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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, 2000
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 8, 2000 was approximately $21,628,000 (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 8, 2000, 5,077,039 shares of the Registrant's Common Stock, $.01
par value, were outstanding of which 1,880,729 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 2000 Annual
Meeting of Shareholders.
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ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I Page
----
<S> <C> <C>
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.......................... 19
Item 8. Financial Statements and Supplementary Data........................................ 19
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure................................................ 19
PART III
Item 10. Directors of the Company........................................................... 20
Item 11. Executive Compensation............................................................. 20
Item 12. Security Ownership of Certain Beneficial
Owners and Management.............................................................. 20
Item 13. Certain Relationships and Related Transactions..................................... 20
PART IV
Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K................................................................ 20
Signatures ................................................................................... 23
</TABLE>
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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 driveability. 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 motorcycle 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 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.
In June 2000, the Company entered into a Product Development and
Distribution Agreement with JG Engine Dynamics, Inc. ("JG") and Automotive
Systems Group Inc. (collectively, the "Licensor") whereby the Company will pay
the Licensor a percentage of net revenues derived from the sale of internal
engine, exhaust, and suspension components for import aftermarket products. The
Company paid to the Licensor cash, and issued common stock and stock warrants.
In addition, the Licensor has the right to purchase Licensed Products developed
by 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:
- Broaden Application of Core Products
- Expand Market Share in Compatible Product Lines
- Expand Presence in Chain Stores
- Introduce New Products
- Expand Production Capacity
- 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 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
June 2000, the Company acquired the exclusive rights to manufacture and sell
internal engine, exhaust, and suspension components to the import aftermarket
under the Edelbrock and JG name.
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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 October 1999, the Company completed 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 is utilizing the 30,000 square foot former distribution area at its
Company headquarters in Torrance for additional manufacturing capacity.
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, 1998, 1999, and 2000
research and development expenditures totalled $2,972,000, $3,237,000, and
$3,688,000, respectively.
PRODUCTS
The Company offers over 3,200 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 1998 and 1999, and 28% for fiscal year 2000, and carburetors, which
accounted for 40%, 39%, and 41% of the Company's revenues for fiscal years 1998,
1999, and 2000, 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:
- Retail Automotive Chain Stores.
- Mail Order Catalog Houses.
- Warehouse Distributors and Performance Specialty Dealers.
- 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. In
addition, the Company's aluminum foundry, located in San Jacinto, California,
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%, 14.8%, and 14.8% of
the Company's revenues for fiscal years 1998, 1999, and 2000 respectively.
Another customer, AutoZone, Inc. accounted for 10.2% of revenues for fiscal year
2000. See Note 6 of Notes to Consolidated Financial Statements of the Company.
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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 2000 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 2000, 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.
COMPETITION
There is significant competition in the performance automotive and
motorcycle parts industries for both domestic and import. 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 Trick Flow Specialties in the cylinder
head market and Mr. Gasket, TransDapt and Moroso in the specialty automotive
accessories market. The Company competes primarily with Harley Davidson, Inc., 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 2000 and 2013.
EMPLOYEES
As of June 30, 2000, the Company employed 691 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, distribution and manufacturing
facilities located in buildings of approximately 142,000, 65,590, 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 which matures in June 2001. 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.
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In October 1999, the Company completed construction of a 65,950 square
foot distribution facility on Company-owned property adjacent to its exhaust
system and shock absorber production facilities. The Company believes that its
existing facilities are adequate to meet its current production requirements.
Item 3. Legal Proceedings
None.
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, 2000:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
O. Victor Edelbrock...........................63 Chairman, President and Chief Executive Officer
Jeffrey L. Thompson...........................47 Executive Vice-President, Chief Operating Officer and Director
Aristedes T. Feles............................32 Vice-President of Finance and Director
Bryan Robb....................................33 Vice-President of Sales
Wayne P. Murray...............................48 Vice-President of Manufacturing
Jack B. Mayberry..............................53 Vice-President of Research & Development
Cathleen Edelbrock-Ford.......................40 Vice-President of Advertising, Secretary and Director
Nancy Edelbrock...............................63 Treasurer
Ronald L. Webb................................66 Executive Vice-President of Edelbrock Foundry Corp.
Rodney T. Teraishi............................34 Controller
</TABLE>
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 was
also a six year member of the board of directors of the Specialty Equipment
Market Association (SEMA) and was awarded the 1999 SEMA Person of the Year
Award, the automotive aftermarket's highest individual honor. 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 served as Vice-President of Sales for the Company since 1998.
Mr. Robb was previously the National Sales Manager for the Company (since 1992).
Mr. Robb resigned effective September 1, 2000 and was replaced by Mr. Steve
Whipple, the Company's National Sales Manager, who was promoted to
Vice-President of Sales effective September 2, 2000. Prior to joining the
Company, Mr. Whipple was the Director of Sales & Marketing for Nitrous Oxide
Systems, Inc.
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 1999 and 2000. On September 8, 2000, the Company had 110 holders of
record of its Common Stock with 5,077,039 shares outstanding and a closing price
of $11.50.
<TABLE>
<CAPTION>
Price Range of Common Stock
---------------------------
Year Ended June 30, 1999 High Low
---- ---
<S> <C> <C>
First Quarter $18.00 $13.00
Second Quarter $17.75 $13.38
Third Quarter $17.00 $13.50
Fourth Quarter $16.00 $13.06
</TABLE>
<TABLE>
<CAPTION>
Year Ended June 30, 2000 High Low
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<S> <C> <C>
First Quarter $15.63 $13.38
Second Quarter $15.00 $11.75
Third Quarter $13.25 $11.38
Fourth Quarter $12.50 $ 8.88
</TABLE>
During fiscal year ended June 30, 2000, the Company has paid a dividend
in the amount of $.02 per share on November 11, 1999 and in the amount of $.02
per share on June 2, 2000. No dividends were declared during fiscal year ended
June 30, 1999.
In June 2000, in consideration of entering into a Product
Development and Distribution Agreement with the Company, the Company issued to
JG Engine Dynamics, Inc. 8,000 shares of common stock and warrants to purchase
80,000 shares of common stock at an exercise price of $11.00. The warrants
vest annually on June 1st of each year through a period of 4 years with the
first 25% vesting on June 1, 2001. The exercise term starts June 1, 2001 and
expires on May 31, 2010. The securities were issued in a transaction exempt from
registration under the Securities Act of 1933 in accordance with the
requirements of Section 4(2) thereof. See Note 8 of Notes to Consolidated
Financial Statements of the Company.
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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, 2000
and 1999 and the Income Statement Data and the Other Data for each of the three
fiscal years in the period ended June 30, 2000 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, 1996, 1997 and 1998 and the
Income Statement Data and the Other Data for each of the two fiscal years in the
period ended June 30, 1997 have been derived from audited financial statements
not included herein.
<TABLE>
<CAPTION>
INCOME STATEMENT DATA: 1996 1997 1998 1999 2000
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Revenues $ 79,032,000 $ 87,120,000 $ 95,504,000 $108,943,000 $121,173,000
Cost of sales 47,043,000 52,163,000 57,410,000 65,881,000 74,315,000
------------ ------------ ------------ ------------ ------------
Gross profit 31,989,000 34,957,000 38,094,000 43,062,000 46,858,000
------------ ------------ ------------ ------------ ------------
Operating expenses
Selling, general and administrative 20,392,000 21,308,000 24,281,000 27,564,000 30,762,000
Research and development 2,227,000 2,874,000 2,972,000 3,237,000 3,688,000
Write-off of uncollectible
receivable -- -- 1,878,000 400,000 --
Settlement expense -- -- -- 190,000 --
------------ ------------ ------------ ------------ ------------
Total operating expenses 22,619,000 24,182,000 29,131,000 31,391,000 34,450,000
------------ ------------ ------------ ------------ ------------
Operating income 9,370,000 10,775,000 8,963,000 11,671,000 12,408,000
Interest expense 344,000 340,000 269,000 203,000 196,000
Interest income 523,000 317,000 410,000 304,000 385,000
Other income 274,000 469,000 -- -- --
------------ ------------ ------------ ------------ ------------
Income before taxes 9,823,000 11,221,000 9,104,000 11,772,000 12,597,000
Taxes on income 3,346,000 4,076,000 3,304,000 4,344,000 4,549,000
------------ ------------ ------------ ------------ ------------
Net income $ 6,477,000 $ 7,145,000 $ 5,800,000 $ 7,428,000 $ 8,048,000
============ ============ ============ ============ ============
</TABLE>
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<TABLE>
<CAPTION>
Year Ended June 30,
-------------------------------------------------------------------------------
PER SHARE DATA: 1996 1997 1998 1999 2000
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Basic net income per share $ 1.24 $ 1.36 $ 1.10 $ 1.41 $ 1.55
Diluted net income per share $ 1.22 $ 1.34 $ 1.08 $ 1.40 $ 1.55
Basic weighted average shares outstanding 5,241,000 5,244,000 5,252,000 5,251,000 5,179,000
Effect of dilutive stocks options and warrants 70,000 108,000 136,000 51,000 6,000
Diluted weighted average shares outstanding 5,311,000 5,352,000 5,388,000 5,302,000 5,185,000
OTHER DATA:
Capital expenditures $ 4,342,000 $ 8,602,000 $ 8,076,000 $ 5,760,000 $11,285,000
Dividends -- -- -- -- $ 207,000
</TABLE>
<TABLE>
<CAPTION>
June 30,
BALANCE SHEET DATA: -------------------------------------------------------------------------------
(In thousands) 1996 1997 1998 1999 2000
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Working capital $ 23,953 $ 26,428 $ 29,260 $ 35,423 $ 34,273
Total assets 66,430 77,868 84,975 94,252 100,247
Total long-term debt 3,148 2,178 2,123 2,065 148
Shareholders' equity 48,420 55,650 61,731 68,651 75,443
</TABLE>
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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, 1998, 1999 and 2000. 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, selected V6, and
selected import engines. In addition, the Company offers performance aftermarket
manifolds, cylinder heads, camshafts, air cleaners, and carburetors for
Harley-Davidson and off road motorcycles. The Company currently offers over
3,200 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, 1998, 1999, and 2000 approximately 29%, 29%, and 28% of revenues
were derived from the sales of intake manifolds and 40%, 39% and 41% 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 October 1999, the Company completed 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 is utilizing the 30,000 square foot former distribution 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.
<TABLE>
<CAPTION>
Year Ended
June 30, 1999 Percentage of Year Ended
Percentage of Revenues As Compared Revenues for Year June 30, 2000
for Year Ended June 30, To Year Ended June 30, As Compared
------------------------ Ended --------------------- To Year Ended
1998 1999 June 30, 1998 1999 2000 June 30, 1999
----------- -------- ------------- --------- -------- -------------
<S> <C> <C> <C> <C> <C> <C>
Revenues 100.0% 100.0% 14.1% 100.0% 100.0% 11.2
Cost of sales 60.1 60.5 14.8 60.5 61.3 12.8
----- ----- ----- -----
Gross profit 39.9 39.5 13.0 39.5 38.7 8.8
----- ----- ----- -----
Operating expenses
Selling, general and administrative 25.4 25.3 13.5 25.3 25.4 11.6
Research and development 3.1 3.0 8.9 3.0 3.0 13.9
Settlement expense 0.0 0.4 100.0 0.4 -- (100.0)
Write-off of uncollectible receivable 2.0 0.2 (78.7) 0.2 0.0 (100.0)
----- ----- ----- -----
Total operating expenses 30.5 28.8 (7.8) 28.8 28.4 9.7
----- ----- ----- -----
Operating income 9.4 10.7 30.2 10.7 10.2 6.3
Interest expense 0.3 0.2 (24.5) 0.2 0.2 (3.4)
Interest income 0.4 0.3 (25.9) 0.3 0.3 26.6
----- ----- ----- -----
Income before taxes on income 9.5 10.8 29.3 10.8 10.4 7.0
Taxes on income 3.4 4.0 31.5 4.0 3.8 4.7
----- ----- ----- -----
Net Income 6.1% 6.8% 28.1% 6.8% 6.6% 8.3%
===== ===== ===== =====
</TABLE>
12
<PAGE> 13
FISCAL YEAR 2000 COMPARED TO FISCAL YEAR 1999
Revenues
Revenues increased 11.2% to $121.2 million in fiscal year 2000 from
$108.9 million in fiscal year 1999. The increase was primarily the result of an
increase in volume of approximately $6.5 million, or 15.2%, in the sale of
carburetors, an increase of $1.5 million, or 12.8%, in the sale of aluminum
cylinder heads and an increase of $2.3 million, or 7.6%, in the sale of intake
manifolds.
Cost of Sales
Cost of sales increased 12.8% to $74.3 million in fiscal year from $65.9
million in fiscal year 2000. As a percent of revenues, cost of sales increased
to 61.3% in fiscal year 2000 from 60.5% in fiscal year 1999. 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 11.6% to $30.8
million in fiscal year 2000 from $27.6 million in fiscal year 1999. This
increase resulted primarily from the increased in sales commissions, advertising
expense, and salaries associated with increased sales and the Company's
depreciation and related expenditures in connection with the opening of its new
state of the art distribution facility. As a percent of sales, selling, general
and administrative expenses increased to 25.4% in fiscal year 2000 from 25.3% in
fiscal year 1999.
Research and Development Expense
Research and development expense increased 13.9% to $3.7 million in
fiscal year 2000 from $3.2 million in fiscal year 1999. As a percent of revenue,
research and development expense was 3.0% in fiscal year 2000 and 1999. 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.
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 6.3% to $12.4 million in fiscal year 2000
from $11.7 million in fiscal year 1999. This increase was mainly a result of
increased revenues and lower operating expenses as a percent of revenues, offset
by higher cost of goods sold as a percentage of revenues.
13
<PAGE> 14
FISCAL YEAR 2000 COMPARED TO FISCAL YEAR 1999
Interest Expense
Interest expense decreased 3.4% to $196,000 in fiscal year 2000 from
$203,000 in fiscal 1999. This decrease was primarily due to decrease in the
principal amount of average debt outstanding.
Interest Income
Interest income increased 26.6% to $385,000 in fiscal year 2000 from
$304,000 in fiscal year 1999. This increase was the result of an increase in
interest earned on invested cash.
Taxes on Income
The provision for income taxes increased $205,000 to $4,549,000 in
fiscal year 2000 from $4,344,000 in fiscal year 1999. The effective tax rates
were 36.1% and 36.9% for fiscal year 2000 and 1999, respectively. The decrease
in the effective tax rate resulted primarily from increases in state tax credits
relating to capital equipment acquisitions and increased research & development
credits.
Net Income
The Company's net income increased 8.3% for fiscal year 2000 to $8.0
million in fiscal 2000 from $7.4 million in fiscal year 1999. This increase was
primarily due to the items mentioned above.
14
<PAGE> 15
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 $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.
15
<PAGE> 16
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.
16
<PAGE> 17
Quarterly Results
The following table sets forth unaudited operating data for each of the
specified quarters of fiscal years 1999 and 2000. 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.
<TABLE>
<CAPTION>
For the Fiscal Year Ended For the Fiscal Year Ended
June 30, 1999 June 30, 2000
---------------------------------------- ----------------------------------------
First Second Third Fourth First Second Third Fourth
(In thousands except per share data) Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter
------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues $22,595 $25,602 $26,973 $33,773 $25,644 $28,522 $29,900 $37,107
Cost of sales 13,545 15,789 16,480 20,067 15,899 17,498 18,570 22,348
------- ------- ------- ------- ------- ------- ------- -------
Gross profit 9,050 9,813 10,493 13,706 9,745 11,024 11,330 14,759
------- ------- ------- ------- ------- ------- ------- -------
Operating expenses
Selling, general and
administrative 6,272 6,403 6,733 8,156 6,827 7,475 7,414 9,046
Research and development 678 763 746 1,050 784 870 887 1,147
Write-off uncollectible receivable -- 400 -- -- -- -- -- --
Settlement expense -- -- 190 -- -- -- -- --
------- ------- ------- ------- ------- ------- ------- -------
Total operating expenses 6,950 7,566 7,669 9,206 7,611 8,345 8,301 10,193
------- ------- ------- ------- ------- ------- ------- -------
Operating income 2,100 2,247 2,824 4,500 2,134 2,679 3,029 4,566
Interest expense 51 51 50 51 50 49 49 48
Interest income 106 66 56 76 149 151 41 44
------- ------- ------- ------- ------- ------- ------- -------
Income before taxes on income 2,155 2,262 2,830 4,525 2,233 2,781 3,021 4,562
Taxes on income 797 838 1,046 1,663 826 1,029 1,118 1,576
------- ------- ------- ------- ------- ------- ------- -------
Net income $ 1,358 $ 1,424 $ 1,784 $ 2,862 $ 1,407 $ 1,752 $ 1,903 $ 2,986
======= ======= ======= ======= ======= ======= ======= =======
Basic net income per share $ 0.26 $ 0.27 $ 0.34 $ 0.55 $ 0.27 $ 0.34 $ 0.37 $ 0.58
======= ======= ======= ======= ======= ======= ======= =======
Diluted net income per share $ 0.26 $ 0.27 $ 0.34 $ 0.54 $ 0.27 $ 0.34 $ 0.37 $ 0.58
======= ======= ======= ======= ======= ======= ======= =======
Basic weighted average
number of shares outstanding 5,257 5,249 5,257 5,241 5,222 5,191 5,174 5,132
Effect of dilutive stock options
and warrants 60 60 49 39 39 23 -- 1
------- ------- ------- ------- ------- ------- ------- -------
Diluted weighted average
number of shares outstanding 5,317 5,309 5,306 5,280 5,261 5,214 5,174 5,133
======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
17
<PAGE> 18
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 19,
2000. The line of credit borrowings are at the applicable bank's base rate (9.5%
at June 30, 2000). The line of credit agreement expires on February 1, 2001.
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 19, 2000.
Net cash provided by operating activities was $6.6 million, $11.1
million and $9.4 million in fiscal years 1998, 1999, and 2000, 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 decreased $961,000 for fiscal year 2000 compared to
fiscal year 1999 primarily as a result of timing of payment terms from a
principal supplier.
Accounts receivable increased by $3.3 million for fiscal year 2000
compared to fiscal year 1999, while sales increased $12.2 million for fiscal
year 2000 compared to fiscal year 1999. The increase in accounts receivable in
fiscal year 2000 was primarily due to the timing of payments from customers in
connection with the Company's dating programs and increased sales.
Inventories remained substantially unchanged for both periods.
The Company's total capital expenditures were $8.1 million in fiscal
year 1998, $5.8 million in fiscal year 1999, and $11.3 million in fiscal year
2000. The $11.3 million of capital expenditures for fiscal year 2000 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 $5.5 - $7.0 million in fiscal year
2001 primarily for additional capital equipment to increase the Company's
production capacity.
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 2001.
18
<PAGE> 19
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, 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 9.5%). It expires on February 1, 2001.
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 2000 and as of September 19, 2000, 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 $7,917. If the prime rate rose
100 basis points, the monthly interest payment would equal $8,750. 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.
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.
19
<PAGE> 20
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 24 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
2000 fiscal year.
Exhibits. The exhibits listed on the Exhibit Index following the
signature page hereof are filed herewith in response to this Item.
20
<PAGE> 21
EDELBROCK CORPORATION
EXHIBIT INDEX
<TABLE>
<CAPTION>
Number and Sequential
Description of Page
Exhibit Number
-------------- ----------
<S> <C> <C>
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)
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).
</TABLE>
21
<PAGE> 22
EDELBROCK CORPORATION
EXHIBIT INDEX
<TABLE>
<CAPTION>
Number and Sequential
Description of Page
Exhibit Number
-------------- ----------
<S> <C> <C>
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 25,
1999)
10.17 Settlement Agreement between Edelbrock Corporation and
Super Shops, Inc. (filed as Exhibit 10.17 to the
Company's Annual Report on Form 10-K for the fiscal
year ended June 30, 1999 and incorporated herein by
reference)
10.18 Amendments to Employment Agreements (filed as Exhibit 10.18 to the Company's
Annual Report on Form 10-K for the fiscal year ended June 30, 1999 and
incorporated herein by reference)
10.19 Product Development and Distribution Agreement dated June 1, 2000 between
Edelbrock Corporation, JG Engine Dynamics, Inc., and
Automotive Systems Group Inc.
10.20 Warrant Agreement dated June 1, 2000 between Edelbrock Corporation, JG Engine
Dynamics, Inc. and Automotive Systems Group Inc.
10.21 Amendment to Product Development and Distribution Agreement dated June 26, 2000
between Edelbrock Corporation, JG Engine Dynamics, Inc., and Automotive
Systems Group Inc.
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)
23.1 Consent of Grant Thornton LLP
24.1 Powers of Attorney
27.1 Financial Data Schedule
</TABLE>
*Management Contract or compensatory plan or arrangement which is separately
identified in accordance with Item 14(a)(3) of Form 10-K.
22
<PAGE> 23
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 19, 2000 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.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
*
---------------------------------------------
O. Victor Edelbrock President, Chief Executive September 19, 2000
Officer and Chairman of the
Board (Principal Executive Officer)
*
---------------------------------------------
Jeffrey L. Thompson Executive Vice President and September 19, 2000
Director
ARISTEDES T. FELES
---------------------------------------------
Aristedes T. Feles Vice-President, Finance and Director September 19, 2000
(Principal Financial Officer and
Principal Accounting Officer)
*
---------------------------------------------
Cathleen Edelbrock-Ford Vice President of Advertising, September 19, 2000
and Director
*
---------------------------------------------
Timothy D. Pettit Director September 19, 2000
*
---------------------------------------------
Alexander Michalowski Director September 19, 2000
*
---------------------------------------------
Jerry Herbst Director September 19, 2000
*
---------------------------------------------
Richard Wilbur Director September 19, 2000
ARISTEDES T. FELES
---------------------------------------------
*By: Aristedes T. Feles September 19, 2000
Attorney-in-fact
</TABLE>
23
<PAGE> 24
EDELBROCK CORPORATION
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Reports of independent certified public accountants....................................................... 25
Consolidated financial statements
Balance sheets................................................................................... 27
Statements of income............................................................................. 29
Statements of shareholders' equity............................................................... 30
Statements of cash flows ........................................................................ 31
Notes to consolidated financial statements....................................................... 33
Schedule II - Valuation and qualifying accounts........................................................... 44
</TABLE>
24
<PAGE> 25
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors
and Shareholders of
Edelbrock Corporation
We have audited the accompanying consolidated balance sheets of Edelbrock
Corporation as of June 30, 1999 and 2000, and the related consolidated
statements of income, shareholders' equity, and cash flows for the 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 auditing standards generally accepted
in the United States of America. 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 audits provide 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 2000, and the consolidated results of its
operations and its consolidated cash flows for the years then ended, in
conformity with accounting principles generally accepted in the United States of
America.
We have also audited Schedule II for the year ended June 30, 1999 and 2000. 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 18, 2000
25
<PAGE> 26
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors
and Shareholders of
Edelbrock Corporation
We have audited the accompanying consolidated statements of income,
shareholders' equity, and cash flows of Edelbrock Corporation for the year ended
June 30, 1998. 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 presentation of the financial
statements. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the results of operations and cash flows of
Edelbrock Corporation for the year ended June 30, 1998, in conformity with
generally accepted auditing standards.
We have also audited the accompanying schedule for the year ended June 30, 1998.
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
26
<PAGE> 27
EDELBROCK CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30,
--------------------------------
1999 2000
------------ ------------
<S> <C> <C>
Assets
Cash and cash equivalents $ 13,685,000 $ 9,883,000
Accounts receivable, net of allowance for doubtful
accounts of $500,000 at 1999 and 2000 23,976,000 27,228,000
Inventories (Note 2) 17,155,000 17,157,000
Deferred income taxes (Note 4) 801,000 1,046,000
Prepaid expenses and other 460,000 530,000
------------ ------------
Total current assets 56,077,000 55,844,000
------------ ------------
Property, plant and equipment (Note 3)
Land 6,242,000 6,242,000
Buildings and improvements 13,892,000 16,945,000
Machinery and equipment 33,617,000 39,010,000
Office equipment 3,831,000 5,115,000
Furniture and fixtures 974,000 1,416,000
Transportation equipment 4,985,000 5,344,000
------------ ------------
63,541,000 74,072,000
Less accumulated depreciation and amortization 26,833,000 31,916,000
------------ ------------
Property, plant and equipment, net 36,708,000 42,156,000
Real estate properties and partnerships 482,000 437,000
License agreement (Notes 5 and 8) -- 842,000
Other 985,000 968,000
------------ ------------
Total assets $ 94,252,000 $100,247,000
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
27
<PAGE> 28
EDELBROCK CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30,
--------------------------------
1999 2000
------------ ------------
<S> <C> <C>
Liabilities and shareholders' equity
Current liabilities
Accounts payable $ 16,037,000 $ 15,076,000
Accrued expenses
Payroll and bonuses 2,140,000 1,995,000
Retirement plans (Note 5) 618,000 649,000
Commissions 1,020,000 1,184,000
Income taxes payable 446,000 318,000
Other (Note 9) 324,000 428,000
Current portion of long-term debt (Note 3) 69,000 1,921,000
------------ ------------
Total current liabilities 20,654,000 21,571,000
Long-term debt, less current portion (Note 3) 2,065,000 148,000
Deferred income taxes (Note 4) 2,882,000 3,085,000
------------ ------------
Total liabilities 25,601,000 24,804,000
------------ ------------
Commitments and contingencies (Notes 5 and 7)
Shareholders' equity (Note 8)
Common stock, par value $.01 per share;
15,000,000 shares authorized;
5,272,739 shares issued and 5,221,939 outstanding in 1999;
5,283,139 shares issued and 5,077,039 outstanding in 2000 52,200 50,700
Paid-in capital 16,800,300 15,752,800
Retained earnings 51,798,500 59,639,500
------------ ------------
Total shareholders' equity 68,651,000 75,443,000
------------ ------------
Total liabilities and shareholders' equity $ 94,252,000 $100,247,000
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
28
<PAGE> 29
EDELBROCK CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year Ended June 30,
----------------------------------------------------
1998 1999 2000
------------ ------------ ------------
<S> <C> <C> <C>
Revenues (Note 6) $ 95,504,000 $108,943,000 $121,173,000
Cost of sales 57,410,000 65,881,000 74,315,000
------------ ------------ ------------
Gross profit 38,094,000 43,062,000 46,858,000
------------ ------------ ------------
Operating expenses
Selling, general and administrative 24,281,000 27,564,000 30,762,000
Research and development 2,972,000 3,237,000 3,688,000
Write-off of uncollectible receivable 1,878,000 400,000 --
Settlement expense (Note 9) -- 190,000 --
------------ ------------ ------------
Total operating expenses 29,131,000 31,391,000 34,450,000
------------ ------------ ------------
Operating income 8,963,000 11,671,000 12,408,000
Interest expense 269,000 203,000 196,000
Interest income 410,000 304,000 385,000
------------ ------------ ------------
Income before taxes on income 9,104,000 11,772,000 12,597,000
Taxes on income (Note 4) 3,304,000 4,344,000 4,549,000
------------ ------------ ------------
Net income $ 5,800,000 $ 7,428,000 $ 8,048,000
============ ============ ============
Net income per share:
Basic net income per share $ 1.10 $ 1.41 $ 1.55
============ ============ ============
Diluted net income per share $ 1.08 $ 1.40 $ 1.55
============ ============ ============
Basic weighted average number of shares
outstanding 5,252,000 5,251,000 5,179,000
Effect of dilutive stock options and warrants 136,000 51,000 6,000
------------ ------------ ------------
Diluted weighted average number of shares
outstanding 5,388,000 5,302,000 5,185,000
============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
29
<PAGE> 30
EDELBROCK CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Total
Common Stock Paid-in Retained Shareholders'
Shares Amount Capital Earnings Equity
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
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
Net income for year -- -- -- 8,048,000 8,048,000
Cash dividends -- -- -- (207,000) (207,000)
Stock repurchase (155,300) (1,600) (1,842,400) -- (1,844,000)
Stock issued for
license agreement 8,000 80 80,920 -- 81,000
Fair value of stock
warrants issued for
license agreement -- -- 617,000 -- 617,000
Fair value of stock
warrants granted -- -- 65,000 -- 65,000
Stock options exercised 2,400 20 31,980 -- 32,000
------------ ------------ ------------ ------------ ------------
Balance June 30, 2000 5,077,039 $ 50,700 $ 15,752,800 $ 59,639,500 $ 75,443,000
============ ============ ============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
30
<PAGE> 31
EDELBROCK CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended June 30,
------------------------------------------------------
1998 1999 2000
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities
Net income $ 5,800,000 $ 7,428,000 $ 8,048,000
Adjustments to reconcile net income to net cash
provided by operating activities
Allowance for doubtful accounts 200,000 -- --
Inventory reserve -- -- 200,000
Write-off of uncollectible receivable 1,878,000 400,000 --
Depreciation and amortization of
property, plant and equipment 4,233,000 4,718,000 5,481,000
(Gain) loss from sale of property,
plant and equipment (208,000) (18,000) 140,000
Depreciation and amortization of
real estate properties 15,000 21,000 28,000
Fair value of stock warrants granted 75,000 75,000 65,000
Deferred income taxes (5,000) 62,000 (42,000)
Equity in net income of partnerships (181,000) (133,000) (94,000)
Increase (decrease) from changes in
Accounts receivable (3,424,000) (3,154,000) (3,252,000)
Inventories (3,728,000) (379,000) (202,000)
Prepaid expenses and other assets 47,000 122,000 (70,000)
Other assets 56,000 (244,000) 17,000
Accounts payable 1,280,000 1,313,000 (961,000)
Accrued expenses 587,000 938,000 26,000
------------ ------------ ------------
Net cash provided by operating activities 6,625,000 11,149,000 9,384,000
------------ ------------ ------------
Cash flows from investing activities
Acquisition of property, plant and equipment (8,076,000) (5,760,000) (11,141,000)
Purchase of license agreement -- -- (144,000)
Proceeds from sale of property, plant
and equipment 295,000 28,000 72,000
Acquisition of real estate properties -- -- (64,000)
Proceeds from sale of real estate properties 391,000 -- --
Distributions from partnerships 154,000 532,000 175,000
------------ ------------ ------------
Net cash used in investing activities (7,236,000) (5,200,000) (11,102,000)
------------ ------------ ------------
</TABLE>
See accompanying notes to consolidated financial statements.
31
<PAGE> 32
EDELBROCK CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended June 30,
------------------------------------------------------
1998 1999 2000
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from financing activities
Net proceeds from issuance of
common stock 206,000 154,000 32,000
Dividends paid -- -- (207,000)
Payments to acquire treasury stock -- (737,000) (1,844,000)
Proceeds from long-term debt financing -- -- 4,000
Principal payments on long-term debt (969,000) (51,000) (69,000)
------------ ------------ ------------
Net cash used in financing activities (763,000) (634,000) (2,084,000)
------------ ------------ ------------
Net increase (decrease) in cash and
cash equivalents (1,374,000) 5,315,000 (3,802,000)
Cash and cash equivalents, beginning of year 9,744,000 8,370,000 13,685,000
------------ ------------ ------------
Cash and cash equivalents, end of year $ 8,370,000 $ 13,685,000 $ 9,883,000
============ ============ ============
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest $ 263,000 $ 203,000 $ 195,000
============ ============ ============
Income taxes $ 3,275,000 $ 4,275,000 $ 4,719,000
============ ============ ============
</TABLE>
Supplemental schedule of non-cash investing and financing activities:
The Company entered into a license agreement with a third party (see Note 5). In
conjunction with this license purchase, the Company issued common stock and
common stock warrants as follows:
<TABLE>
<CAPTION>
2000
---------
<S> <C>
License acquired $ 842,000
Common Stock (8,000 shares) (81,000)
Fair Value of Common Stock Warrants (for 80,000 shares) (617,000)
---------
Cash Paid $(144,000)
=========
</TABLE>
See accompanying notes to consolidated financial statements.
32
<PAGE> 33
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 and License Agreement
Property, plant and equipment and License Agreement are stated at cost.
Depreciation and amortization are computed, primarily utilizing the
straight-line method, over the estimated useful lives of the assets as follows:
<TABLE>
<CAPTION>
Estimated
Useful Life
(in years)
-----------
<S> <C>
Buildings and improvements 7-40
Machinery and equipment 3-7
Office equipment 5
Furniture and fixtures 7
Transportation equipment 3-10
License agreement 10
</TABLE>
Long-Lived Assets
Long-lived assets, such as property and equipment, license agreements, 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, 2000.
33
<PAGE> 34
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 bases 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,
1999 and 2000.
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
The Company accounts for stock-based employee compensation as prescribed by APB
Opinion No. 25, "Accounting for Stock Issued to Employees," and has adopted the
disclosure provisions of Statement of Financial Accounting Standards 123,
"Accounting for Stock-based Compensation" ("SFAS 123"). SFAS 123 requires pro
forma disclosures of net income and net income per share as if the fair value
based method of accounting for stock-based awards had been applied. Under the
fair value based method, compensation cost is recorded based on the value of the
award at the grant date and is recognized over the service period.
34
<PAGE> 35
EDELBROCK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Basic and Diluted Net Income Per Share Information
Basic net income per share is based upon the weighted average number of common
shares outstanding. Diluted net income per share is based on the assumption that
options and warrants are included in the calculation of diluted net income per
share, except when their effect would be anti-dilutive. Dilution is computed by
applying the treasury stock method. Under this method, options and warrants are
assumed to be exercised at the beginning of the period (or at the time of
issuance, if later), and as if funds obtained thereby were used to purchase
common stock at the average market price during the period. The Company had no
anti-dilutive options or warrants for the fiscal years ended June 30, 1998 and
1999 and had anti-dilutive options and warrants of 177,915, with exercise prices
ranging from $13.50 - $22.00, for the fiscal year ended June 30, 2000 (see Note
8). Below is the calculation of basic and diluted earnings per share for each of
the past three fiscal years:
<TABLE>
<CAPTION>
Fiscal Year Ended
---------------------------------------------
June 30, 1998 June 30, 1999 June 30, 2000
------------- ------------- -------------
(In Thousands, Except per Share Data)
<S> <C> <C> <C>
Net income $5,800 $7,428 $8,048
====== ====== ======
Weighted average shares outstanding - Basic 5,252 5,251 5,179
Employee stock options and warrants 136 51 6
------ ------ ------
Weighted average shares outstanding - Diluted 5,388 5,302 5,185
====== ====== ======
Earnings per common share:
Basic $ 1.10 $ 1.41 $ 1.55
====== ====== ======
Diluted $ 1.08 $ 1.40 $ 1.55
====== ====== ======
</TABLE>
Segment Reporting
The Company is centrally managed and operates in one business segment: specialty
performance automotive and motorcycle aftermarket parts.
Reclassifications
Certain prior period amounts have been reclassified for comparison with the 2000
presentation.
NOTE 2 - INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
June 30,
------------------------------
1999 2000
----------- -----------
<S> <C> <C>
Raw materials $ 8,671,000 $ 8,468,000
Work in process 1,923,000 1,857,000
Finished goods 6,561,000 6,832,000
----------- -----------
$17,155,000 $17,157,000
=========== ===========
</TABLE>
35
<PAGE> 36
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:
<TABLE>
<CAPTION>
June 30,
----------------------------
1999 2000
---------- ----------
<S> <C> <C>
Mortgage note (a) $1,990,000 $1,921,000
Other 144,000 148,000
---------- ----------
2,134,000 2,069,000
Less current portion 69,000 1,921,000
---------- ----------
$2,065,000 $ 148,000
========== ==========
</TABLE>
(a) Mortgage note, collateralized by a trust deed on real estate with a net book
value of $3,350,000 at June 30, 2000, payable in monthly principal and interest
payments, totaling approximately $22,000, at an interest rate of 10%, due June
2001.
Principal payments are due on long-term debt as follows:
<TABLE>
<CAPTION>
Years ending June 30, Amount
--------------------- ----------
<S> <C>
2001 $1,921,000
2002 148,000
----------
$2,069,000
==========
</TABLE>
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 (9.5% at June 30, 2000). This agreement
expires in February 2001. There were no borrowings on the line at June 30, 1999
and 2000. This obligation contains covenants, among other items, relating to
various financial ratios. The Company was in compliance with all such covenants
at June 30, 2000.
36
<PAGE> 37
EDELBROCK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 - TAXES ON INCOME
The provision (benefit) for taxes on income consists of the following:
<TABLE>
<CAPTION>
Year Ended June 30,
---------------------------------------------------
1998 1999 2000
----------- ----------- -----------
<S> <C> <C> <C>
Current
Federal $ 2,738,000 $ 3,557,000 $ 3,884,000
State 571,000 725,000 707,000
----------- ----------- -----------
3,309,000 4,282,000 4,591,000
----------- ----------- -----------
Deferred
Federal (140,000) 157,000 (244,000)
State 135,000 (95,000) 202,000
----------- ----------- -----------
(5,000) 62,000 (42,000)
----------- ----------- -----------
$ 3,304,000 $ 4,344,000 $ 4,549,000
=========== =========== ===========
</TABLE>
The differences between the U.S. federal statutory tax rate and the Company's
effective rate are as follows:
<TABLE>
<CAPTION>
Year Ended June 30,
---------------------------------------
1998 1999 2000
------ ------ ------
<S> <C> <C> <C>
U.S. federal statutory tax rate 34.0% 35.0% 35.0%
State income taxes (net of federal benefits) 6.4 6.0 6.0
State income tax credits (2.3) (2.0) (2.4)
Federal income tax credits (1.6) (1.5) (2.5)
Other (0.2) (0.6) --
------ ------ ------
Effective tax rate 36.3% 36.9% 36.1%
====== ====== ======
</TABLE>
The components of deferred taxes at June 30, 1999 and 2000 are as follows:
<TABLE>
<CAPTION>
1999 2000
---------- ----------
<S> <C> <C>
Deferred tax assets
State income taxes $ 230,000 $ 271,000
Advertising accrual 186,000 196,000
Uniform capitalization rule 141,000 201,000
Accrued vacation 180,000 249,000
Deferred gains 15,000 15,000
Allowance for doubtful accounts 170,000 170,000
Inventory reserve -- 68,000
Other 50,000 72,000
---------- ----------
$ 972,000 $1,242,000
========== ==========
Deferred tax liabilities:
Depreciation and amortization $1,650,000 $1,648,000
Like kind exchange 1,272,000 1,543,000
State tax deferred items 131,000 90,000
---------- ----------
$3,053,000 $3,281,000
========== ==========
</TABLE>
37
<PAGE> 38
EDELBROCK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 - COMMITMENTS AND CONTINGENCIES
Royalty and Development Fee Agreements
In February 1996, 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:
<TABLE>
<CAPTION>
Aggregate Net Sales Volume Royalty
-------------------------- -------
<S> <C>
Up to $4,000,000 8%
From $4,000,001 to $8,000,000 7%
$8,000,001 and above 6%
</TABLE>
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 $381,000, $702,000, and $750,000 for fiscal year ended
June 30, 1998, 1999, and 2000, respectively.
In June 2000, the Company entered into a Product Development and Distribution
Agreement (License Agreement) with Engine Dynamics, Inc. (JG) and Automotive
Systems Group Inc. (collectively the Licensor) whereby the Company will pay the
Licensor 5% of net revenues derived from the sale of internal engine, exhaust,
and suspension components for import aftermarket products. In connection with
this agreement, the Company paid to the Licensor cash of $144,000 and issued
common stock and warrants with a fair value of $81,000 and $617,000,
respectively (see Note 8). The Company capitalized the total $842,000 cost of
this License Agreement and will amortize the asset over its estimated useful
life of 10 years.
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. Edelbrock Corporation matches 50% up
to 4% of a participant's 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
year ended June 30, 1998, $595,000 for the year ended June 30, 1999, and
$636,000 for the year ended June 30, 2000.
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. Edelbrock Foundry Corp. matches 50% up to 4% of a
participant's contribution to this plan. Contributions to the Plan amounted to
$55,000 for the years ended June 30, 1998, $65,000 for the year ended June 30,
1999, and $65,000 for the year ended June 30, 2000.
The Company had accrued contributions of $618,000 and $649,000 at June 30, 1999
and 2000, 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.
38
<PAGE> 39
EDELBROCK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
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.
NOTE 6 - MAJOR CUSTOMERS
During the fiscal years ended June 30, 1998, 1999, and 2000, one customer
accounted for 16.0%, 14.8%, and 14.8% of revenues, respectively. Another
customer accounted for 10.2% of revenues during fiscal year ended June 30, 2000.
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 41% of the Company's revenues for the year ended
June 30, 2000. 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.
1994 Stock Option Plan For Non-Employee Directors
Additionally, the Company adopted the Edelbrock Corporation 1994 Stock Option
Plan for Non-Employee Directors ("Director Plan"), which authorizes the granting
of non-qualified stock options to certain non-employee directors of the Company.
The maximum number of shares granted under the Director Plan shall not exceed
25,000 shares of Common Stock. Initial grants of options under the Director Plan
totaled 14,000. Three grants of 3,500 shares each were 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 his vested options. The Company elected a new director and granted
3,500 shares at a price of $16.375 per share.
39
<PAGE> 40
EDELBROCK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 - SHAREHOLDERS' EQUITY (CONTINUED)
A summary of changes in common stock options during 1998, 1999, and 2000 are as
follows:
<TABLE>
<CAPTION>
Number of Weighted Average Aggregate
Shares Price Per Share Exercise Price
--------- ---------------- --------------
<S> <C> <C> <C>
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 69,662
------- ----------
Outstanding at June 30, 1999 344,799 13.20 4,550,003
Granted 0 -- 0
Exercised 2,400 13.50 32,400
Cancelled 7,861 15.15 119,128
------- ----------
Outstanding at June 30, 2000 334,538 13.15 $4,398,475
======= ==========
Options exercisable (vested) at June 30, 2000 315,038 $12.85 $4,047,375
======= ==========
</TABLE>
On February 2, 1996, the Company issued warrants to purchase 100,000 shares of
common stock at $14.75 per share to RICOR Racing and Development L.P. "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, 1996.
40
<PAGE> 41
EDELBROCK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 - SHAREHOLDERS' EQUITY (CONTINUED)
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.
On June 26, 2000, the Company issued 8,000 shares of common stock at $10.125 per
share to Automotive Systems Group Inc. and issued warrants to purchase 80,000
shares of the Company's common stock at an exercise price of $11.00 to JG Engine
Dynamics, Inc. The warrants vest annually on June 1st of each year through a
period of 4 years with the first 25% vesting on June 1, 2001. The exercise term
starts June 1, 2001 and expires on May 31, 2010 (see Note 5).
A summary of changes in stock warrants during 1998, 1999, and 2000 are as
follows.
<TABLE>
<CAPTION>
Number of Weighted Average Aggregate
Shares Price Per Share Exercise Price
--------- ---------------- --------------
<S> <C> <C> <C>
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
Granted 80,000 11.00 880,000
Exercised 0 -- 0
Cancelled 0 -- 0
------- ----------
Outstanding at June 30, 2000 224,415 $14.07 $3,157,144
======= ==========
Warrants exercisable (vested) at June 30, 2000 97,472 $15.03 $1,464,922
======= ==========
</TABLE>
41
<PAGE> 42
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 income 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 1998, 1999, and fiscal
2000: dividend yield of zero percent, risk-free interest rate of 6 percent,
expected lives of ten years, and expected volatility of 9.27, 27.96, and 63.96
respectively. Under the accounting provisions of FASB Statement 123, the
Company's net income and income per share for 1998, 1999, and 2000 would have
been reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
Year Ended June 30,
-----------------------------------------------------------
1998 1999 2000
------------- ------------- -------------
<S> <C> <C> <C>
Net income
As reported $5,800,000 $7,428,000 $8,048,000
Pro forma $5,563,000 $7,203,000 $7,953,000
Income per share
As reported - Basic $ 1.10 $ 1.41 $ 1.55
As reported - Diluted $ 1.08 $ 1.40 $ 1.55
Pro forma - Basic $ 1.06 $ 1.37 $ 1.54
Pro forma - Diluted $ 1.03 $ 1.36 $ 1.53
</TABLE>
The following table summarizes information about stock options and warrants
outstanding at June 30, 2000:
Stock Options:
<TABLE>
<CAPTION>
Number Weighted-Average Exercisable Number
Range of Exercise Outstanding Remaining Weighted-Average Exercisable Weighted-Average
Prices at 6/30/00 Contractual Life Exercise Price at 6/30/00 Exercise Price
----------------- ----------- ---------------- ---------------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
$12.50 294,038 5.30 $12.50 294,038 $12.50
$13.50 - $15.00 3,000 9.69 $14.00 1,400 $13.93
$16.00 - $19.50 37,500 7.97 $18.20 19,600 $17.98
----------------- ----------- ---------------- ---------------- ----------- ----------------
$12.50 - $19.50 334,538 5.64 $13.20 315,038 $12.85
================= =========== ================ ================ =========== ================
</TABLE>
The weighted average fair value of options granted during the year ended June
30, 1999 was $8.10. No options were granted during the year end June 30, 2000.
Warrants:
<TABLE>
<CAPTION>
Number Weighted-Average Exercisable Number
Range of Exercise Outstanding Remaining Weighted-Average Exercisable Weighted-Average
Prices at 6/30/00 Contractual Life Exercise Price at 6/30/00 Exercise Price
----------------- ----------- ---------------- ---------------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
$11.00 - $22.00 224,415 6.75 $15.77 97,472 $15.03
================== =========== ================ ================ =========== ================
</TABLE>
The weighted average fair value of warrants granted during the years ended June
30, 1999 and 2000 were $3.45 and $7.72, respectively.
42
<PAGE> 43
NOTE 9 - LEGAL PROCEEDINGS
As previously reported, 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.
43
<PAGE> 44
EDELBROCK CORPORATION
SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Charged to
Balance at Costs and Balance at
Beginning of Year Expenses Deductions End of Year
----------------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
Year ended June 30, 2000:
Allowance for doubtful accounts $ 500,000 -- -- $ 500,000
Inventory reserves $ - $ 200,000 -- $ 200,000
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
</TABLE>
44
