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 June 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 August
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 June 30, 1997, and December 31, 1996
Condensed Consolidated Statements of 4
Income for the second quarter and Six
Months Ended June 30, 1997 and 1996
Condensed Consolidated Statements of Cash 5
Flows for the Six Months Ended June 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 11
Signatures 12
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MOTORS & GEARS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(ALL DOLLAR AMOUNTS IN THOUSANDS)
June 30, December 31,
1997 1996
(Unaudited)
ASSETS
Current Assets:
Cash and cash equivalents $ 14,210 $ 10,011
Accounts receivable, net 29,770 13,056
Inventories 25,662 16,554
Prepaid expenses and other current assets 3,709 886
Deferred income taxes 1,159 1,159
Total Current Assets 74,510 41,666
Property, plant, and equipment, net 14,695 11,431
Goodwill, net 141,098 109,103
Covenants not to compete, net 1,056 1,206
Deferred financing costs, net 10,034 10,181
Other assets 101 81
Total Assets $ 241,494 $173,668
LIABILITIES AND NET CAPITAL DEFICIENCY
Current Liabilities:
Accounts Payable $ 15,922 $ 5,408
Accrued interest payable 2,692 3,204
Accrued expenses and other 5,091 3,744
Due to affiliated company 1,190 1,706
Current portion of capital lease obligations 20 18
Total Current Liabilities 24,915 14,080
Long-Term debt 220,000 170,000
Subordinated note payable 5,000 5,000
Capital lease obligations, less current portion 80 49
Deferred income taxes 2,258 282
Other non-current liabilities 2,573 44
Net Capital Deficiency:
Common Stock 1 1
Additional paid-in capital 30,005 30,005
Accumulated deficit (43,338) (45,793)
Total Net Capital Deficiency (13,332) (15,787)
Total Liabilities and Net Capital Deficiency $241,494 $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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
1997 1996 1997 1996
Net Sales $34,999 $31,491 $66,518 $59,578
Cost of Sales, excluding
depreciation 22,396 20,251 42,776 38,318
Selling, general, and
administrative expenses 2,691 2,385 4,932 4,139
Depreciation 969 826 1,940 1,408
Amortization of goodwill
and other intangibles 989 1,008 1,975 1,930
Management fees and other 353 759 679 1,476
Operating Income 7,601 6,262 14,216 12,307
Other (income) and expenses:
Interest expense 5,247 2,561 10,141 4,907
Interest income (178) (12) (319) (16)
Total other expenses 5,069 2,549 9,822 4,891
Income before income taxes 2,532 3,713 4,394 7,416
Provision for income taxes 1,196 1,292 1,939 2,773
Net income $ 1,336 $ 2,421 $ 2,455 $ 4,643
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MOTORS & GEARS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(ALL DOLLAR AMOUNTS IN THOUSANDS)
SIX MONTHS ENDED
June 30,
1997 1996
Cash flows from operating activities:
Net income $ 2,455 $ 4,643
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 4,437 3,821
Provision for deferred income taxes 612 225
Changes in operating assets and liabilities
Net of effects from acquisitions:
Increase in current assets (3,328) (219)
Increase in current liabilities 2,914 1,704
Increase in non-current assets (380) -
Decreases in payables to affiliated company (516) (5,660)
Net cash provided by operating activities 6,194 4,514
Cash flows from investing activities:
Capital expenditures, net (249) (738)
Acquisitions of subsidiaries (51,767) (21,700)
Net cash used in investing activities (52,016) (22,438)
Cash flows from financing activities:
Proceeds from debt issuance -- 20,000
Proceeds from revolving credit facilities 50,000 1,700
Repayment of long-term debt (11) (5,253)
Other 32 158
Net cash provided by financing activities 50,021 16,605
Net increase (decrease) in cash and cash equivalents 4,199 (1,319)
Cash and cash equivalents at beginning of period 10,011 2,781
Cash and cash equivalents at end of period $ 14,210 $ 1,462
Cash paid during the period for:
Interest $ 10,033 $ 3,635
Income taxes $ 110 $ 97
Non-cash investing activities:
Capital leases $ 46 $ 59
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. 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:
June 30, December 31,
1997 1996
Raw materials and work in process $22,158 $14,019
Finished goods 3,504 2,535
$25,662 $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 June 30, 1997 and
December 31, 1996, are as follows:
June 30, December 31,
1997 1996
Deferred tax liabilities
Goodwill $2,503 $1,866
Other 1,364 -
Total deferred tax liabilities $3,867 $1,866
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PAGE 7
MOTORS & GEARS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(ALL DOLLAR AMOUNTS IN THOUSANDS)
June 30, 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 liabilities (assets) $1,099 $ (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
subfractional 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.
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
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PAGE 8
MOTORS & GEARS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(ALL DOLLAR AMOUNTS IN THOUSANDS)
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 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.
E. 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. In reference to the above, the operations of the FIR
Group Companies from the date of acquisition, June 12, 1997, through June 30,
1997, are excluded from the second quarter 10Q and will subsequently be included
in the third quarter 10Q.
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PAGE 9
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(UNAUDITED)
(ALL DOLLAR AMOUNTS IN THOUSANDS)
SECOND QUARTER SIX MONTHS ENDED
1997 1996 1997 1996
Net sales $34,999 $31,491 $66,518 $59,578
Operating incom 7,601 6,262 14,216 12,307
Net income 1,336 2,421 2,455 4,643
Operating Margin (1) 21.7% 19.9% 21.4% 20.7%
____________________
(1) Operating margin is operating income divided by net sales.
Results of Operations
Net sales for the second quarter and first half of 1997 increased 11% ($3.5
million) and 12% ($6.9 million) respectively as compared with the same periods
in the prior year. Net sales of sub-fractional motors for the second quarter
and first half of 1997 increased 20% and 28%, 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 second quarter and first half of 1997 increased 21% and 17%
respectively as compared with the same periods in the prior year, primarily as
a result of strong sales of planetary gears in the floor care market. These
increases were offset partially by reduced sales in fractional/integral motors,
10% and 20% for the second quarter and first half of 1997 respectively as
compared with the same periods in the prior year. These decreases reflect the
unusually strong sales in the first and second quarters of 1996, principally
due to a substantial reduction in the backlog of orders accumulated in the
fourth quarter of 1995.
Operating income increased 21% ($1.3 million) and 16% ($1.9 million) for the
second quarter and first half respectively, as compared with the same periods of
the prior year. The increase in operating income is primarily due to the
increased sales discussed above. Increases in selling, general, and
administrative expenses, and depreciation, were due principally to the
acquisition of Colman Motor Products. 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 increased from 19.9% to 21.7% for the second quarter and from
20.7% to 21.4% for the first half of 1997.
Consolidated net income decreased from $2.4 million to $1.3 million for the
second quarter and from $4.6 million to $2.5 million for the first half,
principally due to increased interest expense offset partially by improved
operating margins. Interest expense for the second quarter increased from $2.6
million to $5.2 million and from $4.9 million to $10.1 million for the first
half of 1997, reflecting higher debt levels resulting from the issuance of $170
million of Senior Notes in November of 1996.
Liquidity and Capital Resources
The Company had $49.6 million of working capital at June 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, higher cash
balances, increased accounts receivable, and lower intercompany payables offset
partially by an increase in accounts payable and accrued expenses and other
current liabilities.
The Company's net cash generated from operating activities for the six months
ended June 30, 1997 increased $1.7 million to $6.2 million compared with the
same period in 1996. The increase was due to higher current liabilities, $1.2
million, a lower decrease in payables to affiliated company, $5.1 million, an
increase in depreciation and amortization, $0.6 million, and a greater benefit
for deferred taxes, $0.4 million. These increases were partially offset by
lower net income, $2.1 million, and a higher increase in current assets of $3.1
million, and an increase in non-current assets of $0.4 million.
The net cash used in investing activities increased $29.6 million to $52.0
million in 1997, as compared to the same period in 1996, reflecting the FIR
Group Companies acquisition, $51.3 million, offset partially by lower capital
expenditures, $0.5 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 six months ended June 30,
1997, increased by $33.4 million compared with the same period in 1996, due to
proceeds from borrowings under the Motors & Gears Industries, Inc. Credit
Agreement, $50 million, and lower repayments of long term debt, $5.2 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.
The Company, at June 30, 1997, had available cash of $25 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.
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PAGE 11
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-K on June 24, 1997
describing the acquisition of the FIR Group Companies
on June 12, 1997. Financial statements and exhibits
were not filed at that time. The required financial
information will be filed no later than August 22,
1997.
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PAGE 12
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
August 13, 1997
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<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1997
<CASH> 14,210
<SECURITIES> 0
<RECEIVABLES> 29,861
<ALLOWANCES> (91)
<INVENTORY> 25,662
<CURRENT-ASSETS> 74,510
<PP&E> 30,291
<DEPRECIATION> 15,596
<TOTAL-ASSETS> 241,494
<CURRENT-LIABILITIES> 24,915
<BONDS> 170,000
0
0
<COMMON> 1
<OTHER-SE> (13,333)
<TOTAL-LIABILITY-AND-EQUITY> 241,494
<SALES> 66,518
<TOTAL-REVENUES> 66,518
<CGS> 42,776
<TOTAL-COSTS> 42,776
<OTHER-EXPENSES> 9,526
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 10,141
<INCOME-PRETAX> 4,394
<INCOME-TAX> 1,939
<INCOME-CONTINUING> 2,455
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,455
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
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