UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
--------
FORM 10-QSB
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the quarter ended September 30, 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 Number)
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 September 30, there were
5,482,563 shares of the Registrant's $.001 par value Common Stock outstanding.
<PAGE>
HIREL HOLDINGS, INC. AND SUBSIDIARIES
INDEX TO 10-QSB
- -------------------------------------------------------------------------------
Part I: Financial Information
Item 1. Financial Statements
Consolidated Balance Sheet as of September 30, 1997 (Unaudited) 1
Consolidated Statements of Operations for the three months and 2
nine months ended September 30, 1997 and 1996 (Unaudited)
Consolidated Statements of Cash Flows for the nine months ended 3...4
September 30, 1997 and 1996 (Unaudited)
Notes to Consolidated Financial Statements 5...7
Item 2. Management's Discussion and Analysis of Financial 8...15
Condition and Results of Operations
Part II. Other Information 16
Signature Page 17
<PAGE>
HIREL HOLDINGS, INC. AND SUBSIDIARIES
- -------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEET AS OF SEPTEMBER 30, 1997
(UNAUDITED)
- -------------------------------------------------------------------------------
ASSETS:
CURRENT ASSETS:
Cash and cash equivalents $ 454,675
Restricted cash 221,235
Accounts receivable (Net of Allowance for 1,033,093
doubtful accounts of $145,000)
Accounts receivable- related party 768,894
Inventory 5,035,884
Other current assets 176,732
---------------
TOTAL CURRENT ASSETS 7,690,513
PROPERTY AND EQUIPMENT-NET 1,508,619
OTHER ASSETS:
Loans receivable-related parties-net 978,237
Bond issue costs 155,555
Other assets 60,827
Goodwill 2,506,814
---------------
TOTAL OTHER ASSETS 3,701,433
---------------
TOTAL ASSETS $ 12,900,565
===============
LIABILITIES AND STOCKHOLDERS' EQUITY:
CURRENT LIABILITIES:
Accounts payable $ 3,058,298
Line of credit 1,164,068
Other current liabilities 555,311
Checks drawn in excess of bank's balances 139,977
Current portion of long-term debt 77,356
Current portion of obligation under capital lease 28,403
---------------
TOTAL CURRENT LIABILITIES 5,023,413
---------------
BONDS PAYABLE 2,294,164
LONG-TERM DEBT, less current portion included above 1,411,120
OBLIGATION UNDER CAPITAL LEASE, less
current portion included above 95,808
OTHER LIABILITIES 49,484
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, 5,482,563 shares issued and outstanding 5,483
Paid-in capital 8,785,874
Accumulated deficit (4,764,781)
---------------
TOTAL STOCKHOLDERS' EQUITY 4,026,576
---------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 12,900,565
===============
See notes to consolidated financial statements.
<PAGE>
HIREL HOLDINGS, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
- --------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30, September 30,
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net Sales:
Computer Equipment $2,107,460 $5,617,666 $7,877,511 $18,114,722
Marine Power Engines 2,335,504 - 8,655,951 -
Fuel Injection Systems 74,637 324,127 665,125 1,253,521
------ ------- ------- ---------
TOTAL NET SALES 4,517,601 5,941,793 17,198,587 19,368,243
--------- --------- ---------- ----------
Cost of Goods Sold:
Computer Equipment 1,679,317 5,366,022 6,801,496 17,218,900
Marine Power Engines 2,478,687 - 8,369,559 -
Fuel Injection Systems 127,476 221,452 625,215 828,038
------- ------- ------- -------
TOTAL COST OF GOODS SOLD 4,285,480 5,587,474 15,796,270 18,046,938
--------- --------- ---------- ----------
GROSS PROFIT 232,121 354,319 1,402,317 1,321,305
------- ------- --------- ---------
Expenses:
General and administrative expenses 1,512,220 527,936 4,027,420 1,442,090
Research and development 3,276 70,644 59,291 150,580
----- ------ ------ -------
TOTAL EXPENSES 1,515,496 598,580 4,086,711 1,592,670
--------- ------- --------- ---------
Operating Loss
(1,283,375) (244,261) (2,684,394) (271,365)
Other Income (Expense):
Interest expense (107,233) (36,930) (297,742) (100,831)
Interest income 23,900 32,843 75,435 32,843
Interest income- related parties 8,530 8,210 24,855 22,960
Loss on sale of asset - - (4,804) (41,574)
Rental income- related party - 9,000 - 18,000
Other income 1,827 - 27,934 -
Bond amortization (490,545) - (690,982) -
-------- --------
TOTAL OTHER INCOME(EXPENSE) (563,521) 13,123 (865,304) (68,602)
-------- ------ -------- -------
NET LOSS $(1,846,896) $(231,138) $(3,549,698) $(339,967)
=========== ========= =========== =========
LOSS PER SHARE $ (0.35) $ (0.05) $ (0.68) $ (0.08)
=========== ========= =========== =========
Weighted average common
shares outstanding 5,227,197 4,559,375 5,214,967 4,021,761
========= ========= ========= =========
</TABLE>
See notes to consolidated financial statements.
<PAGE>
HIREL HOLDINGS, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Nine Months Ended September 30,
-------------------------------
Operating activities: 1997 1996
---- ----
<S> <C> <C>
Net loss
Adjustments to reconcile net loss to net cash $ (3,549,698) $ (339,967)
----------------- -----------------
used in operating activities:
Depreciation 311,469 75,477
Amortization 822,920 69,060
Loss on sale of assets 4,804 41,574
Provision for losses on accounts receivable 5,518 21,099
Changes in assets and liabilities:
(Increase) decrease in:
Accounts receivable (565,652) (418,059)
Inventory (1,498,848) (942,127)
Other current assets (46,363) (666,528)
Other assets 123,587 (73,458)
Increase (decrease) in:
Accounts payable (278,013) (49,707)
Other current liabilities (10,402) (13,385)
Other liabilities 49,484 -
----------------- -----------------
Total Adjustments (1,081,496) (1,956,054)
----------------- -----------------
NET CASH- OPERATING ACTIVITIES (4,631,194) (2,296,021)
----------------- -----------------
Investing activities:
Purchase of property and equipment (339,251) (44,267)
Proceeds from sale of equipment 27,000 85,000
Loans receivable- related party - (162,660)
Decrease in restricted cash 566,765 -
Net advances to related parties (445,506) (16,778)
----------------- -----------------
NET CASH- INVESTING ACTIVITIES (190,992) (138,705)
----------------- -----------------
Financing activities:
Increase in checks drawn in excess of banks' balances 139,977 -
Distributions - (384,317)
Net (Repayments) Advances from line of credit (431,022) 879,415
Principal payments on long-term debt (135,587) -
Principal paid on obligation under capital lease (33,761) -
Proceeds from equity sales - 649,000
Proceeds from bond issues 2,325,000 -
Net Proceeds from Initial Public Offering - 4,841,829
Payment of Loan Renewal Fee - (25,000)
----------------- -----------------
NET CASH-FINANCING ACTIVITIES 1,864,607 5,960,927
----------------- -----------------
NET (DECREASE) INCREASE IN CASH (2,957,579) 3,526,201
<PAGE>
HIREL HOLDINGS, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS-Continued
(UNAUDITED)
- --------------------------------------------------------------------------------
<CAPTION>
<S> <C> <C>
CASH AND CASH EQUIVALENTS-
BEGINNING OF PERIOD 3,426,450 558,241
---------------- -----------------
CASH AND CASH EQUIVALENTS-
END OF PERIODS $ 454,675 $ 4,084,442
================ =================
Supplemental disclosures of cash flow information
Cash paid during the year for: $ 262,000 $ 101,000
================ =================
Supplemental schedule of non-cash
investing and financing activities:
Notes payable executed on new equipment $ 125,000 $ -
================ =================
Capital lease obligation on
new equipment $ 131,000 $ -
================ =================
Value assigned to additional
paid-in capital for debentures
conversion feature and common
stock warrants $ 727,000 $ -
================ =================
Debentures converted to common
stock and paid-in-capital $ 150,000 $ -
================ =================
</TABLE>
See notes to consolidated financial statements.
<PAGE>
HIREL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
- --------------------------------------------------------------------------------
(1) Basis of Presentation
The unaudited consolidated financial statements as of September 30, 1997 and for
the three month and nine month periods ended September 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 nine month
periods ended September 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.
<PAGE>
HIREL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMETS
(UNAUDITED)
- --------------------------------------------------------------------------------
(2) Business Combination (continued)
Three Months Ended Nine Months Ended
------------------ -----------------
September 30, September 30,
------------- -------------
1996 1996
---- ----
Computer Equipment $ 5,617,666 $ 18,114,722
============ =============
Fuel Injection Systems $ 324,127 $ 1,253,521
============ =============
Marine Power Engines $ 3,138,710 $ 9,474,115
============ =============
Total Revenues $ 9,080,503 $ 28,842,358
============ =============
Net Income (Loss) $ (500,906) $ (1,261,433)
============ =============
Loss Per Common Share $ (.11) $ (.31)
============ =============
Weighted Average Common Shares Outstanding 4,559,375 4,021,761
============ =============
(3) Inventory
The components of inventory as of September 30, 1997, are as follows:
Raw Materials $3,793,188
Work-in-Process -
Finished Goods $1,242,696
---------
$5,035,884
==========
(4) 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.
<PAGE>
HIREL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
- --------------------------------------------------------------------------------
(5) 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. As of
September 30, 1997, $150,000 in Debentures had been converted into 273,813
shares of Common Stock.
(6) 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. As of November 12, 1997,
this transaction has not been executed and is unlikely to be successfully
completed.
<PAGE>
Item 2. HIREL HOLDINGS, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
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 September 30, 1997 and for the three month and nine month
periods ended September 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 nine month periods ended September 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 nine months ended September 30, 1997.
For the nine months ended September 30, 1996, HMI was the predominant business
segment.
Three Months Ended September 30, 1997 Compared to Three Months Ended
September 30, 1996
The Combined Statement of Operations for the three months ended September 30,
1997 reflects Total Net Sales of $4,517,601, and Gross Profit of $232,121.
This resulted in a
<PAGE>
HIREL HOLDINGS, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
Gross Profit Margin of 5.1% and a Pro Forma Net loss of $1,846,896. The Combined
Statement of Operations for the three months ended September 30, 1996 reflected
Total Net Sales of $5,941,793 and Gross Profit of $354,319, resulting in a Gross
Profit Margin of 5.9%.
The Loss Before Income Taxes for the three months ended September 30, 1997 and
September 30, 1996 was $1,846,896 and $231,138, respectively.
During the three months ending September 30, 1997, the Company incurred
substantial legal, accounting and consulting expenses associated with
exploration and negotiation of certain business combinations including the
Jerry's Marine Service deal that resulted in approximately $200,000 in costs.
In addition, the company recorded amortization expense of $490,545 for the Bond
Discount as compared to $0 for the comparable prior period quarter. Please refer
to footnote (5) on Bond Offering details.
Any comparisons between the Combined Statement of Operations for the three
months ended September 30, 1997 and the three months ended September 30, 1996
must be made in light of the discussion that follows. The Combined Statement of
Operations for the three months ended September 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 September 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 (please refer to footnote (2)
for Proforma results of operations had MPI been included). The sections below
compare the operations of HMI and HTI for the three months ended September 30,
1997 and September 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. In addition, the newly formed division known as
HMIS is a distributor of marine hard parts, primarily engines manufactured
by MPI. Net sales decreased by $3,510,206 which is a decrease of 62% during the
third quarter 1997, as compared to the third quarter 1996. This was
attributable solely to the decrease in sales from computer hardware and due to
Apple Computer Company turmoil, the soft market during the summer months and
with slow European demand. Gross Profit increased by approximately $176,499
which is an increase of 70%. The Gross Profit margin for the third quarter 1997
was 20%, which is an increase from the Gross Profit margin of 4.5% for the
third quarter 1996. There are two
<PAGE>
HIREL HOLDINGS, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
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. Sales in
the third quarter for HMIS were $293,112 and are included in the Computer
Equipment Sales figure of $2,107,460.
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 the Citibank prime rate (8.5% at
September 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 September 30, 1997, borrowings under this line of
credit were $368,618 as compared to $1,540,221 as of September 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 $129,479
as of September 30, 1997, as compared to $354,705 as of September 30, 1996. The
interest expense associated with the line of credit was $12,834 for the three
months ended September 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 third quarter 1997, total General and Administrative Expenses
attributable to HMI were $204,720 vs. $197,004 for the third quarter ended
September 30, 1996. This slight increase of approximately $7,700 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.
Net Income attributable to the operations of HMI was $217,086 for the fiscal
quarter ended September 30, 1997, as compared to Net Income of $29,942 for the
fiscal quarter ended September 30, 1996. This increase is primarily the result
of the sale of higher margin products in the marine distribution business in the
NE United States.
Hirel Technologies, Inc.
Hirel Technologies, Inc. ("HTI"), through its predecessor entity, Hirel
Technologies, Ltd. ("HTL") began operations 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 September 30, 1997, HTI
had total revenue of $74,637 of which $43,105 came from
<PAGE>
HIREL HOLDINGS, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
original equipment manufacturer ("OEM") customers and the remaining $31,532
resulted from sales to after market purchasers. A singe OEM customer accounted
for approximately 58% of revenues for the fiscal quarter ended September 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 September
30, 1997 totaled $240,516 and consisted primarily of salaries and payroll taxes
of approximately $192,000, professional fees of $17,000 and warranty expense of
$15,000. The loss from operations for the fiscal quarter ended September 30,
1997, was $293,355 and the net loss was $297,104.
Nine Months Ended September 30, 1997 Compared to Nine Months Ended
September 30, 1996
The Combined Statement of Operations for the nine months ended September 30,
1997 reflects Total Net Sales of $17,198,587 and Gross Profit of $1,402,317.
This resulted in a Gross Profit Margin of 8.2% and Net Loss of $3,549,698. The
Combined Statement of Operations for the nine month ended September 30, 1996
reflected Total Net Sales of $19,368,243 and Gross Profit of $1,321,305
resulting in a Gross Profit Margin of 6.8%. Net Loss for the nine months ended
September 30, 1996 was $339,967.
As noted previously, and comparisons between the Combined Statement of
Operations for the nine months ended September 30, 1997 and the nine months
ended September 30, 1996 must be made in light of the discussion that follows.
The Combined Statement of Operations for the nine months ended September 30,
1997 includes the results from operations for both HMI, HTI and MPI. The
Combined Statement of Operations for the nine months ended September 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
nine months ended September 30, 1997 and September 30, 1996 separately.
Hirel Marketing, Inc.
Net Sales were $7,877,511 for the nine months ended September 30, 1997, which
reflects a decrease of approximately $10,237,211 or 56% as compared to the nine
months ended September 30, 1996. The decrease in sales is due solely to the
decrease in computer hardware as a result of Apple Computer Company turmoil in
conjunction with low European demand all year. The Gross Profit Margin for the
nine months ended September 30, 1997 increased to 13.7%, as compared to 4.9% for
the nine months ended September
<PAGE>
HIREL HOLDINGS, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
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. Sales for HMIS for the nine months were $646,145 and are
included in the Computer Equipment Sales figure of $7,877,511.
General and Administrative Expenses for the nine months ended September 30, 1997
totaled $652,510 as compared to $647,345 of General and Administrative Expenses
incurred during the nine months ended September 30, 1996. The slight increase in
General and Administrative Expenses 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 nine months ended
September 30, 1997 was $386,841 as compared to $181,042 for the nine months
ended September 30, 1996.
Hirel Technologies, Inc.
For the nine months ended September 30, 1997, HTI had total sales of $665,125 in
Fuel Injection Systems, of which $247,034 came from OEM customers and $418,091
were from sales to after-market purchasers. In 1996, the total sales were
$1,253,521 of which $725,924 came from OEM customers and $527,597 were
after-market sales. In 1997, the Gross Profit attributable to such systems was
$39,910, a Gross Profit margin of 6.0% vs. 33.9%for 1996. The General and
Administrative expenses for HTI (exclusive of the MPI division) during the nine
months ended September 30, 1997 totaled $706,342 vs. $650,542 in 1996. The
General and Administrative Expenses consisted primarily of salary and payroll
taxes of $285,938, professional fees of $48,443, rent of $28,960 and
depreciation of $121,000. The total loss of HTI for the nine months ended
September 30, 1997 was $674,120 of which $666,432 was the loss from operations,
interest expense of $11,713 and other interest income of $4,025.
As noted previously, the Pro Forma Combined Statement of Operations for the nine
month period ended September 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 nine months ended
September 30, 1996, the loss before income taxes would have been $1,261,433.
This compares to the loss before income taxes of HHI for the nine months ended
September 30, 1997 of $3,549,698.
Marine Power Division
Net Sales of marine engines and parts for the nine months ended September 30,
1997 were $8,655,951 versus $9,474,115 for the nine months ended September 30,
1996 (see
<PAGE>
HIREL HOLDINGS, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
footnote (2) Business Combination for 1996 Proforma results of operations). This
decrease of $818,164 represents a 8.6% change. The Gross Profit for the nine
months ended September 30, 1997 is $286,392 or 3.3% compared to $1,428,842 or
15% 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 $1,439,702 and $1,257,204 for the nine
months ended September 30, 1997 and September 30, 1996 respectively.
Income (Loss) before Income Taxes for the nine months ended September 30, 1997
was $(1,311,368) as compared to $(921,466) for the nine months ended September
30, 1996.
The company recorded $165,948 in interest expense associated with the $850,000
line of credit facility and a $1,383,276 term loan. A loan agreement containing
certain financial statement covenants, among other restrictions, limited the
payment of dividends. Marine Power has failed to satisfy certain of the
covenants and has received a waiver of the covenants through the receipt of the
company's December 31, 1997 financial statements.
Liquidity and Capital Resources
Cash at September 30, 1997 was $454,675 compared to $4,084,442 at September 30,
1996. Net cash used for operating activities was $4,645,390 for the nine months
ended September 30,1997, compared to net cash used in operating activities of
$2,296,021 for the nine months ended September 30, 1996. In 1997, the net loss
adjusted for non-cash charges was $2,415,309 which along with increases in
accounts receivable of $565,652 inventory of $1,493,848 and a decrease in
accounts payable of $278,013 were the primary reasons for net cash used in
operating activities for the nine months ended September 30, 1997. In 1996, net
loss adjusted for non-cash charges was $195,430 which along with decrease in
accounts payable of $49,707 and increases in accounts receivable of $418,059,
inventory of $942,127 and Other Current Assets of $666,528 were the primary
reasons for net cash used in operating activities for the nine months ended
September 30, 1996.
Net cash provided by investing activities was $190,992 for the nine months ended
September 30, 1997 compared to net cash used by investing activities of $138,705
for the nine months ended September 30, 1996. In 1997, transfers from restricted
cash to cash available for operations of $566,765 was offset by purchases of
property and equipment of $339,251 and net advances to related parties of
$445,506. In 1996, proceeds from the sale of equipment of $85,000 was offset by
purchases of property and equipment of $44,267 and net advances to related
parties of $162,660.
<PAGE>
HIREL HOLDINGS, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
Net cash provided by financing activities was $1,864,607 for the nine months
ended September 30, 1997, compared to $5,960,927 for the nine months ended
September 30, 1996. In 1997, the primary source of cash provided by financing
activities was $2,325,000 from the net sale of a bond issue partially offset by
$431,022 in net repayments on the lines of credit. In 1996, net advances from
the Company's line of credit of $879,415 and proceeds from equity sales of
$650,000 and IPO proceeds of $4,841,829 were offset by distributions to
shareholders and partners of $384,317.
As a result of the losses from operations the Company continued to experience a
decline in liquidity throughout the third quarter despite the $2,500,000 bond
proceeds that occurred on June 5, 1997 of the second quarter. Management is not
aware, however, of any known demands, commitments, events, or uncertainties
except as described above as well as the extension of HMI's line of credit on
October 10, 1997 that was renewed at a reduced level of $1,000,000 maturing
March 31, 1998, with current availability of $631,382 at September 30, 1997; MPI
also has a line of credit of $850,000 with availability of $54,550, that may
result in material changes in liquidity, although management believes there will
be additional losses from operations in the quarter ended December 31, 1997.
During the nine month period ended September 30, 1997 and September 30, 1996,
the company spent approximately $339,000 and $44,000, respectively, to purchase
capital equipment which was funded through long-term borrowings and current
operations. Additionally, management expects the Company's level of future
capital expenditures to increase at a level that is consistent with the
Company's projected growth and operations. Management has projected capital
expenditure requirements of approximately $400,000 for the calendar year ending
December 31, 1997. This increase will be supported by increased bank borrowing
and internal operations.
Management believes that its current financial position, together with the
available borrowings under the Company's various short and long-term credit
facilities will be sufficient to meet the Company's anticipated operating needs
and projected capital expenditure requirements for the next twelve months.
In addition and if necessary, cash generated from the sale or exchange of
corporate assets, divisions or affiliates may also be considered in cashflow
projections during this period.
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.
<PAGE>
HIREL HOLDINGS, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
Certain information set forth in this report includes "forward looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995 and is subject to certain risks and uncertainties, including but not
limited to, the Company's limited operating history, entry into new lines of
business and the uncertainty of success of its newly acquired subsidiaries,
dependence upon major customers, risk of inventory obsolescence, substantial
competition and dependence upon a small number of key executives. Readers are
cautioned not to place undue reliance on these forward looking statements, which
are made as of the date hereof. The Company undertakes no obligation to release
any revisions to the forward looking statements to reflect events or
circumstances after the date hereof or to reflect unanticipated events or
developments.
<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.
<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: /s/ Gregory S. Fenech
--------------------------------
Gregory S. Fenech
Duly Authorized and Vice President
of Operations, Director
November 12, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 454,675
<SECURITIES> 0
<RECEIVABLES> 1,033,093
<ALLOWANCES> 145,000
<INVENTORY> 5,035,884
<CURRENT-ASSETS> 7,690,513
<PP&E> 1,508,619
<DEPRECIATION> 0
<TOTAL-ASSETS> 12,900,565
<CURRENT-LIABILITIES> 5,023,413
<BONDS> 2,294,164
0
0
<COMMON> 5483
<OTHER-SE> 4,021,093
<TOTAL-LIABILITY-AND-EQUITY> 12,900,565
<SALES> 17,198,587
<TOTAL-REVENUES> 17,198,587
<CGS> 15,796,270
<TOTAL-COSTS> 4,086,711
<OTHER-EXPENSES> 567,562
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 297,742
<INCOME-PRETAX> (3,549,698)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,549,698)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,549,698)
<EPS-PRIMARY> (.68)
<EPS-DILUTED> 0
</TABLE>
