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 September 30, 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 x No
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
November 14, 1997: 100,000.
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PAGE 2
MOTORS & GEARS, INC.
INDEX
Part I.
Page No.
Financial Information
Condensed Consolidated Balance Sheets 3
at September 30, 1997, and December 31, 1996
Condensed Consolidated Statements of 4
Income for the third quarter and Nine
Months Ended September 30, 1997 and 1996
Condensed Consolidated Statements of Cash 5
Flows for the Nine Months Ended September 30,
1997 and 1996
Notes to Condensed Consolidated Financial 6
Statements
Management's Discussion and Analysis of 9
Financial Condition and Results of
Operations
Part II.
Other Information 12
Signatures 13
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PAGE 3
MOTORS & GEARS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(ALL DOLLAR AMOUNTS IN THOUSANDS)
September 30, December 31,
1997 1996
(Unaudited)
ASSETS
Current Assets:
Cash and cash equivalents $ 5,104 $ 10,011
Accounts receivable, net 29,988 13,056
Inventories 25,442 16,554
Prepaid expenses and other current assets 3,142 886
Deferred income taxes 1,159 1,159
Total Current Assets 64,835 41,666
Property, plant, and equipment, net 14,081 11,431
Goodwill, net 138,556 109,103
Covenants not to compete, net 981 1,206
Deferred financing costs, net 9,643 10,181
Other assets 199 81
Total Assets $228,295 $173,668
LIABILITIES AND NET CAPITAL DEFICIENCY
Current Liabilities:
Accounts Payable $ 15,195 $ 5,408
Accrued interest payable 6,965 3,204
Accrued expenses and other 2,602 3,744
Due to affiliated company 2,770 1,706
Current portion of capital lease obligations 20 18
Total Current Liabilities $ 27,552 14,080
Long-Term debt 204,000 170,000
Subordinated note payable 5,000 5,000
Capital lease obligations, less current portion 75 49
Deferred income taxes 2,503 282
Other non-current liabilities 2,626 44
Net Capital Deficiency:
Common Stock 1 1
Additional paid-in capital 30,005 30,005
Accumulated deficit (43,467) (45,793)
Total Net Capital Deficiency (13,461) (15,787)
Total Liabilities and Net Capital Deficiency $228,295 $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)
THIRD QUARTER NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1997 1996 1997 1996
Net Sales $39,861 $30,575 $106,379 $90,153
Cost of Sales, excluding
depreciation 25,573 19,689 68,349 58,007
Selling, general, and
administrative expenses 3,294 2,265 8,226 6,404
Depreciation 1,063 760 3,003 2,168
Amortization of goodwill
and other intangibles 1,281 990 3,256 2,920
Management fees and other 888 813 1,567 2,289
Operating Income $ 7,762 $ 6,058 $ 21,978 $18,365
Other (income) and expenses:
Interest expense 5,809 2,522 15,950 7,413
Interest income (35) 0 (354) 0
Total other expenses $ 5,774 $ 2,522 $ 15,596 $ 7,413
Income before income taxes 1,988 3,536 6,382 10,952
Provision for income taxes 866 1,309 2,805 4,082
Net income $ 1,122 $ 2,227 $ 3,577 $ 6,870
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PAGE 5
MOTORS & GEARS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(ALL DOLLAR AMOUNTS IN THOUSANDS)
NINE MONTHS ENDED
SEPTEMBER 30,
1997 1996
Cash flows from operating activities:
Net income $ 3,577 $ 6,870
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 7,046 5,978
Provision for deferred income taxes 803 516
Changes in operating assets and liabilities
Net of effects from acquisitions:
(Increase)/Decrease in current assets (2,527) 1,169
Increase in current liabilities 3,401 1,295
Increase in non-current liabilities 53 -0-
Increase in non-current assets (327) -0-
Increase/(Decrease) in payables to
affiliated company 1,064 (6,235)
Net cash provided by operating activities 13,090 9,593
Cash flows from investing activities:
Capital expenditures, net (739) (874)
Acquisitions of subsidiaries (50,950) (21,700)
Cash acquired in purchase of subsidiaries 890 -0-
Net cash used in investing activities (50,799) (22,574)
Cash flows from financing activities:
Proceeds from debt issuance -- 20,000
Net borrowings from revolving credit facilities 34,000 1,700
Repayment of long-term debt (17) (6,945)
Other 70 81
Net cash provided by financing activities 34,053 14,836
Effect of exchange rate changes on cash (1,251) -0-
Net (decrease) increase in cash and cash equivalents (4,907) 1,855
Cash and cash equivalents at beginning of period 10,011 2,781
Cash and cash equivalents at end of period $ 5,104 $ 4,636
Cash paid during the period for:
Interest $ 11,695 $ 7,183
Income taxes $ 319 $ 839
Non-cash investing activities:
Capital leases $ 46 $ 67
See accompanying notes to condensed consolidated financial statements.
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PAGE 6
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 3/4%
Series B Senior Notes due 2006, and filed on April 3, 1997. The Company
conducts its operations exclusively through its subsidiaries. Results of
operations for the interim periods are not necessarily indicative of annual
results of operations.
B. Inventories
Inventories are summarized as follows:
September 30, December 31,
1997 1996
Raw materials and work in process $22,533 $14,019
Finished goods 2,909 2,535
$25,442 $16,554
C. 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 7
MOTORS & GEARS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(ALL DOLLAR AMOUNTS IN THOUSANDS)
On June 12, 1997, Motors & Gears Industries, Inc. ("The Company"), through
its newly-formed wholly-owned subsidiary, FIR Group Holdings, Inc. and its
wholly- owned subsidiaries, Motors and Gears Amsterdam, B.V. and FIR Group
Holdings Italia, SrL, purchased all of the common stock of the FIR Group
Companies, consisting of CIME S.p.A., SELIN S.p.A., and FIR S.p.A. The FIR
Group Companies are manufacturers of electric motors and pumps for niche
applications such as pumps for commercial dishwashers, motors for industrial
sewing machines, and motors for industrial fans and ventilators.
The purchase price of $50.5 million, including costs directly related to the
transaction, was preliminarily allocated to working capital of $17.5 million,
property, plant, and equipment of $4.9 million, other long term liabilities
of $3.9 million, and resulted in an excess of purchase price over net
identifiable assets of $32.0 million. The cash was provided from borrowings
under the Company's existing Credit Agreement.
On October 27, 1997, Motor & Gears Industries, Inc. ("The Company") acquired
all of the outstanding stock of ED&C Company ("ED&C"). The Company acquired
ED&C through its newly formed wholly owned subsidiary, Electrical Design and
Control Company. ED&C is a full-service electrical engineering company which
designs, engineers, and manufactures electrical control systems and panels
for material handling systems and other like applications. ED&C provides
comprehensive design, build, and support services to produce electronic
control panels which regulate the speed and movement of conveyor systems used
in a variety of automotive plants and other industrial applications.
In connection with the acquisition, the Company paid $15.0 million to the
sellers in cash and the remainder was financed through a $4.0 million
unsecured note which bears an interest rate of 9% with one principal
amortization payment of $4.0 million in 2002. The cash was provided from
borrowings under the Company's existing credit agreement.
Unaudited proforma information with respect to the Company as if the 1997 and
1996 acquisitions had occurred on January 1, 1997 and 1996 is as follows:
Nine Months Ended Nine Months Ended
September 30, 1997 September 30, 1996
Net Sales $137,470 $136,337
Net Income 4,732 4,187
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PAGE 8
MOTORS & GEARS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(ALL DOLLAR AMOUNTS IN THOUSANDS)
D. Significant Accounting Policies - Consolidation Principles
The consolidated financial statements include the accounts of Motors & Gears,
Inc. and its subsidiaries. Material intercompany transactions and balances
are eliminated in consolidations. Operations of subsidiaries outside the
United States are included for periods ending two months prior to the
Company's year end and interim periods to ensure timely preparation of the
consolidated financial statements.
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PAGE 9
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THIRD QUARTER NINE MONTHS ENDED
1997 1996 1997 1996
Net sales $39,861 $30,575 $106,379 $90,153
Operating income 7,762 6,058 21,978 18,365
Net income 1,122 2,227 3,577 6,870
Operating Margin (1) 19.5% 19.8% 20.7% 20.4%
____________________
(1) Operating margin is operating income divided by net sales.
Results of Operations
Net sales for the third quarter and first nine months of 1997 increased 30%
($9.3 million) and 18% ($16.2 million) respectively as compared with the same
periods of the prior year. Net sales of sub-fractional motors for the third
quarter and first nine months of 1997 increased 6% and 20% respectively over
the same periods in 1996. The strong growth in sub- fractional motors is
primarily attributed to the acquisition of Colman Motor Products on March 8,
1996, as well as continued strength in the vending and appliance markets.
Gears and gear box sales for the third quarter and first nine months of 1997
increased 27% and 21% respectively as compared with the same periods of the
prior year. This strong performance is driven by increased sales of planetary
gears in the floor care market. Sales of fractional/integral motors for the
third quarter and first nine months of 1997 increased 99% and 13%
respectively as compared with the same periods of the prior year.
This significant increase is attributed to the acquisition of the FIR Group
Companies on June 12, 1997. Sales in the existing fractional/integral motors
business increased 7% for the third quarter compared with the same period in
1996. Existing fractional/integral motor business sales for the first nine
months of 1997 decreased 13%, reflecting unusually strong sales in the first
half of 1996, principally due to a substantial reduction in the backlog of
orders accumulated in the fourth quarter of 1995.
Operating income increased 28% ($1.7 million) and 20% ($3.6 million) for the
third quarter and first nine months respectively, as compared with the same
periods of the prior year. The increase in operating income is primarily due
to increased sales dicsussed above. Increases in selling, general, and
administrative expenses, depreciation, and amortization were due
principally to the acquisition of the FIR Group Companies. These increases
were partially offset by reduced management fees and other expenses at
Imperial Electric Company.
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PAGE 10
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Operating margins remained strong, increasing slightly to 20.7% from 20.4%
for the first nine months of 1997 and decreasing from 19.8% to 19.5% for the
third quarter of 1997.
Consolidated net income decreased from $2.2 million to $1.1 million for the
third quarter and from $6.9 million to $3.6 million for the first nine
months, principally due to increased interest expense offset partially by
improved operating income. Interest expense for the third quarter increased
from $2.5 million to $5.8 million and from $7.4 million to $16.0 million for
the first nine months. The increased interest expense reflects the higher
debt levels resulting from the issuance of $170 million of Senior Notes
issued in November of 1996, as well as, higher debt levels resulting from
borrowings under the existing credit agreement for the purchase of the FIR
Group Companies.
Liquidity and Capital Resources
The Company had $37.2 million of working capital at September 30, 1997,
compared with $27.6 million at December 31, 1996. The increase in working
capital was primarily due to the acquisition of the FIR Group Companies,
increased accounts receivable, and lower intercompany payables offset
partially by an increase in accounts payable and accrued expenses and other
current liabilities, and a decrease in inventory.
The Company's net cash generated from operating activities for the nine
months ended September 30, 1997 increased $3.5 million to $13.1 million
compared with the same period in 1996. The increase was due to higher
current liabilities, $2.1 million, an increase in payables to affiliated
company, $7.3 million, an increase in depreciation and amortization, $1.1
million, and a greater benefit for deferred taxes, $0.3 million. These
increases were partially offset by lower net income, $3.3 million, an
increase in current assets of $3.7 million, and an increase in non-current
assets of $0.3 million.
The net cash used in investing activities increased $28.2 million to $50.8
million in 1997, as compared to the same period in 1996, reflecting the FIR
Group Companies acquisition, $50.5 million, offset partially by lower capital
expenditures, $0.2 million, cash acquired in the purchase of the FIR Group
Companies, $0.9 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 nine months ended
September 30, 1997, increased by $19.3 million compared with the same period
in 1996, due to net borrowings under the Motors & Gears Industries, Inc.
Credit Agreement, $34 million and lower repayments of long term debt, $6.9
million, offset partially by proceeds in the first quarter 1996 from new
debt issued in connection with the Colman Motor Products acquisition, $21.7
million.
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PAGE 11
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Company, at November 14, 1997, had available cash of $24.5 million in
connection with its existing Credit Agreement. None of the subsidiaries
require significant amounts of capital spending to sustain their current
operations or to achieve projected growth.
Management believes that the Company's cash on hand and anticipated funds
from operations will be sufficient to cover its working capital, capital
expenditures, debt service requirements and other fixed charge obligations
for at least the next 12 months.
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PAGE 12
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
a) 27. EDGAR Financial Data Schedule
b) The Company filed a Form 8-KA on August 20, 1997
describing the acquisition of the FIR Group Companies on
June 12, 1997. The filing included the required
financial statements and exhibits excluded from the 8K
filed on June 24, 1997.
The Company filed a Form 8-K on November 10, 1997
describing the acquisition of ED&C Company on October 27,
1997. Financial Statements and exhibits were not filed
at that time. The required financial information will be
filed no later than 60 days following the filing of the
8-K.
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PAGE 13
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
November 14, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 5,104
<SECURITIES> 0
<RECEIVABLES> 30,146
<ALLOWANCES> (158)
<INVENTORY> 25,442
<CURRENT-ASSETS> 64,835
<PP&E> 29,606
<DEPRECIATION> 15,525
<TOTAL-ASSETS> 228,295
<CURRENT-LIABILITIES> 27,552
<BONDS> 170,000
0
0
<COMMON> 1
<OTHER-SE> (13,461)
<TOTAL-LIABILITY-AND-EQUITY> 228,295
<SALES> 106,379
<TOTAL-REVENUES> 106,379
<CGS> 68,349
<TOTAL-COSTS> 68,349
<OTHER-EXPENSES> 16,052
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 15,950
<INCOME-PRETAX> 6,382
<INCOME-TAX> 2,805
<INCOME-CONTINUING> 3,577
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,577
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
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