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 March 31, 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 May
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 March 31, 1999,
and December 31, 1998 4
Condensed Consolidated Statements of Income for the
three months ended March 31, 1999 and 1998 5
Condensed Consolidated Statements of Cash Flows for the three
months ended March 31, 1999 and 1998 6
Notes to Condensed Consolidated Financial Statements 7-8
<PAGE>
MOTORS AND GEARS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(ALL DOLLAR AMOUNTS IN THOUSANDS)
March 31, December 31,
1999 1998
(Unaudited)
ASSETS
Current Assets:
Cash and cash equivalents $ 10,983 $ 7,016
Accounts receivable, net 54,403 51,969
Inventories 41,622 43,318
Prepaid expenses and other current assets 3,004 3,058
Total Current Assets 110,012 105,361
Property, plant, and equipment, net 21,781 22,268
Goodwill, net 231,865 232,058
Deferred financing costs, net 13,735 14,182
Deferred income taxes 4,436 4,868
Investment in affiliate 7,285 7,285
Other assets, net 2,641 2,799
Total Assets $391,755 $388,821
LIABILITIES AND SHAREHOLDER'S EQUITY
Current Liabilities:
Accounts payable $ 23,097 $ 23,832
Accrued interest payable 11,803 4,756
Accrued expenses and other current liabilities 9,818 7,274
Due to affiliated company - 1,216
Current portion of long term debt 343 361
Total Current Liabilities 45,061 37,439
Long-Term debt 320,485 325,455
Other non-current liabilities 3,193 3,314
Shareholder's Equity:
Common Stock 1 1
Additional paid-in-capital 50,005 50,005
Accumulated other comprehensive income/(loss) (280) 1,947
Accumulated deficit (26,710) (29,340)
Total Shareholder's Equity 23,016 22,613
Total Liabilities and Shareholder's Equity $391,755 $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
March 31,
1999 1998
Net Sales $76,491 $58,567
Cost of sales, excluding depreciation 48,818 38,212
Selling, general, and administrative expenses 10,297 7,722
Depreciation 1,320 1,205
Amortization of goodwill and other intangibles 2,238 1,819
Management fees and other 764 618
Operating income 13,054 8,991
Other (income)/expense:
Interest expense 8,538 7,820
Interest income (80) (363)
Miscellaneous, net (185) -
Income before income taxes 4,781 1,534
Provision for income taxes 2,151 651
Net income $ 2,630 $ 883
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)
Three Months Ended
March 31,
1999 1998
Cash flows from operating activities:
Net income $ 2,630 $ 883
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 3,628 3,345
Provision for deferred income taxes - 264
Changes in operating assets and liabilities net
of effects from acquisitions:
Current assets (412) (3,244)
Current liabilities 8,857 5,175
Non-current assets & liabilities 311 (8)
Payables to affiliated company (1,540) 117
Net cash provided by operating activities 13,474 6,532
Cash flows from investing activities:
Capital expenditures, net (609) (902)
Contingent purchase price and acquisition fees (3,151) (50)
Net cash used in investing activities (3,760) (952)
Cash flows from financing activities:
Repayment of borrowings under revolving
credit facility and other long-term debt (5,064) (5)
Net cash used in financing activities (5,064) (5)
Effect of exchange rate changes on cash (683) (890)
Net increase in cash and cash equivalents 3,967 4,685
Cash and cash equivalents at beginning of period 7,016 28,880
Cash and cash equivalents at end of period $10,983 $33,565
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:
March 31, December 31,
1999 1998
Raw materials $27,285 $27,101
Work in process 9,754 10,626
Finished goods 4,583 5,591
$41,622 $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 contingent purchase
price agreement of up to approximately $5,600 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.
<PAGE>
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
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 first quarter of 1998
as if the 1998 acquisitions had occurred on January 1, 1998 is as follows:
Three Months Ended
March 31, 1998
Net sales $70,151
Income before income taxes 3,721
Net income 2,047
5. Comprehensive Income
Total comprehensive income/(loss) for the three months ended March 31, 1999
and 1998 is as follows:
Three Months Ended
March 31,
1999 1998
Net Income $2,630 $ 883
Foreign currency translation adjustment (2,227) (3,088)
Comprehensive income/(loss) $ 403 $(2,205)
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
March 31,
1999 1998
(Unaudited)
(Dollar amounts in thousands)
Net sales
Motors $61,329 $43,496
Controls 15,162 15,071
76,491 58,567
Operating income
Motors 13,491 8,863
Controls 1,748 1,829
15,239 10,692
Management fees and unallocated
corporate overhead 2,185 1,701
Total operating income 13,054 8,991
Interest expense 8,538 7,820
Interest income and other (265) (363)
Income before income taxes $ 4,781 $ 1,534
Consolidated Results of Operations
Net sales for the first quarter increased 31% to $76.5 million, up $17.9
million from the first quarter of 1998. The strong sales growth was primarily
driven by the two acquisitions in 1998 which accounted for $14.2 million of
the growth. The remaining $3.7 million was the result of organic sales
growth. Net sales of subfractional motors for the first quarter increased
11%, mainly attributed to continued strength in the vending machine and
appliance markets. Net sales of fractional/integral motors, excluding the 1998
acquisitions, increased 6%, driven mostly by stronger sales in the floor care
and elevator markets.
Operating income for the first quarter increased 45% to $13.1 million, up $4.1
million from the first quarter of 1998. The increase in operating income was
primarily the result of the increased sales described above. Gross margins
increased from 34.8% to 36.2%, predominantly driven by the effects of the 1998
acquisitions and increased margins in the controls segment. Increased
operating income resulting from the increased sales described above was
partially offset by increased corporate expenses. Operating margins increased
from 15.4% to 17.1%, mainly as the result of the 1998 acquisitions and an
increase in operating margins of subfractional motors.
Interest expense increased $0.7 million from $7.8 million in the first quarter
of 1998 to $8.5 million in the first quarter of 1999, reflecting higher debt
levels related to the financing of new acquisitions.
<PAGE>
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
quarter ended March 31, 1999 was $13.5 million, compared to $6.5 million
provided from operating activities during the same period in 1998. An
increase in net income and improved working capital performance during the
first quarter 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 quarter 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.
The Company plans to fund future acquisitions through its revolving credit
facility and excess operating cash flow.
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. Interest paid on the Junior Seller Notes was $0.5 million in
the first quarter of 1999.
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 purpos
es. 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 May 13, 1999, the Company has approximately $46.7 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 is in the process of assessing 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 most 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
is contacting each of the Company's significant customers and suppliers and
requesting that they apprize the Company of the status of their Year 2000
compliance programs. The Company has targeted the beginning of the second
quarter of 1999 as the date for receiving substantially all customer and
supplier responses. There can be no assurance as to when this process will be
completed.
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 June 30, 1999. Once software is
modified or replaced for a system, the Company begins testing and
implementation. 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 December 31, 1999.
Cost. The Company will utilize 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 $2.3 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.
<PAGE>
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.
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.
The Company expects to have the contingency plan completed by the end of 1999.
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 March 31, 1999 the Company does have variable rate debt
outstanding of $36.0 million. A one percentage point increase in interest
rates would increase the amount of annual interest paid by approximately $0.4
million. The Company does not believe that its market risk financial
instruments on March 31, 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
May 13, 1999
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<ARTICLE> 5
<S> <C>
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<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1999
<CASH> 10,983
<SECURITIES> 0
<RECEIVABLES> 55,361
<ALLOWANCES> (959)
<INVENTORY> 41,622
<CURRENT-ASSETS> 110,012
<PP&E> 46,405
<DEPRECIATION> (24,624)
<TOTAL-ASSETS> 391,755
<CURRENT-LIABILITIES> 45,061
<BONDS> 273,875
0
0
<COMMON> 1
<OTHER-SE> 23,015
<TOTAL-LIABILITY-AND-EQUITY> 391,755
<SALES> 76,491
<TOTAL-REVENUES> 76,491
<CGS> 48,818
<TOTAL-COSTS> 48,818
<OTHER-EXPENSES> 14,619
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 8,538
<INCOME-PRETAX> 4,781
<INCOME-TAX> 2,151
<INCOME-CONTINUING> 2,630
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,630
<EPS-PRIMARY> 0
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