $ 39,804
========== ===========
Pro Forma [Loss] Earnings Per Share $ (.11) $ .01
========== ===========
Weighted Average Common Shares Outstanding 5,208,750 4,675,000
========== ===========
See Notes to Consolidated Financial Statements.
2
<PAGE>
HIREL HOLDINGS, INC. AND SUBSIDIARIES
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CONSOLIDATED STATEMENTS OF CASH FLOWS
[UNAUDITED]
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Three months ended
March 31,
1 9 9 7 1 9 9 6
------- -------
Operating Activities:
Net [Loss] Income $ (595,863) $ 39,804
---------- -----------
Adjustments to Reconcile Net [Loss] Income to Net
Cash [Used for] Operating Activities:
Depreciation and Amortization 137,465 49,505
Loss on Sale of Asset 4,804 41,574
Provision for Losses on Accounts Recele -- 15,918
Changes in Assets and Liabilities:
[Increase] Decrease in:
Accounts Receivable (819,777) (533,694)
Inventory (867,578) (634,587)
Other Current Assets 16,087 3,217
Other Assets (4,178) 20,348
Increase [Decrease] in:
Accounts Payable (1,274,952) 144,399
Other Current Liabilities 145,184 (77,117)
---------- -----------
Total Adjustments (2,662,945) (970,437)
---------- -----------
Net Cash - Operating Activities (3,258,808) (930,633)
---------- -----------
Investing Activities:
Purchase of Property and Equipment (221,587) (32,359)
Proceeds from Sale of Equipment 27,000 85,000
Transfer from Restricted Cash 788,000 --
Loans to Unrelated Company (200,000) --
Advances to Related Parties - Net -- (148,733)
---------- -----------
Net Cash - Investing Activities 393,413 (96,092)
---------- -----------
Financing Activities:
Distributions -- (302,317)
Advances from Line of Credit - Net 546,261 942,708
Repayments of Note Payable (64,596) --
Repayments from Related Parties 19,965 --
Proceeds from Equity Sales -- 650,000
---------- -----------
Net Cash - Financing Activities 501,630 1,290,391
---------- -----------
Net [Decrease] Increase in Cash and Cash Equivalents (2,363,765) 263,666
Cash and Cash Equivalents - Beginning of Periods 3,426,450 558,242
---------- -----------
Cash and Cash Equivalents - End of Periods $1,062,685 $ 821,908
========== ===========
See Notes to Consolidated Financial Statements.
3
<PAGE>
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 and for the three months
ended March 31, 1997, include the results of 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"]. The unaudited financial statements as of and for the three
months ended March 31, 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 significant
intercompany accounts and transactions have been eliminated in consolidation.
In 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.
March 31,
1 9 9 6
Computer Equipment $ 6,662,628
Fuel Injection Systems 324,438
Marine Power Engines 2,767,415
Total Revenue $ 9,754,481
===========
Net Earnings $ 91,077
===========
Earnings Per Common Share $ .02
===========
Weighted Average Common Shares Outstanding 4,140,000
4
<PAGE>
HIREL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #2
[UNAUDITED]
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[3] Inventory
The components of inventory as of March 31, 1997 are as follows:
Raw Materials $ 3,172,367
Work-in-Process --
Finished Goods 1,237,247
-----------
Total $ 4,409,614
----- ===========
[4] Income Taxes
For the three months ended March 31, 1996, pro forma income taxes are provided
to reflect income tax expense had the consolidated companies been subject to
federal and state income taxes for that period.
[5] Earnings Per Share
Earnings per share is based on the weighted average number of common shares
outstanding for each period presented. Common stock equivalents are included if
dilutive.
. . . . . . . . . .
5
<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 and for the three months ended March 31, 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 as of and for the three
months ended March 31, 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. 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 45% and 55%, respectively,
of total sales for the three months ended March 31, 1997. For the three months
ended March 31, 1996, HMI was the predominant business segment.
Three Months Ended March 31, 1997 Compared to Three Months Ended March 31, 1996
Total sales for the three months ended March 31, 1997, decreased $871,326 over
the three months ended March 31, 1996, from $6,987,066 to $6,115,740, a decrease
of 12.5%. Net sales of computer equipment decreased $3,876,198 over the three
months ended March 31, 1996, a decrease of 58.2%. Most of the products sold by
HMI are manufactured by Apple Computer, Inc. or are peripherals for Apple
computers. Apple products which historically were in demand and competitively
priced were not as readily available beginning in the fourth quarter of 1996 and
continuing in the first quarter of 1997. In addition, international sales of
computer products have weakened as the dollar has strengthened against foreign
currencies. HMI has been approved as a distributor for Motorola, IBM and Adobe
hardware and software products, but to date has not realized any benefit as a
result of these distribution arrangements. In addition, HMI has increased its
advertising budget, hired an additional sales person and a new President who has
spent much of his time since January evaluating the prospects for HMI's computer
distribution business. Based on the continued weak sales that occurred during
the first quarter and the evaluation that has taken place, HMI intends to reduce
its cost structure to be more in line with the current level of sales, as there
can be no assurance that the downward trend in sales will not continue. HMI
which has examined other lines of business established a marine hard parts
distribution business in the northeast United States late in March which
business compliments and is a division of HMI. Net sales of fuel injection
systems increased $37,778 over the quarter ended March 31, 1996, from $324,438
to $362,216, an increase of 11.6%. This increase is primarily attributable to
sales resulting from HTI's recently established distribution/dealer network and
sale of systems and components to a marine engine manufacturer. Sales of marine
engines for the three months ended March 31, 1997, were $2,967,094 which
resulted from the acquisition of MPI effective December 31, 1996. Management
anticipates, based in part on the seasonality of MPI's business that sales for
the second quarter should increase significantly from first quarter sales.
6
<PAGE>
HIREL HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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Three Months Ended March 31, 1997 Compared to Three Months Ended March 31, 1996
Cost of goods sold was $5,513,435 and $6,357,349 for the three months ended
March 31, 1997 and 1996, respectively, a decrease of $843,914 or 13.3%. Cost of
computer equipment sold decreased $3,523,569 over the three months ended March
31, 1996, from $6,178,754 to $2,655,185, a decrease of 57.0%. This decrease is
attributable to the decrease in sales discussed above. The gross profit margin
on computer equipment for the three months ended March 31, 1997, was 4.7%
compared to a gross profit margin of 7.3% for the three months ended March 31,
1996, a decline of 2.6%. However, the 4.7% gross profit margin for the three
months ended March 31, 1997 is the same as the gross profit margin on computer
equipment for the full year ended December 31, 1996. Availability of product and
competition will likely continue to put pressure on the gross profit margin of
HMI's computer distribution business. Cost of fuel injection systems sold
increased $91,687 over the three months ended March 31, 1996, from $178,595 to
$270,282, an increase of 51.3%. This increase is attributable to the increase in
sales discussed above and to some inefficiencies in the first quarter of 1997
resulting from HTI's relocation to a new facility late in 1996. Cost of marine
engines sold was $2,587,968 for the three months ended March 31, 1997.
Gross profit was $602,305 and $629,717 for the three months ended March 31, 1997
and 1996, respectively, a decrease of $27,412 or 4.4%. The decrease in gross
profit of $352,629 from HMI's computer distribution business was offset by the
gross profit of $379,126 resulting from sales of marine engines by HTI's MPI
division.
General and administrative expenses increased $624,426 over the three months
ended March 31, 1996 from $479,298 to $1,103,724, an increase of 130.3%.
Approximately $443,000 of the increase is attributable to MPI and the balance of
the increase is primarily attributable to salaries of personnel hired toward the
end of 1996 and beginning of 1997 including a chief financial officer and the
new president of HMI and to the costs associated with being a public company. In
addition, the Company incurred approximately $38,000 in non-recurring rent
expense in the first quarter of 1997 associated with its relocation to its new
Pompano Beach, FL facility. Research and development increased $43,497 over the
three months ended March 31, 1996, from $8,813 to $52,310, and increase of
493.6%. The increase is primarily attributable to increased payroll and overhead
incurred by HTI for the three months ended March 31, 1997 [HTI began operations
in October, 1995].
As a result of the discussion above, the operating loss for the three months
ended March 31, 1997, increased $695,335 over the three months ended March 31,
1996, from an operating profit of $141,606 to an operating loss of $553,729.
Interest income for the three months ended March 31, 1997, increased $22,107
over the three months ended March 31, 1996, from $7,104 to $29,211, an increase
of 311.2%. The increase is primarily attributable to HHI's investment of excess
cash from its initial public offering of Common Stock in July 1996.
Interest expense for the three months ended March 31, 1997, increased $39,594
over the three months ended March 31, 1996, from $47,085 to $86,679, an increase
of 84.1%. This increase is primarily attributable to interest expense incurred
by MPI during the first quarter of 1997.
Other income [expense] for the three months ended March 31, 1997, decreased
$56,908 over the three months ended March 31, 1996, from expense of $41,574 to
income of $15,334. The decrease is primarily attributable to a loss of
approximately $41,000 incurred by HTI in the first quarter of 1996 on the sale
of equipment.
As a result of the discussion above, the net loss for the three months ended
March 31, 1997, increased by $635,667 over the three months ended March 31,
1996, from pro forma net income of $39,804 to a net loss of $595,863.
7
<PAGE>
HIREL HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
- ------------------------------------------------------------------------------
Three Months Ended March 31, 1997 Compared to Three Months Ended March 31, 1996
Liquidity and Capital Resources
Cash at March 31, 1997 was $1,062,685 compared to $821,908 at March 31, 1996.
Net cash used for operating activities was $3,258,808 for the three months ended
March 31, 1997, compared to net cash used in operating activities of $930,633
for the three months ended March 31, 1996. In 1997, the net loss adjusted for
non-cash charges was $453,544 which along with increases in accounts receivable
of $819,777, inventory of $867,578 and a decrease in accounts payable of
$1,274,952 were the primary reasons for net cash used in operating activities
for the three months ended March 31, 1997. In excess of $2,000,000 in cash used
for operations is attributable to MPI for the three months ended March 31, 1997.
In 1996, net income adjusted for non-cash charges was $146,801 which along with
an increase in accounts payable of $144,399 was offset by increases in accounts
receivable of $533,694 and inventory of $634,587 and were the primary reasons
for net cash used in operating activities for the three months ended March 31,
1996.
Net cash provided by investing activities was $393,413 for the three months
ended March 31, 1997 compared to net cash used by investing activities of
$96,092 for the three months ended March 31, 1996. In 1997, transfers from
restricted cash to cash available for operations of $788,000 was offset by
purchases of property and equipment of $221,758 and loans to an unrelated
company of $200,000. In 1996, proceeds from the sale of equipment of $85,000 was
offset by purchases of property and equipment of $32,359 and net advances to
related parties of $148,733.
Net cash provided by financing activities was $501,630 for the three months
ended March 31, 1997, compared to $1,290,391 for the three months ended March
31, 1996. In 1997, the primary source of cash provided by financing activities
was net advances from the Company's lines of credit. In 1996, net advances from
the Company's line of credit of $942,708 and proceeds from equity sales of
$650,000 were offset by distributions to shareholders and partners of $302,317.
As a result of the losses from operations and the Company's continuing
investment in MPI, the Company, in the short term, will experience a decline in
liquidity. 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 May 31, 1997, that may result in material changes in
liquidity. To provide additional liquidity in the short term, the Company is
seeking additional equity financing.
8
<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
None
Reports
Incorporated by reference from the Company's annual report on Form
10-KSB for the year ended December 31, 1996.
9
<PAGE>
SIGNATURE
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Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this report on Form 10-QSB to be signed on its behalf
by the undersigned thereon duly authorized.
HIREL HOLDINGS, INC.
May 20, 1997 By: /s/ William H. Aden
William H. Aden,
Duly Authorized and Chief Financial Officer
10
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Consolidated Balance Sheet and the Consolidated Statement of Operations and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-mos
<FISCAL-YEAR-END> dec-31-1997
<PERIOD-END> mar-31-1997
<CASH> 1,062,685
<SECURITIES> 0
<RECEIVABLES> 1,781,596
<ALLOWANCES> 0
<INVENTORY> 4,409,614
<CURRENT-ASSETS> 7,648,031
<PP&E> 1,353,643
<DEPRECIATION> 0
<TOTAL-ASSETS> 12,397,984
<CURRENT-LIABILITIES> 4,931,220
<BONDS> 0
0
0
<COMMON> 5,209
<OTHER-SE> 6,097,828
<TOTAL-LIABILITY-AND-EQUITY> 12,397,984
<SALES> 6,115,740
<TOTAL-REVENUES> 6,115,740
<CGS> 5,513,435
<TOTAL-COSTS> 1,156,034
<OTHER-EXPENSES> (15,334)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 57,468
<INCOME-PRETAX> (595,863)
<INCOME-TAX> 0
<INCOME-CONTINUING> (595,863)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (595,863)
<EPS-PRIMARY> (.11)
<EPS-DILUTED> (.11)
</TABLE>
