SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
Current Report Pursuant to Section 13 or 15(d) of
The Securities Act of 1934
Date of Report (Date of earliest event reported) June 12, 1997
Motors & Gears, Inc.
(Exact name of registrant as specified in its charter)
Delaware 333-19257 36-4109641
(State or other (Commission (I.R.S. Employer
Jurisdiction) File Number) Identification No.)
ArborLake Centre, Suite 550
1751 Lake Cook Road, Deerfield, IL 60015
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code (847) 945-5591
PAGE 2
Item 2. Acquisition or disposition of assets
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 $51.3 million, including costs directly related to
the transaction, was preliminarily allocated to working capital of $16.9
million, property, plant, and equipment of $4.9 million, other long term assets
and liabilities of $3.8 million, and resulted in an excess of purchase price
over net identifiable assets of $33.3 million. The cash was provided from
borrowings under the Company's existing Credit Agreement.
Item 7. Financial Statements and Exhibits
The following sections (a) and (b) amend, in their entirety, sections (a) and
(b) of Item 7 of Form 8-K previously filed on June 24.
(a) Financial Statements
See Exhibit 28(a) of Item 7(c).
(b) Pro Forma Financial Information
The following unaudited pro forma condensed consolidated statements of
operations are based on the historical statements of operations of the Company,
adjusted to give effect to the 1997 acquisition of the FIR Group Companies and
the 1996 acquisition of Barber-Colman Motors. The pro forma condensed consol-
idated statements of operations for the year ended December 31, 1996 and for the
six months ended June 30, 1997 were derived from the audited historical
statements of operations for the year ended December 31, 1996 and the unaudited
historical statements of operations for the six months ended June 30, 1997,
adjusted to give effect to the acquisitions and related transactions as if they
occurred as of the beginning of each period.
PAGE 3
The pro forma adjustments included in the pro forma condensed consolidated
statements of operations are based upon available information and certain
assumptions that management believes are reasonable. With respect to the pro
forma acquisition adjustments described in the notes accompanying the pro forma
condensed consolidated statement of operations, the allocation of the purchase
price of the FIR Group Companies is preliminary and subject to final
determination by the Company's management. The unaudited pro forma condensed
consolidated statements of operations do not purport to represent what the
Company's results of operations would actually have been had the transactions in
fact occurred as of the beginning of each period presented. In addition, the
unaudited pro forma condensed consolidated statements of operations do not
purport to project the Company's results of operations for any future date or
period.
The pro forma condensed consolidated statements of operations should be read in
connection with 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, and the Company's unaudited interim condensed
consolidated financial statements included in the Company's Form 10-Q for the
quarter ended June 30, 1997.
(c) Exhibits
28(a) FIR Group Companies combined audited financial statements for the
year's ended July 31, 1995, and 1996, and for the eight months ended
March 31, 1997.
PAGE 4
MOTORS & GEARS, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
JUNE 30, 1997
($ in thousands)
FIR Group
FIR Group Pro forma
Historical May 31, 1997 Adjustments Ref # Pro forma
ASSETS
Current Assets:
Cash and cash equivalents $ 14,210 $ 2,051 $ (2,051) (2) $ 14,210
Accounts receivable, net 17,341 12,429 - 29,770
Inventories 15,606 10,056 - 25,662
Prepaid expenses and other
current assets 877 2,832 - 3,709
Deferred income taxes 1,159 - - 1,159
Total Current Assets 49,193 27,368 (2,051) 74,510
Property, plant, and
equipment, net 9,753 4,942 - 14,695
Goodwill, net 107,732 8,453 24,913 141,098
Covenants not to compete, net 1,056 - - 1,056
Deferred financing costs, net 10,034 - - 10,034
Other assets 85 16 - 101
Total Assets $ 177,853 $ 40,779 $ 22,862 $ 241,494
LIABILITIES AND NET CAPITAL DEFICIENCY
Current Liabilities:
Accounts Payable $ 8,116 $ 7,806 $ - $ 15,922
Accrued interest payable 2,692 875 (875) (2) 2,692
Accrued expenses and other 3,149 629 1,313 (1) 5,091
Due to affiliated companies 1,190 - - 1,190
Current portion of long term
debt 20 8,028 (8,028) (2) $ 20
Total Current Liabilities $ 15,167 $ 17,338 $(7,590) $ 24,915
Long Term Debt 170,000 7,270 (7,270) (2) 220,000
50,000 (1)
Subordinated note payable 5,000 - 5,000 5,000
Capital lease obligations, less
current portion 80 - - 80
Deferred income taxes 894 1,364 - 2,258
Other non-current liabilities 44 2,529 - 2,573
Net Capital Deficiency:
Common Stock 1 1,756 (1,756) (2) 1
Additional paid-in capital 30,005 4,728 (4,728) (2) 30,005
Accumulated deficit (43,338) 10,551 (10,551) (2) (43,338)
Treasury Stock - (4,656) 4,656 (2) -
Cumulative Translation
Adjustment - (101) (101) (2) -
Total Net Capital Deficiency (13,332) 12,278 (12,278) (13,332)
Total Liabilities and
Net Capital Deficiency $ 177,853 $40,779 $ 22,862 $241,494
See notes to Unaudited Pro Forma Condensed Consolidated Statements of Opera-
tions.
PAGE 5
MOTORS & GEARS, INC.
UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
($ in thousands)
Pro-Forma from FIR Group
April 3, 1997 FIR Group Pro-Forma Pro-
Prospectus Historical Adjustments Ref # Forma
Net Sales $122,377 $38,476 $ - $160,853
Cost of Sales
(excluding depreciation) 79,310 25,905 - 105,215
Selling, general & administrative
expenses 9,298 3,688 - 12,986
Operating income before
depreciation and amortization
of goodwill and other
intangibles 33,769 8,883 - 42,652
Depreciation 3,043 526 - 3,569
Amortization of goodwill and
other intangibles 4,293 423 796 (3) 5,512
Management fees and other 1,224 442 (39) (4) 1,627
Operating income 25,209 7,492 (757) $ 31,944
Interest expense 19,725 2,301 2,199 (5) 24,225
Other (income) and expenses - - - -
Income before income taxes 5,484 5,191 (2,956) 7,719
Provision for income taxes 2,193 3,123 (2,228) (6) 3,088
Net income $ 3,291 $ 2,068 $ (728) $ 4,631
See notes to Unaudited Pro Forma Condensed Consolidated Statements of
Operations.
PAGE 6
MOTORS & GEARS, INC.
UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1997
($ in thousands)
FIR Group
FIR Group Pro-Forma Pro-
Historical Historical Adjustments Ref # Forma
Net Sales $66,518 $17,942 $ - $84,460
Cost of Sales (excluding
depreciation) 42,776 12,750 - 55,526
Selling, general &
administrative expenses 4,932 1,879 - 6,811
Operating income before
depreciation and amortization
of goodwill and other
intangibles 18,810 3,313 - 22,123
Depreciation 1,940 285 - 2,225
Amortization of goodwill and
other intangibles 1,975 287 337 (3) 2,599
Management fees and other 679 240 (161) (4) 758
Operating income 14,216 2,501 (176) 16,541
Interest expense 10,141 1,010 1,240 (5) 12,391
Other (income) and expenses (319) - - (319)
Income before income taxes 4,394 1,491 (1,416) 4,469
Provision for income taxes 1,939 923 (893) (6) 1,969
Net income $ 2,455 $ 568 $ (523) $ 2,500
See notes to Unaudited Pro Forma Condensed Consolidated Statements of
Operations.
PAGE 7
MOTORS & GEARS, INC.
NOTES TO PRO FORMA CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
($ in thousands)
Adjustments to the Pro forma Condensed Consolidated Balance Sheet:
1).1. The cash purchase price of $51,313, including costs directly related
to the transaction, was financed with borrowings from the Company's
revolving credit facility, $50,000, and accrued expenses of $1,313.
2). The purchase price of $51,313 is allocated as follows:
Accounts Receivable $12,429
Inventories 10,056
Prepaid Expenses and other assets 2,848
Property, Plant, Equipment 4,942
Accounts Payable (7,806)
Accrued Expenses and other Current
Liabilities (629)
Deferred Income Taxes (1,364)
Other non current liabilities (2,529)
Excess Purchase Price over Net
Identifiable Assets 33,366
$51,313
Incremental goodwill of $24,913, reflects the elimination of existing
goodwill of $8,453, adjusted for excess purchase price over net
identifiable assets of $33,366.
No non-operating liabilities were assumed by Motors and Gears, Inc.
Adjustments to the Pro forma Condensed Consolidated Statement of Operations:
3). Adjustments to amortization of goodwill to reflect the allocation of
purchase price. Estimated amortization of goodwill is based on a
straight line basis over thirty years.
4). Adjustments to eliminate fees associated with prior acquisitions and
related costs, offset by additional fees under the management consulting
agreement in the amount of 1% of sales.
5). Adjustments to interest expense reflect additional borrowings related to
the acquisition, using an effective annual interest rate of 9%.
6). Adjustments to provision for income taxes, primarily resulting from
additional interest expense in connection with borrowings related to the
acquisition.
PAGE 8
MOTORS & GEARS, INC.
NOTES TO PRO FORMA CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
($ in thousands)
7). 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.
PAGE 9
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 AND GEARS, INC.
August 20, 1997 By /s/ Norman R. Bates
Norman R. Bates
Chief Financial Officer
FIR GROUP
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE EIGHT MONTHS ENDED MARCH 31, 1997
<PAGE>
Report of Independent Accountants
To the Board of Directors of
FIR Group
We have audited the accompanying consolidated balance sheet of
FIR Group (the "Company"), composed of FIR Elettromeccanica
S.p.A., CIME S.p.A. and Selin Sistemi S.p.A., as of March 31,
1997 and the related consolidated statements of income, changes
in stockholder's equity and cash flows for the years then ended.
These consolidated financial statements are the responsibility
of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audit in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that
our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the financial
position of the Company as of March 31, 1997, and the results of
its operations and its cash flows for the years then ended in
conformity with generally accepted accounting principles.
/s/ Coopers & Lybrand LLP
--------------------------
Chicago, Illinois
July 25, 1997
<PAGE>
FIR Group
Consolidated Balance Sheet
as of March 31, 1997
(Dollars in thousands)
ASSETS
Current assets:
Cash and cash equivalents $ 2,337
Accounts receivable, net of
allowance for doubtful accounts of $341 11,108
Other receivables 2,341
Prepaid assets 174
Inventories 9,263
Deferred income taxes 1,759
Total current assets 26,982
Property, plant and equipment, net 4,575
Goodwill, net of $810 accumulated amortization 8,280
Other intangible assets, net of $138
accumulated amortization 133
Other assets 49
Total assets $ 40,019
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 5,783
Bank debt 1,193
Accounts payable 6,852
Accrued interest 1,172
Accrued liabilities 619
Taxes payable 244
Total current liabilities 15,863
Long-term debt, net 8,467
Deferred taxes 1,145
Staff severance liability 2,551
Total liabilities 28,026
Total shareholders' equity 11,993
Total liabilities and shareholders'
equity $40,019
The accompanying notes are an integral part of the consolidated
financial statements.
<PAGE>
FIR Group
Consolidated Income Statement
for the eight months ended March 31, 1997
(Dollars in thousands)
Net sales $ 21,241
Cost of sales 14,898
Gross profit 6,343
Selling, general and administrative expenses 2,337
Amortization of intangible assets 274
Net exchange loss 20
Income from operations 3,712
Other expense, net 489
Income before interest and taxes 3,223
Interest expense, net 1,294
Income before taxes 1,929
Income tax provision 1,247
Net income $ 682
The accompanying notes are an integral part of the consolidated
financial statements.
<PAGE>
FIR Group
Consolidated Statement of Changes in Shareholders' Equity
for the eight months ended March 31, 1997
(Dollars in thousands)
Cumulative
Common Additional Retained Treasury Translation
Stock Paid-in-Capital Earnings Stock Adjustment Total
Balance,
July 31,1996 1,756 4,681 9,647 (4,656) 1,139 12,567
Net income,
eight months
ended March 31,
1997 682 682
Translation
adjustment (1,256) (1,256)
Balance,
March 31,
1997 $ 1,756 $ 4,681 $ 10,329 $ (4,656) $ (117) $ 11,993
The accompanying notes are an integral part of the consolidated
financial statements.
<PAGE>
FIR Group
Consolidated Statement of Cash Flows
for the eight months ended March 31, 1997
(Dollars in thousands)
Cash flow from operating activities:
Net income $ 682
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 614
Increase (decrease) in deferred taxes 153
Changes in assets and liabilities:
Decrease in accounts receivable 1,774
Increase in other receivables (1,349)
Decrease in prepaid assets 49
Increase in other assets (45)
Decrease in income tax receivable 980
Increase in inventory 253
Increase in accounts payable 962
Decrease in accrued liabilities (119)
Decrease in accrued interest (301)
Decrease in income tax payable (223)
Increase in staff severance liability and
other long-term liabilities 134
Net cash provided by operating
activities 3,564
Cash flows from investing activities:
Net fixed asset acquisitions (152)
Acquisition of intangibles (12)
Net cash provided by investing
activities (164)
Cash flows from financing activities:
Payment of long-term debt (6,216)
Change in short-term bank debt 2,611
Net cash provided by financing
activities (3,605)
Effect of exchange rate on changes in cash (248)
Net change in cash (453)
Cash, beginning of year 2,790
Cash, end of year $ 2,337
The accompanying notes are an integral part of the consolidated
financial statements.
<PAGE>
FIR Group
Notes to Combined Financial Statements
(dollars in thousands)
1. Nature of Business and Organization
Description of Business and Operating Structure
The FIR Group (the "Company"), composed of FIR Elettromeccanica
S.p.A. ("FIR"), CIME S.p.A. ("CIME") and Selin Sistemi S.p.A.
("Selin"), is engaged in the design, production, and assembly of
special electric motors employed in several industrial
applications such as gasoline pumps, industrial sewing machines,
and construction machines. Approximately 50% of its sales are
within Italy and 40% are within the rest of Europe. No
customer comprises more than 10% of consolidated sales.
The consolidated financial statements include all accounts of
the FIR Group and related entities under common control
including FIR, CIME and Selin. All significant intercompany
balances and transactions have been eliminated.
In July, 1994, MEVA S.r.l. and SEPI S.r.l. were acquired through
a buy-out group of institutional investors. In September,
1994, FIR Elettromeccanica S.p.A. was acquired by MEVA and in
March, 1995, MEVA, FIR and SEPI were merged into a single
company under the FIR name.
Cime S.p.A. was created in 1995 by the FIR shareholders and the
managing director of FIR to lease certain production activities
formerly performed by FIR Elettromeccanica S.p.A. before the
March 1995 merger.
In May 1995, Nike S.r.l. ("Nike") was created by the FIR
shareholders and the managing director of FIR to lease certain
production activities performed by Selin S.p.A., a company in
receivership. In May, Nike changed its name to Selin Sistemi,
S.p.A. In January, 1996, Selin acquired Selin S.p.A. and ended
the leasing arrangement.
2. Summary of Significant Accounting Policies
Translation of Financial Statements Denominated in a Foreign
Currency
The functional currency is the Italian lire. The balance sheet
has been translated into U.S. dollars using the year-end
exchange rates, while the income statement has been translated
using the average exchange rates each year. Translation gains
and losses are reported as a part of consolidated shareholders'
equity.
Cash and Cash Equivalents
All highly liquid debt instruments purchased with an initial
maturity of three months or less are considered to be cash
equivalents.
<PAGE>
2. Summary of Significant Accounting Policies, continued
Inventories
Inventories are stated at the lower of cost or market. Cost is
determined using the last-in, first out (LIFO) method.
Property, Plant and Equipment
Property, plant and equipment are recorded at purchase cost.
Depreciation is provided on the straight-line method over the
estimated useful lives of the assets as follows:
Buildings and improvements 10-33 years
Plant and equipment 6-10 years
Commercial and industrial tools 4-5 years
Repairs and maintenance are charged to expense when incurred,
and expenditures for improvements are capitalized. Upon sale or
retirement, the related cost and accumulated depreciation or
amortization are removed from the respective accounts and any
resulting gain or loss is included in operations.
Intangible Assets
Goodwill is being amortized using the straight-line method over
thirty years. Other intangibles consists of patents and other
intangible assets and are amortized using the straight-line
method over four to five years.
Revenue Recognition
Revenue from the sale of products is recognized on the transfer
of ownership, which generally coincides with the time of
shipment.
Research and Development
Research and development costs related to both present and
future products are charged to expense when incurred.
Interest Rate Swaps
As discussed in Note 11, the Company used interest rate swaps to
hedge its long-term debt. The Company recognizes the
differentials to be received or paid under the contracts as an
adjustment to interest expense over the life of the contracts.
The Interest Rate Swap contracts have been canceled and the
related termination cost of $568 has been recorded as a
component of Other Expense in the March 31, 1997 financial
statements.<PAGE>
2. Summary of Significant Accounting Policies, continued
Use of Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Income Taxes
Income taxes are accounted for as prescribed in Statement of
Financial Accounting Standards ("SFAS") No. 109 - Accounting for
Income Taxes. Under the asset and liability method SFAS No.
109, the Company recognizes the amount of income taxes payable.
Deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and
liabilities, and their respective tax bases. Deferred tax
assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years those temporary
differences are expected to be recovered or settled.
3. Inventories
Inventories as of March 31, 1997 consist of the following,
valued at LIFO cost:
Raw Materials $ 4,831
Work-in-Process 3,442
Finished Goods 990
Total $ 9,263
Inventories are accounted for using the LIFO cost method. LIFO
cost approximates replacement cost.
4. Property, Plant and Equipment
Property, plant and equipment consist of the following as of
March 31, 1997:
Land and building $ 2,917
Plant and machinery 1,245
Commercial and industrial tools 1,404
Total 5,566
Less accumulated depreciation and
amortization (991)
$ 4,575
5. Gains and Losses on Foreign Sales
Sales to customers outside of Italy are denominated in the
customer's local currency. Gains and losses on the currency
translation of theses sales are recorded in the income statement
when the Company receives remittance. Gains/losses on amounts
in accounts receivable at year end are immaterial. The net loss
on the settlement of foreign currency sales was $20 for the
eight months ending March 31, 1997.
6. Lease Commitments
The Company leases certain production facilities under operating
leases expiring through 2002. In most cases, management expects
that in the normal course of business these leases will be
renewed or replaced by other leases.
Rental expense under noncancelable operating leases was
approximately $93 for the eight months ending March 31, 1997.
Future minimum commitments under noncancelable operating leases
are as follows:
Year ending July 31,
1997 $ 24
1998 117
1999 117
2000 117
2001 117
Thereafter 117
7. Income Taxes
Deferred income taxes reflect the net tax effects of temporary
differences between the Italian tax basis of assets and
liabilities and their carrying amounts for financial reporting
purposes. The more significant components of the net deferred
income tax assets and liabilities resulted from differences in
the timing of expenses for financial statement purposes and
deductibility for income taxes principally related to the future
benefit of an Italian tax credit and for differences in
depreciation and amortization methods.
The income tax (provision) benefit for the eight months ended
March 31, 1997 consists of the following:
Current $ (1,329)
Deferred 82
$ (1,247)
8. Debt Arrangements
The Company has a number of short-term borrowing facilities
available from approximately 25 banks. The total amount
available under overdraft facilities is $5,096 at interest rates
between 9.00% and 11.25% at March 31, 1997. These facilities
are not collateralized and do not contain significant financial
covenants. In addition, the Company has a number of export and
domestic sales facilities whereby the banks loan against
accounts receivable. Total available receivable lines of credit
are $10,187 at March 31, 1997 and carry interest at 7.5% to 9.5%.
8. Debt Arrangements, continued
Long-term debt consists of the following at March 31, 1997 :
CARIPLO and other banks pool senior loan to FIR, due
September 15, 1999. Indexed interest rate at
Roman Interbank Offering Rate ("RIBOR") plus
1.5%. No penalty for anticipated
reimbursements. $ 8,228
Subordinated debt from Banca Popolare di Cremona to
FIR, due September 9, 1999. Indexed interest rate
at RIBOR plus 1.5%. 1,491
Subordinated debt from Credit Lyonnais (Milan) to FIR,
due September 9, 1999. Indexed rate at RIBOR plus
1.5%. No penalty for anticipated reimbursement. 1,491
Senior debt from Credit Lyonnais to Selin, due
February 26, 2001. Indexed interest rate at
RIBOR plus 0.5%. 3,040
Total 14,250
Less current maturities (5,783)
Long-term debt, net $ 8,467
RIBOR was 7.75% at March 31, 1997.
In accordance with the pool senior loan, the Company is unable
to declare dividends or make a reduction in share capital. In
addition, the bank has the right to request the repayment of the
debt in the event of certain changes in ownership. There are no
significant financial covenants on the subordinated debt. None
of the debt facilities are collateralized.
The controlling shareholder has guaranteed the subordinated debt
from Banca Popolare di Cremona, the subordinated debt from
credit Lyonnais, and the senior debt from Credit Lyonnais.
Maturities of net long-term debt as of March 31, 1997 are as
follows:
1998 $ 5,783
1999 2,743
2000 2,684
2001 3,040
Based upon the borrowing rates currently available to the
Company for debt, management estimates that the recorded
principle amount is deemed to be the same as current fair value.
9. Staff Severance
The staff severance liability is similar to a pension fund. It
is accrued by the Company per Italian law for all employees at
13.5% of annual gross salary. In addition to the annual
accrual, the total fund is revalued each year according to an
official index (equivalent to the retail price index plus 1.5%).
This fund is payable to employees when they leave the Company.
10. Related Party Transactions
Commercial relationships are in place between FIR and TEA S.r.l.
Tecnologia Elettromeccanica ("TEA"), which is partially owned by
the managing director of FIR. TEA buys motors from FIR, which
totaled $105 during the eight month period ended March 31, 1997.
TEA also provides subcontracted production services to FIR,
which totaled $75 during the eight month period ended March 31,
1997. The Company has a receivable from TEA of $894 at March
31, 1997.
11. Interest Rate Swap
In order to hedge the Company's senior loan, the Company entered
into interest swap agreements with San Paolo Torini as follows:
Expiration Nominal
Date amount $000's Rate Received Rate Paid
Contract 1 September 1997 $ 3,291 LIBOR at 6 months 11.70%
Contract 2 September 1998 $ 3,291 LIBOR at 6 months 11.85%
Contract 3 September 1999 $ 3,291 LIBOR at 6 months 11.91%
The Company records the differentials to be received or paid
under the contracts as an adjustment to interest expense over
the life of the contracts.
These Interest Rate Swap contracts were cancelled and the
related termination cost of $568 has been recorded as a
component of Other Expense in the March 31, 1997 financial
statements.
13. Subsequent Events
In May 1997, the Company entered into an agreement to purchase
TEA for approximately $1,100 in cash and assumed debt. The
transaction will be accounted for under the purchase method of
accounting.
13. Subsequent Events, continued
In May 1997, the Company's shareholders entered into an
agreement to sell their shares to a subsidiary of Motors and
Gears, Inc.
14. Commitments and Contingencies
The Company is evaluating potential environmental remediation
liabilities. As of April, 1997, the Company has identified a
site which may require remediation. The Company is presently
unable to determine what, if any, liability it may incur in this
matter.
FIR GROUP
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JULY 31, 1996 AND 1995
<PAGE>
Report of Independent Accountants
To the Board of Directors of
FIR Group
We have audited the accompanying consolidated balance sheets of
FIR Group (the "Company"), composed of FIR Elettromeccanica
S.p.A., CIME S.p.A. and Selin Sistemi S.p.A., as of July 31,
1996 and 1995 and the related consolidated statements of income,
changes in stockholder's equity and cash flows for the years
then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the financial
position of the Company as of July 31, 1996 and 1995, and the
results of its operations and its cash flows for the years then
ended in conformity with generally accepted accounting
principles.
/s/ Coopers & Lybrand LLP
--------------------------
Chicago, Illinois
June 9, 1997
<PAGE>
FIR Group
Consolidated Balance Sheets
as of July 31, 1996 and 1995
(Dollars in thousands)
ASSETS 1996 1995
Current assets:
Cash and cash equivalents $ 2,790 $ 631
Accounts receivable, net of allowance for
doubtful accounts of $153 in 1996 and
$148 in 1995 14,086 14,474
Other receivables 1,081 816
Prepaid assets 243 129
Inventories 10,487 9,124
Deferred income taxes 2,948 5,449
Total current assets 31,635 30,623
Property, plant and equipment, net 5,179 4,483
Goodwill, net of $671 and $322 accumulated
amortization in 1996 and 1995, respectively 9,366 9,328
Other intangible assets, net of $94 and $28
accumulated amortization in 1996 and 1995,
respectively 277 170
Other assets 125 201
Total assets $ 46,582 $ 44,805
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 3,028 $ 2,901
Bank debt 1,992 2,951
Accounts payable 6,576 5,342
Accrued interest 1,603 426
Accrued liabilities 808 593
Taxes payable 499 214
Total current liabilities 14,506 12,427
Long-term debt, net 15,733 14,768
Deferred taxes 1,106 939
Staff severance liability 2,680 2,234
Total liabilities 34,025 30,368
Total shareholders' equity 12,557 14,437
Total liabilities and shareholders'
equity $46,582 $ 44,805
The accompanying notes are an integral part of the consolidated
financial statements.
FIR Group
Consolidated Income Statements
for the years ended July 31, 1996 and 1995
(Dollars in thousands)
1996 1995
Net sales $ 37,040 $ 31,811
Cost of sales 25,333 22,180
Gross profit 11,707 9,631
Selling, general and administrative
expenses 3,594 2,645
Amortization of intangible assets 385 343
Net exchange (gain) loss 98 (134)
Income from operations 7,630 6,777
Other expense (income), net 263 632
Income before interest and
taxes 7,367 6,145
Interest expense, net 2,433 2,303
Income before taxes 4,934 3,842
Income tax (provision) benefit (2,977) 3,944
Profit before minority
interest 1,957 7,786
Minority interest (96) -
Net income $ 1,861 $ 7,786
The accompanying notes are an integral part of the consolidated
financial statements.
FIR Group
Consolidated Statement of Changes in Shareholders'
Equity for the years ended July 31, 1996 and 1995
(Dollars in thousands)
Cumulative
Common Additional Retained Treasury Translation
Stock Paid-in-Capital Earnings Stock Adjustment Total
Balance,
July 31,
1995 $ 1,756 $ 291 $ - $ - $ - $ 2,047
Net income,
fiscal 1995 $ - $ - $ 7,786 $ - $ - $ 7,786
Capital
contribution $ - $4,390 $ - $ - $ - $ 4,390
Translation
adjustment $ - $ - $ - $ - $ 214 $ 214
Balance, July
31, 1995 $ 1,756 $4,681 $ 7,786 $ - $ 214 $ 14,437
Net income,
fiscal 1996 $ - $ - $ 1,861 $ - $ - $ 1,861
Share
buyback $ - $ - $ - $ (4,656) $ - $(4,656)
Translation
adjustment $ - $ - $ - $ - $ 925 $ 925
Balance, July
31, 1996 $ 1,756 $ 4,681 $ 9,647 $ (4,656) $ 1,139 $12,567
The accompanying notes are an integral part of the consolidated
financial statements.
FIR Group
Consolidated Statements of Cash Flows
for the years ended July 31, 1996 and 1995
(Dollars in thousands)
1996 1995
Cash flow from operating activities:
Net income $ 1,861 $ 7,785
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 806 631
Increase (decrease) in deferred taxes 122 (81)
Changes in assets and liabilities, net of
effects from purchase of SELIN and FIR:
Decrease (increase) in accounts receivable
and other 975 (1,198)
(Increase) decrease in other receivables (221) 41
(Increase) decrease in prepaid assets (104) 60
Decrease (increase) in other assets 81 (154)
Decrease (increase) in income tax receivable 2,635 (5,553)
Increase in inventory (934) (1,129)
Increase in accounts payable 967 575
Increase (decrease) in accrued liabilities 165 (492)
Increase in accrued interest 1,132 400
Increase (decrease) in income tax payable 266 (1,010)
Increase (decrease) in staff severance liability
and other long-term liabilities 337 (57)
Net cash provided by operating activities 8,088 (182)
Cash flows from investing activities:
Net fixed asset acquisitions (906) (543)
Acquisition of intangibles (130) (86)
Payment for purchase of FIR, net of cash acquired - (23,521)
Payment for purchase of SELIN, net of cash acquired - (358)
Net cash provided by investing activities (1,036) (24,508)
Cash flows from financing activities:
Proceeds from issuance of long-term debt - 17,894
Payment of long-term debt 311 -
Change in short-term bank debt (1,047) 2,811
Purchase of treasury stock (4,344) -
Proceeds from capital contribution - 4,454
Net cash provided by financing
activities (5,080) 25,159
Effect of exchange rate on changes in cash 187 46
Net change in cash 2,159 515
Cash, beginning of year 631 116
Cash, end of year $ 2,790 $ 631
Supplemental disclosure of cash flow information:
Interest paid $ 879 $ 1,144
Income taxes paid $ 67 $ -
The accompanying notes are an integral part of the consolidated
financial statements.
FIR
Notes to Combined Financial Statements
(dollars in thousands)
1. Nature of Business and Organization
Description of Business and Operating Structure
The FIR Group (the "Company"), composed of FIR Elettromeccanica
S.p.A. ("FIR"), CIME S.p.A. ("CIME") and Selin Sistemi S.p.A.
("Selin"), is engaged in the design, production, and assembly of
special electric motors employed in several industrial
applications such as gasoline pumps, industrial sewing machines,
and construction machines. Approximately 50% of its sales are
within Italy and 40% are within the rest of Europe. No
customer comprises more than 10% of consolidated sales.
The consolidated financial statements include all accounts of
the FIR Group and related entities under common control
including FIR, CIME, and Selin. All significant intercompany
balances and transactions have been eliminated.
In July, 1994, MEVA S.r.l. and SEPI S.r.l. were acquired through
a buy-out group of institutional investors. In September,
1994, FIR Elettromeccanica S.p.A. was acquired by MEVA and in
March, 1995, MEVA, FIR and SEPI were merged into a single
company under the FIR name.
Cime S.p.A. was created in 1995 by the FIR shareholders and the
managing director of FIR to lease certain production activities
formerly performed by FIR Elettromeccanica S.p.A. before the
March 1995 merger.
In May 1995, Nike S.r.l. ("Nike") was created by the FIR
shareholders and the managing director of FIR to lease certain
production activities performed by Selin S.p.A., a company in
receivership. In May, Nike changed its name to Selin Sistemi,
S.p.A. In January, 1996, Selin acquired the Selin S.p.A. and
ended the leasing arrangement.
2. Summary of Significant Accounting Policies
Translation of Financial Statements Denominated in a Foreign
Currency
The functional currency is the Italian lire. The balance sheets
have been translated into U.S. dollars using the year-end
exchange rates, while the income statements have been translated
using the average exchange rates each year. Translation gains
and losses are reported as a part of consolidated shareholders'
equity.
Cash and Cash Equivalents
All highly liquid debt instruments purchased with an initial
maturity of three months or less are considered to be cash
equivalents.
2. Summary of Significant Accounting Policies, continued
Inventories
Inventories are stated at the lower of cost or market. Cost is
determined using the last-in, first out (LIFO) method.
Property, Plant and Equipment
Property, plant and equipment are recorded at purchase cost.
Depreciation is provided on the straight-line method over the
estimated useful lives of the assets as follows:
Buildings and improvements 10-33 years
Plant and equipment 6-10 years
Commercial and industrial tools 4-5 years
Repairs and maintenance are charged to expense when incurred,
and expenditures for improvements are capitalized. Upon sale or
retirement, the related cost and accumulated depreciation or
amortization are removed from the respective accounts and any
resulting gain or loss is included in operations.
Intangible Assets
Goodwill is being amortized using the straight-line method over
thirty years. Other intangibles consists of patents and other
intangible assets and are amortized using the straight-line
method over four to five years.
Revenue Recognition
Revenue from the sale of products are recognized on the transfer
of ownership, which generally coincides with the time of
shipment.
Research and Development
Research and development costs related to both present and
future products are charged to expense when incurred.
Interest Rate Swaps
As discussed in Note 14, the Company uses interest rate swaps to
hedge its long-term debt. The Company recognizes the
differentials to be received or paid under the contracts as an
adjustment to interest expense over the life of the contracts.
2. Summary of Significant Accounting Policies, continued
Use of Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Income Taxes
Income taxes are accounted for as prescribed in Statement of
Financial Accounting Standards ("SFAS") No. 109 - Accounting for
Income Taxes. Under the asset and liability method SFAS No.
109, the Company recognizes the amount of income taxes payable.
Deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and
liabilities, and their respective tax bases. Deferred tax
assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years those temporary
differences are expected to be recovered or settled.
3. Related Party Transactions
Commercial relationships are in place between FIR and TEA, which
is partially owned by the managing director of FIR. TEA buys
motors from FIR, which totaled $158 in 1996 and $65 in 1995.
TEA also provides some subcontracted production services to FIR,
which totaled $113 in 1996 and $33 in 1995.
The controlling shareholder group performs certain managerial
and corporate finance functions for the Company. During 1996
and 1995, fees paid to these controlling shareholders totaled
$105 and $527, respectively. These fees were included in other
income/expenses.
As discussed in Note 10, the majority shareholder has guaranteed
certain debts of the Group.<PAGE>
4. Inventories
Inventories consist of the following, valued at LIFO cost:
July 31, 1996 July 31, 1995
Raw Materials $ 6,955 $ 6,103
Work-in-Process 2,891 2,550
Finished Goods 641 471
Total $ 10,487 $ 9,124
Inventories are accounted for using the LIFO cost method. LIFO
cost approximates replacement cost.
5. Property, Plant and Equipment
Property, plant and equipment consist of the following:
July 31, 1996 July 31, 1995
Land and building $ 3,124 $ 2,931
Plant and machinery 1,451 1,086
Commercial and industrial tools 1,348 761
5,923 4,778
Less accumulated depreciation and
amortization (744) (295)
$ 5,179 $ 4,483
6. Shareholders' Equity
In September, 1995, the shareholders made an additional capital
contribution of $4,390. This amount was recorded directly to
Additional Paid-in-Capital.
In March, 1996, the Company re-acquired common stock from
certain shareholders for $4,656. The transaction was recorded
as a Treasury Stock acquisition.<PAGE>
7. Gains and Losses on Foreign Sales
Approximately 50% of the Company's sales are to customers
outside of Italy and 10% of these sales are to customers outside
of Europe. These sales are denominated in the customer's local
currency. Gains and losses on the currency translation of
theses sales are recorded in the income statement when the
Company receives remittance. Gains/losses on amounts in
accounts receivable at year end are immaterial. Net gains and
losses on the settlement of foreign currency sales were $98 loss
and $134 gain for the years ending July 31, 1996 and 1995,
respectively.
8. Lease Commitments
The Company leases certain production facilities under operating
leases expiring through 2002. In most cases, management expects
that in the normal course of business these leases will be
renewed or replaced by other leases.
Rental expense under noncancelable operating leases was
approximately $21 and $5 for the years ended July 31, 1996 and
1995, respectively. Future minimum commitments under
noncancelable operating leases are as follows:
Year ending July 31,
1997 $ 134
1998 130
1999 130
2000 130
2001 130
Thereafter 130
9. Income Taxes
Deferred income taxes reflect the net tax effects of temporary
differences between the Italian tax basis of assets and
liabilities and their carrying amounts for financial reporting
purposes. The more significant components of the net deferred
income tax assets and liabilities resulted from differences in
the timing of expenses for financial statement purposes and
deductibility for income taxes principally related to the future
benefit of an Italian tax credit and for differences in
depreciation and amortization methods.<PAGE>
9. Income Taxes, continued
The income tax (provision) benefit for the years ended July 31,
1996 and 1995 consists of the following:
1996 1995
Current $ (289) $ (566)
Deferred (2,688) 4,510
$ (2,977) $ 3,944
The 1995 benefit results principally from an Italian tax credit
arising from an intercompany merger transaction. The credit
carryforward is reflected as a deferred tax asset as its
realizability is considered by management to be more likely than
not.
10. Debt Arrangements
The Company has a number of short-term borrowing facilities
available from approximately 25 banks. The total amount
available under overdraft facilities is $4,147 at interest rates
between 9.5% and 12.75% at July 31, 1996. These facilities are
not collateralized and do not contain significant financial
covenants. In addition, the Company has a number of export and
domestic sales facilities whereby the banks loan against
accounts receivable. Total available receivable lines of credit
are $15,273 at July 31, 1996 and carry interest at 9.5% to
12.75%.
10. Debt Arrangements, continued
Long-term debt consists of the following at July 31, 1996 and
1995:
1996 1995
CARIPLO and other banks pool senior loan to FIR, due
September 15, 1999. Indexed interest rate at
Roman Interbank Offering Rate ("RIBOR") plus
1.5%. No penalty for anticipated
reimbursements. $ 12,112 $ 14,513
Subordinated debt from Banca Popolare di Cremona to
FIR, due September 9, 1999. Indexed interest rate
at RIBOR plus 1.5%. 1,646 1,578
Subordinated debt from Credit Lyonnais (Milan) to FIR,
due September 9, 1999. Indexed rate at RIBOR plus
1.5%. No penalty for anticipated reimbursement. 1,646 1,578
Senior debt from Credit Lyonnais to Selin, due
February 26, 2001. Indexed interest rate at
RIBOR plus 0.5%. 3,357 -
Total 18,761 17,669
Less current maturities (3,028) (2,901)
Long-term debt, net $ 15,733 $ 14,768
RIBOR was 8.5625% and 11.375% at July 31, 1996 and 1995,
respectively.
In accordance with the pool senior loan, the Company is unable
to declare dividends or make a reduction in share capital. In
addition, the bank has the right to request the repayment of the
debt in the event of certain changes in ownership. There are no
significant financial covenants on the subordinated debt. None
of the debt facilities are collateralized.
The controlling shareholder has guaranteed the subordinated debt
from Banca Popolare di Cremona, the subordinated debt from
credit Lyonnais, and the senior debt from Credit Lyonnais.
Maturities of net long-term debt as of July 31, 1996 are as
follows:
1997 $ 3,028
1998 3,028
1999 3,028
2000 6,320
2001 3,357
Based upon the borrowing rates currently available to the
Company for debt, management estimates that the recorded
principle amount is deemed to be the same as current fair value.
11. Staff Severance
The staff severance liability is similar to a pension fund. It
is accrued by the Company per Italian law for all employees at
13.5% of annual gross salary. In addition to the annual
accrual, the total fund is revalued each year according to an
official index (equivalent to the retail price index plus 1.5%).
This fund is payable to employees when they leave the Company.
12. Subsequent Events
In May, 1997, the Company entered into an agreement to acquire
the common stock of TEA, referred to in Note 3, for
approximately $1,100 in cash and assumed debt. The transaction
will be accounted for under the purchase method of accounting.
In May, 1997, the Company's shareholders entered into an
agreement to sell their shares to a subsidiary of Motors and
Gears.
13. Commitments and Contingencies
FIR issued a guarantee in favor of Banca di Roma, which in turn
had issued a bank guarantee in favor of third parties for a
commercial obligation of Selin Sistemi. Such obligation is
related to a $1,970 supply contract for an Indian government
body. As of July 31, 1996, approximately $99 remained on the
guarantee.
The Company is evaluating potential environmental remediation
liabilities. As of April, 1997, the Company has identified a
site which may require remediation. The Company is presently
unable to determine what, if any, liability it may incur in this
matter.
14. Interest Rate Swap
In order to hedge the Company's $14,500 loan, the Company has
entered into four interest swap agreements with San Paolo Torini
as follows:
Nominal amount
Expiration Date $000's Rate received Rate paid
Contract 1 September 1996 $ 3,291 LIBOR at 6 months 11.28%
Contract 2 September 1997 $ 3,291 LIBOR at 6 months 11.70%
Contract 3 September 1998 $ 3,291 LIBOR at 6 months 11.85%
Contract 4 September 1999 $ 3,291 LIBOR at 6 months 11.91%
<PAGE>
14. Interest Rate Swap, continued
The 6 month LIBOR rate was 10.94% at July 31, 1995 and 8.67% at
July 31, 1996. The LIBOR rate may continue to decline, thereby
creating larger losses on the interest rate swaps. The Company
records the differentials to be received or paid under the
contracts as an adjustment to interest expense over the life of
the contracts. An additional $172 and $44 was expensed for the
loss on the swap contract in 1996 and 1995, respectively.
15. Supplemental Disclosure of Noncash Investing Activities
During 1995, noncash investing activities consisted of the
following:
Acquisition of FIR
Assets acquired $ 50,027
Liabilities assumed 13,222
Acquisition of SELIN
Assets acquired 631
Liabilities assumed -
