SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
_________________________________
QUARTERLY REPORT PURSUANT TO SECTION 12 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For quarter ended June 30, 1999 Commission File Number: 333-19257
MOTORS AND 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 place and there
is currently no public market for such shares.
The number of shares outstanding of Registrant's Common Stock as of
August 13, 1999: 100,000.
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MOTORS AND GEARS, INC.
INDEX
Part I FINANCIAL INFORMATION PAGE NO.
Item 1. Financial Statements (Unaudited) 3
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 12
Part II OTHER INFORMATION
Item 1. Legal Proceedings 13
Item 2. Changes in Securities and Use of Proceeds 13
Item 3. Defaults Upon Senior Securities 13
Item 4. Submission of Matters to a Vote of Security
Holders 13
Item 5. Other Information 13
Item 6. Exhibits and Reports on Form 8-k 13
Signatures 14
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS (Unaudited)
PAGE NO.
Condensed Consolidated Balance Sheets at June 30, 1999,
and December 31, 1998 4
Condensed Consolidated Statements of Income for the
three and six months ended June 30, 1999 and 1998 5
Condensed Consolidated Statements of Cash Flows for the six
months ended June 30, 1999 and 1998 6
Notes to Condensed Consolidated Financial Statements 7-8
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MOTORS AND GEARS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(ALL DOLLAR AMOUNTS IN THOUSANDS)
June 30, December 31,
1999 1998
(Unaudited)
ASSETS
Current Assets:
Cash and cash equivalents $ 11,668 $ 7,016
Accounts receivable, net 53,571 51,969
Inventories 42,709 43,318
Prepaid expenses and other current assets 2,479 3,058
Total Current Assets 110,427 105,361
Property, plant, and equipment, net 22,026 22,268
Goodwill, net 227,646 232,058
Deferred financing costs, net 13,287 14,182
Deferred income taxes 4,436 4,868
Investment in affiliate 7,285 7,285
Other assets, net 2,400 2,799
Total Assets $387,507 $388,821
LIABILITIES AND SHAREHOLDER'S EQUITY
Current Liabilities:
Accounts payable $ 25,113 $ 23,832
Accrued interest payable 4,731 4,756
Accrued expenses and other current liabilities 11,408 7,274
Due to affiliated company 1,501 1,216
Current portion of long term debt 382 361
Total Current Liabilities 43,135 37,439
Long-term debt 318,937 325,455
Other non-current liabilities 3,377 3,314
Shareholder's Equity:
Common Stock 1 1
Additional paid-in-capital 50,005 50,005
Accumulated other comprehensive income/(loss) (4,106) 1,947
Accumulated deficit (23,842) (29,340)
Total Shareholder's Equity 22,058 22,613
Total Liabilities and Shareholder's Equity $387,507 $388,821
See accompanying notes to condensed consolidated financial statements.
<PAGE>
MOTORS AND GEARS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(ALL DOLLAR AMOUNTS IN THOUSANDS)
Three Months Ended Six Months Ended
June 30, June 30,
1999 1998 1999 1998
Net Sales $77,903 $71,700 $154,394 $130,267
Cost of Sales, excluding
depreciation 49,738 46,440 98,556 84,652
Selling, general and
administrative expenses 10,152 9,047 20,449 16,769
Depreciation 1,365 1,356 2,685 2,561
Amortization of goodwill
and other intangibles 2,291 2,004 4,529 3,823
Management fees and other 776 815 1,540 1,433
Operating Income 13,581 12,038 26,635 21,029
Other (income)/expense:
Interest expense 8,468 8,241 17,006 16,061
Interest income (69) (259) (149) (622)
Miscellaneous, net (33) - (218) -
Income before income taxes 5,215 4,056 9,996 5,590
Provision for income taxes 2,347 1,877 4,498 2,528
Net income $ 2,868 $ 2,179 $ 5,498 $ 3,062
See accompanying notes to condensed consolidated financial statements.
<PAGE>
MOTORS AND GEARS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(ALL DOLLAR AMOUNTS IN THOUSANDS)
Six Months Ended
June 30,
1999 1998
Cash flows from operating activities:
Net income $ 5,498 $ 3,062
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 7,859 7,029
Provision for deferred income taxes 760 587
Changes in operating assets and liabilities net
of effects from acquisitions:
Current assets (414) (7,498)
Current liabilities 5,390 2,801
Non-current assets & liabilities (259) (44)
Payables to affiliated company 285 (807)
Net cash provided by operating activities 19,119 5,130
Cash flows from investing activities:
Capital expenditures, net (2,159) (2,140)
Contingent purchase price and acquisition of
subsidiaries (3,151) (55,852)
Cash acquired in acquisition of subsidiaries - 360
Net cash used in investing activities (5,310) (57,632)
Cash flows from financing activities:
Proceeds from revolving credit facility 12,000 40,000
Repayment of borrowings under revolving
credit facility and other long-term debt (19,138) (9,040)
Net cash (used in)/provided by financing
activities (7,138) 30,960
Effect of exchange rate changes on cash (2,019) (698)
Net increase (decrease) in cash and
cash equivalents 4,652 (22,240)
Cash and cash equivalents at beginning of period 7,016 28,880
Cash and cash equivalents at end of period $11,668 $ 6,640
See accompanying notes to condensed consolidated financial statements.
<PAGE>
MOTORS AND GEARS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(ALL DOLLAR AMOUNTS IN THOUSANDS)
1. Organization
The unaudited condensed consolidated financial statements, which reflect all
adjustments that management believes necessary to present fairly the results
of interim operations and which are of a normal recurring nature, should be
read in conjunction with the Company's consolidated financial statements for
the year ended December 31, 1998, included in the Company's annual report on
Form 10-K. 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.
2. Summary of Significant Accounting Policies
The condensed consolidated financial statements include the accounts of Motors
and Gears, Inc. and its subsidiaries. Material intercompany transactions and
balances are eliminated in consolidation. Operations of certain 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
condensed consolidated financial statements.
3. Inventories
Inventories are summarized as follows:
June 30, December 31,
1999 1998
Raw materials $26,795 $27,101
Work in process 10,991 10,626
Finished goods 4,923 5,591
$42,709 $43,318
4. Acquisition of Subsidiaries
On May 15, 1998, the Company acquired all of the outstanding stock of Advanced
D.C. Motors, Inc. and its affiliated corporations (collectively "ADC") for
$58,651. The purchase price, including costs incurred directly related to the
transaction, was allocated to working capital of $9,345; property and
equipment of $4,088; covenants not to compete of $662; other long-term assets
and liabilities of $(51); and resulted in an excess purchase price over net
identifiable assets of $44,607. The Company also has a remaining contingent
purchase price agreement of up to approximately $2,700 relating to the
acquisition of ADC. The contingent purchase price is dependent upon the
acquired entity's results of operations exceeding certain targeted levels
substantially above the historical experience of ADC at the time of
acquisition. ADC designs and manufactures special purpose, custom designed
motors for use in electric lift trucks, power sweepers, electric utility
vehicles, golf carts, electric boats, and other niche products. ADC also
designs and manufactures its own production equipment as well as electric
motor components known as commutators.
On December 31, 1998, the Company, through its wholly-owned subsidiary
Imperial Electric Company, acquired all of the outstanding stock of Euclid
Universal Corporation ("Euclid") for $2,100. The purchase price, including
<PAGE>
costs incurred directly related to the transaction, was preliminarily
allocated to working capital of $772; property and equipment of $953; other
long-term assets and liabilities of ($498); and resulted in an excess purchase
price over net identifiable assets of $873. Euclid designs and manufactures
speed reducers, customer gearing, right angle gearboxes and transaxles for use
in a wide array of industries including material handling, healthcare and
floor care. Euclid has strong technical expertise in the areas of worm, spur
and helical gearing.
Acquisitions of the Company have been financed primarily through the use of
the revolving line of credit and the issuance of Senior Debt. These
acquisitions have been accounted for using the purchase method of accounting.
Accordingly, the operating results of each of these acquisitions have been
included in the consolidated operating results of the Company since the date
of their acquisition.
Proforma information with respect to the Company for the three and six months
ended June 30, 1998 as if the 1998 acquisitions had occurred on January 1,
1998 is as follows:
Three Months Ended Six Months Ended
June 30, 1998 June 30, 1998
Net sales $78,711 $148,862
Income before income taxes 5,889 9,610
Net income 3,238 5,285
5. Comprehensive Income
Total comprehensive income/(loss) for the three and six months ended June 30,
1999 and 1998 is as follows:
Three Months Ended Six Months Ended
June 30, June 30,
1999 1998 1999 1998
Net Income $ 2,868 $ 2,179 $ 5,498 $ 3,062
Foreign currency
translation adjustment (3,826) 697 (6,053) (2,391)
Comprehensive income/(loss) $ (958) $ 2,876 $ (555) $ 671
6. Business Segment Information
See Part 1 "Financial Information" - Item 2 "Management's Discussion and
Analysis of Financial Condition and Results of Operations" for the Company's
business segment disclosures. There have been no changes from the Company's
December 31, 1998 consolidated financial statements with respect to
segmentation or the measurement of segment profit.
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Summary financial information included in the financial statements of the
Company is as follows:
Three Months Ended Six Months Ended
June 30, June 30,
1999 1998 1999 1998
(Unaudited)
(Dollar amounts in thousands)
Net sales
Motors $60,530 $55,245 $121,859 $ 98,740
Controls 17,373 16,455 32,535 31,527
77,903 71,700 154,394 130,267
Operating income
Motors 13,807 12,062 27,298 20,925
Controls 2,095 2,207 3,842 4,036
15,902 14,269 31,140 24,961
Management fees and unallocated
corporate overhead 2,321 2,231 4,505 3,932
Total operating income 13,581 12,038 26,635 21,029
Interest expense 8,468 8,241 17,006 16,061
Interest income and other (102) (259) (367) (622)
Income before income taxes $ 5,215 $ 4,056 $ 9,996 $ 5,590
Consolidated Results of Operations
Net sales for the second quarter and first half of 1999 increased 9% ($6.2
million)and 19% ($24.1 million), respectively, over the same periods for
1998. The strong sales growth was primarily driven by the two acquisitions in
1998 which resulted in $6.6 million of the growth for the second quarter and
$20.7 million for the first half. Subfractional motor sales experienced a
slight decrease in the second quarter of 1999 as compared to 1998 due to
market softness in the vending machine industry, while 1999 year to date
subfractional motor sales increased $1.7 million over 1998 primarily from
increased sales in the appliance market. Sales of fractional/integral motors
excluding 1998 acquisitions were relatively flat for the second quarter of
1999 and increased $1.1 million for the first half of 1999 as compared to
1998. Sales of electronic motion control systems increased $0.9 million and
$1.0 million in the second quarter and first half of 1999, respectively, over
the same periods for 1998. The increases in the electronic motion control
systems sales were mainly attributed to continued strength in the elevator
modernization market.
Gross margins (excluding depreciation) increased from 35.2% to 36.2% for the
three months ended June 30, 1998 and 1999, respectively, and from 35.0% to
36.2% for the six months ended June 30, 1998 and 1999, respectively. These
increases were predominantly driven by the effects of the 1998 acquisitions.
Operating income for the second quarter and first half of 1999 increased 13%
to $13.6 million, and 27% to $26.6 million, respectively, over the same
periods for 1998. The increase in operating income was primarily the result
of the increased sales described above, coupled with improved operating
margins on subfractional motor sales. Operating margins increased from 16.8%
to 17.4% for the three months ended June 30, 1998 and 1999, respectively, and
from 16.1% to 17.3% for the six months ended June 30, 1998 and 1999,
respectively. Increased operating income resulting from the increased sales
and improved margins described above was partially offset by an increase in
corporate expenses.
<PAGE>
Interest expense increased $0.9 million from $16.1 million in the first half
of 1998 to $17.0 million in the first half of 1999, reflecting higher debt
levels related to the financing of new acquisitions.
Liquidity and Capital Resources
In general, the Company requires liquidity for working capital, capital
expenditures, interest, taxes, debt repayment and its acquisition strategy.
Of primary importance are the Company's working capital requirements, which
increase whenever the Company experiences strong incremental demand or
geographical expansion. The Company expects to satisfy its liquidity
requirements through a combination of funds generated from operating
activities and the funds available under its revolving credit facility.
Operating activities. Net cash provided by operating activities for the six
months ended June 30, 1999 was $19.1 million, compared to $5.1 million
provided from operating activities for the six months ended June 30, 1998. An
increase in net income and improved working capital performance during the
first half of 1999 as compared to the same period of 1998 are the main factors
contributing to the increase in cash flow from operating activities.
Investing activities. In the first half of 1999, the Company made a $3.2
million contingent purchase price payment to the sellers of ADC as a result of
ADC 1998 operations exceeding certain targeted levels. These targeted levels
were established in the acquisition agreement between the Company and the
sellers of ADC. The agreement provides for an additional contingent payment
to be made to the sellers of ADC on or before April 1, 2000, contingent upon
ADC 1999 operations exceeding certain targeted levels which have been set
substantially above the historical experience of ADC.
Financing activities. The Company's annual cash interest expense on the
Senior Notes, which are due 2006, will be approximately $29.0 million.
Interest on the Senior Notes is payable semi-annually on May 15 and November
15 of each year.
The Company is party to a Credit Agreement under which the Company is able to
borrow up to approximately $75.0 million over a term of five years to fund
acquisitions and provide working capital, and for other general corporate
purposes. Obligations under the Credit Agreement are guaranteed by M&G
Industries' subsidiaries, and secured by pledges of the stock of M&G
Industries' subsidiaries and liens in respect of certain assets of M&G
Industries and its subsidiaries. As of August 13, 1999, the Company has
approximately $43.6 million of available funds under this Agreement. In
addition, under the terms of the Series D Notes, the Company is able to
increase the credit facility to approximately $115.0 million.
The Company expects its principal sources of liquidity to be from its
operating activities and funding from the revolving line-of-credit agreement.
The Company further expects that these sources will enable it to meet its
long-term cash requirements for working capital, capital expenditures,
interest, taxes, and debt repayment for at least the next 12 months.
<PAGE>
Year 2000 Disclosure
Introduction. The Year 2000 issue is the result of computer programs being
written using two digits rather than four to define the applicable year. Any
of the Company's computer programs or hardware that have date-sensitive
software or embedded chips may recognize a date using "00" as the year 1900
rather than the year 2000. This could result in a system failure or
miscalculations causing disruptions of operations, including, among other
things, a temporary inability to process transactions, send invoices, or
engage in similar normal business activities.
State of Readiness. The Company has determined that it will be required to
modify or replace significant portions of its software and certain hardware so
that those systems will properly utilize dates beyond December 31, 1999. The
Company presently believes that with modifications or replacements of existing
software and certain hardware, the Year 2000 issue can be mitigated. However,
if such modifications and replacements are not made, or are not completed
timely, the Year 2000 issue could have a material impact on the operations of
the Company.
The Company's plan to resolve the Year 2000 issue involves the following four
phases: assessment, remediation, testing and implementation. The Company has
assembled an internal project team that has assessed all systems that could be
significantly affected by the Year 2000 issue. Results of this assessment
indicated that some of the Company's significant information technology
systems could be affected. The assessment also indicated that software and
hardware (embedded chips) used in production and manufacturing systems
(hereafter also referred to as operating equipment) may also be at risk. In
addition, based on a review of its product lines, the Company has determined
that substantially all of the products it has sold and will continue to sell
do not require remediation to be Year 2000 compliant. Accordingly, the
Company does not believe that the Year 2000 issue presents a material exposure
as it relates to the Company's products. The internal project team has
contacted each of the Company's significant suppliers and requested that they
apprize the Company of the status of their Year 2000 compliance programs. The
Company has received responses from its significant suppliers and continues to
monitor their compliance.
For its information technology exposures, to date the Company has completed a
majority of the remediation phase and expects to complete software
modification and replacement no later than August 31, 1999. The testing and
implementation phases for all significant systems are expected to be completed
by September 30, 1999. The four phases of the Company's Year 2000 program in
relation to operating equipment is on-going and expected to be completed by
October 31, 1999.
Cost. The Company has been utilizing both internal and external resources to
reprogram or replace, test, and implement the software and operating equipment
for Year 2000 modifications. The total cost of the Year 2000 project is
estimated at $3.1 million and is being funded through operating cash flows and
capital leases. To date, the Company has incurred approximately $2.6 million
related to all phases of the Year 2000 project. The majority of these costs
have been capitalized as they relate to new software and equipment.
Risks. Management of the Company believes it has an effective program in
place to resolve the Year 2000 issue in a timely manner. As noted above, the
Company has not yet completed all necessary phases of the Year 2000 program.
In the event that the Company does not complete any additional phases, the
Company could be materially adversely affected. In addition, disruptions in
the economy generally resulting from the Year 2000 issue could also materially
adversely affect the Company. The amount of potential liability and lost
revenue cannot be reasonably estimated at this time.
<PAGE>
Contingency Plans. The Company is in the process of developing a contingency
plan in the event it does not complete all phases of the Year 2000 program.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company does not engage in hedging or other market structure derivative
trading activities. Additionally, the Company's debt obligations are
primarily fixed-rate in nature and, as such, are not sensitive to changes in
interest rates. At June 30, 1999 the Company does have variable rate debt
outstanding of $34.0 million. A one percentage point increase in interest
rates would increase the amount of annual interest paid by approximately $0.3
million. The Company does not believe that its market risk financial
instruments on June 30, 1999 would have a material effect on future operations
or cash flow.
<PAGE>
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
None
Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
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
1) 27. EDGAR Financial Data Schedule
<PAGE>
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.
By: /s/ Norman R. Bates
Norman R. Bates
Chief Financial Officer
August 13, 1999
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<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<CASH> 11,668
<SECURITIES> 0
<RECEIVABLES> 54,789
<ALLOWANCES> (1,218)
<INVENTORY> 42,709
<CURRENT-ASSETS> 110,427
<PP&E> 47,790
<DEPRECIATION> (25,764)
<TOTAL-ASSETS> 387,507
<CURRENT-LIABILITIES> 43,135
<BONDS> 273,750
0
0
<COMMON> 1
<OTHER-SE> 22,057
<TOTAL-LIABILITY-AND-EQUITY> 387,507
<SALES> 154,394
<TOTAL-REVENUES> 154,394
<CGS> 98,556
<TOTAL-COSTS> 98,556
<OTHER-EXPENSES> 29,203
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 17,006
<INCOME-PRETAX> 9,996
<INCOME-TAX> 4,498
<INCOME-CONTINUING> 5,498
<DISCONTINUED> 0
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