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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended June 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [NO FEE REQUIRED]
For the transition period from ____to____
Commission file number 0-24802
EDELBROCK CORPORATION
(Exact name of Registrant as specified in its charter)
Delaware 33-0627520
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
2700 California Street
Torrance, California 90503
(Address of principal executive offices, including Zip Code)
Registrant's telephone number, including area code: (310) 781-2222
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
(Title and Class)
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 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 90 days.
Yes X No __
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in part II of this Form 10-K or any amendments to this
Form 10-K. [ X ]
The aggregate market value of voting stock held by non-affiliates of the
Registrant, as of September 26, 1997, was approximately $101,070,000 (based upon
the closing price for shares of the Registrant's Common Stock as reported by the
NASDAQ Stock Market for the last trading date prior to that date).
On September 26, 1997, approximately 5,250,412 shares of the Registrant's Common
Stock, $.01 par value, were outstanding.
DOCUMENT INCORPORATED BY REFERENCE
Information required by Part III (Items 10, 11, 12 and 13) is incorporated by
reference to the Company's definitive proxy statement of its 1997 Annual Meeting
of Shareholders.
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ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
PART I
Page
----
Item 1. Business.......................................................... 3
Item 2. Properties........................................................ 5
Item 3. Legal Proceedings................................................. 6
Item 4. Submission of Matters To a Vote of Security Holders............... 6
Additional Item: Executive Officers of the Company................................. 6
PART II
Item 5. Market for the Company's Common Stock and Related
Shareholder Matters............................................... 7
Item 6. Selected Consolidated Financial Data.............................. 8
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations............................... 10
Item 8. Financial Statements and Supplementary Data....................... 17
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure............................... 17
PART III
Item 10. Directors of the Company.......................................... 17
Item 11. Executive Compensation............................................ 17
Item 12. Security Ownership of Certain Beneficial
Owners and Management............................................. 17
Item 13. Certain Relationships and Related Transactions.................... 17
PART IV
Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K............................................... 17
Signatures .................................................................. 20
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PART I
Item 1. Business
GENERAL
Edelbrock Corporation (the "Company") is one of America's leading
manufacturers and marketers of specialty performance automotive and motorcycle
aftermarket parts. The Company designs, manufacturers, distributes and markets a
wide range of high quality performance products, including intake manifolds,
carburetors, camshafts, cylinder heads, exhaust systems, shock absorbers and
other components designed for most domestic V8 and selected V6 engines. These
products are designed to enhance street, off-road, recreational and competition
vehicle performance through increased horsepower, torque and drivability. The
Company also designs and markets products to enhance engine and vehicle
appearance, such as chrome and polished aluminum air cleaners, valve covers and
breathers. In October 1994, the Company introduced performance aluminum cylinder
heads and intake manifolds for the Harley-Davidson Evolution engine which are
distributed and marketed through over 5,000 Harley-Davidson performance shops
nationwide. In March 1995, the Company acquired substantially all of the assets
of QwikSilver II, Inc. of Apple Valley, California a manufacturer of aftermarket
Harley-Davidson and other motorcycle carburetors and air cleaners.
In May 1997, the Company entered the performance shock absorber market
for a range of all aftermarket applications with certain restrictions utilizing
RICOR Racing and Development, L.P.'s ("RICOR") patented "inertia sensitive
system." In connection therewith, the Company has entered into a royalty
agreement with RICOR and issued warrants to purchase common stock of the
Company. See Notes 5 and 9 of Notes to Consolidated Financial Statements.
The Company's business strategy is to capitalize on recognition of the
"Edelbrock" brand name and strong distribution network to expand its leading
position in the specialty performance automotive and motorcycle aftermarket
parts market. The Company plans to achieve its business objective by pursuing
the following business strategies:
o Broaden Application of Core Products.
o Expand Market Share in Compatible Product Lines.
o Expand Presence in Chain Stores.
o Introduce New Products.
o Expand Production Capacity.
o Reduce Manufacturing Costs through Vertical Integration and Automation.
HISTORY
The Company was founded in 1938 in Los Angeles by O. Victor Edelbrock,
Sr. Mr. Edelbrock utilized his experience as a mechanic and a winning car racer
to design and produce manifolds and cylinder heads. Upon his father's death in
1962, O. Victor Edelbrock, Jr., also a racing enthusiast who began designing
manifolds in the 1960's, assumed his father's position as Chief Executive
Officer of the Company. In 1967, the Company moved its operations to El Segundo,
California. The Company continued designing and marketing new generations of
manifolds throughout the 1960's and 1970's. In the 1980's, the Company expanded
it product line to include camshaft kits, valve train parts, exhaust systems and
other performance components. In 1987, the Company moved to its present location
in Torrance, California and in 1990 built its own sand-cast aluminum foundry in
San Jacinto, California. In the 1990's, the Company has continued to expand its
product lines to include carburetors, aluminum cylinder heads, aluminum water
pumps, fuel-injected manifolds and aftermarket performance parts for
Harley-Davidson motorcycles. In 1995, the Company completed the construction of
a 37,000 square foot building in Torrance, California to house its exhaust
products division and a 15,000 square foot facility to expand the Company's
Foundry warehouse space in San Jacinto, California. In late 1996, the Company
completed construction of a 45,000 square foot facility adjacent to its existing
exhaust facility which is being utilized primarily for the manufacture of shock
absorbers, as well as to accommodate additional corporate expansion including
warehouse overflow. In May 1997, the Company began production on a new line of
performance aftermarket shock absorbers.
In July 1997, the Company completed construction of a 12,000 and 15,000
square foot facility on Company owned property at its Foundry location in San
Jacinto, California. The 12,000 square foot facility is being utilized for
additional Foundry warehouse space and the 15,000 houses the Company's
"QwikSilver" motorcycle parts division, which was relocated from Apple Valley,
California.
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RESEARCH AND DEVELOPMENT
The Company seeks to develop new products to respond to consumer
demand, to increase performance characteristics of existing product lines and to
enter into new product lines. For the fiscal year ended June 30, 1995, 1996 and
1997 research and development expenditures totalled $1,963,000, $2,227,000 and
$2,874,000, respectively.
PRODUCTS
The Company offers over 1,800 performance automotive and motorcycle
aftermarket parts for street, offroad, recreational and competition use. The
Company's products are designed to enhance the engine's performance through
increased horsepower, torque and drivability primarily by improving induction of
fuel and air into and exhaust out of the engine. The Company also designs and
markets products to improve appearance.
The Company's present lines include, among other items, intake
manifolds, which accounted for 33%, 32% and 29%of the Company's revenues for
fiscal years 1995, 1996 and 1997, respectively and carburetors, which accounted
for 39%, 39% and 42% of the Company's revenue for fiscal years 1995, 1996 and
1997, respectively. See "Item 6. Selected Consolidated Financial Data" for the
Company's revenue, operating income and total assets for each of the last three
years.
DISTRIBUTION, SALES AND MARKETING
The Company has established a balanced nationwide distribution network,
which encompasses all the major channels of distribution. It is the Company's
policy to offer its products at the same price and under the same terms and
conditions in each of its channels of distribution. The Company's products are
sold in all 50 states and Canada, as well as to a lesser degree in Australia,
Europe, New Zealand and the Pacific Rim, and distributed through the following
channels:
o Retail Automotive Chain Stores.
o Mail Order Catalog Houses.
o Warehouse Distributors and Performance Specialty Dealers.
In addition to the foregoing channels of distribution, the Company
supplies select component parts to original equipment manufacturers, including
Ford Motor Company, Volvo-Penta of the Americas, Inc., General Motors
Corporation, and Mercruiser, Inc., a division of Brunswick Corporation. The
Company's aluminum foundry casts components for a variety of third-party
manufacturers.
The Company's sales are subject to seasonal variations. Customer orders
and sales are greatest in the second, third and fourth quarters of the Company's
fiscal year in anticipation of and during the spring and summer months.
Accordingly, revenues and operating income tend to be relatively higher in the
third and fourth fiscal quarters. This seasonality typically results in reduced
earnings for the Company's first and second fiscal quarters because a
significant portion of operating expenses are fixed throughout the fiscal year.
Three customers, Auto Sales, Inc., Super Shops, Inc., and Auto Zone
accounted for 12.9%, 11.7% and 11.4%, respectively, of the Company's revenues
for fiscal year 1997. For fiscal year 1996 two customers, Auto Sales, Inc. and
Super Shops, Inc., accounted for 16.0% and 12.7%, respectively, of the Company's
revenues. See Note 7 of Notes to Consolidated Financial Statements of the
Company.
As a result of events which occurred subsequent to June 30, 1997, Super
Shops, Inc. filed voluntary petitions for reorganization on September 19, 1997
under Chapter 11 of the Federal Bankruptcy Code in the United States Bankruptcy
Court. As of September 19, 1997 Super Shops owed the Company approximately
$3,182,000 for products purchased from the Company in which it retained a
security interest with respect to approximately $1.1 million of inventory. The
Company's ability to recover these amounts cannot be determined at this time
however, the Company has decided to increase its June 30, 1997 allowance for
doubtful accounts by $155,000 to $300,000 for possible loss. No assurance can be
made as to the amount and timing of the Company's ultimate loss resulting from
the settlement of Super Shops bankruptcy proceedings and it is reasonably
possible that a further material loss could ultimately result from the outcome
of this matter.
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MANUFACTURING
The Company conducts manufact, uring operations in its Torrance,
California facilities and its aluminum foundry in San Jacinto, California. The
Company manufactures products such as manifolds, cylinder heads, water pumps,
shock absorbers and exhaust systems. Approximately 56% of the Company's revenues
for fiscal year 1997 were attributable to products which were manufactured by
third-party suppliers. Magneti Marelli, U.S.A., Inc. pursuant to an agreement
with the Company, supplied the Company with all of the carburetors which it
marketed in fiscal year 1997, representing approximately 42% of the Company's
revenue for that fiscal year. The agreement extends through 1999 and is
renewable at the option of the parties. See Note 8 of Notes to Consolidated
Financial Statements.
COMPETITION
There is significant competition in the performance automotive and
motorcycle parts industries. The Company competes with other companies and
individuals in the manufacture and sale of performance automotive and motorcycle
parts. The Company competes with, among others, Weiand Automotive and Holley
Replacement Parts ("Holley") in the manifold market, Holley and Federal-Mogul
Corporation in the automotive carburetor market, Rancho Industries and Billstein
in the shock absorber market, Crane Cams and Competition Cams in the camshaft
market, World Products and TFS in the cylinder head market and Mr. Gasket,
TransDapt and Moroso in the specialty automotive accessories market. The Company
competes primarily with S & S Cycle, Incorporated and Mikuni of America in the
motorcycle aftermarket. The Company competes primarily on the basis of product
quality and brand name recognition, service and price. Some of the Company's
competitors are substantially larger and have greater financial resources than
the Company.
TRADEMARKS AND PATENTS
The Company owns over 40 trademarks and patents used in connection with
the marketing of the Company's products, including Edelbrock(R), Torker(R),
Torker II(R), Tunnel Ram(R), Signature Series(R), Performer Series(R),
QwikSilver II(R), Performer IAS(R) and Edelbrock Total Power Package(R). The
Company believes that its trademarks and patents and the associated recognition,
reputation and customer loyalty contribute to the success of the Company's
business operations. The Company possesses a number of United States and
international patents, including three United States patents relating to the
Company's manifolds, all of which also contribute to the success of the
Company's operations. The Company's patents expire between 1997 and 2013.
EMPLOYEES
As of June 30, 1997 the Company employed 531 persons in the operation
of its business. The Company believes that its ability to attract and retain
qualified management personnel and skilled production technicians and marketing
employees will be a key determinant of the Company's continued success. The
Company has not entered into any collective bargaining agreements with any
unions and believes that its overall relations with its employees are good.
Item 2. Properties
The Company owns its headquarters and manufacturing facilities located
in buildings of approximately 142,000, 45,000 and 37,000 square feet,
respectively, in Torrance, California, and three buildings for its Foundry
operations located in approximately 73,000, 15,000, and 12,000 square feet in
San Jacinto, California. The 73,000 square foot facility and related land are
subject to a deed of trust which secures certain indebtedness incurred in
connection with the construction of the facility. See Note 3 of Notes to
Consolidated Financial Statements.
In December 1996, the Company completed construction of a new 45,000
square foot facility on Company owned property contiguous to its current exhaust
facility in Torrance, California. This facility is being utilized primarily for
the manufacture of performance aftermarket shock absorbers and to house
additional corporate expansion including warehouse overflow.
In July 1997, the Company completed construction of 12,000 and 15,000
square foot facilities on Company owned property at its Foundry location in San
Jacinto, California. The 12,000 square foot facility is being utilized for
additional Foundry warehouse space and the 15,000 square foot facility houses
the Company's "QwikSilver" motorcycle parts division, which was relocated from
Apple Valley, California.
The Company believes that its existing facilities are adequate to meet
its current requirements.
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Item 3. Legal Proceedings
There is no material legal proceeding to which the Company is a party
or to which any of its properties are subject.
Item 4. Submission of Matters to a Vote of Security Holders.
No matter was submitted, during the fourth quarter of the fiscal year
covered by this report, to a vote of shareholders.
Executive Officers of the Company.
EXECUTIVE OFFICERS
The following sets forth the name, age and business experience of the
executive officers of the Company as of June 30, 1997:
NAME AGE POSITION
- ---- --- ---------
O. Victor Edelbrock...........................60 Chairman, President and Chief Executive Officer
Jeffrey L. Thompson...........................44 Executive Vice-President, Chief Operating Officer and Director
Aristedes T. Feles............................29 Vice-President of Finance and Director
Adrian Murray.................................42 Vice-President of Sales
Wayne P. Murray...............................45 Vice-President of Manufacturing
Jack B. Mayberry..............................50 Vice-President of Research & Development
Cathleen Edelbrock............................37 Vice-President of Advertising, Secretary and Director
Nancy Edelbrock...............................60 Treasurer
Ronald L. Webb................................63 Executive Vice-President of Edelbrock Foundry Corp.
O. Victor Edelbrock has been Chairman, President and Chief Executive
Officer of the Company since 1962. Mr. Edelbrock is the husband of Nancy
Edelbrock and the father of Camee Edelbrock.
Jeffrey L. Thompson has been the Executive Vice-President/General Manager
and Chief Operating Officer of the Company since December 1988. He is also a
member of the board of directors of the Specialty Equipment Market Association.
Mr. Thompson has been a director of the Company since 1994.
Aristedes T. Feles has been the Vice President of Finance since July 1996
and was previously Controller for the Company (since 1992). Prior to 1992, Mr.
Feles was employed as a senior accountant at BDO Seidman, LLP (since 1989). Mr.
Feles has been a director of the Company since July 1996.
Adrian Murray has been Vice-President of Sales for the Company since 1992.
Mr. Murray was previously the National Sales Manager for the Company (since
1988).
Wayne P. Murray has been employed in various positions by the Company since
1969 and has been Vice-President of Manufacturing for the Company since 1984.
Jack B. Mayberry has been the Vice President of Research & Development for
the Company since 1995. Prior to joining the Company, Mr. Mayberry was a captain
in the U.S. Navy where he served for 25 years.
Cathleen Edelbrock has been Vice-President of Advertising for the Company
since 1993. Prior to 1993, Ms. Edelbrock was Director of Advertising (since
1987), and has served in various other capacities with the Company (since 1978).
Ms. Edelbrock is a director of the Company. Ms. Edelbrock is the daughter of
O.Victor Edelbrock Jr., and Nancy Edelbrock.
Nancy Edelbrock has been Treasurer of the Company since 1968 and has been
involved in all facets of the business since 1962. Mrs. Edelbrock is the wife of
O.Victor Edelbrock Jr. and the mother of Camee Edelbrock.
Ronald L. Webb has been Executive Vice-President of Edelbrock Foundry Corp.
since 1989. Prior to 1989, Mr. Webb served as Vice-President, Operations and in
various other capacities for Buddy Bar Castings (since 1958).
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PART II
Item 5. Market for Company's Common Stock and Related Shareholder Matters.
The Company's Common Stock is traded over-the-counter on the National
Association of Securities Dealers Automated Quotation System ("NASDAQ") Stock
Market under the symbol EDEL. The following table sets forth the range of high
and low closing sales prices, as reported on the NASDAQ Stock Market for fiscal
years 1996 and 1997. On September 26, 1997 the Company had 86 holders of record
of its Common Stock and 5,250,412 shares outstanding and a closing price of
$19.25.
Price Range of Common Stock
--------------------------------
Year Ended June 30, 1996 High Low
---- ---
First Quarter $17.00 $12.88
Second Quarter $15.75 $13.75
Third Quarter $16.25 $12.25
Fourth Quarter $19.50 $14.00
Year Ended June 30, 1997 High Low
---- ---
First Quarter $17.75 $15.25
Second Quarter $17.25 $14.75
Third Quarter $20.75 $15.25
Fourth Quarter $22.25 $17.25
Since its initial public offering, the Company has not declared or paid
a dividend on its common stock. The Company currently plans to retain all of its
earnings to support the development and expansion of its business and has no
present intention of paying any dividends on the Common Stock in the foreseeable
future. However, the Board of Directors of the Company will review the dividend
policy periodically to determine whether the declaration of dividends is
appropriate.
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tem 6. Selected Consolidated Financial Data.
The following Selected Consolidated Financial Data is qualified in its
entirety by, and should be read in conjunction with, the Consolidated Financial
Statements of the Company and the notes thereto and with "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
contained elsewhere in this Form 10-K. The Balance Sheet Data at June 30, 1997
and the Income Statement Data and the Other Data for each of the three fiscal
years in the period ended June 30, 1997 have been derived from the audited
Consolidated Financial Statements of the Company, which were audited by BDO
Seidman, LLP as indicated in their report included elsewhere in this Form 10-K.
The Balance Sheet Data at June 30, 1995 and the Income Statement Data and the
Other Data for each of the two fiscal years in the period ended June 30, 1994
have been derived from audited financial statements not included herein.
INCOME STATEMENT DATA: 1993 1994 1995 1996 1997
------------ ------------ ------------ ------------ ------------
Revenues $ 46,136,000 $ 53,509,000 $ 68,792,000 $ 79,032,000 $ 87,120,000
Cost of sales 26,536,000 31,012,000 40,883,000 47,043,000 52,163,000
------------ ------------ ------------ ------------ ------------
Gross profit 19,600,000 22,497,000 27,909,000 31,989,000 34,957,000
------------ ------------ ------------ ------------ ------------
Operating expenses
Selling, general and administrative 13,378,000 15,203,000 17,172,000 20,392,000 21,308,000
Research and development 1,494,000 1,862,000 1,963,000 2,227,000 2,874,000
------------ ------------ ------------ ------------ ------------
------------
Total operating expenses 14,872,000 17,065,000 19,135,000 22,619,000 24,182,000
------------ ------------ ------------ ------------ ------------
Operating income 4,728,000 5,432,000 8,774,000 9,370,000 10,775,000
Interest expense 726,000 672,000 552,000 344,000 340,000
Interest income - - 344,000 523,000 317,000
Other income - - - 274,000 469,000
------------ ------------ ------------ ------------ ------------
Income from continuing operations
before taxes on income and
cumulative effect of change in
accounting principle 4,002,000 4,760,000 8,566,000 9,823,000 11,221,000
Taxes on income from continuing
operations 1,493,000 1,740,000 3,336,000 3,346,000 4,076,000
------------ ------------ ------------ ------------ ------------
Income from continuing operations
before cumulative effect of change
in accounting principle 2,509,000 3,020,000 5,230,000 6,477,000 7,145,000
Income (loss) from discontinued
operations, net of tax (1) (478,000) (62,000) 1,086,000 - -
------------ ------------ ------------ ------------ ------------
Income before cumulative effect of
change in accounting principle 2,031,000 2,958,000 6,316,000 6,477,000 7,145,000
Cumulative effect on prior years
of change in accounting for
taxes on income (2) - 201,000 - - -
------------ ------------ ------------ ------------ ------------
Net income $ 2,031,000 $ 3,159,000 $ 6,316,000 $ 6,477,000 $ 7,145,000
============ ============ ============ ============ ============
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Year Ended June 30,
---------------------------------------------------------------------------------------
PER SHARE DATA: 1993 1994 1995 1996 1997
---------------- ------------- -------------- -------------- -------------
Income per share before change
in accounting principle and
discontinued operations $ 0.67 $ 0.81 $ 1.10 $ 1.24 $ 1.36
Income (loss) per share from
discontinued operations,
net of tax (0.13) (0.02) 0.22 - -
Primary net income per share $ 0.54 $ 0.84 $ 1.32 $ 1.24 $ 1.36
Fully diluted net income per share $ 0.54 $ 0.84 $ 1.32 $ 1.24 $ 1.32
Primary weighted average shares outstanding 3,750,000 3,750,000 4,772,000 5,241,000 5,244,000
Fully diluted weighted average
shares 3,750,000 3,750,000 4,772,000 5,241,000 5,424,000
outstanding
OTHER DATA:
Capital expenditures $ 2,026,000 $ 2,396,000 $ 12,221,000 $ 4,342,000 $ 8,602,000
Dividends - - - - -
June 30,
---------------------------------------------------------------------------------------
BALANCE SHEET DATA:
(In thousands) 1993 1994 1995 1996 1997
---------------- ------------- -------------- ------------- -------------
Working capital $ 7,514 $ 7,772 $20,033 $23,953 $26,428
Total assets 47,377 50,272 62,771 66,430 77,868
Total long-term debt 19,355 17,278 4,657 3,148 2,178
Shareholders' equity 15,602 18,761 41,923 48,420 55,650
(1) On May 1, 1995, the Company disposed of substantially all of its real
estate operations. See Management's Discussion and Analysis of Financial
Condition and Results of Operations and Note 6 of Notes to Consolidated
Financial Statements for further information regarding the Company's real
estate activities.
(2) On July 1, 1993, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 109, "Accounting for Income Taxes."
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Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operation.
The following is a discussion and analysis of the consolidated
financial condition and results of operations of the Company for the fiscal
years ended June 30, 1995, 1996 and 1997. The following should be read in
conjunction with the Consolidated Financial Statements and related notes
appearing elsewhere herein.
OVERVIEW
The Company was founded in 1938, and is one of America's leading
manufacturers and marketers of specialty performance automotive and motorcycle
aftermarket parts. The Company designs, manufactures, packages and markets
performance automotive and motorcycle aftermarket parts, including intake
manifolds, carburetors, shock absorbers, camshafts, cylinder heads, exhaust
systems and other performance components for most domestic V8 and selected V6
engines. In addition, the Company offers performance aftermarket manifolds,
cylinder heads, camshafts, air cleaners, and carburetors for Harley-Davidson
motorcycles. The Company currently offers over 1,800 performance automotive and
motorcycle aftermarket parts for street, off-road, recreational and competition
use.
Product Mix
The Company manufactures its own products and purchases other products
designed to the Company's specifications from third-party manufacturers for
subsequent packaging and distribution to the Company's customers. Generally, the
Company can achieve a higher margin on those products which it manufactures as
compared to those purchased from third-party manufacturers. Accordingly, the
Company's results of operations in any given period are affected by product mix.
For example, in recent years, the Company has experienced significant growth in
the sale of carburetors, which it has purchased pursuant to a long-term contract
with a third-party manufacturer.
Product Concentration
Historically, the Company has derived a substantial portion of its
revenues from the sale of intake manifolds and carburetors. For the fiscal years
ended June 30, 1996 and 1997 approximately 32% and 29% of revenues were derived
from the sales of intake manifolds and 39% and 42% from the sales of
carburetors, respectively.
Manufacturing Capacity
During the most recent peak manufacturing period, the Company used
substantially all of its manufacturing capability for producing its specialty
performance automotive and motorcycle aftermarket parts. In fiscal year 1995,
the Company expanded its manufacturing capacity by constructing an additional
37,000 square-foot manufacturing facility in Torrance, California to house its
exhaust division, and a 15,000 square-foot expansion of its foundry operation on
Company-owned property adjacent to its current San Jacinto, California foundry
site.
In December 1996, the Company completed construction of a new 45,000
square foot facility on Company owned property contiguous to its current Exhaust
facility in Torrance, California. This facility is being utilized primarily for
the manufacture of performance aftermarket shock absorbers and to house
additional corporate expansion including warehouse overflow.
In July 1997, the Company completed construction of 12,000 and 15,000
square foot facilities on Company owned property at its Foundry location in San
Jacinto, California. The 12,000 square foot facility is being utilized for
additional Foundry warehouse space and the 15,000 square foot facility houses
the Company's "QwikSilver" motorcycle parts division, which was relocated from
Apple Valley, California.
Seasonality
The Company's sales are subject to seasonal variations. Customer orders
and sales are greatest in the second, third and fourth quarters of the Company's
fiscal year in anticipation of and during the spring and summer months.
Accordingly, revenues and operating income tend to be relatively higher in the
third and fourth fiscal quarters. This seasonality typically results in reduced
earnings for the Company's first and second fiscal quarters because a
significant portion of operating expenses are fixed throughout the fiscal year.
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Real Estate
In May 1995, the Company completed the sale of substantially all of its
Arizona real estate portfolio to Arizona Presidio Industrial Partners for $17.1
million. The $17.1 million sales price included $1.9 million for real estate
held by two partnerships, of which the Company is a general partner, and $0.5
million was for real estate held by the Company Employee Stock Ownership Plan
("ESOP"). The Company netted, after payment of debt and sales expenses, cash of
$3.2 million and 2.31 acres of prime industrial property contiguous to its new
exhaust facility in Torrance, California. The partnerships and ESOP netted cash
of approximately $536,000 and $435,000, respectively. Through the sale, the
Company was able to eliminate approximately $10.0 million in debt and the
varying degrees of risk associated with real property investments. In addition,
through this sale, the Company has focused its efforts on automotive and
motorcycle operations. The results of the real estate division have been
reported separately as discontinued operations.
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RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the
percentage of revenues of certain items in the Company's consolidated statements
of income and the percentage change in each item from the prior period.
Percentage of Percentage of
Revenues for Year Year Ended Revenues for Year
Ended June 30, June 30, 1996 Ended June 30, Year Ended
---------------------- As Compared --------------------- June 30, 1997
To Year As Compared
Ended To Year Ended
1995 1996 June 30, 1995 1996 1997 June 30, 1996
------ ------ ------------ ------ ---- --------------
Revenues 100.0% 100.0% 14.9% 100.0% 100.0% 10.2%
Cost of sales 59.4 59.5 15.1 59.5 59.9 10.9
----- ----- ----- -----
Gross profit 40.6 40.5 14.6 40.5 40.1 9.3
----- ----- ----- -----
Operating expenses
Selling, general and administrative 25.0 25.8 18.8 25.8 24.5 4.5
Research and development 2.8 2.8 13.4 2.8 3.3 29.1
----- ----- ----- -----
Total operating expenses 27.8 28.6 18.2 28.6 27.8 6.9
----- ----- ----- -----
Operating income 12.8 11.9 6.8 11.9 12.4 15.0
Interest expense 0.8 0.4 (37.7) 0.4 0.4 (1.2)
Interest income 0.5 0.7 52.0 0.7 0.4 (39.4)
Other income - 0.3 NM 0.3 0.5 71.2
----- ----- ----- -----
Income from continuing operations before
taxes on income and cumulative effect of
change in accounting principle 12.5 12.4 14.7 12.4 12.9 14.2
Taxes on income from
continuing 4.9 4.2 0.3 4.2 4.7 21.8
operations
----- ----- ----- -----
Income from continuing operations 7.6 8.2 23.8 8.2 8.2 10.3
Income (loss) from discontinued operations,
net of tax 1.6 N/A N/A N/A N/A N/A
----- ----- ----- -----
Net income 9.2% 8.2% 2.5% 8.2% 8.2% 10.3%
==== ===== ===== =====
12
13
FISCAL YEAR 1996 COMPARED TO FISCAL YEAR 1997
Revenues
Revenues increased 10.2% to $87.1 million in fiscal year 1997 from
$79.0 million in fiscal year 1996. The increase was primarily the result of an
increase in volume of approximately $5.8 million, or 18.6%, in the sale of
carburetors, an increase of $1.7 million, or 38.0%, in the sale of aluminum
cylinder heads, and an increase of $600,000, or 34.4%, in the sale of
performance aftermarket parts for Harley-Davidson motorcycles.
Cost of Sales
Cost of sales increased 10.9% to $52.2 million in fiscal year 1997 from
$47.0 million in fiscal year 1996. As a percent of revenues, cost of sales
increased to 59.9% in fiscal year 1997 from 59.5% in fiscal year 1996. The
increase in cost of sales was primarily due to an increase in sales which
included a change in product mix toward third-party manufactured products,
partially offset by improved production efficiencies associated with the
introduction of high-tech machining centers used in the production of manifolds,
cylinder heads and water pumps.
Selling, General and Administrative Expense
Selling, general and administrative expenses increased 4.5% to $21.3
million in fiscal year 1997 from $20.4 million in fiscal year 1996. This
increase was primarily due to increased advertising expense, sales commissions
and salaries associated with increased sales. As a percent of sales, selling,
general and administrative expenses decreased to 24.5% in fiscal year 1997 from
25.8% in fiscal year 1996.
Research and Development Expense
Research and development expense increased 29.1% to $2.9 million in
fiscal year 1997 from $2.2 million in fiscal year 1996. As a percent of revenue,
research and development expense increased to 3.3% in fiscal year 1997 from 2.8%
in fiscal year 1996, primarily as a result of increased expenditures relating to
the development of performance aftermarket shock absorbers. The Company plans on
continuing to expand its research and development program, but through improved
efficiency, expenditures may decrease as a percent of revenue in the future.
Operating Income
Operating income increased 15.0% to $10.8 million in fiscal year 1997 from
$9.4 million in fiscal year 1996. This increase was a result of the items
mentioned above.
Interest Expense
Interest expense decreased 1.2% to $340,000 in fiscal year 1997 from
$344,000 in fiscal year 1996, primarily as a result of a decrease in average
debt outstanding.
Interest Income
Interest income decreased 39.4% to $317,000 in fiscal year 1997 from
$523,000 in fiscal year 1996. This decrease was the result of a decrease in the
balance of invested funds raised from the Company's initial public offering.
Other Income
During fiscal year 1997, the Company sold a piece of property that
resulted in a $274,000 pre-tax gain. Additionally, one of the partnerships in
which the Company holds a 50% interest sold a portion of its real estate, which
resulted in a $192,000 pretax gain.
Taxes on Income
The provision for taxes on income increased $730,000 to $4.1 million in
fiscal year 1997 from $3.3 million in fiscal year 1996. The effective tax rate
increased to 36.3% in fiscal year 1997 from 34.1% in fiscal year 1996 as a
result of a decrease in available capital expenditures relating to state income
tax credits.
Net Income
The Company's net income increased 10.3% to $7.1 million in fiscal 1997
from $6.5 million in fiscal 1996. This increase was primarily due to the items
mentioned above.
13
14
FISCAL YEAR 1995 COMPARED TO FISCAL YEAR 1996
Revenues
Revenues increased 14.9% to $79.0 million in fiscal year 1996 from
$68.8 million in fiscal year 1995. The increase was primarily the result of an
increase in volume of approximately $4.1 million, or 15.3%, in the sale of
carburetors, an increase of $0.9 million, or 24.8%, in the sale of aluminum
cylinder heads, and an increase of $900,000, or 46.4%, in the sale of exhaust
systems.
Cost of Sales
Cost of sales increased 15.1% to $47.0 million in fiscal year 1996 from
$40.9 million in fiscal year 1995. As a percent of revenues, cost of sales
increased to 59.5% in fiscal year 1996 from 59.4% in fiscal year 1995. The
increase in cost of sales was primarily due to an increase in sales which
included a change in product mix toward third-party manufactured products,
partially offset by improved production efficiencies associated with the
introduction of high-tech machining centers used in the production of manifolds,
cylinder heads and water pumps.
Selling, General and Administrative Expense
Selling, general and administrative expenses increased 18.6% to $20.4
million in fiscal year 1996 from $17.2 million in fiscal year 1995. This
increase was primarily due to increased advertising expense, sales commissions
and salaries associated with increased sales. As a percent of sales, selling,
general and administrative expenses increased to 25.8% in fiscal year 1996 from
25.0% in fiscal year 1995. This increase was the result of expenditures relating
to being a public company and increased advertising expenses including catalogs
and television advertising.
Research and Development Expense
Research and development expense increased 13.4% to $2.2 million in
fiscal year 1996 from $2.0 million in fiscal year 1995. As a percent of revenue,
research and development expense decreased to 2.8% in fiscal year 1996 from 2.9%
in fiscal year 1995. The Company plans on continuing to expand its research and
development program, but through improved efficiency, expenditures may decrease
as a percent of revenue in the future.
Operating Income Operating income increased 6.8% to $9.4 million in
fiscal year 1996 from $8.8 million in fiscal year 1995. This increase was a
result of the items mentioned above.
Interest Expense
Interest expense decreased 37.7% to $344,000 in fiscal year 1996 from
$552,000 in fiscal year 1995. This decrease was primarily due to retirement of
debt and a decrease in the principal amount of average debt outstanding.
Interest Income
Interest income increased 52.0% to $523,000 in fiscal year 1996 from
$344,000 in fiscal year 1995. This increase was the result of interest earned on
invested proceeds from the Company's initial public offering, which occurred
during the second quarter of fiscal 1995.
Other Income
During fiscal year 1996, the Company sold a piece of equipment that
resulted in a $162,000 pre-tax gain.
Additionally, the Company settled its lawsuit against a supplier of
defective foundry furnace equipment relating to the original construction of the
refractory furnaces at the Company's aluminum foundry in 1990. Under the terms
of the settlement, the Company received net proceeds of $112,000.
14
15
Taxes on Income
The provision of income taxes increased $10,000 to $3,346,000 in fiscal
year 1996 from $3,336,000 in fiscal year 1995. The effective tax rate decreased
to 34.1% in fiscal year 1996 from 38.9% in fiscal year 1995 as a result of state
income tax credits relating to research and development and manufacturing.
Net Income
The Company's net income increased 23.8% to $6.5 million in fiscal 1996
from $5.2 million (excluding net income of $1.1 million from discontinued real
estate operations) in fiscal year 1995. This increase was primarily due to the
items mentioned above.
Quarterly Results
The following table sets forth unaudited operating data for each of the
specified quarters of fiscal years 1996 and 1997. This quarterly information has
been prepared on the same basis as the annual consolidated financial statements
and, in the opinion of management, contains all adjustments necessary to state
fairly the information set forth herein. The sum of the four quarters earnings
per share may not agree to the fiscal year earnings per share due to rounding.
The unaudited quarterly financial data presented below has not been subject to a
review by BDO Seidman, LLP, Edelbrock's independent certified public
accountants.
For the Fiscal Year Ended For the Fiscal Year Ended
June 30, 1996 June 30, 1997
------------------------------------------ ------------------------------------------
First Second Third Fourth First Second Third Fourth
(In thousands except per share data) Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter
-------- -------- -------- -------- -------- -------- -------- ---------
Revenues $ 16,843 $ 18,536 $ 18,854 $ 24,799 $ 18,950 $ 20,551 $ 20,619 $ 27,000
Cost of sales 9,916 11,060 11,316 14,751 11,506 12,450 12,474 15,733
-------- -------- -------- -------- -------- -------- -------- --------
Gross profit 6,927 7,476 7,538 10,048 7,444 8,101 8,145 11,267
-------- -------- -------- -------- -------- -------- -------- --------
Operating expenses
Selling, general and 4,731 4,919 4,923 5,819 4,874 5,030 5,099 6,305
administrative 426 408 405 988 548 608 605 1,113
Research and development
-------- -------- -------- -------- -------- -------- -------- --------
Total operating expenses 5,157 5,327 5,328 6,807 5,422 5,638 5,704 7,418
-------- -------- -------- -------- -------- -------- -------- --------
Operating income 1,770 2,149 2,210 3,241 2,022 2,463 2,441 3,849
Interest expense 114 112 108 10 87 87 86 80
Interest income 157 153 51 162 116 104 21 76
Other income 192 (20) 102 - - 4 273 192
-------- -------- -------- -------- -------- -------- -------- --------
Income before taxes on income 2,005 2,170 2,255 3,393 2,051 2,484 2,649 4,037
Taxes on income 778 787 846 935 759 919 980 1,418
-------- -------- -------- -------- -------- -------- -------- --------
Net income $ 1,227 $ 1,383 $ 1,409 $ 2,458 $ 1,292 $ 1,565 $ 1,669 $ 2,619
======== ======== ======== ======== ======== ======== ======== ========
Primary net income per share $ 0.23 $ 0.26 $ 0.27 $ 0.47 $ 0.25 $ 0.30 $ 0.32 $ 0.50
======== ======== ======== ======== ======== ======== ======== ========
Fully diluted net income
per share $ 0.23 $ 0.26 $ 0.27 $ 0.47 $ 0.25 $ 0.30 $ 0.32 $ 0.48
======== ======== ======== ======== ======== ======== ======== ========
Primary weighted average
number of shares outstanding 5,240 5,240 5,241 5,241 5,242 5,242 5,246 5,248
======== ======== ======== ======== ======== ======== ======== ========
Fully diluted weighted average
number of shares outstanding 5,240 5,240 5,241 5,241 5,242 5,242 5,246 5,428
======== ======== ======== ======== ======== ======== ======== ========
15
16
LIQUIDITY AND CAPITAL RESOURCES
The Company's liquidity requirements arise primarily from the funding
of its seasonal working capital needs and capital expenditures. Historically,
the Company has met these liquidity requirements through cash flow generated
from operating activities and with borrowed funds under the Company's $2.0
million revolving credit facility ("Revolving Credit Facility"). Due to the
seasonal demand for the Company's products, the Company builds inventory during
the Company's first fiscal quarter in advance of the typically stronger selling
periods during the Company's second, third and fourth fiscal quarters.
The Revolving Credit Facility consists of an unsecured line of credit
agreement with one bank, which provides a total loan commitment not to exceed
$2.0 million, all of which was available to the Company as of September 26,
1997. The line of credit borrowings are at the applicable bank's base rate (8.5%
at June 30, 1997 ). The line of credit agreement expires in February 1998.
Net cash provided by operating activities was $5.0 million, $4.2
million and $9.9 million in fiscal years 1995, 1996, and 1997, respectively.
Because of the seasonality of the Company's business, more funds from operating
activities are generated in its third and fourth fiscal quarters. During fiscal
year 1997, the Company paid down $1.0 million on its long-term debt which
primarily represents one principal payment on its Industrial Development Bond
(see Note 3 of Notes to Consolidated Financial Statements). Under the Revolving
Credit Facility, the Company is subject to certain customary restrictive
financial requirements. The Company has been and is in compliance with all such
financial covenants as of September 26, 1997.
Accounts payable increased $4.0 million for fiscal year 1997 compared
to fiscal year 1996 primarily as a result of an increase in payment terms from a
principal supplier and costs associated with the initial production of shock
absorbers. Income taxes payable increased by $431,000 primarily as a result of
an increase in income before taxes.
Accounts receivable increased $2.1 million for fiscal year 1997
compared to fiscal year 1996, while sales increased $8.1 million for fiscal year
1997 compared to fiscal year 1996. The increase in accounts receivable in fiscal
year 1997 was primarily due to an increase in sales in the fourth quarter over
prior year and to the timing of payments from customers in connection with the
Company's dating programs.
As a result of events which occurred subsequent to June 30, 1997, Super
Shops, Inc. filed voluntary petitions for reorganization on September 19, 1997
under Chapter 11 of the Federal Bankruptcy Code in the United States Bankruptcy
Court. As of September 19, 1997 Super Shops owed the Company approximately
$3,182,000 for products purchased from the Company in which it retained a
security interest with respect to approximately $1.1 million of inventory. The
Company's ability to recover these amounts cannot be determined at this time
however, the Company has decided to increase its June 30, 1997 allowance for
doubtful accounts by $155,000 to $300,000 for possible loss. No assurance can be
made as to the amount and timing of the Company's ultimate loss resulting from
the settlement of Super Shops bankruptcy proceedings and it is reasonably
possible that a further material loss could ultimately result from the outcome
of this matter.
Inventories increased $3.3 million primarily as a result of initial raw
material purchases relating to the Company's introduction of performance
aftermarket shock absorbers and an overall increase in inventory levels relating
to increased sales.
The Company believes that funds generated from operations and funds
available under the Revolving Credit Facility will be adequate to meet its
working capital, debt service and capital expenditure requirements through
fiscal 1998.
The Company's total capital expenditures were $12.2 million in fiscal
year 1995, $4.3 million in fiscal year 1996 and $8.6 million in fiscal year
1997. The $8.6 million of capital expenditures for fiscal year 1997 included the
purchase of computerized machining centers and costs associated with the
construction of the shock absorber facility, Foundry and relocation of the
Company's QwikSilver facility. The Company anticipates making capital
expenditures of approximately $6.5 million in fiscal year 1998 primarily for the
purchase of additional machinery and equipment for the Company's newly
constructed shock absorber facility, and additional capital equipment to
increase the company's production capacity.
RECENT ACCOUNTING PRONOUNCEMENTS
In March 1997, the FASB issued Statement of Financial Accounting
Standards No. 128, "Earnings per Share" (SFAS 128). This pronouncement provides
a different method of calculating earnings per share than is currently used in
accordance with APB 15, "Earnings per Share." SFAS 128 provides for the
calculation of Basic and Diluted earnings per share. Basic earnings per share
includes no dilution and is computed by dividing income available to common
shareholders by the weighted average number of common shares outstanding for the
period. Diluted earnings per share reflects the potential dilution of securities
that could share in the earnings of an entity, similar to fully diluted earnings
per share. This pronouncement is effective for fiscal years and interim periods
ending after December 15, 1997. Early adoption is not permitted. The Company has
not determined the effect, if any, of adoption on its EPS computations.
INFLATION
General inflation over the last three years has not had a material
effect on the Company's cost of doing business and it is not expected to have a
material effect in the foreseeable future.
16
17
"SAFE HARBOR" STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995: Any statements set forth above which are not historical facts are
forward-looking statements that involve known and unknown risks and
uncertainties that could cause actual results to differ materially from those in
the forward-looking statements. Potential risks and uncertainties include such
factors as the financial strength and competitive pricing environment of the
automotive and motorcycle aftermarket industries, product demand, market
acceptance, manufacturing efficiencies, new product development, the success of
planned advertising, marketing and promotional campaigns, and other risks
identified in documents filed by the Company with the Securities and Exchange
Commission.
Item 8. Financial Statements and Supplementary Data.
See Item 14 for an index to the consolidated financial statements and
supplementary financial information which are included herewith.
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure.
None.
PART III
Item 10. Directors of the Company
The information required by Item 10 will be set forth in the Proxy
Statement under the caption "Directors of the Company" and is incorporated
herein by reference.
Item 11. Executive Compensation.
The information required by Item 11 will be set forth on the Proxy
Statement under the caption "Executive Compensation" and is incorporated herein
by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The information required by Item 12 will be set forth on the Proxy
Statement under the caption "Security Ownership of Certain Beneficial Owners and
Management" an is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions.
None
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
Financial Statements and Schedules. See Index to Financial Statements
which appears on page 21 hereof.
Other Financial Data. See Summary of Selected Financial Data, which
appears in "Item 6. Selected Financial Data."
Reports on Form 8-K.
The Company filed no Reports on Form 8-K during the last quarter of the
1997 fiscal year.
Exhibits. The exhibits listed on the Exhibit Index following the
signature page hereof are filed herewith in response to this Item.
17
18
EDELBROCK CORPORATION
EXHIBIT INDEX
Number and Sequential
Description of Page
Exhibit Number
- ------------------- -----------------
3.(i).1 Form of Amended and Restated Certificate of Incorporation
of the Company (filed as Exhibit 3(i).1 to the Company's
Registration Statement on Form S-1 (File No. 33-83258)
and incorporated herein by reference)
3(ii).1 Form of Amended and Restated Bylaws of the Company (filed
as Exhibit 3(ii).1 to the Company's Registration
Statement on Form S-1 (File No. 33-83258) and
incorporated herein by reference)
4.1 Specimen Common Stock Certificate (filed as Exhibit 4.1 to the
Company's Registration Statement on Form S-1 (File No. 33-83258) and
incorporated herein by reference)
4.2 Form of Edelbrock Corp. Employee Stock Ownership Plan
(filed as Exhibit 4.2 to the Company's Registration Statement on Form
S-1 (File No. 33-83258) and incorporated herein by reference)
10.1 Form of Indemnification Agreement entered into with officers and
directors of the Company (filed as Exhibit 10.1 to the Company's
Registration Statement on Form S-1 (File No. 33-83258) and incorporated
herein by reference)
10.2 Mutual Agreement between Weber U.S.A.and Edelbrock (filed as Exhibit
10.2 to the Company's Registration Statement on Form S-1 (File No.
33-83258) and incorporated herein by reference)
10.3 Form of Employment Agreement with O. Victor Edelbrock, Jr. (filed as
Exhibit 10.2 to the Company's Registration Statement on Form S-1 (File
No. 33-83258) and incorporated herein by reference)*
10.4 Form of Employment Agreement with Jeffrey L. Thompson (filed as Exhibit
10.4 to the Company's Registration Statement on Form S-1 (File No.
33-83258) and incorporated herein by reference)*
10.5 Form of Employment Agreement with Ronald L. Webb (filed as Exhibit 10.6
to the Company's Registration Statement on Form S-1 (File No. 33-83258)
and incorporated herein by reference)*
10.6 Form of Benefit Plans
- 1994 Incentive Equity Plan
- 1994 Stock Option Plan for Non-Employee Directors(filed as Exhibit
10.7 to the Company's Registration Statement on Form S-1 (File No.
33-83258) and incorporated herein by reference)
10.7 Loan Agreement between Edelbrock Corporation and City National Bank
(filed as Exhibit 10.8 to the Company's Registration Statement on Form
S-1 (File No. 33-83258) and incorporated herein by reference)
10.8 Business Loan Agreement between Edelbrock Corporation and Bank of
America, NT&SA (filed as Exhibit 10.9 to the Company's Registration
Statement on Form S-1 (File No. 33-83258) and incorporated herein by
reference)
18
19
EDELBROCK CORPORATION
EXHIBIT INDEX
Number and Sequential
Description of Page
Exhibit Number
- --------------------- ----------------
10.9 Business Loan Agreement between Edelbrock Foundry Corp. and Bank of
America NT&SA (filed as Exhibit 10.10 to the Company's Registration
Statement on Form S-1 (File No. 33-83258) and incorporated herein by
reference)
10.10 Industrial Development Bond Agreements (filed as Exhibit 10.11 to the
Company's Registration Statement on Form S-1 (File No. 33-83258) and
incorporated herein by reference)
10.11 Industrial Redevelopment Bond Agreements (filed as Exhibit 10.12 to the
Company's Registration Statement on Form S-1 (File No. 33-83258) and
incorporated herein by reference)
10.12 Amendments to Purchase Agreements dated December 2, 1994 (filed as Exhibit
10.5 to the Company's Quarterly Report on Form 10-Q for the Quarter Ended
March 25, 1995 and incorporated herein by reference.)
10.13 Amendment to Purchase Agreements dated April 13, 1995. (filed as Exhibit
10.6 to the Company's Quarterly Report on Form 10-Q for the Quarter Ended
March 25, 1995 and incorporated herein by reference.)
10.14 License Agreement dated February 2, 1996 between Edelbrock Corporation and
RICOR Racing and Development, L.P. (filed as Exhibit 10.1 to the
Company's Quarterly Report on Form 10-Q for the Quarter Ended December 25,
1995 and incorporated herein by reference).
10.15 Warrant Agreement dated February 2, 1996 between Edelbrock Corporation and
RICOR Racing and Development L.P. (filed as Exhibit 10.2 to the Company's
Quarterly Report on Form 10-Q for the Quarter Ended December 25, 1995 and
incorporated herein by reference).
10.16 Amendment to Business Loan Agreement between Edelbrock Corporation and
Bank of America, NT&SA. (filed as Exhibit 10.22 to the Company's Annual
Report on Form 10-K for the fiscal year ended June 30, 1996 and
incorporated herein by reference).
10.17 Second amendment to Business Loan Agreement between Edelbrock Corporation
and Bank of America, NT & SA (filed as Exhibit 10.2 to the Company's
Quarterly Report on Form 10-Q for the Quarter Ended March 25, 1997).
10.18 Amendment No. 1 to License Agreement, dated February 21, 1997 by and
between Edelbrock Corporation and RICOR Racing and Development, L.P.
(filed as Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for
the Quarter Ended March 25, 1997).
11 Calculation of Earnings per Common Share 42
21.1 Subsidiaries of the Company (filed as Exhibit 21.1 to the Company's
Registration Statement on Form S-1 (File No. 33-83258) and incorporated
herein by reference)
23.2 Consent of BDO Seidman, LLP 43
24.1 Powers of Attorney 44
27.1 Financial Data Schedule 52
- -------------
*Management Contract or compensatory plan or arrangement which is separately
identified in accordance with Item 14(a)(3) of Form 10-K.
19
20
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
it behalf by the undersigned, thereunto duly authorized.
September 26, 1997 EDELBROCK CORPORATION
By: JEFFREY L. THOMPSON
-------------------------------------------------
Jeffrey L. Thompson
Executive Vice President,
Chief Operating Officer and
Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
* President, Chief Executive
- ---------------------------------------------
O. Victor Edelbrock Officer and Chairman of the
Board (Principal Executive Officer) September 26, 1997
JEFFREY L. THOMPSON Executive Vice President and
- ---------------------------------------------
Jeffrey L. Thompson Director September 26, 1997
* Vice-President, Finance and Director September 26, 1997
- ---------------------------------------------
Aristedes T. Feles (Principal Financial Officer and
Principal Accounting Officer)
* Vice President of Advertising, September 26, 1997
- ---------------------------------------------
Cathleen Edelbrock and Director
* Director September 26, 1997
- ---------------------------------------------
E. A. Breitenbach
*
- ---------------------------------------------
Alexander Michalowski Director September 26, 1997
*
- ---------------------------------------------
Jerry Herbst Director September 26, 1997
*
- ---------------------------------------------
Richard Wilbur Director September 26, 1997
JEFFREY L. THOMPSON
- ---------------------------------------------
*By: Jeffrey L. Thompson
Attorney-in-fact
20
21
EDELBROCK CORPORATION
INDEX TO FINANCIAL STATEMENTS
Page
----
Report of independent certified public accountants........................................................ 22
Consolidated financial statements
Balance sheets................................................................................... 23
Statements of income............................................................................. 25
Statements of shareholders' equity............................................................... 27
Statements of cash flows ........................................................................ 28
Notes to consolidated financial statements....................................................... 30
21
22
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors
and Shareholders of
Edelbrock Corporation
We have audited the accompanying consolidated balance sheets of Edelbrock
Corporation as of June 30, 1996 and 1997, and the related consolidated
statements of income, shareholders' equity, and cash flows for each of the years
in the three year period ended June 30, 1997 . These 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 audit to obtain
reasonable assurance about whether the financial statements are free from
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 presentation of the
financial statements. 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 Edelbrock
Corporation at June 30, 1997 and the results of its operations and its cash
flows for each of the years in the three year period ended June 30, 1997, in
conformity with generally accepted accounting principles.
BDO SEIDMAN, LLP
Los Angeles, California
August 29, 1997, except for Notes 1 and 10
which are as of September 24, 1997
22
23
EDELBROCK CORPORATION
CONSOLIDATED BALANCE SHEETS
June 30,
---------------------------
1996 1997
----------- -----------
Assets
Cash and cash equivalents $ 8,771,000 $ 9,744,000
Accounts receivable, net of allowance for doubtful
accounts of $145,000 for 1996 and $300,000 for 1997 17,973,000 19,876,000
Inventories (Note 2) 9,735,000 13,048,000
Prepaid expenses and other 436,000 1,203,000
----------- -----------
Total current assets 36,915,000 43,871,000
----------- -----------
Property, plant and equipment (Note 3)
Land 4,658,000 4,658,000
Buildings and improvements 10,070,000 12,330,000
Machinery and equipment 22,201,000 26,311,000
Office equipment 1,579,000 2,626,000
Furniture and fixtures 722,000 821,000
Transportation equipment 4,051,000 4,440,000
----------- -----------
43,281,000 51,186,000
Less accumulated depreciation and amortization 15,899,000 19,268,000
----------- -----------
27,382,000 31,918,000
Real estate properties (Notes 3 and 6) 971,000 1,282,000
Other 1,162,000 797,000
----------- -----------
Total assets $66,430,000 $77,868,000
=========== ===========
See accompanying notes to consolidated financial statements.
23
24
EDELBROCK CORPORATION
CONSOLIDATED BALANCE SHEETS
June 30,
---------------------------
1996 1997
----------- -----------
Liabilities and shareholders' equity
Current liabilities
Accounts payable $ 9,454,000 $13,444,000
Accrued expenses
Payroll and bonuses 1,377,000 1,487,000
ESOP contribution (Note 5) 568,000 568,000
Commissions 493,000 515,000
Income taxes payable 22,000 453,000
Other 77,000 -
Current portion of long-term debt (Note 3) 971,000 976,000
----------- -----------
Total current liabilities 12,962,000 17,443,000
Long-term debt (Note 3) 3,148,000 2,178,000
Deferred income taxes (Note 4) 1,900,000 2,597,000
----------- -----------
Total liabilities 18,010,000 22,218,000
----------- -----------
Commitments and contingency (Notes 5, 9 and 10)
Shareholders' equity Common stock (Note 9)
Common stock, par value $.01 per share;
authorized 15,000,000 shares; 5,241,604 and
5,248,440 shares issued and outstanding 52,400 52,400
Paid-in capital 16,942,100 17,027,100
Retained earnings 31,425,500 38,570,500
----------- -----------
Total shareholders' equity 48,420,000 55,650,000
----------- -----------
Total liabilities and shareholders' equity $66,430,000 $77,868,000
=========== ===========
See accompanying notes to consolidated financial statements.
24
25
EDELBROCK CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
Year Ended June 30,
-------------------------------------------
1995 1996 1997
----------- ----------- -----------
Revenues (Note 7) $68,792,000 $79,032,000 $87,120,000
Cost of sales 40,883,000 47,043,000 52,163,000
----------- ----------- -----------
Gross profit 27,909,000 31,989,000 34,957,000
----------- ----------- -----------
Operating expenses
Selling, general and administrative 17,172,000 20,392,000 21,308,000
Research and development 1,963,000 2,227,000 2,874,000
----------- ----------- -----------
Total operating expenses 19,135,000 22,619,000 24,182,000
----------- ----------- -----------
Operating income 8,774,000 9,370,000 10,775,000
Interest expense 552,000 344,000 340,000
Interest income 344,000 523,000 317,000
Other income - 274,000 469,000
----------- ----------- -----------
Income from continuing operations
before taxes on income 8,566,000 9,823,000 11,221,000
Taxes on income from continuing
operations (Note 4) 3,336,000 3,346,000 4,076,000
----------- ----------- -----------
Income from continuing operations 5,230,000 6,477,000 7,145,000
Income from discontinued
operations, net of tax (Note 6) 1,086,000 - -
----------- ----------- -----------
Net income $ 6,316,000 $ 6,477,000 $ 7,145,000
=========== =========== ===========
See accompanying notes to consolidated financial statements.
25
26
EDELBROCK CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
Year Ended June 30,
-------------------------------------------------------
1995 1996 1997
--------- --------- ----------
Net income per share
Income per share from continuing
operations $1.10 $1.24 $1.36
Income per share from discontinued
operations, net of tax .22 - -
--------- --------- ----------
Primary net income per share $1.32 $1.24 $1.36
========= ========= =========
Fully diluted net income per share $1.32 $1.24 $1.32
========= ========= =========
Primary weighted average number of shares
outstanding 4,772,000 5,241,000 5,244,000
========= ========= =========
Fully diluted weighted average number of shares
outstanding 4,772,000 5,241,000 5,424,000
========= ========= =========
See accompanying notes to consolidated financial statements.
26
27
EDELBROCK CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Common Stock
------------------------------------------------------------
Class A
------------------------------
Shares Amount Shares Amount
------------ ----------- -------------- -------------
Balance, July 1, 1994 0 $- 2,400,000 $ 24,000
Initial public offering,
net of offering costs
(Note 9) 5,240,000 52,400 (2,400,000) (24,000)
Net income for year - - - -
----------- ----------- ----------- -----------
Balance, June 30, 1995 5,240,000 52,400 0 0
Net income for year - - - -
Stock options exercised 1,604 - - -
----------- ----------- ----------- -----------
Balance June 30, 1996 5,241,604 52,400 0 0
Net income for year
Stock options exercised 6,836 - - -
----------- ----------- ----------- -----------
Balance June 30, 1997 5,248,440 $ 52,400 0 $ 0
=========== =========== =========== ===========
EDELBROCK CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (Continued)
Common Stock
-------------------------
Class B
-------------------------
Total
Paid-in Retained Shareholders'
Shares Amount Capital Earnings Equity
----------- ----------- ----------- ----------- -----------
Balance, July 1, 1994 1,350,000 $ 13,500 $ 91,000 $18,632,500 $18,761,000
Initial public offering,
net of offering costs
(Note 9) (1,350,000) (13,500) 16,831,100 - 16,846,000
Net income for year - - - 6,316,000 6,316,000
----------- ----------- ----------- ----------- -----------
Balance, June 30, 1995 0 0 16,922,100 24,948,500 41,923,000
Net income for year - - - 6,477,000 6,477,000
Stock options exercised - - 20,000 - 20,000
----------- ----------- ----------- ----------- -----------
Balance June 30, 1996 0 0 16,942,100 31,425,500 48,420,000
Net income for year 7,145,000 7,145000
Stock options exercised - - 85,000 - 85,000
----------- ----------- ----------- ----------- -----------
Balance June 30, 1997 0 $ 0 $17,027,100 $38,570,500 $55,650,000
=========== =========== =========== =========== ===========
See accompanying notes to consolidated financial statements.
27
28
EDELBROCK CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
Year Ended June 30,
--------------------------------------------
1995 1996 1997
------------ ------------ ------------
Cash flows from operating activities
Net income $ 6,316,000 $ 6,477,000 $ 7,145,000
Adjustments to reconcile net income to
net cash provided by operating activities
Allowance for doubtful
accounts - - 155,000
Depreciation and amortization of
property, plant and equipment 2,700,000 3,646,000 3,922,000
Gain from sale of property,
plant and equipment (13,000) (149,000) (24,000)
Depreciation and amortization of
real estate properties 437,000 30,000 22,000
(Gain) loss from sale of real estate
properties (2,075,000) 34,000 (274,000)
Increase(decrease) in deferred income taxes (205,000) (108,000) 337,000
Equity in net income of partnerships (Note 7) 32,000 (151,000) (421,000)
Increase (decrease) from changes in
Accounts receivable (2,034,000) (3,985,000) (2,058,000)
Inventories (2,571,000) (489,000) (3,313,000)
Prepaid expenses and other assets (132,000) 88,000 (406,000)
Other assets 199,000 (367,000) 365,000
Accounts payable 934,000 (314,000) 3,989,000
Accrued expenses 1,436,000 (540,000) 486,000
------------ ------------ ------------
Net cash provided by operating activities 5,024,000 4,172,000 9,925,000
------------ ------------ ------------
Cash flows from investing activities
Acquisition of property, plant and equipment (12,221,000) (4,342,000) (8,602,000)
Proceeds from sale of property, plant
and equipment 21,000 345,000 168,000
Purchase of QwikSilver II, Inc. (314,000) - -
Acquisition of real estate properties - (5,000) (57,000)
Proceeds from sale of real estate properties, net 13,071,000 - 369,000
Investments in partnerships (310,000) (64,000) -
Distributions from partnerships 221,000 143,000 50,000
------------ ------------ ------------
Net cash provided by (used in) investing activities 468,000 (3,923,000) (8,072,000)
------------ ------------ ------------
See accompanying notes to consolidated financial statements.
28
29
EDELBROCK CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
Year Ended June 30,
--------------------------------------------
1995 1996 1997
------------ ------------ ------------
Cash flows from financing activities
Net proceeds from issuance of
common stock 16,846,000 20,000 85,000
Proceeds from issuance of long-term debt - 8,000 -
Principal payments on long-term debt (12,928,000) (1,804,000) (965,000)
------------ ------------ ------------
Net cash provided by (used in) financing activities 3,918,000 (1,776,000) (880,000)
------------ ------------ ------------
Net increase (decrease) in cash and
cash equivalents 9,410,000 (1,527,000) 973,000
Cash and cash equivalents, beginning of year 888,000 10,298,000 8,771,000
============ ============ ============
Cash and cash equivalents, end of year $ 10,298,000 $ 8,771,000 $ 9,744,000
============ ============ ============
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest $ 1,517,000 $ 422,000 $ 340,000
============ ============ ============
Income taxes $ 2,810,000 $ 4,375,000 $ 3,712,000
============ ============ ============
See accompanying notes to consolidated financial statements.
29
30
EDELBROCK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BUSINESS AND SUMMARY OF ACCOUNTING POLICIES
Business
Edelbrock Corporation and its wholly-owned subsidiaries, Edelbrock Foundry Corp.
and Edelbrock II, Inc. (collectively "the Company") are engaged in the design,
manufacture, distribution and marketing of performance automotive and motorcycle
aftermarket parts.
Consolidation Policy
The consolidated financial statements include the accounts of Edelbrock
Corporation and its wholly-owned subsidiaries. All material intercompany
accounts and transactions have been eliminated.
Accounting 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, liabilities, contingent liabilities,
revenues, and expenses at the date and for the periods that the financial
statements are prepared.
Actual results could differ from those estimates.
Cash Equivalents
For purposes of the consolidated statements of cash flows, the Company considers
all highly liquid debt instruments purchased with an initial maturity of three
months or less to be cash equivalents.
Inventories
Inventories, which consist of raw materials, work in process, and finished
goods, are stated at the lower of cost (first-in, first-out method) or market.
Property, Plant, Equipment and Depreciation
Property, plant and equipment are stated at cost. Depreciation is computed,
primarily utilizing the straight-line method, over the estimated useful lives of
the assets as follows:
Estimated
Useful Life*
(in years)
------------
Buildings and improvements 7-40
Machinery and equipment 3-7
Office equipment 5
Furniture and fixtures 7
Transportation equipment 3-10
*The average life more closely reflects the high end of the range.
30
31
EDELBROCK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BUSINESS AND SUMMARY OF ACCOUNTING POLICIES (CONTINUED)
Revenue Recognition
Revenue is recognized upon shipment of the products.
Taxes on Income
The Company has adopted SFAS No. 109, "Accounting for Income Taxes," which uses
the asset and liability method for the calculation of income taxes. The asset
and liability method requires the recognition of deferred tax assets and
liabilities for the future tax consequences of temporary differences between the
financial statement basis and the tax basis of assets and liabilities.
Concentration of Credit Risk
Financial instruments which potentially subject the Company to concentrations of
credit risk consist principally of temporary cash investments and trade accounts
receivable.
The Company places its temporary cash investments with various financial
institutions and, by policy, limits the amount of credit exposure to any one
financial institution. The Company believes that no significant credit risk
exists as these investments are made with high-credit-quality financial
institutions.
The Company's business activities and accounts receivable are with customers in
the automotive and motorcycle industries located primarily throughout the United
States. The Company performs ongoing credit evaluations of its customers and
maintains allowances for potential credit losses totaling $145,000 at June 30,
1996 and $300,000 at June 30, 1997.
As a result of events which occurred subsequent to June 30, 1997, Super Shops,
Inc. filed voluntary petitions for reorganization on September 19, 1997 under
Chapter 11 of the Federal Bankruptcy Code in the United States Bankruptcy Court.
As of September 19, 1997 Super Shops owed the Company approximately $3,182,000
for products purchased from the Company in which it retained a security interest
with respect to approximately $1.1 million of inventory. The Company's ability
to recover these amounts cannot be determined at this time however, the Company
has decided to increase its June 30, 1997 allowance for doubtful accounts by
$155,000 to $300,000 for possible loss. No assurance can be made as to the
amount and timing of the Company's ultimate loss resulting from the settlement
of Super Shops bankruptcy proceedings and it is reasonably possible that a
further material loss could ultimately result from the outcome of this matter.
Fair Value
The Company has cash and cash equivalents, receivables, and accounts payable for
which the carrying value approximates fair value due to the short-term nature of
these instruments.
The fair value of the Company's long-term debt is estimated based on the market
values of financial instruments with similar terms. Management believes that the
fair value of the long-term debt approximates its carrying value.
31
32
EDELBROCK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BUSINESS AND SUMMARY OF ACCOUNTING POLICIES (CONTINUED)
Stock-based Compensation
As of July 1, 1996, the Company adopted Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS 123), which
establishes a fair value method of accounting for stock-based compensation
plans. In accordance with SFAS 123, the Company has chosen to continue to
account for stock-based compensation utilizing the intrinsic value method
prescribed in APB 25. Accordingly, compensation cost for stock options is
measured as the excess, if any, of the fair market price of the Company's stock
at the date of grant over the amount an employee must pay to acquire the stock.
Also, in accordance with SFAS 123, the Company has provided footnote disclosure
with respect to stock-based employee compensation. The cost of stock-based
compensation is measured at the grant date based on the value of the award and
recognizes this cost over the service period. The value of the stock-based award
is determined using a pricing model whereby compensation cost is the excess of
the fair market value of the stock as determined by the model at grant date or
other measurement date over the amount an employee must pay to acquire the
stock.
Earnings Per Share Information
The computation of earnings per share is based upon the weighted average number
of common shares outstanding during the period plus (in periods in which they
have a dilutive effect) the effect of common shares contingently issuable,
primarily from the exercise of stock options and exercise of warrants, using the
treasury stock method.
The fully diluted per share computation reflects the effect of common shares
contingently issuable upon the exercise of warrants in periods in which such
exercise would cause dilution. Fully diluted earnings per share also reflect
additional dilution related to the exercise of stock options and warrants due to
the use of the market price at the end of the period, when higher than average
price for the period using the treasury stock method.
New Accounting Pronouncements
In March 1997, the FASB issued Statement of Financial Accounting Standards No.
128, "Earnings per Share" (SFAS 128). This pronouncement provides a different
method of calculating earnings per share than is currently used in accordance
with APB 15, "Earnings per Share." SFAS 128 provides for the calculation of
Basic and Diluted earnings per share. Basic earnings per share includes no
dilution and is computed by dividing income available to common shareholders by
the weighted average number of common shares outstanding for the period. Diluted
earnings per share reflects the potential dilution of securities that could
share in the earnings of an entity, similar to fully diluted earnings per share.
This pronouncement is effective for fiscal years and interim periods ending
after December 15, 1997. Early adoption is not permitted. The Company has not
determined the effect, if any, of adoption on its EPS computations.
Reclassification
Certain prior period amounts have been reclassified for comparison with the 1997
presentation.
32
33
EDELBROCK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - INVENTORIES
Inventories consist of the following:
June 30,
----------------------------
1996 1997
----------- ------------
Raw materials $ 5,421,000 $ 8,005,000
Work in process 626,000 948,000
Finished goods 3,688,000 4,095,000
----------- ------------
$ 9,735,000 $13,048,000
=========== ============
NOTE 3 - LONG-TERM DEBT AND REVOLVING LINE OF CREDIT
The Company's long-term debt consists of the following:
June 30,
-------------------------
1996 1997
---------- ----------
Mortgage note (a) $2,159,000 $2,108,000
Industrial Redevelopment Bonds (b) 1,840,000 920,000
Other 120,000 126,000
---------- ----------
4,119,000 3,154,000
Less current portion 971,000 976,000
---------- ----------
3,148,000 $2,178,000
========== ==========
(a) Mortgage note, collateralized by a trust deed on real estate with a net book
value of $3,259,000 at June 30, 1997 payable in various monthly principal and
interest payments, totalling approximately $22,000, at an interest rate of 10%,
due June 2001.
(b) Industrial Redevelopment Bonds, City of San Jacinto, California, issued to
finance the purchase and installation of foundry equipment, collateralized by a
standby letter of credit for $953,120 at June 30, 1997. The standby letter of
credit is collateralized by a financing statement and security agreement on the
foundry equipment. Payments are made to the trustee in annual principal
installments of $920,000 on June 1 through 1998. Interest is due semiannually on
June 1 and December 1 and is fixed at 7.2%.
33
34
EDELBROCK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - LONG-TERM DEBT AND REVOLVING LINE OF CREDIT (CONTINUED)
Principal payments are due on long-term debt as follows:
Years Ending June 30, Amount
------------------- ------
1998 $ 976,000
1999 62,000
2000 69,000
2001 2,047,000
Thereafter -0-
-----------
$ 3,154,000
===========
The Company has one unsecured line of credit agreement with a bank, which
provides total loan commitment not to exceed $2,000,000. All line of credit
financing is at the bank's prime rate (8.5% at June 30, 1997 ). This agreement
expires in February 1998. There were no borrowings on the line at June 30, 1996
and 1997. This obligation contains covenants, among other items, relating to
various financial ratios. The Company was in compliance with all such covenants
at June 30, 1997.
NOTE 4 - TAXES ON INCOME
The provision for taxes on income consists of the following:
Year Ended June 30,
----------------------------------------------
1995 1996 1997
----------- ----------- -----------
Current
Federal $ 3,141,000 $ 2,768,000 $ 3,450,000
State 864,000 686,000 746,000
----------- ----------- -----------
4,005,000 3,454,000 4,196,000
----------- ----------- -----------
Deferred
Federal 48,000 (188,000) (546,000)
State (24,000) 80,000 426,000
----------- ----------- -----------
24,000 (108,000) (120,000)
=========== =========== ===========
$ 4,029,000 $ 3,346,000 $ 4,076,000
=========== =========== ===========
34
35
EDELBROCK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 - TAXES ON INCOME (CONTINUED)
The differences between the U.S. federal statutory tax rate and the Company's
effective rate are as follows:
Year Ended June 30,
-----------------------------
1995 1996 1997
------- ------- -------
U.S. federal statutory tax rate 34.0% 34.0% 34.0%
State income taxes (net of federal benefits) 5.8 6.3 6.8
State income tax credits (0.4) (5.9) (2.6)
Federal income tax credits (1.1) (0.0) (1.6)
Other 0.6 (0.3) (0.3)
---- ---- ----
Effective tax rate 38.9% 34.1% 36.3%
==== ==== ====
The components of deferred taxes at June 30, 1996 and 1997 are as follows:
1996 1997
--------- ---------
Deferred tax assets
State income taxes $ 351,000 $269,000
Uniform capitalization rule 110,000 156,000
Accrued vacation 156,000 155,000
Deferred gains 15,000 15,000
Allowance for doubtful accounts 49,000 102,000
--------- ---------
$ 681,000 $697,000
========= =========
Deferred tax liabilities:
Advertising accrual $ 128,000 $ -0-
Depreciation and amortization 1,032,000 1,243,000
Like kind exchange 1,207,000 1,272,000
State tax deferred items 0 205,000
--------- ---------
$2,367,000 $2,720,000
========= =========
35
36
EDELBROCK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 - COMMITMENTS
Royalty Agreement
In February 1996, the Company entered into a Royalty Agreement with RICOR Racing
and Development L.P. ("RICOR") whereby the Company will pay RICOR a percentage
of revenue derived from the sale of shock absorbers based on the following:
Aggregate Net Sales Price Royalty
----------------------------------- --------
Up to $4,000,000 8%
From $4,000,001 to $8,000,000 7%
$8,000,001 and above 6%
Royalty expense under this agreement amounted to $12,000 during 1997. There was
no expense incurred during 1996.
Retirement Plans
An employee stock ownership plan ("ESOP") was established July 1, 1979 covering
substantially all employees of Edelbrock Corporation who have attained one year
of service. The minimum annual contribution is 1% of the total salaries or wages
of plan participants and may be supplemented with additional amounts at the
discretion of the Board of Directors. During fiscal year 1997, Edelbrock
Corporation established a 401(k) defined contribution plan to enhance the
existing ESOP for participating employees. The Company intends to match 50% of a
certain portion of participants' contribution to this plan. The maximum annual
contribution for both plans cannot exceed 25% of the total salaries or wages of
the plan participants. Contributions to the ESOP amounted to $513,000 for the
years ended June 30, 1995 and 1996 and $513,000 for both plans for the year
ended June 30, 1997.
Edelbrock Foundry Corp. maintains a defined contribution profit sharing plan
(the "Plan") covering substantially all employees who have attained one year of
service. Contributions to the Plan are at the discretion of the Company's Board
of Directors; however, contributions cannot exceed 15% of the total salaries or
wages of the plan participants. During fiscal year 1997, Edelbrock Foundry Corp.
established a 401(k) defined contribution plan to enhance the existing plan for
participating employees. The Company intends to match 50% of a certain portion
of participants' contribution to this plan. Contributions to the Plan amounted
to $50,000 for the year ended June 30, 1995, $55,000 for the year ended June 30,
1996 and $55,000 for both plans for the year ended June 30, 1997.
36
37
EDELBROCK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 - COMMITMENTS (CONTINUED)
Employment Agreements
The Company has an employment agreement with its President and Chief Executive
Officer for a term expiring on June 30, 1999. The agreement provides for a base
salary of $300,000 per year, with an annual raise and bonus to be determined by
the Compensation Committee of the Board of Directors based on such factors as
the performance of the officer and the financial results of the Company. Upon
termination of the officer's employment during the term of the agreement for any
reason other than "cause," death or voluntary termination, the Company will be
obligated to make a lump sum severance payment in an amount equal to the then
current annual base compensation plus an amount equal to the bonus paid the year
prior to such termination.
The Company also has similar employment agreements with two other officers, each
having a term expiring on June 30, 1999. Pursuant to these employment
agreements, the two officers are entitled to an aggregate base salary of
$415,000. Each officer is entitled to an annual bonus to be determined by the
Compensation Committee of the Board of Directors based on such factors as the
performance of the officer and the financial results of the Company.
NOTE 6 - DISCONTINUED OPERATIONS
On May 1, 1995, the Company completed the sale of substantially all of its
Arizona real estate portfolio to Arizona Presidio Industrial Partners for $17.1
million. The $17.1 million sales price included $1.9 million for real estate
held by two partnerships, of which the Company is a general partner, and
$500,000 for real estate held by the Company's ESOP. The Company received cash
of $3.2 million and 2.31 acres of prime industrial property, valued at $850,000,
contiguous to its new exhaust facility in Torrance, California. The partnerships
and ESOP received cash of approximately $536,000 and $435,000, respectively.
The sale resulted in a pre-tax gain of $2,075,000 ($1,268,000 after-tax or $.27
per share), which included selling costs incurred in connection with the sale.
Through the sale, the Company was able to extinguish approximately $10.0 million
of real estate debt. The results of the real estate division have been reported
separately as discontinued operations. Prior year consolidated financial
statements have been restated to present the real estate division as a
discontinued operation. Summarized results are as follows:
Year Ended
June 30, 1995
----------
Real estate revenue $2,002,000
Real estate expense 904,000
General and administrative expenses 533,000
----------
Operating income 565,000
Interest expense 861,000
Gain on sale of real estate 2,075,000
----------
Income before income taxes 1,779,000
Income tax 693,000
----------
Net income $1,086,000
==========
37
38
EDELBROCK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7 - MAJOR CUSTOMERS
A significant portion of the Company's revenues has been derived from three
major customers. For the years ended June 30, 1995, 1996 and 1997, one customer
accounted for 11.6%, 12.7% and 11.7%, respectively, of revenues, and the other
customer accounted for 16.6%, 16.0% and 12.9%, respectively, of revenues. In
addition, for the fiscal year ended June 30, 1997 one customer accounted for
11.4% of revenues. The loss of all, or substantial portion, of sales to these
customers could have a material adverse effect on the Company's results of
operations. See Note 10 of Notes to Consolidated Financial Statements.
NOTE 8 - DEPENDENCE ON KEY SUPPLIER
The Company has entered into an agreement expiring in 1999 with a key supplier
that requires, among other things, that (i) the Company sell only carburetors
manufactured by the supplier, (ii) the Company purchase a minimum number of
carburetors from the supplier and (iii) the Company prices the carburetors so as
to remain market competitive. The Company's minimum obligation under this
agreement aggregates $55,616,000, or $13,904,000 each calendar year. These
carburetors accounted for 42% of the Company's revenues for the year ended June
30, 1997. Any failure of the supplier to supply carburetors to the Company would
have a material adverse effect on the Company's results of operations, since
alternative sources for obtaining the types of carburetors marketed by the
Company are not readily available. The Company's inability to source supply with
other manufacturers, the Company's failure to sell carburetors in excess of the
minimum purchase requirement or the contractual limitations on the Company's
pricing of carburetors could have a material adverse effect on the Company.
NOTE 9 - SHAREHOLDERS' EQUITY
Initial Public Offering
On October 19, 1994, the Company consummated an initial public offering of its
Common Stock (the "Offering"). Prior to the consummation of the Offering,
Edelbrock Corp., a California corporation, was merged with and into the Company,
a Delaware corporation, which was formed on August 10, 1994.
Pursuant to the Offering, 1,600,000 shares of Common Stock were sold at $12.50
per share of which 1,250,000 shares were issued and sold by the Company and
350,000 shares were sold by the Company's principal stockholder. Proceeds to the
Company, after deducting underwriters' commissions and discounts and expenses
payable by the Company in connection with the Offering of approximately
$468,000, were $14,058,000. On November 17, 1994, the underwriters exercised
their over-allotment option to purchase 240,000 shares of Common Stock from the
Company at $12.50 per share. Proceeds from the sale of these shares that were
issued and sold by the Company totaled $2,788,000 and reflects $212,000 of
underwriters' commissions and discounts.
1994 Incentive Equity Plan
The Company adopted the Edelbrock Corporation 1994 Incentive Equity Plan (the
"Plan") that authorizes the granting of options to purchase shares of Common
Stock, stock appreciation rights, restricted shares, deferred shares,
performance shares and performance units. The maximum number of shares of Common
Stock transferred, plus the number of shares of Common Stock covered by
outstanding awards granted under the Plan, shall not, in the aggregate exceed
562,500. The stock options have been granted at the current quoted market price
at the date of grant.
38
39
EDELBROCK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 - SHAREHOLDERS' EQUITY (CONTINUED)
The options vest 20% on October 19 of each year for a period of five years. The
first 20% vested on October 19, 1995. A summary of changes in common stock
options during 1996 and 1997 are as follows:
Number of Weighted Average Aggregate
Shares Price Per Share Value
------------- -------------------- ------------------
Outstanding at July 1, 1995 357,179 $12.51 $4,468,309
Granted - - -
Exercised 1,604 12.50 20,050
Cancelled 8,070 12.50 100,875
------- ----------
Outstanding at June 30, 1996 347,505 12.51 4,347,384
Granted 23,000 17.52 402,960
Exercised 6,836 12.50 85,450
Canceled 9,341 12.50 116,762
------- ----------
Outstanding at June 30, 1997 354,328 12.84 $4,548,132
======= =========
Options exercisable (vested) at June 30, 1997 131,531 12.84 $1,688,858
======= =========
1994 Stock Option Plan For Non-Employee Directors
Additionally, the Company adopted the Edelbrock Corporation 1994 Stock Option
Plan for Non-Employee Directors ("Director Plan"), which authorizes the granting
of non qualified stock options to certain non-employee directors of the Company.
The maximum number of shares granted under the Director Plan shall not exceed
25,000 shares of Common Stock. Initial grants of options under the Director Plan
totaled 14,000, three grants of 3,500 shares each were granted at the initial
offering price of $12.50 per share and one grant of 3,500 shares was granted at
a price of $12.75 per share.
Stock Warrants
On February 2, 1996 the Company issued Warrants to purchase 100,000 shares of
common stock at $14.75 per share to RICOR Racing and Development L.P. The
Warrants were granted at the current quoted market price at the date of grant.
The Warrants vest 20% on December 31 of each year for a period of five years
with the first 20% vesting on December 31, 1996. The Warrants expire on February
2, 2006.
39
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EDELBROCK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 - SHAREHOLDERS' EQUITY (CONTINUED)
STOCK - BASED COMPENSATION
FASB Statement 123, "Accounting for Stock-Based Compensation," requires the
Company to provide pro forma information regarding net income and earnings per
share as if compensation cost for the Company's stock option plans had been
determined in accordance with the fair value based method prescribed in FASB
Statement 123. The company estimates the fair value of each stock option at the
grant date by using the Black-Scholes option-pricing model with the following
weighted-average assumption used for grants in fiscal 1996 and fiscal 1997:
dividend yield of zero percent; expected volatility of 8.1 percent; risk-free
interest rate of 6 percent; and expected lives of ten years. Under the
accounting provisions of FASB Statement 123, the Company's net income and income
per share for 1997 and 1996 would have been reduced to the pro forma amounts
indicated below:
Year Ended June 30,
---------------------------------------
Net income 1996 1997
--------------- -----------------
As reported $6,477,000 $7,145,000
Pro forma $5,955,000 $6,805,000
Income per share
As reported - primary $1.24 $1.36
As reported - fully diluted $1.24 $1.32
Pro forma - primary $1.14 $1.30
Pro forma - fully diluted $1.14 $1.25
Due to the fact that the Company's stock option programs vest over five years;
the above pro forma numbers are not indicative of the financial impact had the
disclosure provisions of FASB 123 been applicable to all years of previous
grants. The numbers above do not include the effect of options granted prior to
1996 that vested in 1996 and 1997.
The following table summarizes information about stock options and warrants
outstanding at June 30, 1997:
Options and Warrants
Outstanding Options and Warrants
Number Weighted-Average Exercisable Number
Range of Exercise Outstanding Remaining Weighted-Average Exercisable Weighted-Average
Prices at 6/30/97 Contractual Life Exercise Price at 6/30/97 Exercise Price
- ------------------- -------------- ----------------------- ---------------------- --------------- -----------------
$12.50 336,828 7.29 $12.50 134,731 $12.50
$12.75 - $13.50 8,500 7.79 $13.50 1,700 $13.19
$14.75 100,000 8.58 $14.75 20,000 $14.75
$16.00 - $19.50 23,000 9.49 $17.52 - 0 - - 0 -
- ------------------- -------------- ----------------------- ---------------------- --------------- -----------------
$12.50 - $19.50 468,328 7.68 $13.24 156,431 $12.80
=================== ============== ======================= ====================== =============== =================
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EDELBROCK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10 - SUBSEQUENT EVENT AND FOURTH QUARTER ADJUSTMENT
As a result of events which occurred subsequent to June 30, 1997, Super Shops,
Inc. filed voluntary petitions for reorganization on September 19, 1997 under
Chapter 11 of the Federal Bankruptcy Code in the United States Bankruptcy Court.
As of September 19, 1997 Super Shops owed the Company approximately $3,182,000
for products purchased from the Company in which it retained a security interest
with respect to approximately $1.1 million of inventory. The Company's ability
to recover these amounts cannot be determined at this time however, the Company
has decided to increase its June 30, 1997 allowance for doubtful accounts by
$155,000 to $300,000 for possible loss. No assurance can be made as to the
amount and timing of the Company's ultimate loss resulting from the settlement
of Super Shops bankruptcy proceedings and it is reasonably possible that a
further material loss could ultimately result from the outcome of this matter.
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