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, 2000 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 placed
and there is currently no public market for such shares.
The number of shares outstanding of Registrant's Common Stock as of
May 11, 2000: 100,000.
<PAGE>
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 11
Part II OTHER INFORMATION
- ------- -----------------
Item 1. Legal Proceedings 12
Item 2. Changes in Securities and Use of Proceeds 12
Item 3. Defaults Upon Senior Securities 12
Item 4. Submission of Matters to a Vote of Security
Holders 12
Item 5. Other Information 12
Item 6. Exhibits and Reports on Form 8-k 12
Signatures 13
2
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS (Unaudited)
--------------------------------
PAGE NO.
--------
Condensed Consolidated Balance Sheets at March 31, 2000,
and December 31, 1999 4
Condensed Consolidated Statements of Income for the
three months ended March 31, 2000 and 1999 5
Condensed Consolidated Statements of Cash Flows for the three
months ended March 31, 2000 and 1999 6
Notes to Condensed Consolidated Financial Statements 7-8
3
<PAGE>
MOTORS AND GEARS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(ALL DOLLAR AMOUNTS IN THOUSANDS)
March 31, December 31,
2000 1999
------------ -----------
(Unaudited)
ASSETS
Current Assets:
Cash and cash equivalents ........................ $ 11,712 $ 11,260
Accounts receivable, net ......................... 54,388 53,473
Inventories ...................................... 44,228 44,146
Prepaid expenses and other current assets ........ 3,616 4,035
--------- --------
Total Current Assets ..................... 113,944 112,914
Property, plant, and equipment, net .............. 20,970 21,562
Goodwill, net .................................... 226,601 223,561
Deferred financing costs, net .................... 11,944 12,392
Deferred income taxes ............................ 2,851 2,851
Investment in affiliate .......................... 7,285 7,285
Other assets, net ................................ 1,825 2,021
--------- ---------
Total Assets ............................. $ 385,420 $ 382,586
========= =========
LIABILITIES AND SHAREHOLDER'S EQUITY
Current Liabilities:
Accounts payable ................................. $ 22,422 $ 22,670
Accrued interest payable ......................... 12,036 4,986
Accrued expenses and other current liabilities ... 15,795 12,081
Due to affiliated company ........................ 775 2,185
Current portion of long term debt ................ 1,607 1,629
--------- ---------
Total Current Liabilities ................ 52,635 43,551
Long-Term debt .................................... 305,298 311,550
Other non-current liabilities ..................... 4,285 3,326
Shareholder's Equity:
Common Stock ..................................... 1 1
Additional paid-in-capital ....................... 50,005 50,005
Accumulated other comprehensive income/(loss) .... (8,682) (5,125)
Accumulated deficit .............................. (18,122) (20,722)
--------- ---------
Total Shareholder's Equity ........... 23,202 24,159
--------- ---------
Total Liabilities and Shareholder's Equity $ 385,420 $ 382,586
========= =========
See accompanying notes to condensed consolidated financial statements.
4
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MOTORS AND GEARS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(ALL DOLLAR AMOUNTS IN THOUSANDS)
Three Months Ended
March 31,
-------------------
2000 1999
---- ----
Net Sales $79,661 $76,491
Cost of sales, excluding depreciation 49,921 48,818
Selling, general, and administrative expenses 12,111 10,297
Depreciation 1,442 1,320
Amortization of goodwill and other intangibles 2,344 2,238
Management fees and other 805 764
------- -------
Operating income 13,038 13,054
Other (income)/expense:
Interest expense 8,353 8,538
Interest income (81) (80)
Miscellaneous, net 40 (185)
------- -------
Income before income taxes 4,726 4,781
Provision for income taxes 2,127 2,151
------- -------
Net income $ 2,599 $ 2,630
======== =======
See accompanying notes to condensed consolidated financial statements.
5
<PAGE>
MOTORS AND GEARS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(ALL DOLLAR AMOUNTS IN THOUSANDS)
Three Months Ended
March 31,
-------------------
2000 1999
---- ----
Cash flows from operating activities:
Net income $ 2,599 $ 2,630
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 4,109 3,628
Provision for deferred income taxes 392 -
Changes in operating assets and liabilities net
of effects from acquisitions:
Current assets 659 (412)
Current liabilities 10,516 8,857
Non-current assets & liabilities 531 311
Payables to affiliated company (1,410) (1,540)
------- -------
Net cash provided by operating activities 17,396 13,474
Cash flows from investing activities:
Capital expenditures, net (1,187) (609)
Contingent purchase price (3,093) (3,151)
Acquisition of subsidiary (5,200) -
------- -------
Net cash used in investing activities (9,480) (3,760)
Cash flows from financing activities:
Net repayment of borrowings under revolving
credit facility and other long-term debt (6,155) (5,064)
------- -------
Net cash used in financing activities (6,155) (5,064)
Effect of exchange rate changes on cash (1,309) (683)
------- ------
Net increase in cash and cash equivalents 452 3,967
Cash and cash equivalents at beginning of period 11,260 7,016
------- -------
Cash and cash equivalents at end of period $11,712 $10,983
======= =======
See accompanying notes to condensed consolidated financial statements.
6
<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, 1999, 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,
2000 1999
---------- ------------
Raw materials $27,755 $27,262
Work in process 11,110 12,086
Finished goods 5,363 4,798
------- -------
$44,228 $44,146
======= =======
4. Acquisition of Subsidiaries
In December 1999, the Company, through its wholly-owned subsidiary FIR,
acquired certain net assets of the L'Europea Electric Hoist division
("L'Europea") from Pramac Industriale for approximately $5,200. The
purchase price, including costs incurred directly related to the
transaction, was preliminarily allocated to working capital of
approximately $1,200 and resulted in an excess purchase price over net
identifiable assets of approximately $4,000. L'Europea hoists are electric
pulleys and elevators used for lifting applications mainly found at
construction sites. As Fir's operations are included for periods ending two
months prior to the Company's year-end and interim periods (see Note 2) the
effects of this transaction are not included in the Company's results until
2000.
Acquisitions by 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.
7
<PAGE>
5. Comprehensive Income
Total comprehensive income/(loss) for the three months ended March 31, 2000
and 1999 is as follows:
Three Months Ended
March 31,
------------------
2000 1999
---- -----
Net Income $2,599 $ 2,630
Foreign currency translation adjustment (3,557) (2,227)
------ -------
Comprehensive income/(loss) $ (958) $ 403
====== =======
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, 1999 consolidated financial statements with respect
to segmentation or the measurement of segment profit.
7. Subsequent Event
Investment in Affiliate. In April 2000, the Company invested an additional
$5,059 in Class A Preferred Stock of JZ International, Ltd. JZ
International's Chief Executive Officer is David W. Zalaznick, and its
stockholders include Messrs. Jordan, Quinn, Zalaznick and Boucher, who are
the Company's directors and stockholders, as well as other partners,
principals and associates. JZ International is a merchant bank located in
London, England that is focused on making European and other international
investments. The Company is accounting for this investment under the cost
method.
8
<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,
------------------
2000 1999
----- -----
(Unaudited)
(Dollar amounts in thousands)
Net sales
Motors $58,961 $61,329
Controls 20,700 15,162
------- -------
79,661 76,491
Operating income
Motors 13,122 13,491
Controls 2,555 1,748
------- -------
15,677 15,239
Management fees and unallocated
corporate overhead 2,639 2,185
------- -------
Total operating income 13,038 13,054
Interest expense 8,353 8,538
Interest income and other (41) (265)
------- -------
Income before income taxes $ 4,726 $ 4,781
======= =======
Consolidated Results of Operations
Net sales for the first quarter of 2000 increased 4% to $79.7 million, up
$3.2 million from the first quarter of 1999. The sales growth was driven by
strong performance in the controls segment of the business, offset
partially by a slight decrease in motor sales. Net sales of elevator
controls increased 30% in the first quarter of 2000 as compared to the same
period of 1999. Net sales of subfractional motors for the first quarter
decreased 5%, largely due to weakness in the vending markets. Net sales of
fractional/integral motors decreased 2% driven mostly by a negative impact
of foreign currency translation on the Company's foreign operations.
Operating income for the first quarter of 2000 remained constant with 1999.
The operating income of the controls segment increased 46% while the motors
segment decreased 3%. These variances are primarily the result of the sales
variances described above. Gross margins increased from 36.2% to 37.3%
mostly as a result of product design changes, manufacturing process
improvements and material cost savings experienced throughout the Company
due to efforts put forth by the Company's sourcing council. Operating
margins decreased from 17.1% to 16.4%, mainly as the result of a slight
increase in corporate expenses.
9
<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, 2000 was $17.4 million, compared to $13.5 million
provided from operating activities during the same period in 1999. Improved
working capital performance during the first quarter of 2000 as compared to
the same period of 1999 is the main factor contributing to the increase in
cash flow from operating activities.
Investing activities. In the first quarter of 2000, the Company made a $3.1
million contingent purchase price payment to the sellers of ADC as a result
of ADC 1999 operations exceeding certain targeted levels. These targeted
levels were established in the acquisition agreement between the Company
and the sellers of ADC. In addition, the Company effectively acquired
L'Europea for $5,200 during the first quarter of 2000(see Note 4 to the
Company's condensed consolidated financial statements).
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 2000.
The Company is party to a Credit Agreement under which the Company is able
to borrow up to approximately $75.0 million 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 May 11, 2000, the Company has approximately $45.4
million of available funds under this Credit 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 credit facility. The Company
further expects that these sources will enable it to meet its cash
requirements for working capital, capital expenditures, interest, taxes,
and debt repayment for at least the next 12 months.
10
<PAGE>
Impact of Year 2000
The Company experienced no significant disruptions in mission critical
information technology and non-information technology systems and believes
those systems successfully responded to the Year 2000 date change. The
total cost of the Year 2000 project was approximately $3.3 million and was
funded through operating cash flows and capital leases. The majority of
these costs have been capitalized as they relate to new software and
equipment.
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, 2000 the Company had variable rate debt
outstanding of $22.0 million with an interest rate of approximately 8.25%.
A one percentage point increase in interest rates would increase the amount
of annual interest paid by approximately $0.2 million. The Company does not
believe that its market risk financial instruments on March 31, 2000 would
have a material effect on future operations or cash flow.
The Company is exposed to market risk from changes in foreign currency
exchange rates, including fluctuations in the functional currency of
foreign operations. The functional currency of operations outside the
United States is the respective local currency. Foreign currency
translation effects are included in accumulated other comprehensive income
in shareholder's equity.
11
<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
12
<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/ Daniel Drury
------------------------------
Daniel Drury
Chief Financial Officer
May 11, 2000
13
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<S> <C>
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<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-END> MAR-31-2000
<CASH> 11,712
<SECURITIES> 0
<RECEIVABLES> 55,503
<ALLOWANCES> (1,115)
<INVENTORY> 44,228
<CURRENT-ASSETS> 113,944
<PP&E> 50,499
<DEPRECIATION> (29,529)
<TOTAL-ASSETS> 385,420
<CURRENT-LIABILITIES> 52,635
<BONDS> 273,375
0
0
<COMMON> 1
<OTHER-SE> 23,201
<TOTAL-LIABILITY-AND-EQUITY> 385,420
<SALES> 79,661
<TOTAL-REVENUES> 79,661
<CGS> 49,921
<TOTAL-COSTS> 49,921
<OTHER-EXPENSES> 16,702
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 8,353
<INCOME-PRETAX> 4,726
<INCOME-TAX> 2,127
<INCOME-CONTINUING> 2,599
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,599
<EPS-BASIC> 0
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