SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For quarter ended March 31, 1997 Commission File Number 333-19257
MOTORS & GEARS, INC.
(Exact name of registrant as specified in charter)
Delaware 36-4109641
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
ArborLake Centre, Suite 550 60015
1751 Lake Cook Road (Zip Code)
Deerfield, Illinois
(Address of Principal Executive Offices)
Registrant's telephone number, including Area Code:
(847) 945-5591
Former name, former address and former fiscal year, if changed since last
report: Not applicable.
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 Exchange Act of
1934 during the preceding twelve (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 ninety (90) days.
Yes No x
The aggregate market value of voting stock held by non-affiliates of the
Registrant is not determinable as such shares were privately placed and there
is currently no public market for such shares.
The number of shares outstanding of Registrant's Common Stock as of May
15, 1997: 100,000.
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MOTORS & GEARS, INC.
INDEX
Part I. Page No.
Financial Information
Condensed Consolidated Balance Sheets 3
at March 31, 1997, and December 31, 1996
Condensed Consolidated Statements of 4
Income for the Three Months Ended
March 31, 1997 and 1996
Condensed Consolidated Statements of Cash 5
Flows for the Three Months Ended March 31,
1997 and 1996
Notes to Condensed Consolidated Financial 6
Statements
Management's Discussion and Analysis of 8
Financial Condition and Results of
Operations
Part II.
Other Information 10
Signatures 11
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MOTORS & GEARS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(ALL DOLLAR AMOUNTS IN THOUSANDS)
March 31, December 31,
1997 1996
(Unaudited)
ASSETS
Current Assets:
Cash and cash equivalents $ 15,531 $ 10,011
Accounts receivable, net 16,972 13,056
Inventories 16,379 16,554
Prepaid expenses and other current assets 1,093 886
Deferred income taxes 1,159 1,159
Total Current Assets 51,134 41,666
Property, plant, and equipment, net 10,609 11,431
Goodwill, net 108,655 109,103
Covenants not to compete, net 1,131 1,206
Deferred financing costs, net 9,972 10,181
Other assets 77 81
Total Assets $ 181,578 $173,668
LIABILITIES AND NET CAPITAL DEFICIENCY
Current Liabilities:
Accounts Payable $ 8,561 $ 5,408
Accrued interest payable 7,260 3,204
Accrued expenses and other 4,418 3,744
Due to Jordan 263 1,706
Current portion of capital lease obligations 31 18
Total Current Liabilities 20,533 14,080
Senior Notes Payable 170,000 170,000
Subordinated note payable 5,000 5,000
Capital lease obligations, less current portion 77 49
Deferred income taxes 592 282
Other non-current liabilities 44 44
Net Capital Deficiency:
Common Stock 1 1
Additional paid-in capital 30,005 30,005
Accumulated deficit (44,674) (45,793)
Total Net Capital Deficiency (14,668) (15,787)
Total Liabilities and Net Capital Deficiency $181,578 $173,668
See accompanying notes to condensed consolidated financial statements.
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MOTORS & GEARS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(ALL DOLLAR AMOUNTS IN THOUSANDS)
THREE MONTHS ENDED
MARCH 31,
1997 1996
Net Sales $31,519 $28,087
Cost of Sales, excluding depreciation 20,380 18,067
Selling, general, and administrative expenses 2,241 1,754
Depreciation 971 582
Amortization of goodwill and other intangibles 986 922
Management fees and other 326 717
Operating Income 6,615 6,045
Other (income) and expenses:
Interest expense 4,894 2,346
Interest income (141) (4)
Total other expenses 4,753 2,342
Income before income taxes 1,862 3,703
Provision for income taxes 743 1,481
Net income $ 1,119 $ 2,222
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MOTORS & GEARS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(ALL DOLLAR AMOUNTS IN THOUSANDS)
THREE MONTHS ENDED
March 31,
1997 1996
Cash flows from operating activities:
Net income $ 1,119 $ 2,222
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Depreciation and amortization 2,218 1,773
Provision for (benefit from) deferred
income taxes 310 (58)
Changes in operating assets and liabilities
Net of effects from acquisitions:
Increase in current assets (3,948) (1,308)
Increase in current liabilities 7,883 817
Increase in non-current assets (48) -
Decreases in payables to Jordan Industries (1,443) (4,031)
Net cash provided by (used in) operating
activities 6,091 (585)
Cash flows from investing activities:
Capital expenditures, net (100) (384)
Acquisitions of subsidiaries (454) (21,700)
Net cash used in investing activities (554) (22,084)
Cash flows from financing activities:
Proceeds from debt issuance - 21,700
Repayment of long-term debt (4) (1,873)
Other (13) (8)
Net cash (used in) provided by financing
activities (17) 19,819
Net increase (decrease) in cash and cash equivalents 5,520 (2,850)
Cash and cash equivalents at beginning of period 10,011 2,781
Cash and cash equivalents at end of period $ 15,531 $ (69)
Cash paid during the period for:
Interest $ 2 $ 1,629
Income taxes $ 71 $ 79
Non-cash investing activities:
Capital leases $ 46 $ -
See accompanying notes to condensed consolidated financial statements.
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MOTORS & GEARS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(ALL DOLLAR AMOUNTS IN THOUSANDS)
A. Organization
The unaudited condensed consolidated financial statements, which reflect all
adjustments that management believes necessary to present fairly the results
of interim operations, should be read in conjunction with the Notes to the
Consolidated Financial Statements (including the Summary of Significant
Accounting Policies) included in the Company's audited consolidated financial
statements for the year ended December 31, 1996, which are included in the
Company's prospectus issued in connection with the offering of its 10 % Series
B Senior Notes due 2006, and filed on April 3, 1997. Results of operations
for the interim periods are not necessarily indicative of annual results of
operations.
B. Inventories
Inventories are summarized as follows:
March 31, December 31,
1997 1996
Raw materials and work in process $14,156 $14,019
Finished goods 2,223 2,535
$16,379 $16,554
C. Accounting for Income Taxes
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components
of the Company's deferred tax liabilities and assets as of March 31, 1997 and
December 31, 1996, are as follows:
March 31, December 31,
1997 1996
Deferred tax liabilities
Tax over book depreciation
Goodwill $2,201 $1,866
Total deferred tax liabilities $2,201 1,866
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MOTORS & GEARS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(ALL DOLLAR AMOUNTS IN THOUSANDS)
March 31, December 31,
1997 1996
Deferred tax assets:
Property, plant and equipment 1,560 1,509
Covenants not to compete 75 75
Vacation accrual 145 136
Franchise Tax 128 128
Employee benefits 267 230
Uniform capitalization 243 243
Allowance for doubtful accounts 15 17
Inventory obsolescence reserve 136 159
Other 199 246
Total deferred tax assets $2,768 $2,743
Net deferred tax assets $ 567 $ 877
D. Acquisition of Subsidiaries
On March 8, 1996, Merkle-Korff acquired the net assets of Barber-Colman Motors
("Colman Motors Products", formerly "Barber-Colman"), a division of Barber-
Colman Company, which was wholly-owned by Siebe, plc. This division consisted
of Colman OEM and Colman Motor Products, wholly-owned subsidiaries of Barber-
Colman Company, and the motors division of Barber-Colman Company, collectively,
Colman Motor Products ("CMP"). It is a vertically integrated manufacturer of
sub fractional horsepower AC/DC motors and gear motors with applications in such
products as vending machines, copiers, printers, ATM machines, currency changers
X-ray machines, peristaltic pumps, HVAC actuators, and other products.
The purchase price of $21,700, which included costs incurred directly related
to the transaction, was allocated to working capital of $5,111, property,
plant and equipment of $6,541, non-compete agreements of $1,000, and resulted
in an excess purchase price over net identifiable assets of $9,048. The
acquisition was financed with $21,700 of new and existing credit facilities.
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PAGE 8
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(UNAUDITED)
(ALL DOLLAR AMOUNTS IN THOUSANDS)
THREE MONTHS ENDED
1997 1996
Net sales $31,519 $28,087
Operating income 6,615 6,045
Net income 1,119 2,222
Operating Margin (1) 21.0% 21.5%
____________________
(1) Operating margin is operating income divided by net sales.
Results of Operations
Net sales increased 12% in the first quarter of 1997 to $31.5 million, up $3.4
million over the first quarter of 1996. Net sales increased 38% ($6.2
million) in sub fractional motors, primarily due to the acquisition of Colman
Motor Products on March 8, 1996, as well as, strong growth in the vending and
appliance markets. Gears and gear box sales increased 13% ($0.3 million),
primarily as a result of customer specified gear boxes. These increases were
offset partially by reduced sales in fractional/integral motors, 30% ($3.1
million), reflecting unusually strong sales in the first quarter of 1996,
principally due to a substantial reduction in the backlog of orders for floor
care motors.
Operating income increased 9.4% in the first quarter of 1997 to $6.6 million,
up $0.6 million over the first quarter of 1996. The increase in operating
income is primarily due to increased sales over the first quarter of 1996.
Increases in selling, general, and administrative expenses $0.5 million, and
depreciation, $0.4 million, were due entirely to the acquisition of Colman
Motor Products. These increases were partially offset by reduced management
fees and other expenses at Imperial Electric Company.
Consolidated net income decreased from $2.2 million to $1.1 million,
principally due to increased interest expense, partially offset by improved
operating income. First quarter interest expense increased from $2.3 million
to $4.9 million, reflecting higher debt levels resulting from the issuance of
$170 million of Senior Notes.
Operating margin decreased from 21.5% to 21.0%, primarily due to slightly
lower operating margins of the product lines acquired through the Colman Motor
Products acquisition and the absorption of fixed plant overhead over lower
sales of fractional/integral motors.
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PAGE 9
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Liquidity and Capital Resources
The Company had $30.6 million of working capital at March 31, 1997, compared
with $27.6 million at December 31, 1996. The increase in working capital was
primarily due to higher cash balances, increased accounts receivable, and
lower intercompany payables offset partially by an increase in accounts
payable and accrued interest payable.
The Company's net cash generated from operating activities for the three
months ended March 31, 1997 increased $6.7 million to $6.1 million compared
with the same period in 1996. The increase was due to higher current
liabilities, $7.1 million, a lower decrease in payables to Jordan Industries,
$2.6 million, an increase in depreciation and amortization, $0.4 million, and
a greater benefit for deferred taxes, $0.4 million. These increases were
partially offset by lower net income, $1.1 million, and a higher increase in
current assets of $2.6 million.
The net cash used in investing activities decreased $21.5 million to $0.6
million in 1997, as compared to the same period in 1996, reflecting lower
capital expenditures, $0.3 million, and the absence of the Colman Motor
Products acquisition, $21.7 million, which occurred in 1996.
The net cash provided by financing activities for the three months ended March
31, 1997, decreased by $19.8 million due to proceeds from new debt issued in
connection with the Coleman Motor Products acquisition, $21.7 million, in the
first quarter 1996 and lower repayments of long term debt, $1.9 million.
None of the subsidiaries require significant amounts of capital spending to
sustain its current operations or to achieve projected growth.
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PAGE 10
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities
None
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
None
27. EDGAR Financial Data Schedule
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PAGE 11
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MOTORS & GEARS, INC.
By: /s/ Norman R. Bates
Norman R. Bates
Chief Financial Officer
May 15, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-31-1997
<CASH> 15,531
<SECURITIES> 0
<RECEIVABLES> 17,047
<ALLOWANCES> (75)
<INVENTORY> 16,379
<CURRENT-ASSETS> 51,134
<PP&E> 24,140
<DEPRECIATION> (13,531)
<TOTAL-ASSETS> 181,578
<CURRENT-LIABILITIES> 20,533
<BONDS> 170,000
0
0
<COMMON> 1
<OTHER-SE> (14,669)
<TOTAL-LIABILITY-AND-EQUITY> 181,578
<SALES> 31,519
<TOTAL-REVENUES> 31,519
<CGS> 20,380
<TOTAL-COSTS> 20,380
<OTHER-EXPENSES> 4,524
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,894
<INCOME-PRETAX> 1,862
<INCOME-TAX> 743
<INCOME-CONTINUING> 1,119
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,119
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
