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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, 1999
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. [ ]
The aggregate market value of voting stock held by non-affiliates of the
Registrant, as of September 15, 1999, was approximately $29,245,000 (based upon
the closing price for shares of the Registrant's Common Stock as reported by the
NASDAQ Stock Market for that date). For purposes of the foregoing calculation
only, all directors and executive officers of the registrant and each person who
may be deemed to beneficially own more than 5% of the registrant's Common Stock
have been deemed affiliates.
On September 15, 1999, 5,221,939 shares of the Registrant's Common Stock, $.01
par value, were outstanding of which 1,966,047 were held by non-affiliates.
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 for its 1999 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.................................. 7
PART II
Item 5. Market for the Company's Common Stock and Related
Shareholder Matters................................................ 8
Item 6. Selected Consolidated Financial Data............................... 9
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations................................ 11
Item 7A. Quantitative and Qualitative Disclosure About Market Risk.......... 18
Item 8. Financial Statements and Supplementary Data........................ 18
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure................................ 19
PART III
Item 10. Directors of the Company........................................... 19
Item 11. Executive Compensation............................................. 19
Item 12. Security Ownership of Certain Beneficial
Owners and Management.............................................. 19
Item 13. Certain Relationships and Related Transactions..................... 19
PART IV
Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K................................................ 19
Signatures ................................................................... 22
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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, manufactures, 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 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 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 1998, 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 active 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 8 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 President and 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 its product line to include camshaft kits, valve train parts,
exhaust systems and other performance components, thus developing the "Total
Power Package" line. 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 1997, 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 1998, the Company began production on a new line of
performance aftermarket shock absorbers utilizing the aforementioned RICOR
inertia active system.
In July 1997, the Company completed construction of two facilities on
Company owned property at its Foundry location in San Jacinto, California. A
12,000 square foot facility is being utilized for additional Foundry warehouse
space and a 15,000 square foot facility houses the Company's "QwikSilver"
motorcycle parts division, which was relocated from Apple Valley, California.
In February 1999, the Company began construction of a 65,950 square foot
distribution facility on Company-owned property adjacent to its exhaust system
and shock absorber production facility in Torrance, California. The Company
expects this facility to be fully operational in October 1999. The Company will
utilize the existing 30,000 square foot distribution area at its Company
headquarters in Torrance for additional manufacturing capacity.
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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 years ended June 30, 1997, 1998, and 1999
research and development expenditures totalled $2,874,000, $2,972,000 and
$3,237,000 respectively.
PRODUCTS
The Company offers over 3,000 performance automotive and motorcycle
aftermarket parts for street, off-road, 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 29% of the Company's revenues for each of the fiscal years
1997, 1998, and 1999, and carburetors, which accounted for 42%, 40%, and 39% of
the Company's revenues for fiscal years 1997, 1998, and 1999, respectively. See
"Item 6. Selected Consolidated Financial Data" for the Company's revenues,
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. The Company's policy
is 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.
o Exporters
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.
One customer, Auto Sales, Inc., accounted for 16.0% and 14.8% of the
Company's revenues for fiscal years 1998 and 1999 respectively. For fiscal year
1997, 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.
See Note 6 of Notes to Consolidated Financial Statements of the Company.
MANUFACTURING
The Company conducts manufacturing operations in its Torrance, California
facilities and casting operations at its aluminum foundry in San Jacinto,
California. The Company manufactures products such as manifolds, cylinder heads,
water pumps, shock absorbers and exhaust systems. Approximately 52% of the
Company's revenues for fiscal year 1999 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 1999, representing approximately
41% of the Company's revenue for that fiscal year. The agreement extends through
2004 and is renewable at the option of the parties. See Note 7 of Notes to
Consolidated Financial Statements.
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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, Holley Performance Products,
Inc. ("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,
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 1999 and 2013.
EMPLOYEES
As of June 30, 1999, the Company employed 592 persons in the operation of
its business. The Company believes that its ability to attract and retain
qualified management personnel, skilled production technicians, and marketing
and administrative 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 as
well as a 15,000 square foot facility for its QwikSilver division 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 division, which was relocated from Apple Valley,
California.
In February 1999, the Company began construction of a 65,950 square foot
distribution facility on Company-owned property adjacent to its exhaust system
and shock absorber production facility. The Company expects this facility to be
fully operational in October 1999.
The Company believes that its existing facilities and those planned for the
current fiscal year are adequate to meet its current requirements.
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Item 3. Legal Proceedings
As previously disclosed, in September 1997, Super Shops Inc. filed a
voluntary petition for relief under chapter 11 of the United States
Bankruptcy code, 11 U.S.C. Section Section 101-l330 (the "Bankruptcy
Code"). At the time of Super Shops' filing, the Company was one of Super
Shops' largest unsecured creditors and in December 1997, Edelbrock
wrote-off approximately $1.9 million of unsecured trade receivables
relating to Super Shops. On January 6, 1999, the Company was served with a
complaint filed by Super Shops in the United States Bankruptcy Court for
the Central District of California wherein Super Shops sought to recover
approximately $1.8 million in allegedly preferential payments made by Super
Shops to the Company in the ninety days prior to the commencement of Super
Shops' Chapter 11 case. In June 1999, the Company settled this claim with
Super Shops. The terms of the settlement, which were accepted by Super
Shops Inc. and approved by the bankruptcy court, included a cash settlement
in the amount of $190,000 payable in eight equal monthly installments, and
Edelbrock has forgone its claim for potential recovery of its unsecured
trade receivable from Super Shops.
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.
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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, 1999:
NAME AGE POSITION
- ---- --- --------------------------------------------------------------
O. Victor Edelbrock...........................62 Chairman, President and Chief Executive Officer
Jeffrey L. Thompson...........................46 Executive Vice-President, Chief Operating Officer and Director
Aristedes T. Feles............................31 Vice-President of Finance and Director
Bryan Robb....................................32 Vice-President of Sales
Wayne P. Murray...............................47 Vice-President of Manufacturing
Jack B. Mayberry..............................52 Vice-President of Research & Development
Cathleen Edelbrock-Ford.......................39 Vice-President of Advertising, Secretary and Director
Nancy Edelbrock...............................62 Treasurer
Ronald L. Webb................................65 Executive Vice-President of Edelbrock Foundry Corp.
Rodney T. Teraishi............................33 Controller
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 Cathleen Edelbrock-Ford.
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 1997
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 1997.
Bryan Robb has been Vice-President of Sales for the Company since 1998. Mr.
Robb was previously the National Sales Manager for the Company (since 1992).
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-Ford has been Vice-President of Advertising for the
Company since 1993. Prior to 1993, Ms. Edelbrock-Ford was Director of
Advertising (since 1987), and has served in various other capacities with the
Company (since 1978). Ms. Edelbrock-Ford is a director of the Company. Ms.
Edelbrock-Ford 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 Cathleen Edelbrock-Ford.
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).
Rodney T. Teraishi has been Controller of the Company since August 1998.
Mr. Teraishi is a Certified Public Accountant and was previously employed at BDO
Seidman, LLP and Deloitte & Touche, LLP (since 1990).
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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 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 1998 and 1999. On September 15, 1999, the Company had 97 holders of record
of its Common Stock and 5,221,939 shares outstanding and a closing price of
$14.875.
Price Range of Common Stock
---------------------------
Year Ended June 30, 1998 High Low
---- ---
First Quarter $22.50 $17.38
Second Quarter $22.13 $15.50
Third Quarter $20.25 $16.00
Fourth Quarter $19.50 $16.50
Year Ended June 30, 1999 High Low
---- ---
First Quarter $18.00 $13.00
Second Quarter $17.75 $13.38
Third Quarter $17.00 $13.50
Fourth Quarter $16.00 $13.06
Since its initial public offering, the Company has not declared or paid
a dividend on its common stock.
On February 2, 1997, the Company issued Warrants to purchase 100,000
shares of common stock at $14.75 per share to RICOR Racing and Development L.P.
"RICOR." The Warrants were granted at the current quoted market price at the
date of grant. The Warrants originally vested 20% on December 31 of each year
for a period of five years with the first 20% vesting on December 31, 1997.
On February 19, 1999, for consideration of Amendment No. 4 to the
Licensing Agreement (see Note 5 of Notes to consolidated financial statements),
the Company accelerated the vesting allowing the 100,000 shares of Warrants to
become fully exercisable at the date of the amendment. In addition, the Company
issued two sets of Warrants to purchase 22,414 and 11,501 shares of common stock
at $18.00 and 22.00 per share, respectively, to RICOR. The Warrants were granted
at a price higher than the current quoted market price at the date of grant. The
first set of warrants vest at 33.3% on December 31 of each year for a period of
three years. The second set of warrants vest at 20% on December 31 of each year
for a period of 5 years. The Warrants expire on February 18, 2002 and 2006,
respectively.
The Warrants were issued pursuant to an exemption by reason of Section 4(2) of
the Securities Act of 1933.
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Item 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, 1999
and 1998 and the Income Statement Data and the Other Data for each of the three
fiscal years in the period ended June 30, 1999 have been derived from the
audited Consolidated Financial Statements of the Company included elsewhere in
this Form 10-K. The Balance Sheet Data at June 30, 1995, 1996 and 1997 and the
Income Statement Data and the Other Data for each of the two fiscal years in the
period ended June 30, 1996 have been derived from audited financial statements
not included herein.
INCOME STATEMENT DATA: 1995 1996 1997 1998 1999
------------ ------------ ------------ ------------ ------------
Revenues $ 68,792,000 $ 79,032,000 $ 87,120,000 $ 95,504,000 $108,943,000
Cost of sales 40,883,000 47,043,000 52,163,000 57,410,000 65,881,000
------------ ------------ ------------ ------------ ------------
Gross profit 27,909,000 31,989,000 34,957,000 38,094,000 43,062,000
------------ ------------ ------------ ------------ ------------
Operating expenses
Selling, general and administrative 17,172,000 20,392,000 21,308,000 24,281,000 27,564,000
Research and development 1,963,000 2,227,000 2,874,000 2,972,000 3,237,000
Write-off of uncollectible
receivable -- -- -- 1,878,000 400,000
Settlement expense -- -- -- -- 190,000
------------- ------------- ------------- ------------- -------------
Total operating expenses 19,135,000 22,619,000 24,182,000 29,131,000 31,391,000
------------- ------------- ------------- ------------- -------------
Operating income 8,774,000 9,370,000 10,775,000 8,963,000 11,671,000
Interest expense 552,000 344,000 340,000 269,000 203,000
Interest income 344,000 523,000 317,000 410,000 304,000
Other income -- 274,000 469,000 -- --
------------- ------------- ------------- ------------- -------------
Income from continuing operations
before taxes on income 8,566,000 9,823,000 11,221,000 9,104,000 11,772,000
Taxes on income from continuing
operations 3,336,000 3,346,000 4,076,000 3,304,000 4,344,000
------------- ------------- ------------- ------------- -------------
Income from continuing operations 5,230,000 6,477,000 7,145,000 5,800,000 7,428,000
Income from discontinued
operations, net of tax (1) 1,086,000 -- -- -- --
------------- ------------- ------------- ------------- -------------
Net income $ 6,316,000 $ 6,477,000 $ 7,145,000 $ 5,800,000 $ 7,428,000
============ ============ ============ =========== ============
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Year Ended June 30,
------------------------------------------------------------------------
PER SHARE DATA: 1995 1996 1997 1998 1999
------------ ------------ ------------ ------------ ------------
Income per share from
continuing operations $ 1.10 $ 1.24 $ 1.36 $ 1.10 $ 1.41
Income per share from
discontinued operations,
net of tax 0.22 -- -- -- --
------------ ---------- --------- ----------- ----------
Basic net income per share (2) $ 1.32 $ 1.24 $ 1.36 $ 1.10 1.41
Diluted net income per share (2) $ 1.32 $ 1.22 $ 1.34 $ 1.08 1.40
Basic weighted average shares
outstanding (2) 4,772,000 5,241,000 5,244,000 5,252,000 5,251,000
Diluted weighted average
shares outstanding (2) 4,799,000 5,311,000 5,352,000 5,388,000 5,302,000
OTHER DATA:
Capital expenditures $12,221,000 $4,342,000 $8,602,000 $8,076,000 $5,760,000
Dividends -- -- -- -- --
June 30,
------------------------------------------------------------------------
BALANCE SHEET DATA:
(In thousands) 1995 1996 1997 1998 1999
------------ ------------ ------------ ------------ ------------
Working capital $20,033 $23,953 $26,428 $29,260 $35,423
Total assets 62,771 66,430 77,868 84,975 94,252
Total long-term debt 4,657 3,148 2,178 2,123 2,065
Shareholders' equity 41,923 48,420 55,650 61,731 68,651
(1) On May 1, 1995, the Company disposed of substantially all of its real
estate operations.
(2) The Company adopted Statement of Financial Accounting Standards No. 128,
"Earnings Per Share," in the fiscal year ended June 30, 1998. All
historical earnings per share data have been restated to conform to this
presentation.
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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, 1997, 1998 and 1999. 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 3,000 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.
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, 1997, 1998, and 1999 approximately 29%, 29%, and 29% of revenues were
derived from the sales of intake manifolds and 42%, 40% and 39% 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 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 division, which was relocated from Apple Valley,
California.
In February 1999, the Company began construction of a 65,950 square foot
distribution facility on Company-owned property adjacent to its exhaust system
and shock absorber production facility in Torrance, California. The Company
expects this facility to be fully operational in October 1999. The Company will
utilize the existing 30,000 square foot facility at its Company headquarters in
Torrance for additional manufacturing capacity.
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 is fixed throughout the fiscal year.
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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.
Year Ended
Percentage of June 30, 1998 Percentage of Year Ended
Revenues for Year As Compared Revenues for Year June 30, 1999
Ended June 30, To Year Ended June 30, As Compared
------------------- Ended --------------------- To Year Ended
1997 1998 June 30, 1997 1998 1999 June 30, 1998
--------- -------- ------------- --------- -------- -------------
Revenues 100.0% 100.0% 9.6% 100.0% 100.0% 14.1%
Cost of sales 59.9 60.1 10.1 60.1 60.5 14.8
--------- -------- --------- --------
Gross profit 40.1 39.9 9.0 39.9 39.5 13.0
--------- -------- --------- --------
Operating expenses
Selling, general and administrative 24.5 25.4 14.0 25.4 25.3 13.5
Research and development 3.3 3.1 3.4 3.1 3.0 8.9
Settlement expense 0.0 0.0 0.0 0.0 0.4 100.0
Write-off of uncollectible receivable 0.0 2.0 100.0 2.0 0.2 (78.7)
--------- -------- --------- --------
Total operating expenses 27.8 30.5 20.5 30.5 28.8 (7.8)
--------- -------- --------- --------
Operating income 12.4 9.4 (16.8) 9.4 10.7 30.2
Interest expense 0.4 0.3 (20.9) 0.3 0.2 (24.5)
Interest income 0.4 0.4 29.3 0.4 0.3 (25.9)
Other income 0.5 0.0 100.0 0.0 0.0 0.0
--------- -------- --------- ---------
Income from operations before
taxes on income 12.9 9.5 (18.9) 9.5 10.8 29.3
Taxes on income 4.7 3.4 (18.9) 3.4 4.0 31.5
--------- -------- --------- ---------
Net Income 8.2% 6.1% (18.8%) 6.1% 6.8% 28.1%
======== ======== ========= =========
12
13
FISCAL YEAR 1999 COMPARED TO FISCAL YEAR 1998
Revenues
Revenues increased 14.1% to $108.9 million in fiscal year 1999 from $95.5
million in fiscal year 1998. The increase was primarily the result of an
increase in volume of approximately $4.4 million or 11.5% in the sale of
carburetors, an increase of $3.6 million or 44.1% in the sale of aluminum
cylinder heads and an increase of $3.4 million, or 12.5%, in the sale of intake
manifolds.
Cost of Sales
Cost of sales increased 14.8% to $65.9 million in fiscal year 1999 from
$57.4 million in fiscal year 1998. As a percent of revenues, cost of sales
increased to 60.5% in fiscal year 1999 from 60.1% in fiscal year 1998. The
increase in cost of sales was primarily due to an increase in sales which
included a change in product mix toward lower margin products, and higher labor
costs, 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 13.5% to $27.6
million in fiscal year 1999 from to $24.3 million in fiscal year 1998. This
increase resulted primarily from the Company's depreciation and related
expenditures in connection with the implementation of a state-of-the-art Oracle
database system, Company-wide deployment of QS 9000 quality standard and
increased advertising expense, sales commissions and salaries associated with
increased sales. As a percent of sales, selling, general and administrative
expenses decreased to 25.3% in fiscal year 1999 from 25.4% in fiscal year 1998.
Research and Development Expense
Research and development expense increased 8.9% to $3.2 million in fiscal
year 1999 from $3.0 million in fiscal year 1998. As a percent of revenue,
research and development expense decreased to 3.0% in fiscal year 1999 from 3.1%
in fiscal year 1998. 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.
Write-off of Uncollectible Receivable
In December 1998, the Company wrote-off approximately $400,000 of unsecured
trade receivables relating to Champion Auto Stores, Inc., a Minnesota-based
automotive parts retailer, who filed a voluntary petition for reorganization
under Chapter 11 of the Federal Bankruptcy Code in May 1998 and was further
converted to Chapter 7 Liquidation in December 1998. The $400,000 write-off
represents all of the outstanding receivable balance, a portion of which was
previously reserved.
In December 1997, the Company wrote-off approximately $1.9 million of
unsecured trade receivables relating to Super Shops, Inc., ("Super Shops") which
filed a voluntary petition for reorganization under Chapter 11 of the Federal
Bankruptcy Code and further obtained court approval in February 1998 to begin a
"Going Out of Business Sale" under Chapter 11 of the Federal Bankruptcy Code.
The Company provided for this loss during the second quarter of 1998.
Settlement Expense
On January 6, 1999, the Company was served with a complaint filed by Super
Shops in the United States Bankruptcy Court for the Central District of
California wherein Super Shops sought to recover approximately $1.8 million in
allegedly preferential payments made by Super Shops to the Company in the ninety
days prior to the commencement of Super Shops' Chapter 11 case. In June 1999,
the Company settled this claim with Super Shops. The terms of the settlement,
which were accepted, included a cash settlement in the amount of $190,000
payable in eight equal monthly installments. Edelbrock has forgone its claim for
potential recovery of its unsecured trade receivable from Super Shops.
Operating Income
Operating income increased 30.2% to $11.7 million in fiscal year 1999 from
$9.0 million in fiscal year 1998. This increase was mainly a result of the $1.9
million pre-tax charge against earnings related to the write-off of unsecured
Super Shops, Inc. trade receivables in 1998 and increased revenues and lower
operating expenses as a percent of revenues.
13
14
FISCAL YEAR 1999 COMPARED TO FISCAL YEAR 1998
Interest Expense
Interest expense decreased 24.5% to $203,000 in fiscal year 1999 from
$269,000 in fiscal 1998. This decrease was primarily due to decrease in the
principal amount of average debt outstanding.
Interest Income
Interest income decreased 25.9% to $304,000 in fiscal year 1999 from
$410,000 in fiscal year 1998. This decrease was the result of a decrease in
interest earned on invested cash.
Taxes on Income
The provision for income taxes increased $1.0 million to $4,344,000 in
fiscal year 1999 from $3,304,000 in fiscal year 1998. The effective tax rates
were 36.9% and 36.3% for fiscal year 1999 and 1998, respectively.
Net Income
The Company's net income increased 28.1% for fiscal year 1999 to $7.4
million in fiscal 1999 from $5.8 million in fiscal year 1998. This increase was
primarily due to the items mentioned above.
14
15
FISCAL YEAR 1998 COMPARED TO FISCAL YEAR 1997
Revenues
Revenues increased 9.6% to $95.5 million in fiscal year 1998 from $87.1
million in fiscal year 1997. The increase was primarily the result of an
increase in volume of approximately $5.1 million, or 16.2%, in the sale of
carburetors, an increase of $2.0 million or 32.1% in the sale of aluminum
cylinder heads and an increase of $2.8 million, or 11.4%, in the sale of intake
manifolds.
Cost of Sales
Cost of sales increased 10.1% to $57.4 million in fiscal year 1998 from
$52.2 million in fiscal year 1997. As a percent of revenues, cost of sales
increased to 60.1% in fiscal year 1998 from 59.9% in fiscal year 1997. The
increase in cost of sales was primarily due to an increase in sales which
included a change in product mix toward lower margin 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 14.0% to $24.3
million in fiscal year 1998 from to $21.3 million in fiscal year 1997. This
increase resulted primarily from the Company's depreciation and related
expenditures in connection with the implementation of a state-of-the-art Oracle
database system, company-wide development of QS 9000 quality standard and
increased advertising expense, sales commissions and salaries associated with
increased sales. As a percent of sales, selling, general and administrative
expenses increased to 25.4% in fiscal year 1998 from 24.5% in fiscal year 1997.
Research and Development Expense
Research and development expense increased 3.4% to $3.0 million in fiscal
year 1998 from $2.9 million in fiscal year 1997. As a percent of revenue,
research and development expense decreased to 3.1% in fiscal year 1998 from 3.3%
in fiscal year 1997. 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.
Provision of Uncollectible Receivable
In December 1997, the Company wrote-off approximately $1.9 million of
unsecured trade receivables relating to Super Shops, Inc., which filed a
voluntary petition for reorganization under Chapter 11 of the Federal Bankruptcy
Code and further obtained court approval in February 1998 to begin a "Going Out
of Business Sale" under Chapter 11 of the Federal Bankruptcy Code. The Company
provided for this loss during the second quarter of 1998.
Operating Income
Operating income decreased 16.8% to $9.0 million in fiscal year 1998 from
$10.8 million in fiscal year 1997. This decrease was a result of the $1.9
million pre-tax charge against earnings to offset unsecured Super Shops, Inc.
trade receivables and the increase in selling, general and administrative
expenses.
Interest Expense
Interest expense decreased 20.9% to $269,000 in fiscal year 1998 from
$340,000 in fiscal 1997. 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 29.3% to $410,000 in fiscal year 1998 from
$317,000 in fiscal year 1997. This increase was the result of interest earned on
invested cash.
Taxes on Income The provision of income taxes decreased $772,000 to
$3,304,000 in fiscal year 1998 from $4,076,000 in fiscal year 1997. The
effective tax rate for both periods was 36.3%.
Net Income The Company's net income decreased 18.8% for fiscal year 1998 to
$5.8 million in fiscal 1998 from $7.1 million in fiscal year 1997. This decrease
was primarily due to the items mentioned above.
15
16
Quarterly Results
The following table sets forth unaudited operating data for each of the
specified quarters of fiscal years 1998 and 1999. 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 Edelbrock's independent certified public accountants.
For the Fiscal Year Ended For the Fiscal Year Ended
June 30, 1998 June 30, 1999
------------------------------------- -------------------------------------
First Second Third Fourth First Second Third Fourth
(In thousands except per share data) Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter
------- ------- ------- ------- ------- ------- ------- -------
Revenues $20,438 $22,805 $22,837 $29,424 $22,595 $25,602 $26,973 $33,773
Cost of sales 12,427 14,181 13,697 17,105 13,545 15,789 16,480 20,067
------- ------- ------- ------- ------- ------- ------- -------
Gross profit 8,011 8,624 9,140 12,319 9,050 9,813 10,493 13,706
------- ------- ------- ------- ------- ------- ------- -------
Operating expenses
Selling, general and
administrative 5,669 5,403 5,699 7,510 6,272 6,403 6,733 8,156
Research and development 567 608 590 1,207 678 763 746 1,050
Write-off uncollectible receivable -- 1,878 -- -- -- 400 -- --
Settlement expense -- -- -- -- -- -- 190 --
------- ------- ------- ------- ------- ------- ------- -------
Total operating expenses 6,236 7,889 6,289 8,717 6,950 7,566 7,669 9,206
------- ------- ------- ------- ------- ------- ------- -------
Operating income 1,775 735 2,851 3,602 2,100 2,247 2,824 4,500
Interest expense 69 69 68 63 51 51 50 51
Interest income 109 83 29 189 106 66 56 76
------- ------- ------- ------- ------- ------- ------- -------
Income before taxes on income 1,815 749 2,812 3,728 2,155 2,262 2,830 4,525
Taxes on income 673 276 1,040 1,315 797 838 1,046 1,663
------- ------- ------- ------- ------- ------- ------- -------
Net income $ 1,142 $ 473 $ 1,772 $ 2,413 $ 1,358 $ 1,424 $ 1,784 $ 2,862
======= ======= ======= ======= ======= ======= ======= =======
Basic net income per share $ 0.22 $ 0.09 $ 0.34 $ 0.46 $ 0.26 $ 0.27 $ 0.34 $ 0.55
======= ======= ======= ======= ======= ======= ======= =======
Diluted net income per share $ 0.21 $ 0.09 $ 0.33 $ 0.45 $ 0.26 $ 0.27 $ 0.34 $ 0.54
======= ======= ======= ======= ======= ======= ======= =======
Basic weighted average
number of shares outstanding 5,250 5,250 5,253 5,257 5,257 5,249 5,257 5,241
Effect of dilutive stock options
and warrants 161 139 145 120 60 60 49 39
------- ------- ------- ------- ------- ------- ------- -------
Diluted weighted average
number of shares outstanding 5,411 5,389 5,398 5,377 5,317 5,309 5,306 5,280
======= ======= ======= ======= ======= ======= ======= =======
16
17
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 24,
1999. The line of credit borrowings are at the applicable bank's base rate
(7.75% at June 30, 1999). The line of credit agreement expires on February 1,
2000. 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 24, 1999.
Net cash provided by operating activities was $9.9 million, $6.6 million
and $11.1 million in fiscal years 1997, 1998, and 1999, respectively. Because of
the seasonality of the Company's business, more funds from operating activities
are generated in its third and fourth fiscal quarters.
Accounts payable increased $1.3 million for fiscal year 1999 compared to
fiscal year 1998 primarily as a result of an increase in the length of payment
terms from a principal supplier and increases in normal operations.
Accounts receivable increased by $3.2 million for fiscal year 1999 compared
to fiscal year 1998, while sales increased $13.4 million for fiscal year 1999
compared to fiscal year 1998. The increase in accounts receivable in fiscal year
1999 was primarily due to the timing of payments from customers in connection
with the Company's dating programs and increased sales.
Inventories increased $379,000 primarily as a result of an overall increase
in inventory levels relating to increased sales.
The Company's total capital expenditures were $8.6 million in fiscal year
1997, $8.1 million in fiscal year 1998 and $5.8 million in fiscal year 1999. The
$5.8 million of capital expenditures for fiscal year 1999 included expenditures
for the construction of the new distribution facility, and the purchase of
computerized machining equipment and office equipment. The Company anticipates
making capital expenditures of $6.5 - $8.0 million in fiscal year 2000 primarily
for the construction of its new distribution facility and additional capital
equipment to increase the Company's production capacity, and the installation of
a new computer system and related software to automate its existing warehouse
management system.
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 2000.
YEAR 2000 COMPLIANCE
Computers, software and other equipment utilizing microprocessors that use
only two digits to identify a year in a date field may be unable to process
accurately certain date-based information at or after the year 2000. This is
commonly referred to as the "Year 2000 or Y2K issue," and the Company is
addressing this issue on several different fronts. First, the Company has
requested Year 2000 compliance certification from each of its major vendors and
suppliers for their hardware or software products and for their internal
business applications and processes. Second, the Company has established a
separate team to coordinate solutions to the Year 2000 issue for its own
internal information systems, for which it has completed substantially all
remediation for Year 2000 compliance in the fourth calendar quarter of 1998. As
part of its initial phase of its Year 2000 readiness, the Company installed
Oracle applications and database. In order to complete the Year 2000 readiness
program for its information systems, the Company upgraded its existing Oracle
applications (Version 10.6) to release 10.7. Amounts incurred in connection with
the Year 2000 compliance program were not material to the Company's financial
condition or results of operations. The Company does not believe that its
business will be adversely affected by the Year 2000 issue in any material
respect. Nevertheless, achieving Year 2000 compliance is dependent on many
factors, some of which are not completely within the Company's control,
including without limitation, the availability and cost of trained personnel and
effectiveness of software upgrades used by the Company and its vendors and
suppliers. Should either the Company's internal systems or the internal systems
of one or more significant vendors or suppliers fail to achieve Year 2000
compliance, the Company's business and its results of operations could be
adversely affected. For Year 2000 issues which, if not timely resolved, could
have a significant impact on the Company's operations, the Company has developed
contingency plans. These plans include utilizing alternative vendors and service
providers and have been designed to minimize the impact of failure to achieve
Year 2000 compliance.
17
18
RECENT ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standards No. 129, "Disclosure of
Information about Capital Structure" is effective for financial statement
periods ending after December 15, 1997. The new standard reinstates various
disclosure requirements previously in effect under Accounting Principles Board
Opinion No. 15, which has been superseded by SFAS No. 128. The adoption of SFAS
No. 129 had no effect on the Company's financial position or results of
operations.
Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income" is effective for financial statements with fiscal years
beginning after December 15, 1997. Earlier application is permitted. SFAS No.
130 establishes standards for reporting and display of comprehensive income and
its components in a full set of general purpose financial statements. The
adoption of SFAS No. 130 had no effect on the Company's financial position or
results of operations.
Statement of Financial Accounting Standards No. 131 "Disclosure about
Segments of an Enterprise and Related Information" is effective for financial
statements with fiscal years beginning after December 15, 1997. The new standard
requires that public business enterprises report certain information about
operating segments in complete sets of financial statements of the enterprise
and in condensed financial statements of interim periods issued to shareholders.
It also requires that public business enterprises report certain information
about their products and services, geographic areas in which they operate and
their major customers. The adoption of SFAS No. 131 had no effect on the
Company's results of operations.
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.
"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, the success of the
Company's, its vendors', and its suppliers' Year 2000 compliance programs and
other risks identified herein and in other documents filed by the Company with
the Securities and Exchange Commission.
Item 7A. Quantitative and Qualitative Disclosure about Market Risk.
The Company's exposure to interest rate changes is primarily related to its
variable rate debt which may be outstanding from time to time under the
Company's Revolving Credit Facility with Bank of America, NT&SA. The Company's
Revolving Credit Facility is a $2 million line of credit with an interest rate
based on the prime rate (currently 8.25%). It expires on February 1, 2000.
Because the interest rate on the Revolving Credit Facility is variable, the
Company's cash flow may be affected by increases in the prime rate. Management
does not, however, believe that any risk inherent in the variable-rate nature of
the loan is likely to have a material effect on the Company. As of the end of
fiscal 1999 and as of September 24, 1999, the Company's outstanding balance on
the Revolving Credit Facility was zero. Even if the Company were to draw down on
the line prior to its expiration and an unpredicted increase in the prime rate
occurred, it would not be likely to have a material effect.
SENSITIVITY ANALYSIS. To assess exposure to interest rate changes, the
Company has performed a sensitivity analysis assuming the Company had $1 million
balance outstanding under the Revolving Line of Credit. The monthly interest
payment, if the rate stayed constant, would be $6,875. If the prime rate rose
100 basis points, the monthly interest payment would equal $7,708. The Company
does not believe the risk resulting from such fluctuations is material nor that
the payment required would have material effect on cash flow.
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.
18
19
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure.
A report on Form 8-K was filed with the Securities and Exchange Commission
on February 8, 1999 under Item 4. Changes in Registrant's Certifying Accountant.
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 23 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
1999 fiscal year.
Exhibits. The exhibits listed on the Exhibit Index following the
signature page hereof are filed herewith in response to this Item.
19
20
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 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)
20
21
EDELBROCK CORPORATION
EXHIBIT INDEX
Number and Sequential
Description of Page
Exhibit Number
- --------------------- ----------------
10.8 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)
10.9 License Agreement dated February 2, 1997 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).
10.10 Warrant Agreement dated February 2, 1997 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).
10.11 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, 1997 and
incorporated herein by reference).
10.12 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, 1998).
10.13 Amendment No. 1 to License Agreement, dated February 21, 1998 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, 1998).
10.14 Amendment No. 1 to Business Loan Agreement between
Edelbrock Corporation and Bank of America, NT & SA
(filed as Exhibit 10.1 to the Company's Quarterly
Report on Form 10-Q for the Quarter ended December 25,
1998).
10.15 Purchasing Agreement between Edelbrock Corporation and Magneti Marelli,
USA, Inc. (filed as Exhibit 10.2 to the Company's Quarterly Report
on Form 10-Q for the Quarter ended December 25, 1998).
10.16 Amendment No. 4 to License Agreement between Edelbrock Corporation, RICOR
Racing and Development L.P., Ricor, Inc. and Mr. Don Richardson
and Amendment to Warrant 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 March 28, 1999).
10.17 Settlement Agreement between Edelbrock Corporation and Super Shops, Inc.
10.18 Amendments to Employment Agreements
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 Grant Thornton LLP
24.1 Powers of Attorney
27.1 Financial Data Schedule
*Management Contract or compensatory plan or arrangement which is separately
identified in accordance with Item 14(a)(3) of Form 10-K.
21
22
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 24, 1999 EDELBROCK CORPORATION
By: ARISTEDES T. FELES
--------------------------------------
Aristedes T. Feles
Vice President Finance, Chief
Financial Officer
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
--------- ----- ----
*
- ---------------------------------------------
O. Victor Edelbrock President, Chief Executive September 24, 1999
Officer and Chairman of the
Board (Principal Executive Officer)
*
- ---------------------------------------------
Jeffrey L. Thompson Executive Vice President and September 24, 1999
Director
ARISTEDES T. FELES
- ---------------------------------------------
Aristedes T. Feles Vice-President, Finance and Director September 24, 1999
(Principal Financial Officer and
Principal Accounting Officer)
*
- ---------------------------------------------
Cathleen Edelbrock-Ford Vice President of Advertising, September 24, 1999
and Director
*
- ---------------------------------------------
Timothy D. Pettit Director September 24, 1999
*
- ---------------------------------------------
Alexander Michalowski Director September 24, 1999
*
- ---------------------------------------------
Jerry Herbst Director September 24, 1999
*
- ---------------------------------------------
Richard Wilbur Director September 24, 1999
ARISTEDES T. FELES
- ---------------------------------------------
*By: Aristedes T. Feles September 24, 1999
Attorney-in-fact
22
23
EDELBROCK CORPORATION
INDEX TO FINANCIAL STATEMENTS
Page
----
Report of independent certified public accountants..................... 24
Consolidated financial statements
Balance sheets................................................ 26
Statements of income.......................................... 28
Statements of shareholders' equity............................ 29
Statements of cash flows ..................................... 30
Notes to consolidated financial statements.................... 32
Schedule II - Valuation and qualifying accounts........................ 42
23
24
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors
and Shareholders of
Edelbrock Corporation
We have audited the accompanying consolidated balance sheet of Edelbrock
Corporation as of June 30, 1999, and the related consolidated statements of
income, shareholders' equity, and cash flows for the year then ended. 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 audit.
We conducted our audit 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 financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Edelbrock
Corporation as of June 30, 1999, and the consolidated results of its operations
and its consolidated cash flows for the year then ended, in conformity with
generally accepted accounting principles.
We have also audited Schedule II for the year ended June 30, 1999. In our
opinion, this schedule presents fairly, in all material respects, the
information required to be set forth therein.
GRANT THORNTON LLP
Los Angeles, California
August 20, 1999
24
25
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors
and Shareholders of
Edelbrock Corporation
We have audited the accompanying consolidated balance sheet of Edelbrock
Corporation as of June 30, 1998 and the related consolidated statements of
income, shareholders' equity, and cash flows for each of the two years then
ended. 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, 1998 and the results of their operations and their cash
flows for each of the two years then ended, in conformity with generally
accepted accounting principles.
We have also audited the accompanying schedule for the year ended June 30, 1998
and 1997. In our opinion, this schedule presents fairly, in all material
respects, the information required to be set forth therein.
BDO SEIDMAN, LLP
Los Angeles, California
September 4, 1998
25
26
EDELBROCK CORPORATION
CONSOLIDATED BALANCE SHEETS
June 30,
-------------------------
1998 1999
----------- -----------
Assets
Cash and cash equivalents $ 8,370,000 $13,685,000
Accounts receivable, net of allowance for doubtful
accounts of $500,000 at 1998 and 1999 21,222,000 23,976,000
Inventories (Note 2) 16,776,000 17,155,000
Prepaid expenses and other 1,288,000 1,261,000
----------- -----------
Total current assets 47,656,000 56,077,000
----------- -----------
Property, plant and equipment (Note 3)
Land 6,242,000 6,242,000
Buildings and improvements 12,696,000 13,892,000
Machinery and equipment 30,548,000 33,617,000
Office equipment 3,012,000 3,831,000
Furniture and fixtures 953,000 974,000
Transportation equipment 4,621,000 4,985,000
----------- -----------
58,072,000 63,541,000
Less accumulated depreciation and amortization 22,396,000 26,833,000
----------- -----------
Property, plant and equipment, net 35,676,000 36,708,000
Real estate properties and partnerships 902,000 482,000
Other 741,000 985,000
----------- -----------
Total assets $84,975,000 $94,252,000
=========== ===========
See accompanying notes to consolidated financial statements.
26
27
EDELBROCK CORPORATION
CONSOLIDATED BALANCE SHEETS
June 30,
----------------------------
1998 1999
----------- -----------
Liabilities and shareholders' equity
Current liabilities
Accounts payable $14,724,000 $16,037,000
Accrued expenses
Payroll and bonuses 1,770,000 2,140,000
Retirement plans (Note 5) 527,000 618,000
Commissions 844,000 1,020,000
Income taxes payable 441,000 446,000
Other (Note 9) 28,000 324,000
Current portion of long-term debt (Note 3) 62,000 69,000
----------- -----------
Total current liabilities 18,396,000 20,654,000
Long-term debt, less current portion (Note 3) 2,123,000 2,065,000
Deferred income taxes (Note 4) 2,725,000 2,882,000
----------- -----------
Total liabilities 23,244,000 25,601,000
----------- -----------
Commitments and contingency (Notes 5 and 7)
Shareholders' equity (Note 8)
Common stock, par value $.01 per share;
15,000,000 shares authorized;
5,257,616 issued and outstanding 1998;
5,272,739 shares issued and 5,221,939 outstanding 1999 52,560 52,200
Paid-in capital 17,307,940 16,800,300
Retained earnings 44,370,500 51,798,500
----------- -----------
Total shareholders' equity 61,731,000 68,651,000
----------- -----------
Total liabilities and shareholders' equity $84,975,000 $94,252,000
=========== ===========
See accompanying notes to consolidated financial statements.
27
28
EDELBROCK CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
Year Ended June 30,
----------------------------------------------
1997 1998 1999
----------- ----------- ------------
Revenues (Note 6) $87,120,000 $95,504,000 $108,943,000
Cost of sales 52,163,000 57,410,000 65,881,000
----------- ----------- ------------
Gross profit 34,957,000 38,094,000 43,062,000
----------- ----------- ------------
Operating expenses
Selling, general and administrative 21,308,000 24,281,000 27,564,000
Research and development 2,874,000 2,972,000 3,237,000
Write-off of uncollectible receivable -- 1,878,000 400,000
Settlement expense (Note 9) -- -- 190,000
----------- ----------- ------------
Total operating expenses 24,182,000 29,131,000 31,391,000
----------- ----------- ------------
Operating income 10,775,000 8,963,000 11,671,000
Interest expense 340,000 269,000 203,000
Interest income 317,000 410,000 304,000
Other income 469,000 -- --
----------- ----------- ------------
Income before taxes on income 11,221,000 9,104,000 11,772,000
Taxes on income (Note 4) 4,076,000 3,304,000 4,344,000
----------- ----------- ------------
Net income $ 7,145,000 $ 5,800,000 $ 7,428,000
=========== =========== ============
Net income per share:
Basic net income per share $ 1.36 $ 1.10 $ 1.41
=========== =========== ============
Diluted net income per share $ 1.34 $ 1.08 $ 1.40
=========== =========== ============
Basic weighted average number of shares
outstanding 5,244,000 5,252,000 5,251,000
Effect of dilutive stock options and warrants 108,000 136,000 51,000
----------- ----------- ------------
Diluted weighted average number of shares
outstanding 5,352,000 5,388,000 5,302,000
=========== =========== ============
See accompanying notes to consolidated financial statements.
28
29
EDELBROCK CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Common Stock Total
------------------------- Paid-in Retained Shareholders'
Shares Amount Capital Earnings Equity
--------- ------- ----------- ----------- -------------
Balance June 30, 1996 5,241,604 $52,400 $16,942,100 $31,425,500 $48,420,000
Net income for year -- -- -- 7,145,000 7,145,000
Stock options and warrants
exercised 6,836 70 84,930 -- 85,000
--------- ------- ----------- ----------- -----------
Balance June 30, 1997 5,248,440 52,470 17,027,030 38,570,500 55,650,000
Net income for year -- -- -- 5,800,000 5,800,000
Fair value of stock
warrants granted -- -- 75,000 -- 75,000
Stock options and warrants
exercised 9,176 90 205,910 -- 206,000
--------- ------- ----------- ----------- -----------
Balance June 30, 1998 5,257,616 52,560 17,307,940 44,370,500 61,731,000
Net income for year -- -- -- 7,428,000 7,428,000
Stock repurchase (50,800) (510) (736,490) -- (737,000)
Fair value of stock
warrants granted -- -- 75,000 -- 75,000
Stock options and warrants
exercised 15,123 150 153,850 -- 154,000
--------- ------- ----------- ----------- -----------
Balance June 30, 1999 5,221,939 $52,200 $16,800,300 $51,798,500 $68,651,000
========= ======= =========== =========== ===========
See accompanying notes to consolidated financial statements.
29
30
EDELBROCK CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
Year Ended June 30,
-----------------------------------------------
1997 1998 1999
----------- ----------- -----------
Cash flows from operating activities
Net income $ 7,145,000 $ 5,800,000 $ 7,428,000
Adjustments to reconcile net income to
net cash provided by operating activities
Allowance for doubtful accounts 155,000 200,000 --
Write off of uncollectible receivable -- 1,878,000 400,000
Depreciation and amortization of
property, plant and equipment 3,922,000 4,233,000 4,718,000
Gain from sale of property,
plant and equipment (24,000) (208,000) (18,000)
Depreciation and amortization of
real estate properties 22,000 15,000 21,000
(Gain) loss from sale of real estate
properties (274,000) -- --
Fair value of stock warrants granted -- 75,000 75,000
Deferred income taxes 337,000 (5,000) 62,000
Equity in net income of partnerships (421,000) (181,000) (133,000)
Increase (decrease) from changes in
Accounts receivable (2,058,000) (3,424,000) (3,154,000)
Inventories (3,313,000) (3,728,000) (379,000)
Prepaid expenses and other assets (406,000) 47,000 122,000
Other assets 365,000 56,000 (244,000)
Accounts payable 3,989,000 1,280,000 1,313,000
Accrued expenses 486,000 587,000 938,000
----------- ----------- -----------
Net cash provided by operating activities 9,925,000 6,625,000 11,149,000
----------- ----------- -----------
Cash flows from investing activities
Acquisition of property, plant and equipment (8,602,000) (8,076,000) (5,760,000)
Proceeds from sale of property, plant
and equipment 168,000 295,000 28,000
Acquisition of real estate properties (57,000) -- --
Proceeds from sale of real estate properties 369,000 391,000 --
Distributions from partnerships 50,000 154,000 532,000
----------- ----------- -----------
Net cash used in investing activities (8,072,000) (7,236,000) (5,200,000)
----------- ----------- -----------
See accompanying notes to consolidated financial statements.
30
31
EDELBROCK CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
Year Ended June 30,
-----------------------------------------------
1997 1998 1999
---------- ---------- -----------
Cash flows from financing activities
Net proceeds from issuance of
common stock 85,000 206,000 154,000
Payments to acquire treasury stock -- -- (737,000)
Principal payments on long-term debt (965,000) (969,000) (51,000)
---------- ---------- -----------
Net cash used in financing activities (880,000) (763,000) (634,000)
---------- ---------- -----------
Net increase (decrease) in cash and
cash equivalents 973,000 (1,374,000) 5,315,000
Cash and cash equivalents, beginning of year 8,771,000 9,744,000 8,370,000
---------- ---------- -----------
Cash and cash equivalents, end of year $9,744,000 $8,370,000 $13,685,000
========== ========== ===========
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest $ 340,000 $ 263,000 $ 203,000
========== ========== ===========
Income taxes $3,712,000 $3,275,000 $ 4,275,000
========== ========== ===========
See accompanying notes to consolidated financial statements.
31
32
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.
Basis of Presentation
The consolidated financial statements include the accounts of Edelbrock
Corporation and its wholly-owned subsidiaries. All material intercompany
accounts and transactions have been eliminated. The Company also has investments
in various real estate partnerships. These investments are accounted for using
the equity method of accounting.
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
Long-Lived Assets
Long-lived assets, such as property and equipment, and real estate properties,
are evaluated for impairment when events or changes in circumstances indicate
that the carrying amount of the assets may not be recoverable through the
estimated undiscounted future cash flows from the use of these assets. When any
such impairment exists, the related assets will be written down to fair value.
No impairment losses have been recorded through June 30, 1999.
32
33
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
Deferred tax assets and liabilities are recorded for differences between the
financial statement and tax basis of the assets and liabilities that will result
in taxable or deductible amounts in the future based on enacted tax laws and
rates applicable to the periods in which the differences are expected to affect
taxable income. Valuation allowances are established when necessary to reduce
deferred tax assets to the amount expected to be realized. Income tax expense is
recorded for the amount of income tax payable or refundable for the period
increased or decreased by the change in deferred tax assets and liabilities
during the period.
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 $500,000 at June 30,
1998 and 1999.
Fair Value
The Company has cash and cash equivalents, receivables, accounts payable, and
accrued expenses 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.
Stock-Based Compensation
As of July 1, 1997, 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 pro forma 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 the Black-Scholes option pricing model.
33
34
EDELBROCK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Earnings Per Share Information
The Company adopted Statement of Financial Accounting Standards No. 128
"Earnings per Share," in fiscal year ended June 30, 1998. This pronouncement
provides a different method of calculating earnings per share than was 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 is
based on the weighted effect of all common shares issued and outstanding, and is
calculated by dividing net income available to common stockholders by the
weighted average shares outstanding during the period. Diluted earnings per
share is calculated by dividing net income available to common stockholders by
the weighted average number of common shares used in the basic earnings per
share calculation plus the number of common shares that would be issued assuming
conversion of all potentially dilutive common shares outstanding. All historical
earnings per share data have been restated to conform to this presentation.
Below is the calculation of basic and diluted earnings per share for each of the
past three fiscal years:
Fiscal Year Ended
-------------------------------------------
June 30, 1997 June 30, 1998 June 30, 1999
------------- ------------- -------------
(In Thousands, Except per Share Data)
Net income $7,145 $5,800 $7,428
====== ====== ======
Weighted average shares outstanding - Basic 5,244 5,252 5,251
Employee stock options and other 108 136 51
------ ------ ------
Weighted average shares outstanding - Diluted 5,352 5,388 5,302
====== ====== ======
Earnings per common share:
Basic $ 1.36 $ 1.10 $ 1.41
Diluted $ 1.34 $ 1.08 $ 1.40
Reclassifications
Certain prior period amounts have been reclassified for comparison with the 1999
presentation.
NOTE 2 - INVENTORIES
Inventories consist of the following:
June 30,
----------------------------
1998 1999
----------- -----------
Raw materials $10,493,000 $ 8,671,000
Work in process 930,000 1,923,000
Finished goods 5,353,000 6,561,000
----------- -----------
$16,776,000 $17,155,000
=========== ===========
34
35
EDELBROCK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - LONG-TERM DEBT AND REVOLVING LINE OF CREDIT
The Company's long-term debt consists of the following:
June 30,
--------------------------
1998 1999
---------- ----------
Mortgage note (a) $2,052,000 $1,990,000
Industrial Redevelopment Bonds (b) -0- -0-
Other 133,000 144,000
---------- ----------
2,185,000 2,134,000
Less current portion 62,000 69,000
---------- ----------
$2,123,000 $2,065,000
========== ==========
(a) Mortgage note, collateralized by a trust deed on real estate with a net book
value of $3,429,000 at June 30, 1999, payable in 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, 1998. The standby letter of
credit was collaterized by a financing statement and security agreement on the
foundry equipment. These bonds were paid off during fiscal 1998.
Principal payments are due on long-term debt as follows:
Years ending June 30, Amount
--------------------- ----------
2000 $69,000
2001 2,065,000
----------
$2,134,000
==========
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 (7.75% at June 30, 1999). This agreement
expires in February 2000. There were no borrowings on the line at June 30, 1998
and 1999. This obligation contains covenants, among other items, relating to
various financial ratios. The Company was in compliance with all such covenants
at June 30, 1999.
35
36
EDELBROCK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 - TAXES ON INCOME
The provision for taxes on income consists of the following:
Year Ended June 30,
----------------------------------------------
1997 1998 1999
---------- ---------- ----------
Current
Federal $3,450,000 $2,738,000 3,557,000
State 746,000 571,000 725,000
---------- ---------- ----------
4,196,000 3,309,000 4,282,000
---------- ---------- ----------
Deferred
Federal (546,000) (140,000) 157,000
State 426,000 135,000 (95,000)
---------- ---------- ----------
(120,000) (5,000) 62,000
---------- ---------- ----------
$4,076,000 $3,304,000 $4,344,000
========== ========== ==========
The differences between the U.S. federal statutory tax rate and the Company's
effective rate are as follows:
Year Ended June 30,
----------------------
1997 1998 1999
---- ---- ----
U.S. federal statutory tax rate 34.0% 34.0% 35.0%
State income taxes (net of federal benefits) 6.8 6.4 6.0
State income tax credits (2.6) (2.3) (2.0)
Federal income tax credits (1.6) (1.6) (1.5)
Other (0.3) (0.2) (0.6)
---- ---- ----
Effective tax rate 36.3% 36.3% 36.9%
==== ==== ====
The components of deferred taxes at June 30, 1998 and 1999 are as follows:
1998 1999
---------- ----------
Deferred tax assets
State income taxes $ 191,000 $ 230,000
Advertising accrual -0- 186,000
Uniform capitalization rule 178,000 141,000
Accrued vacation 149,000 180,000
Deferred gains 15,000 15,000
Allowance for doubtful accounts 170,000 170,000
Inventory reserve 82,000 -0-
Other 61,000 50,000
---------- ----------
$ 846,000 $ 972,000
========== ==========
Deferred tax liabilities:
Depreciation and amortization $1,458,000 $1,650,000
Like kind exchange 1,272,000 1,272,000
State tax deferred items 135,000 131,000
---------- ----------
$2,865,000 $3,053,000
========== ==========
36
37
EDELBROCK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 - COMMITMENTS
Royalty and Development Fee Agreement
In February 1997, the Company entered into a Royalty Agreement with RICOR Racing
and Development L.P. ("RICOR") whereby the Company would pay RICOR a percentage
of revenue derived from the sale of shock absorbers based on the following:
Aggregate Net Sales Volume Royalty
- ----------------------------- -------
Up to $4,000,000 8%
From $4,000,001 to $8,000,000 7%
$8,000,001 and above 6%
On February 19, 1999, the Royalty Agreement was amended where the Company will
pay RICOR 6% of all licensed sales (see Note 8). Royalty expense under this
agreement amounted to $12,000 for fiscal year ended June 30, 1997, and $381,000
for fiscal year ended June 30, 1998, and $702,000 for fiscal year ended June 30,
1999.
In addition, the Company agrees to pay Development Fees of $33,333 per month (to
an annual maximum of $400,000) to RICOR, commencing March 1, 1999 and continuing
through December 31, 2003.
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 1998, 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, 1997 and 1998 and $595,000 for the year ended June 30,
1999.
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 1998, 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 $55,000 for the years ended June 30, 1997 and 1998 and $65,000 for the year
ended June 30, 1999.
The Company had accrued contributions of $527,000 and $618,000 at June 30, 1998
and 1999, respectively.
Employment Agreements
The Company has an employment agreement with its President and Chief Executive
Officer for a term expiring on June 30, 2004. 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, 2004. 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.
37
38
EDELBROCK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 - MAJOR CUSTOMERS
For the year ended June 30, 1997, three customers accounted for 12.9%, 11.7% and
11.4% of revenues. During the fiscal years ended June 30, 1998 and 1999, one
customer accounted for 16.0% and 14.8% of revenues, respectively.
NOTE 7 - DEPENDENCE ON KEY SUPPLIER
The Company has entered into an agreement expiring in December 2004 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 39% of the Company's revenues for the year ended
June 30, 1999. 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 8 - SHAREHOLDERS' EQUITY
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.
A summary of changes in common stock options during 1997, 1998, and 1999 are as
follows:
Number of Weighted Average Aggregate
Shares Price Per Share Exercise Price
--------- ---------------- --------------
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
Cancelled 9,341 12.50 116,762
------- ----------
Outstanding at June 30, 1997 354,328 12.84 4,548,132
Granted 17,500 19.10 334,265
Exercised 9,176 12.45 114,231
Cancelled 1,957 12.50 24,463
------- ----------
Outstanding at June 30, 1998 360,695 13.15 4,743,703
Granted 2,000 15.00 30,000
Exercised 12,323 12.50 154,038
Cancelled 5,573 12.50 69,663
------- ----------
Outstanding at June 30, 1999 344,799 $13.20 $4,550,003
======= ==========
Options exercisable (vested) at June 30, 1999 254,539 $12.78 $3,254,240
======= ==========
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EDELBROCK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 - SHAREHOLDERS' EQUITY (CONTINUED)
1994 Stock Warrant 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 made 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. In November 1998, one director resigned and
exercised their vestable options. The Company elected a new director and granted
3,500 shares at a price of $16.375 per share.
On February 2, 1997, the Company issued Warrants to purchase 100,000 shares of
common stock at $14.75 per share to RICOR Racing and Development L.P. "RICOR."
The Warrants were granted at the current quoted market price at the date of
grant. The Warrants originally vested 20% on December 31 of each year for a
period of five years with the first 20% vesting on December 31, 1997.
On February 19, 1999, for consideration of Amendment No. 4 to the Licensing
Agreement (see Note 5), the Company accelerated the vesting allowing the 100,000
shares of Warrants to become fully exercisable at the date of the amendment. In
addition, the Company issued two sets of Warrants to purchase 22,414 and 11,501
shares of common stock at $18.00 and 22.00 per share, respectively, to RICOR.
The Warrants were granted at a price higher than the current quoted market price
at the date of grant. The first set of warrants vest at 33.3% on December 31 of
each year for a period of three years. The second set of warrants vest at 20% on
December 31 of each year for a period of 5 years. The Warrants expire on
February 18, 2002 and 2006, respectively.
A summary of changes in stock warrants during 1997, 1998, and 1999 are as
follows.
Number of Weighted Average Aggregate
Shares Price Per Share Exercise Price
--------- ---------------- --------------
Outstanding at June 30, 1996 10,500 $12.58 $ 132,125
Granted 100,000 14.75 1,475,000
Exercised 0 0
Cancelled 0 0
------- ------ ----------
Outstanding at June 30, 1997 110,500 14.54 1,607,125
Granted 0 0
Exercised 0 0
Cancelled 0 0
------- ------ ----------
Outstanding at June 30, 1998 110,500 14.54 1,607,125
Granted 37,415 19.08 713,769
Exercised 2,800 12.50 35,000
Cancelled 700 12.50 8,750
------- ------ ----------
Outstanding at June 30, 1999 144,415 $15.77 $2,277,144
======= ====== ----------
Warrants exercisable (vested) at June 30, 1999 65,600 $14.57 $ 955,700
======= ====== ==========
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NOTE 8 - SHAREHOLDERS' EQUITY (CONCLUDED)
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 assumptions used for grants in fiscal 1997, 1998, and fiscal
1999: dividend yield of zero percent, risk-free interest rate of 6 percent,
expected lives of ten years, and expected volatility of 8.11, 9.27, and 27.96
respectively. Under the accounting provisions of FASB Statement 123, the
Company's net income and income per share for 1997, 1998, and 1999 would have
been reduced to the pro forma amounts indicated below:
Year Ended June 30,
------------------------------------------
1997 1998 1999
---------- ---------- ----------
Net Income
As reported $7,145,000 $5,800,000 $7,428,000
Pro forma $6,805,000 $5,563,000 $7,203,000
Income per share
As reported - Basic $ 1.36 $ 1.10 $ 1.41
As reported - Diluted $ 1.34 $ 1.08 $ 1.40
Pro forma - Basic $ 1.30 $ 1.06 $ 1.37
Pro forma - Diluted $ 1.25 $ 1.03 $ 1.36
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, 1999:
Stock Options:
Number Weighted-Average Exercisable Number
Range of Outstanding Remaining Weighted-Average Exercisable Weighted-Average
Exercise Prices at 6/30/99 Contractual Life Exercise Price at 6/30/99 Exercise Price
- --------------- ----------- ---------------- ---------------- ----------- ----------------
$12.50 298,299 5.30 $12.50 238,639 $12.50
$13.50-$15.00 6,000 7.78 $14.00 3,200 $13.50
$16.00-$19.50 40,500 8.02 $18.20 12,700 $17.96
- ------------- ------- ---- ------ ------- ------
$12.50-$19.50 344,799 5.67 $13.20 254,539 $12.78
============= ======= ==== ====== ======= ======
The weighted average fair value of options granted during the years ended June
30, 1998 and 1999 were $8.55 and $8.10, respectively.
Warrants:
Number Weighted-Average Exercisable Number
Range of Outstanding Remaining Weighted-Average Exercisable Weighted-Average
Exercise Prices at 6/30/99 Contractual Life Exercise Price at 6/30/99 Exercise Price
- --------------- ----------- ---------------- ---------------- ----------- ----------------
$12.50 - $22.00 144,415 5.87 $15.77 65,600 $14.57
=============== ======= ==== ====== ====== ======
The weighted average fair value of warrants granted during the years ended June
30, 1998 and 1999 were $7.97 and $3.45, respectively.
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NOTE 9 - LEGAL PROCEEDINGS
As previously disclosed, in September 1997, Super Shops Inc. filed a voluntary
petition for relief under chapter 11 of the United States Bankruptcy code, 11
U.S.C. Sections 101-l330 (the "Bankruptcy Code"). At the time of Super Shops'
filing, the Company was one of Super Shops' largest unsecured creditors and in
December 1997, Edelbrock wrote-off approximately $1.9 million of unsecured trade
receivables relating to Super Shops. On January 6, 1999, the Company was served
with a complaint filed by Super Shops in the United States Bankruptcy Court for
the Central District of California wherein Super Shops sought to recover
approximately $1.8 million in allegedly preferential payments made by Super
Shops to the Company in the ninety days prior to the commencement of Super
Shops' Chapter 11 case. In June 1999, the Company settled this claim with Super
Shops. The terms of the settlement, which were accepted by Super Shops Inc. and
approved by the bankruptcy court, included a cash settlement in the amount of
$190,000 payable in eight equal monthly installments, and Edelbrock has forgone
its claim for potential recovery of its unsecured trade receivable from Super
Shops.
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42
EDELBROCK CORPORATION
SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS
Charged to
Balance at Costs and Balance at
Beginning of Year Expenses Deductions End of Year
----------------- ---------- ---------- -----------
Year ended June 30, 1999:
- -------------------------
Allowance for doubtful accounts $500,000 $ 400,000 $ 400,000 $500,000
Inventory reserves $240,000 $ 217,000 $ 457,000 $ --
Year ended June 30, 1998:
- -------------------------
Allowance for doubtful accounts $300,000 $2,078,000 $1,878,000 $500,000
Inventory reserves $ -- $ 240,000 $ -- $240,000
Year ended June 30, 1997:
- -------------------------
Allowance for doubtful accounts $145,000 $ 155,000 $ -- $300,000
Inventory reserves $ -- $ -- $ -- $ --
42