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 September 30, 1996 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 November 13, 1996, there
were 4,818,750 shares of the Registrant's $.001 par value common stock
outstanding.
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 September 30, 1996 [Unaudited]3
Consolidated Statements of Operations for the three and nine months ended
September 30, 1996 and 1995 [Unaudited].......................4
Consolidated Statements of Cash Flows for the nine months ended
September 30, 1996 and 1995 [Unaudited].......................5
Notes to Consolidated Financial Statements....................6......7
Item 2: Management's Discussion and Analysis of Financial Condition
and Results of Operations.............................8......11
Part II. Other Information...................................12
Signature Page................................................13
. . . . . . . . . . . .
2
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements
HIREL HOLDINGS, INC. AND SUBSIDIARIES
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CONSOLIDATED BALANCE SHEET AS OF SEPTEMBER 30, 1996
[UNAUDITED]
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Assets:
Current Assets:
Cash and Cash Equivalents $ 4,084,442
Accounts Receivable [Net of Allowance for Doubtful Accounts
of $23,918] 747,380
Inventory 1,343,993
Other Current Assets 672,485
-----------
Total Current Assets 6,848,300
Property and Equipment - Net 768,900
-----------
Other Assets:
Loans Receivable - Related Parties 385,864
Other Assets 124,466
-----------
Total Other Assets 510,330
Total Assets $ 8,127,530
===========
Liabilities and Stockholders' Equity:
Current Liabilities:
Line of Credit $ 1,540,221
Accounts Payable 619,251
Other Current Liabilities 204,123
-----------
Total Current Liabilities 2,363,595
Loan Payable - Related Party 13,111
-----------
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,
4,813,750 Shares Issued and Outstanding 4,814
Paid-in Capital 5,963,674
Retained Earnings [Deficit] (217,664)
Total Stockholders' Equity 5,750,824
Total Liabilities and Stockholders' Equity $ 8,127,530
===========
See Notes to Consolidated Financial Statements.
3
HIREL HOLDINGS, INC. AND SUBSIDIARIES
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CONSOLIDATED STATEMENTS OF OPERATIONS
[UNAUDITED]
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Three months ended Nine months ended
September 30, September 30,
------------- -------------
1 9 9 6 1 9 9 5 1 9 9 6 1 9 9 5
------- ------- ------- -------
Net Sales:
Computer Equipment $5,617,666 $ 5,410,515 $18,114,722 $14,674,588
Computer Equipment - Related Party -- -- -- 2,491,111
Fuel Injection Systems 324,127 -- 1,253,521 --
---------- ----------- ---------- -----------
Total Net Sales 5,941,793 5,410,515 19,368,243 17,165,699
---------- ----------- ---------- -----------
Cost of Goods Sold:
Computer Equipment 5,366,022 5,177,509 17,218,900 16,519,952
Fuel Injection Systems 221,452 -- 828,038 --
---------- ----------- ---------- -----------
Total Cost of Goods Sold 5,587,474 5,177,509 18,046,938 16,519,952
---------- ----------- ---------- -----------
Gross Profit 354,319 233,006 1,321,305 645,747
---------- ----------- ---------- -----------
Expenses:
General and Administrative Expenses527,936 196,031 1,442,090 436,141
Research and Development 70,644 -- 150,580 --
---------- ----------- ---------- -----------
Total Expenses 598,580 196,031 1,592,670 436,141
---------- ----------- ---------- -----------
Operating [Loss] Income (244,261) 36,975 (271,365) 209,606
---------- ----------- ---------- -----------
Other Income [Expense]:
Rental Income - Related Party 9,000 -- 18,000 --
Interest Expense (36,930) (5,103) (100,831) (5,103)
Interest Income 32,843 -- 32,843 --
Interest Income - Related Parties 8,210 -- 22,960 --
Loss on Sale of Asset -- -- (41,574) --
---------- ----------- ---------- -----------
Total Other Income [Expense] 13,123 (5,103) (68,602) (5,103)
---------- ----------- ---------- -----------
[Loss] Income Before Pro Forma
Income Tax Adjustments (231,138) 31,872 (339,967) 204,503
Pro Forma Income Tax
Adjustments -- 4,920 -- 69,870
---------- ----------- ---------- -----------
Pro Forma Net [Loss] Income $ (231,138) $ 26,952 $ (339,967) $ 134,633
========== =========== ========== ===========
Pro Forma [Loss] Earnings
Per Share $ (.05) $ .01 $ (.08) $ .05
========== =========== ========== ===========
Weighted Average Common Shares
Outstanding 4,559,375 2,750,000 4,021,761 2,750,000
========== =========== ========== ===========
See Notes to Consolidated Financial Statements.
4
HIREL HOLDINGS, INC. AND SUBSIDIARIES
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CONSOLIDATED STATEMENTS OF CASH FLOWS
[UNAUDITED]
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Nine months ended
September 30,
1 9 9 6 1 9 9 5
------- -------
Operating Activities:
Net [Loss] Income $ (339,967) $ 204,503
---------- -----------
Adjustments to Reconcile Net [Loss] Income to Net Cash [Used for] Provided by
Operating Activities:
Depreciation 75,477 4,428
Amortization 69,060 --
Loss on Sale of Asset 41,574 --
Provision for Losses on Accounts Receivable 21,099 940
Changes in Assets and Liabilities:
[Increase] Decrease in:
Accounts Receivable (418,059) 2,440
Inventory (942,127) (51,379)
Other Current Assets (666,528) (1,332)
Other Assets (73,458) --
Increase [Decrease] in:
Accounts Payable (49,707) (45,592)
Other Current Liabilities (13,385) (39,629)
---------- -----------
Total Adjustments (1,956,054) (130,124)
---------- -----------
Net Cash - Operating Activities (2,296,021) 74,379
---------- -----------
Investing Activities:
Purchase of Property and Equipment (44,267) (109)
Proceeds from Sale of Equipment 85,000 --
Advances - Related Party (162,660) (476,274)
---------- -----------
Net Cash - Investing Activities (121,927) (476,383)
---------- -----------
Financing Activities:
Payment of Loan Renewal Fee (25,000) --
Distributions (384,317) (726,061)
Advances from Line of Credit 6,039,318 1,384,093
Repayments on Line of Credit (5,159,903) (643,891)
Advances from Related Parties 287,483 449,584
Repayments to Related Parties (304,261) --
Proceeds from Equity Sales 649,000 --
Net Proceeds from Initial Public Offering 4,841,829 --
---------- -----------
Net Cash - Financing Activities 5,944,149 463,725
---------- -----------
Net Increase in Cash and Cash Equivalents 3,526,201 61,721
Cash and Cash Equivalents - Beginning of Periods 558,241 88,581
---------- -----------
Cash and Cash Equivalents - End of Periods $4,084,442 $ 150,302
========== ===========
See Notes to Consolidated Financial Statements.
5
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 period ended
September 30, 1996 give retroactive effect to the acquisition by Hirel Holdings,
Inc. [the "Company"] of all of the outstanding common stock of Hirel Marketing,
Inc. [an S corporation] ["HMI"] and Hirel Technologies, Inc. ["HTI"] on July 22,
1996. HTI is the successor to Hirel Technologies, Ltd. ["HTL"], a limited
partnership. The financial statements of the Company are presented on a
consolidated basis commencing July 22, 1996. Prior to that date the separate
results of HMI and HTI [including HTL as predecessor from inception on October
24, 1995] have been consolidated on a basis consistent with that of consolidated
financial statements in a manner similar to a pooling of interests and giving
retroactive effect to the issuance of 2,750,000 shares of the Company's common
stock to the stockholders of HMI, and 1,000,000 shares of the Company's common
stock to the stockholders of HTI. Additionally, the S corporation and
partnership equity sections of HMI and HTL as predecessor to HTI have been
reclassified to additional paid-in capital. No adjustment of assets to "fair
value" has been recorded and all intercompany balances and transactions have
been eliminated.
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.
The following pro forma unaudited information gives effect to the results the
Company would have reflected for three months and nine months periods ended
September 30, 1995 had the predecessor of HTL [Cutler Induction Systems, Inc.]
been included in the consolidated statements of operations.
Three months ended Nine months ended
September 30, 1995September 30, 1995
Net Sales - Computer Equipment $ 5,401,515 $17,165,699
Net Sales - Fuel Injection Systems 174,052 661,197
----------- ----------
Total Net Sales $ 5,584,567 $17,826,896
--------------- =========== ===========
Net Loss $ (644,653) $(1,260,605)
- -------- =========== ===========
Net Loss Per Share $ (.17) $ (.34)
- ------------------ =========== ==========
Weighted Average Common Shares Outstanding 3,750,000 3,750,000
For further information, refer to the financial statements and footnotes
included in the Company's Form SB-2, filed July 22, 1996.
[2] Inventory
The components of inventory as of September 30, 1996 are as follows:
Raw Materials $ 279,772
Work-in-Process 35,732
Finished Goods 1,028,489
-----------
Total $ 1,343,993
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6
HIREL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #2
[UNAUDITED]
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[3] Income Taxes
Income taxes are provided, where appropriate, on historical earnings of each
combining company. Pro forma income tax adjustments are provided to reflect an
estimate of income tax expense had the consolidated companies been subject to
federal and state income taxes for each period presented.
[4] Earnings Per Share
Earnings per share is based on the weighted average number of common shares
outstanding for each period presented and gives retroactive effect to the
combination discussed in Note 1, and to the public offering of 1,063,750 shares
of the Company's common stock on July 22, 1996. The Company does not have any
common stock equivalents outstanding.
[5] Initial Public Offering
On July 22, 1996, the Company realized net proceeds of $4,841,829 through the
sale of 1,063,750 shares of common stock.
. . . . . . . . . .
7
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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Three Months Ended September 30, 1996 Compared to Three Months Ended
September 30, 1995
The Consolidated Statement of Operations for the three months ended September
30, 1996 reflects Total Net Sales of $5,941,793, Gross Profit of $354,319 or
6.0%, and Pro Forma Net Loss of $231,138. The Combined Statement of Operations
for the three months ended September 30, 1995 reflected Total Net Sales of
$5,410,515, Gross Profit of $233,006 or 4.3% and Income Before Pro Forma Income
Tax Adjustments of $31,872.
Any comparisons between the Consolidated Statement of Operations for the three
months ended September 30, 1996 and the three months ended September 30, 1995
must be made in light of the discussion that follows. The Consolidated Statement
of Operations for the three months ended September 30, 1996 includes the results
of operations for parent company, Hirel Holdings, Inc. ["HHI"], and both of its
wholly-owned subsidiaries, Hirel Marketing, Inc. ["HMI"] and Hirel Technologies,
Inc. ["HTI"]. The Combined Statement of Operations for the three months ended
September 30, 1995 includes only the operations of HMI, and does not include the
operations for HHI, which did not commence business until July 22, 1996, the
effective date of the Company's initial public offering, or HTI, which did not
commence business [through a predecessor entity] until October 24, 1995. The
sections below compare the operations of HMI and HTI for the three months ended
September 30, 1996 and September 30, 1995 separately.
HHI incurred a net loss of $74,360 for the three months ended September 30, 1996
consisting primarily of payroll of $66,055 and expenses associated with being a
public company of $41,148 offset by interest income of $32,843 on investment of
the net proceeds from the Company's initial public offering.
Hirel Marketing, Inc.
Hirel Marketing, Inc. ["HMI"] is the subsidiary of the Company that is a
distributor of microcomputer hardware, peripherals and related communication
products. Net Sales increased by $207,151 or 3.8%, to $5,617,666 in the third
quarter 1996 from $5,410,515 in the third quarter 1995. Gross Profit on computer
equipment sold increased by approximately $19,000 or 8%. The Gross Profit margin
for the third quarter of 1996 was 4.48%, which compared to the Gross Profit
margin of 4.31% for the third quarter of 1995.
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. 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, 1996] 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, President of HHI. The
line of credit was increased to $2,000,000 on December 26, 1995. As of September
30, 1996, borrowings under the line of credit were $1,540,221, as compared to
$740,202 as of September 30, 1995. Interest expense associated with the line of
credit was $36,930 for the three months ended September 30, 1996 compared to
$5,103 for the three months ended September 30, 1995. Management intends to
continue to seek favorable opportunities to purchase inventory using, where
appropriate, financing available through the line of credit and the proceeds
from the Company's initial public offering.
In the third quarter 1996, total General and Administrative Expenses
attributable to HMI were $197,004 compared to $196,031 for the third quarter of
1995.
Income Before Pro Forma Income Tax Adjustments attributable to the operations of
HMI remained relatively unchanged decreasing from $31,872 for the quarter ended
September 30, 1995 to $29,942 for the quarter ended September 30, 1996.
8
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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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 quarter ended September 30, 1996, HTI had
total revenue of $324,127, of which $225,264 came from original equipment
manufacturer ["OEM"] customers and the remaining $98,863 resulted from sales to
aftermarket purchasers. A single unaffiliated OEM customer accounted for
approximately 69% of revenues for the fiscal quarter ended September 30, 1996.
The General and Administrative Expenses for the quarter ended September 30, 1996
totaled $223,728, and consisted primarily of payroll and payroll taxes of
$100,418, rent of $24,684, insurance of $16,312, telephone of $11,111 and
depreciation of $21,005. Research and Development Expenses incurred during the
quarter ended September 30, 1996 were $70,644. 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 quarter ended September
30, 1996 was $186,720 as a result of research and development expenses and other
expenses related to the creation of an infrastructure for HTI. Management
believes that these losses may continue for the next six to nine months.
While the quarter ended September 30, 1996 reflects the operations of HTI, the
comparative quarter ended September 30, 1995, does not reflect the operations of
Cutler Induction Systems, Inc., a Florida corporation ["Cutler"] that originally
developed the intellectual property rights acquired by HTL from Cutler and that
is related to HTL by certain common beneficial ownership. For a complete
discussion of the acquisition of certain property rights by HTL and certain
issues related thereto, please see the Registration Statement [Form SB-2, File
No. 333-4686-A] as filed with the Securities and Exchange Commission and
effective as of July 22, 1996. As noted in the footnote 1 of the Consolidated
Financial Statements, had the results of Cutler been included in the statement
of operations for HTI for the quarter ended September 30, 1995, the loss from
operations would have been $676,525. Net sales of Fuel Injection Systems for
that period were $174,052, as compared to $324,127 sold by HTI during the
quarter ended September 30, 1996.
Nine Months Ended September 30, 1996 Compared to Nine Months Ended
September 30, 1995
The Consolidated Statement of Operations for the nine months ended September 30,
1996 reflects Total Net Sales of $19,368,243, Gross Profit of $1,321,305 or
6.8%, and Pro Forma Net Loss of $339,967, compared to Total Net Sales of
$17,165,699, Gross Profit of $645,747 or 3.8% and Pro Forma Net Income of
$134,633 for the nine months ended September 30, 1995.
As noted previously, any comparisons between the Statement of Operations for the
nine months ended September 30, 1996 and the nine months ended September 30,
1995 must be made in light of the discussion that follows. The Consolidated
Statement of Operations for the nine months ended September 30, 1996 includes
the results of operations for HHI and its subsidiaries, HMI and HTI. The
Combined Statement of Operations for the nine months ended September 30, 1995
includes only the results of operations of HMI, and does not include the results
of operations for HHI or HTI. The sections below compare the results of
operations of HMI and HTI for the nine months ended September 30, 1996 and
September 30, 1995, separately.
HHI incurred a net loss of $111,360 for the nine months ended September 30, 1996
consisting primarily of payroll of $103,055 and expenses associated with being a
public company of $41,148 offset by interest income of $32,843 on investment of
the net proceeds from a sale of the Company's common stock.
9
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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Hirel Marketing, Inc.
Net Sales of computer equipment were $18,114,722 for the nine months ended
September 30, 1996, which reflects an increase of approximately $949,000 or 5.5%
compared to the nine months ended September 30, 1995. The Gross Profit for the
nine months ended September 30, 1996 increased to 4.9% compared to 3.8% for the
nine months ended September 30, 1995. Management believes that this increase in
Gross Profit was, in part, reflective of enhanced buying opportunities as a
result of the availability of the line of credit which is more fully described
above. Interest expense associated with the line of credit was $100,831 for the
nine months ended September 30, 1996.
General and Administrative Expenses for the nine months ended September 30, 1996
were $647,345 compared to $436,141 for the nine months ended September 30, 1995.
The increase was primarily attributable to an increase in payroll and payroll
taxes of approximately $50,000 resulting from commissions paid on the increase
in net sales as well as increases in advertising, bad debts, insurance, rent and
telephone expenses of approximately $75,000. Furthermore, HMI incurred certain
loan origination fees in connection with obtaining the $1,000,000 line of credit
referenced above, as well as the increase in the line of credit to $2,000,000.
Amortization of loan origination fees and related bank charges included General
and Administrative Expenses for the nine months ended September 30, 1996 were
approximately $116,000 compared to approximately $21,000 for the nine months
ended September 30, 1995.
Income Before Income Taxes attributable to HMI for the nine months ended
September 30, 1996 was $181,042, as compared to $204,503 for the nine months
ended September 30, 1995, a decrease of 11.5%.
Hirel Technologies, Inc.
As previously noted, HTI [through its predecessor HTL] began operations on
October 24, 1995. For the nine months ended September 30, 1996, HTI had total
sales of $1,253,521 in Fuel Injection Systems, of which $725,924 came from OEM
customers and $527,597 were from sales to after market purchasers. The Gross
Profit was $425,483 or 33.9%. The General and Administrative Expenses for HTI
during the nine months ended September 30, 1996 totaled $650,542, and Research
and Development Expenses during that period totaled $150,580.
General and Administrative Expenses consisted primarily of payroll and payroll
taxes of $355,170, rent of $75,914, insurance of $40,914, telephone of $31,649
and depreciation of $66,966. The total loss of HTI for the nine months ended
September 30, 1996 was $409,649, of which $368,075 was the loss from the
operations after interest expense, but before a $41,574 loss on the sale of a
capital asset.
As noted previously, the Pro Forma Combined Statement of Operations for the nine
month period ended September 30, 1995, does not reflect the operations of Culter
Induction Systems, Inc. As set forth in footnote 1, had the operations of Culter
been included in the statement of operations for HTI for the nine months ended
September 30, 1995, the loss before pro forma income taxes would have been
$1,465,108 compared to the loss before pro forma income taxes of HTI for the
nine months ended September 30, 1996 of $409,649.
Reference is made to the amended Form 10-QSB-A for Hirel Holdings, Inc. and
Subsidiaries for the quarter ended June 30, 1996, wherein adjustments in the
amount of $245,000 were made to the previously reported financial statements
resulting in a pro forma net loss of $202,530 and $108,829 for the three and six
months ended June 30, 1996.
10
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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Liquidity and Capital Resources
Cash and cash equivalents at September 30, 1996 were $4,084,442, an increase in
cash of $3,526,201. This increase as reflected on the Consolidated Statement of
Cash Flows is primarily the result of the following:
Net cash used for operating activities was $2,296,021 for the nine months ended
September 30, 1996, compared to net cash generated from operating activities of
$74,379 for the same period in 1995. This change is primarily attributable to
the increases in accounts receivable of $418,059, inventory of $942,127 and
other current assets of $666,528.
Net cash used in investing activities was $121,927 for the nine months ended
September 30, 1996, due largely to an increase in loans receivable-related party
of $162,660. This was partially offset by proceeds from the sale of equipment of
$85,000.
Net cash provided by financing activities totaled $5,944,149 for the nine month
period ending September 30, 1996, as compared to $463,725 for the nine months
ended September 30, 1995. This change is primarily the result of proceeds from
draws under the line of credit in excess of repayments on the same line of
$879,415, proceeds from equity sales of $649,000, and net proceeds of $4,841,829
from the initial public offering of the Company's common stock.
HMI continues to maintain a $2,000,000 short-term line of credit with a
financial institution. Amounts outstanding under the line were $1,540,221 as of
September 30, 1996. HMI intends to repay the outstanding borrowings under the
line through normal conversion of its short-term trade assets. The Company was
not dependent upon trade terms for material, supplies and other working capital
needs incurred during the nine months ended September 30, 1996.
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.
11
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.
Not applicable
12
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/A to be signed on its
behalf by the undersigned thereon duly authorized.
HIREL HOLDINGS, INC.
By: /s/ William H. Aden
William H. Aden,
Duly Authorized and Chief Financial Officer
November 19, 1996
13