-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, LqhJypRydlmnV0UFseu4oNmmVBXWfRUBFSBD0A4nJ4fNFkTj7MyDMTY/T1MgMxkD /YK5FpkJTeZtpDKRVe6b9g== 0000950150-98-001553.txt : 19980929 0000950150-98-001553.hdr.sgml : 19980929 ACCESSION NUMBER: 0000950150-98-001553 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19980928 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: EDELBROCK CORP CENTRAL INDEX KEY: 0000929037 STANDARD INDUSTRIAL CLASSIFICATION: MOTOR VEHICLE PARTS & ACCESSORIES [3714] IRS NUMBER: 330627520 STATE OF INCORPORATION: DE FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 000-24802 FILM NUMBER: 98715511 BUSINESS ADDRESS: STREET 1: 2700 CALIFORNIA STREET CITY: TORRANCE STATE: CA ZIP: 90503 BUSINESS PHONE: 3107812222 10-K405 1 FORM 10-K405 1 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, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] For the transition period from _________to__________ Commission file number 0-24802 EDELBROCK CORPORATION (Exact name of Registrant as specified in its charter) Delaware 33-0627520 (State or other jurisdiction (I.R.S. Employer Identification No.) of incorporation or organization) 2700 California Street Torrance, California 90503 (Address of principal executive offices, including Zip Code) Registrant's telephone number, including area code: (310) 781-2222 Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.01 par value (Title and Class) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ---- ---- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in part II of this Form 10-K or any amendments to this Form 10-K. [ X ] The aggregate market value of voting stock held by non-affiliates of the Registrant, as of September 25, 1998, was approximately $72,520,000 (based upon the closing price for shares of the Registrant's Common Stock as reported by the NASDAQ Stock Market). On September 25, 1998, 5,250,316 shares of the Registrant's Common Stock, $.01 par value, were outstanding. DOCUMENT INCORPORATED BY REFERENCE Information required by Part III (Items 10, 11, 12 and 13) is incorporated by reference to the Company's definitive proxy statement for its 1998 Annual Meeting of Shareholders. 1 2 ANNUAL REPORT ON FORM 10-K TABLE OF CONTENTS
Page ---- PART I Item 1. Business........................................................................... 3 Item 2. Properties......................................................................... 5 Item 3. Legal Proceedings.................................................................. 5 Item 4. Submission of Matters To a Vote of Security Holders................................ 5 Additional Item: Executive Officers of the Company.................................................. 6 PART II Item 5. Market for the Company's Common Stock and Related Shareholder Matters................................................................ 7 Item 6. Selected Consolidated Financial Data............................................... 8 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations................................................ 10 Item 7A. Quantitative and Qualitative Disclosure About Market Risk.......................... 16 Item 8. Financial Statements and Supplementary Data........................................ 16 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure................................................ 17 PART III Item 10. Directors of the Company........................................................... 17 Item 11. Executive Compensation............................................................. 17 Item 12. Security Ownership of Certain Beneficial Owners and Management.............................................................. 17 Item 13. Certain Relationships and Related Transactions..................................... 17 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K................................................................ 17 Signatures ................................................................................... 20
2 3 PART I Item 1. Business GENERAL Edelbrock Corporation (the "Company") is one of America's leading manufacturers and marketers of specialty performance automotive and motorcycle aftermarket parts. The Company designs, manufacturers, distributes and markets a wide range of high quality performance products, including intake manifolds, carburetors, camshafts, cylinder heads, exhaust systems, shock absorbers and other components designed for most domestic V8 and selected V6 engines. These products are designed to enhance street, off-road, recreational and competition vehicle performance through increased horsepower, torque and drivability. The Company also designs and markets products to enhance engine and vehicle appearance, such as chrome and polished aluminum air cleaners, valve covers and breathers. In October 1994, the Company introduced performance aluminum cylinder heads and intake manifolds for the Harley-Davidson Evolution engine which are distributed and marketed through over 5,000 Harley-Davidson performance shops nationwide. In March 1995, the Company acquired substantially all of the assets of QwikSilver II, Inc. of Apple Valley, California a manufacturer of aftermarket Harley-Davidson and other motorcycle carburetors and air cleaners. In May 1997, the Company entered the performance shock absorber market for a range of all aftermarket applications with certain restrictions utilizing RICOR Racing and Development, L.P.'s ("RICOR") patented "inertia sensitive system." In connection therewith, the Company has entered into a royalty agreement with RICOR and issued warrants to purchase common stock of the Company. See Notes 5 and 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 Chief Executive Officer of the Company. In 1967, the Company moved its operations to El Segundo, California. The Company continued designing and marketing new generations of manifolds throughout the 1960's and 1970's. In the 1980's, the Company expanded it product line to include camshaft kits, valve train parts, exhaust systems and other performance components thus developing the "Total Power Package" line. In 1987, the Company moved to its present location in Torrance, California and in 1990 built its own sand-cast aluminum foundry in San Jacinto, California. In the 1990's, the Company has continued to expand its product lines to include carburetors, aluminum cylinder heads, aluminum water pumps, fuel-injected manifolds and aftermarket performance parts for Harley-Davidson motorcycles. In 1995, the Company completed the construction of a 37,000 square foot building in Torrance, California to house its exhaust products division and a 15,000 square foot facility to expand the Company's Foundry warehouse space in San Jacinto, California. In late 1996, the Company completed construction of a 45,000 square foot facility adjacent to its existing exhaust facility which is being utilized primarily for the manufacture of shock absorbers, as well as to accommodate additional corporate expansion including warehouse overflow. In May 1997, the Company began production on a new line of performance aftermarket shock absorbers. In July 1997, the Company completed construction of a 12,000 and 15,000 square foot facility on Company owned property at its Foundry location in San Jacinto, California. The 12,000 square foot facility is being utilized for additional Foundry warehouse space and the 15,000 houses the Company's "QwikSilver" motorcycle parts division, which was relocated from Apple Valley, California. In September 1998, the Company announced its intent to construct a 65,000 square foot distribution facility on Company-owned property adjacent to its exhaust system and shock absorber production facility in Torrance, California. The Company expects this facility to be fully operational in July 1999. 3 4 RESEARCH AND DEVELOPMENT The Company seeks to develop new products to respond to consumer demand, to increase performance characteristics of existing product lines and to enter into new product lines. For the fiscal year ended June 30, 1996, 1997 and 1998 research and development expenditures totalled $2,227,000, $2,874,000 and $2,972,000, respectively. PRODUCTS The Company offers over 1,800 performance automotive and motorcycle aftermarket parts for street, offroad, recreational and competition use. The Company's products are designed to enhance the engine's performance through increased horsepower, torque and drivability primarily by improving induction of fuel and air into and exhaust out of the engine. The Company also designs and markets products to improve appearance. The Company's present lines include, among other items, intake manifolds, which accounted for 32%, 29% and 29% of the Company's revenues for fiscal years 1996, 1997 and 1998, respectively and carburetors, which accounted for 39%, 42% and 40% of the Company's revenue for fiscal years 1996, 1997 and 1998, respectively. See "Item 6. Selected Consolidated Financial Data" for the Company's revenue, operating income and total assets for each of the last three years. DISTRIBUTION, SALES AND MARKETING The Company has established a balanced nationwide distribution network, which encompasses all the major channels of distribution. It is the Company's policy to offer its products at the same price and under the same terms and conditions in each of its channels of distribution. The Company's products are sold in all 50 states and Canada, as well as to a lesser degree in Australia, Europe, New Zealand and the Pacific Rim, and distributed through the following channels: - Retail Automotive Chain Stores. - Mail Order Catalog Houses. - Warehouse Distributors and Performance Specialty Dealers. In addition to the foregoing channels of distribution, the Company supplies select component parts to original equipment manufacturers, including Ford Motor Company, Volvo-Penta of the Americas, Inc., General Motors Corporation, and Mercruiser, Inc., a division of Brunswick Corporation. The Company's aluminum foundry casts components for a variety of third-party manufacturers. The Company's sales are subject to seasonal variations. Customer orders and sales are greatest in the second, third and fourth quarters of the Company's fiscal year in anticipation of and during the spring and summer months. Accordingly, revenues and operating income tend to be relatively higher in the third and fourth fiscal quarters. This seasonality typically results in reduced earnings for the Company's first and second fiscal quarters because a significant portion of operating expenses are fixed throughout the fiscal year. One customer, Auto Sales, Inc., accounted for 16.0% of the Company's revenues for fiscal year 1998. For fiscal year 1997 three customers, Auto Sales, Inc., Super Shops, Inc., and Auto Zone accounted for 12.9%, 11.7% and 11.4%, respectively, of the Company's revenues. For fiscal year 1996, two customers, Auto Sales, Inc. and Super Shops, Inc. accoumted for 16.0% and 12.7% respectively, of the Company's revenues. See Note 6 of Notes to Consolidated Financial Statements of the Company. MANUFACTURING The Company conducts manufacturing operations in its Torrance, California facilities and its aluminum foundry in San Jacinto, California. The Company manufactures products such as manifolds, cylinder heads, water pumps, shock absorbers and exhaust systems. Approximately 55% of the Company's revenues for fiscal year 1998 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 1998, representing approximately 40% of the Company's revenue for that fiscal year. The agreement extends through 1999 and is renewable at the option of the parties. See Note 7 of Notes to Consolidated Financial Statements. COMPETITION There is significant competition in the performance automotive and motorcycle parts industries. The Company competes with other companies and individuals in the manufacture and sale of performance automotive and motorcycle parts. The Company competes with, among others, Weiand Automotive and Holley Replacement Parts ("Holley") in the manifold market, Holley and Federal-Mogul Corporation in the automotive carburetor market, Rancho Industries and Billstein in the shock absorber 4 5 market, Crane Cams and Competition Cams in the camshaft market, World Products and TFS in the cylinder head market and Mr. Gasket, TransDapt and Moroso in the specialty automotive accessories market. The Company competes primarily with S & S Cycle, Incorporated and Mikuni of America in the motorcycle aftermarket. The Company competes primarily on the basis of product quality and brand name recognition, service and price. Some of the Company's competitors are substantially larger and have greater financial resources than the Company. TRADEMARKS AND PATENTS The Company owns over 40 trademarks and patents used in connection with the marketing of the Company's products, including Edelbrock(R), Torker(R), Torker II(R), Tunnel Ram(R), Signature Series(R), Performer Series(R), QwikSilver II(R), Performer IAS(R) and Edelbrock Total Power Package(R). The Company believes that its trademarks and patents and the associated recognition, reputation and customer loyalty contribute to the success of the Company's business operations. The Company possesses a number of United States and international patents, including three United States patents relating to the Company's manifolds, all of which also contribute to the success of the Company's operations. The Company's patents expire between 1998 and 2013. EMPLOYEES As of June 30, 1998 the Company employed 563 persons in the operation of its business. The Company believes that its ability to attract and retain qualified management personnel and skilled production technicians and marketing employees will be a key determinant of the Company's continued success. The Company has not entered into any collective bargaining agreements with any unions and believes that its overall relations with its employees are good. Item 2. Properties The Company owns its headquarters and manufacturing facilities located in buildings of approximately 142,000, 45,000 and 37,000 square feet, respectively, in Torrance, California, and three buildings for its Foundry operations located in approximately 73,000, 15,000, and 12,000 square feet as well as a 15,000 square foot facility for its Qwiksilver division in San Jacinto, California. The 73,000 square foot facility and related land are subject to a deed of trust which secures certain indebtedness incurred in connection with the construction of the facility. See Note 3 of Notes to Consolidated Financial Statements. In December 1996, the Company completed construction of a new 45,000 square foot facility on Company owned property contiguous to its current exhaust facility in Torrance, California. This facility is being utilized primarily for the manufacture of performance aftermarket shock absorbers and to house additional corporate expansion including warehouse overflow. In July 1997, the Company completed construction of 12,000 and 15,000 square foot facilities on Company owned property at its Foundry location in San Jacinto, California. The 12,000 square foot facility is being utilized for additional Foundry warehouse space and the 15,000 square foot facility houses the Company's QwikSilver division, which was relocated from Apple Valley, California. In September 1998, the Company announced its intent to construct a 65,000 square foot distribution facility on Company-owned property adjacent to its exhaust system and shock absorber production facility. The Company expects this facility to be fully operational in July 1999. The Company believes that its existing facilities and those planned for the current fiscal year are adequate to meet its current requirements. Item 3. Legal Proceedings There is no material legal proceeding to which the Company is a party or to which any of its properties are subject. Item 4. Submission of Matters to a Vote of Security Holders. No matter was submitted, during the fourth quarter of the fiscal year covered by this report, to a vote of shareholders. 5 6 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, 1998:
NAME AGE POSITION - ---- --- -------- O. Victor Edelbrock........................... 61 Chairman, President and Chief Executive Officer Jeffrey L. Thompson........................... 45 Executive Vice-President, Chief Operating Officer and Director Aristedes T. Feles............................ 30 Vice-President of Finance and Director Adrian Murray................................. 43 Vice-President of Sales Wayne P. Murray............................... 46 Vice-President of Manufacturing Jack B. Mayberry.............................. 51 Vice-President of Research & Development Cathleen Edelbrock-Ford....................... 38 Vice-President of Advertising, Secretary and Director Nancy Edelbrock............................... 61 Treasurer Ronald L. Webb................................ 64 Executive Vice-President of Edelbrock Foundry Corp.
O. Victor Edelbrock has been Chairman, President and Chief Executive Officer of the Company since 1962. Mr. Edelbrock is the husband of Nancy Edelbrock and the father of Cathleen Edelbrock-Ford. Jeffrey L. Thompson has been the Executive Vice-President/General Manager and Chief Operating Officer of the Company since December 1988. He is also a member of the board of directors of the Specialty Equipment Market Association. Mr. Thompson has been a director of the Company since 1994. Aristedes T. Feles has been the Vice President of Finance since July 1996 and was previously Controller for the Company (since 1992). Prior to 1992, Mr. Feles was employed as a senior accountant at BDO Seidman, LLP (since 1989). Mr. Feles has been a director of the Company since July 1996. Adrian Murray has been Vice-President of Sales for the Company since 1992. Mr. Murray was previously the National Sales Manager for the Company (since 1988). Wayne P. Murray has been employed in various positions by the Company since 1969 and has been Vice-President of Manufacturing for the Company since 1984. Jack B. Mayberry has been the Vice President of Research & Development for the Company since 1995. Prior to joining the Company, Mr. Mayberry was a captain in the U.S. Navy where he served for 25 years. Cathleen Edelbrock-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). 6 7 PART II Item 5. Market for Company's Common Stock and Related Shareholder Matters. The Company's Common Stock is traded over-the-counter on the National Association of Securities Dealers Automated Quotation System ("NASDAQ") Stock Market under the symbol EDEL. The following table sets forth the range of high and low closing sales prices, as reported on the NASDAQ Stock Market for fiscal years 1997 and 1998. On September 25, 1998 the Company had 99 holders of record of its Common Stock and 5,250,316 shares outstanding and a closing price of $13.8125.
Price Range of Common Stock ------------------------------ Year Ended June 30, 1997 High Low --------- --------- First Quarter $ 17.75 $ 15.25 Second Quarter $ 17.25 $ 14.75 Third Quarter $ 20.75 $ 15.25 Fourth Quarter $ 22.25 $ 17.25
Year Ended June 30, 1998 High Low --------- --------- First Quarter $ 22.50 $ 17.38 Second Quarter $ 22.13 $ 15.50 Third Quarter $ 20.25 $ 16.00 Fourth Quarter $ 19.50 $ 16.50
Since its initial public offering, the Company has not declared or paid a dividend on its common stock. The Company currently plans to retain all of its earnings to support the development and expansion of its business and has no present intention of paying any dividends on the Common Stock in the foreseeable future. However, the Board of Directors of the Company will review the dividend policy periodically to determine whether the declaration of dividends is appropriate. 7 8 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, 1998 and 1997 and the Income Statement Data and the Other Data for each of the three fiscal years in the period ended June 30, 1998 have been derived from the audited Consolidated Financial Statements of the Company, which were audited by BDO Seidman, LLP as indicated in their report included elsewhere in this Form 10-K. The Balance Sheet Data at June 30, 1996, 1995 and 1994 and the Income Statement Data and the Other Data for each of the two fiscal years in the period ended June 30, 1995 have been derived from audited financial statements not included herein.
INCOME STATEMENT DATA: 1994 1995 1996 1997 1998 ------------ ------------ ------------ ------------ ------------ Revenues $ 53,509,000 $ 68,792,000 $ 79,032,000 $ 87,120,000 $ 95,504,000 Cost of sales 31,012,000 40,883,000 47,043,000 52,163,000 57,410,000 ------------ ------------ ------------ ------------ ------------ Gross profit 22,497,000 27,909,000 31,989,000 34,957,000 38,094,000 ------------ ------------ ------------ ------------ ------------ Operating expenses Selling, general and administrative 15,203,000 17,172,000 20,392,000 21,308,000 24,281,000 Research and development 1,862,000 1,963,000 2,227,000 2,874,000 2,972,000 Provision for uncollectible receivable -- -- -- -- 1,878,000 ------------ ------------ ------------ ------------ ------------ Total operating expenses 17,065,000 19,135,000 22,619,000 24,182,000 29,131,000 ------------ ------------ ------------ ------------ ------------ Operating income 5,432,000 8,774,000 9,370,000 10,775,000 8,963,000 Interest expense 672,000 552,000 344,000 340,000 269,000 Interest income -- 344,000 523,000 317,000 410,000 Other income -- -- 274,000 469,000 -- ------------ ------------ ------------ ------------ ------------ Income from continuing operations before taxes on income and cumulative effect of change in accounting principle 4,760,000 8,566,000 9,823,000 11,221,000 9,104,000 Taxes on income from continuing operations 1,740,000 3,336,000 3,346,000 4,076,000 3,304,000 ------------ ------------ ------------ ------------ ------------ Income from continuing operations before cumulative effect of change in accounting principle 3,020,000 5,230,000 6,477,000 7,145,000 5,800,000 Income (loss) from discontinued operations, net of tax (1) (62,000) 1,086,000 -- -- -- ------------ ------------ ------------ ------------ ------------ Income before cumulative effect of change in accounting principle 2,958,000 6,316,000 6,477,000 7,145,000 5,800,000 Cumulative effect on prior years of change in accounting for taxes on income (2) 201,000 -- -- -- -- ------------ ------------ ------------ ------------ ------------ Net income $ 3,159,000 $ 6,316,000 $ 6,477,000 $ 7,145,000 $ 5,800,000 ============ ============ ============ ============ ============
8 9
Year Ended June 30, ----------------------------------------------------------------------------------- PER SHARE DATA: 1994 1995 1996 1997 1998 -------------- -------------- -------------- -------------- -------------- Income per share before change in accounting principle and discontinued operations $ 0.81 $ 1.10 $ 1.24 $ 1.36 $ 1.10 Income (loss) per share from discontinued operations, net of tax (0.02) 0.22 -- -- -- Basic net income per share (3) $ 0.84 $ 1.32 $ 1.24 $ 1.36 $ 1.10 Diluted net income per share (3) $ 0.84 $ 1.32 $ 1.22 $ 1.34 $ 1.08 Basic weighted average shares outstanding (3) 3,750,000 4,772,000 5,241,000 5,244,000 5,252,000 Diluted weighted average shares outstanding (3) 3,750,000 4,799,000 5,311,000 5,352,000 5,388,000 OTHER DATA: Capital expenditures $ 2,396,000 $ 12,221,000 $ 4,342,000 $ 8,602,000 $ 8,077,000 Dividends -- -- -- -- --
June 30, ------------------------------------------------------- BALANCE SHEET DATA: (In thousands) 1994 1995 1996 1997 1998 ------- ------- ------- ------- ------- Working capital $ 7,772 $20,033 $23,953 $26,428 $29,260 Total assets 50,272 62,771 66,430 77,868 84,975 Total long-term debt 17,278 4,657 3,148 2,178 2,123 Shareholders' equity 18,761 41,923 48,420 55,650 61,731
(1) On May 1, 1995, the Company disposed of substantially all of its real estate operations. See Management's Discussion and Analysis of Financial Condition and Results of Operation for further information regarding the Company's real estate operations. (2) On July 1, 1993, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes." (3) The Company adopted Statement of Financial Accounting Standards No. 128, "Earnings Per Share," in the fiscal year ended June 30, 1998. All historical earnings per share data have been restated to conform to this presentation. 9 10 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, 1996, 1997 and 1998. The following should be read in conjunction with the Consolidated Financial Statements and related notes appearing elsewhere herein. OVERVIEW The Company was founded in 1938, and is one of America's leading manufacturers and marketers of specialty performance automotive and motorcycle aftermarket parts. The Company designs, manufactures, packages and markets performance automotive and motorcycle aftermarket parts, including intake manifolds, carburetors, shock absorbers, camshafts, cylinder heads, exhaust systems and other performance components for most domestic V8 and selected V6 engines. In addition, the Company offers performance aftermarket manifolds, cylinder heads, camshafts, air cleaners, and carburetors for Harley-Davidson motorcycles. The Company currently offers over 1,800 performance automotive and motorcycle aftermarket parts for street, off-road, recreational and competition use. Product Mix The Company manufactures its own products and purchases other products designed to the Company's specifications from third-party manufacturers for subsequent packaging and distribution to the Company's customers. Generally, the Company can achieve a higher margin on those products, which it manufactures as compared to those purchased from third-party manufacturers. Accordingly, the Company's results of operations in any given period are affected by product mix. For example, in recent years, the Company has experienced significant growth in the sale of carburetors, which it has purchased pursuant to a long-term contract with a third-party manufacturer. Product Concentration Historically, the Company has derived a substantial portion of its revenues from the sale of intake manifolds and carburetors. For the fiscal years ended June 30, 1996, 1997, and 1998 approximately 32%, 29%, and 29% of revenues were derived from the sales of intake manifolds and 39%, 42%, and 40% 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 September 1998, the Company announced its intent to construct a 65,000 square foot distribution facility on Company-owned property adjacent to its exhaust system and shock absorber production facility in Torrance, California. The Company expects this facility to be fully operational in July 1999. 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. 10 11 RESULTS OF OPERATIONS The following table sets forth, for the periods indicated, the percentage of revenues of certain items in the Company's consolidated statements of income and the percentage change in each item from the prior period.
Percentage of Percentage of Revenues for Year Revenues for Year Ended June 30, Year Ended Ended June 30, Year Ended ------------------ June 30, 1997 ------------------ June 30, 1998 As Compared As Compared To Year To Year Ended Ended 1996 1997 June 30, 1996 1997 1998 June 30, 1997 ----- ----- ------------- ----- ----- ------------- Revenues 100.0% 100.0% 10.2% 100.0% 100.0% 9.6% Cost of sales 59.5 59.9 10.9 59.9 60.1 10.1 ----- ----- ----- ----- Gross profit 40.5 40.1 9.3 40.1 39.9 9.0 ----- ----- ----- ----- Operating expenses Selling, general and administrative 25.8 24.5 4.5 24.5 25.4 14.0 Research and development 2.8 3.3 29.1 3.3 3.1 3.4 Provision for uncollectible receivable -- -- -- -- 2.0 100.0 ----- ----- ----- ----- Total operating expenses 28.6 27.8 6.9 27.8 30.5 20.5 ----- ----- ----- ----- Operating income 11.9 12.4 15.0 12.4 9.4 (16.8) Interest expense 0.4 0.4 (1.2) 0.4 0.3 (20.9) Interest income 0.7 0.4 (39.4) 0.4 0.4 29.3 Other income 0.3 0.5 71.2 0.5 0.0 100.0 ----- ----- ----- ----- Income from operations before taxes on income 12.4 12.9 14.2 12.9 9.5 (18.9) Taxes on income 4.2 4.7 21.8 4.7 3.4 (18.9) ----- ----- ----- ----- Net Income 8.2% 8.2% 10.3% 8.2% 6.1% (18.8%) ===== ===== ===== =====
11 12 FISCAL YEAR 1998 COMPARED TO FISCAL YEAR 1997 Revenues Revenues increased 9.6% to $95.5 million in fiscal year 1998 from $87.1 million in fiscal year 1997. The increase was primarily the result of an increase in volume of approximately $5.1 million or 16.2% in the sale of carburetors, an increase of $2.0 million or 32.1% in the sale of aluminum cylinder heads and an increase of $2.8 million or 11.4 % in the sale of intake manifolds. Cost of Sales Cost of sales increased 10.1% to $57.4 million in fiscal year 1998 from $52.2 million in fiscal year 1997. As a percent of revenues, cost of sales increased to 60.1% in fiscal year 1998 from 59.9% in fiscal year 1997. The increase in cost of sales was primarily due to an increase in sales which included a change in product mix toward lower margin products, partially offset by improved production efficiencies associated with the introduction of high-tech machining centers used in the production of manifolds, cylinder heads and water pumps. Selling, General and Administrative Expense Selling, general and administrative expenses increased 14.0% to $24.3 million in fiscal year 1998 from to $21.3 million in fiscal year 1997. This increase resulted primarily from the Company's depreciation and related expenditures in connection with the implementation of a state-of-the-art Oracle database system, company-wide development of QS 9000 quality standard and increased advertising expense, sales commissions and salaries associated with increased sales. As a percent of sales, selling, general and administrative expenses increased to 25.4% in fiscal year 1998 from 24.5% in fiscal year 1997. Research and Development Expense Research and development expense increased 3.4% to $3.0 million in fiscal year 1998 from $2.9 million in fiscal year 1997. As a percent of revenue, research and development expense decreased to 3.1% in fiscal year 1998 from 3.3% in fiscal year 1997. The Company plans on continuing to expand its research and development program, but through improved efficiency, expenditures may decrease as a percent of revenue in the future. Provision for Uncollectible Receivable In December 1997, the Company wrote-off approximately $1.9 million of unsecured trade receivables relating to Super Shops, Inc., which filed a voluntary petition for reorganization under Chapter 11 of the Federal Bankruptcy Code and further obtained court approval in February 1998 to begin a "Going Out of Business Sale" under Chapter 11 of the Federal Bankruptcy Code. The Company provided for this loss during the second quarter of fiscal 1998. Operating Income Operating income decreased 16.8% to $9.0 million in fiscal year 1998 from $10.8 million in fiscal year 1997. This decrease was a result of the $1.9 million pre-tax charge against earnings to offset unsecured Super Shops, Inc. trade receivables and the increase in selling, general and administrative expenses. Interest Expense Interest expense decreased 20.9% to $269,000 in fiscal year 1998 from $340,000 in fiscal 1997. This decrease was primarily due to retirement of debt and a decrease in the principal amount of average debt outstanding. Interest Income Interest income increased 29.3% to $410,000 in fiscal year 1998 from $317,000 in fiscal year 1997. This increase was the result of interest earned on invested cash. Taxes on Income The provision of income taxes decreased $772,000 to $3,304,000 in fiscal year 1998 from $4,076,000 in fiscal year 1997. The effective tax rate for both periods was 36.3%. Net Income The Company's net income decreased 18.8% for fiscal year 1998 to $5.8 million in fiscal 1998 from $7.1 million in fiscal year 1997. This decrease was primarily due to the items mentioned above. 12 13 FISCAL YEAR 1997 COMPARED TO FISCAL YEAR 1996 Revenues Revenues increased 10.2% to $87.1 million in fiscal year 1997 from $79.0 million in fiscal year 1996. The increase was primarily the result of an increase in volume of approximately $5.8 million, or 18.6%, in the sale of carburetors, an increase of $1.7 million, or 38.0%, in the sale of aluminum cylinder heads, and an increase of $600,000, or 34.4%, in the sale of performance aftermarket parts for Harley-Davidson motorcycles. Cost of Sales Cost of sales increased 10.9% to $52.2 million in fiscal year 1997 from $47.0 million in fiscal year 1996. As a percent of revenues, cost of sales increased to 59.9% in fiscal year 1997 from 59.5% in fiscal year 1996. The increase in cost of sales was primarily due to an increase in sales which included a change in product mix toward third-party manufactured products, partially offset by improved production efficiencies associated with the introduction of high-tech machining centers used in the production of manifolds, cylinder heads and water pumps. Selling, General and Administrative Expense Selling, general and administrative expenses increased 4.5% to $21.3 million in fiscal year 1997 from $20.4 million in fiscal year 1996. This increase was primarily due to increased advertising expense, sales commissions and salaries associated with increased sales. As a percent of sales, selling, general and administrative expenses decreased to 24.5% in fiscal year 1997 from 25.8% in fiscal year 1996. Research and Development Expense Research and development expense increased 29.1% to $2.9 million in fiscal year 1997 from $2.2 million in fiscal year 1996. As a percent of revenue, research and development expense increased to 3.3% in fiscal year 1997 from 2.8% in fiscal year 1996, primarily as a result of increased expenditures relating to the development of performance aftermarket shock absorbers. Operating Income Operating income increased 15.0% to $10.8 million in fiscal year 1997 from $9.4 million in fiscal year 1996. This increase was a result of the items mentioned above. Interest Expense Interest expense decreased 1.2% to $340,000 in fiscal year 1997 from $344,000 in fiscal year 1996, primarily as a result of a decrease in average debt outstanding. Interest Income Interest income decreased 39.4% to $317,000 in fiscal year 1997 from $523,000 in fiscal year 1996. This decrease was the result of a decrease in the balance of invested funds raised from the Company's initial public offering. Other Income During fiscal year 1997, the Company sold a piece of property that resulted in a $274,000 pre-tax gain. Additionally, one of the partnerships in which the Company holds a 50% interest sold a portion of its real estate, which resulted in a $192,000 pretax gain. Taxes on Income The provision for taxes on income increased $730,000 to $4.1 million in fiscal year 1997 from $3.3 million in fiscal year 1996. The effective tax rate increased to 36.3% in fiscal year 1997 from 34.1% in fiscal year 1996 as a result of a decrease in available capital expenditures relating to state income tax credits. Net Income The Company's net income increased 10.3% to $7.1 million in fiscal 1997 from $6.5 million in fiscal 1996. This increase was primarily due to the items mentioned above. 13 14 Quarterly Results The following table sets forth unaudited operating data for each of the specified quarters of fiscal years 1997 and 1998. This quarterly information has been prepared on the same basis as the annual consolidated financial statements and, in the opinion of management, contains all adjustments necessary to state fairly the information set forth herein. The sum of the four quarters earnings per share may not agree to the fiscal year earnings per share due to rounding. The unaudited quarterly financial data presented below has not been subject to a review by BDO Seidman, LLP, Edelbrock's independent certified public accountants.
For the Fiscal Year Ended For the Fiscal Year Ended June 30, 1997 June 30, 1998 ------------------------------------------- ------------------------------------------- First Second Third Fourth First Second Third Fourth (In thousands except per share data) Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter ------- ------- ------- ------- ------- ------- ------- ------- Revenues $18,950 $20,551 $20,619 $27,000 $20,438 $22,805 $22,837 $29,424 Cost of sales 11,506 12,450 12,474 15,733 12,427 14,181 13,697 17,105 ------- ------- ------- ------- ------- ------- ------- ------- Gross profit 7,444 8,101 8,145 11,267 8,011 8,624 9,140 12,319 ------- ------- ------- ------- ------- ------- ------- ------- Operating expenses Selling, general and administrative 4,874 5,030 5,099 6,305 5,669 5,403 5,699 7,510 Research and development 548 608 605 1,113 567 608 590 1,207 Provision for uncollectible receivable -- -- -- -- -- 1,878 -- -- ------- ------- ------- ------- ------- ------- ------- ------- Total operating expenses 5,422 5,638 5,704 7,418 6,236 7,889 6,289 8,717 ------- ------- ------- ------- ------- ------- ------- ------- Operating income 2,022 2,463 2,441 3,849 1,775 735 2,851 3,602 Interest expense 87 87 86 80 69 69 68 63 Interest income 116 104 21 76 109 83 29 189 Other income -- 4 273 192 -- -- -- -- ------- ------- ------- ------- ------- ------- ------- ------- Income before taxes on income 2,051 2,484 2,649 4,037 1,815 749 2,812 3,728 Taxes on income 759 919 980 1,418 673 276 1,040 1,315 ------- ------- ------- ------- ------- ------- ------- ------- Net income $ 1,292 $ 1,565 $ 1,669 $ 2,619 $ 1,142 $ 473 $ 1,772 $ 2,413 ======= ======= ======= ======= ======= ======= ======= ======= Basic net income per share $ 0.25 $ 0.30 $ 0.32 $ 0.50 $ 0.22 $ 0.09 $ 0.34 $ 0.46 ======= ======= ======= ======= ======= ======= ======= ======= Diluted net income per share $ 0.24 $ 0.29 $ 0.31 $ 0.49 $ 0.21 $ 0.09 $ 0.33 $ 0.45 ======= ======= ======= ======= ======= ======= ======= ======= Basic weighted average number of shares outstanding 5,242 5,242 5,246 5,248 5,250 5,250 5,253 5,257 ======= ======= ======= ======= ======= ======= ======= ======= Diluted weighted average number of shares outstanding 5,338 5,315 5,323 5,395 5,411 5,389 5,398 5,377 ======= ======= ======= ======= ======= ======= ======= =======
14 15 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 25, 1998. The line of credit borrowings are at the applicable bank's base rate (8.5% at June 30, 1998). The line of credit agreement expires on February 1, 1999. 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 25, 1998. Net cash provided by operating activities was $4.2 million, $9.9 million and $7.0 million in fiscal years 1996, 1997, and 1998, respectively. Because of the seasonality of the Company's business, more funds from operating activities are generated in its third and fourth fiscal quarters. During fiscal year 1998, the Company paid down $1.0 million on its long-term debt which primarily represents one principal payment on its Industrial Development Bond (see Note 3 of Notes to Consolidated Financial Statements). Accounts payable increased $1.3 million for fiscal year 1998 compared to fiscal year 1997 primarily as a result of an increase in payment terms from a principal supplier and costs associated with the initial production of shock absorbers. Income taxes payable decreased by $12,000 primarily as a result of a decrease in income before taxes. Accounts receivable increased by $1.3 million for fiscal year 1998 compared to fiscal year 1997, while sales increased $8.4 million for fiscal year 1998 compared to fiscal year 1997. The increase in accounts receivable in fiscal year 1998 was primarily due to the timing of payments from customers in connection with the Company's dating programs and increased sales. Inventories increased $3.7 million primarily as a result of initial raw material purchases relating to the Company's introduction of performance aftermarket shock absorbers and an overall increase in inventory levels relating to increased sales. The Company's total capital expenditures were $4.3 million in fiscal year 1996, $8.6 million in fiscal year 1997 and $8.1 million in fiscal year 1998. The $8.1 million of capital expenditures for fiscal year 1998 included the purchase of computerized machining centers and costs associated with the enhancement of the shock absorber facility and the purchase and implementation of the Company's new accounting software. The Company anticipates making capital expenditures of $6.5 - $8.0 million in fiscal year 1999 primarily for the construction of its new distribution facility, and 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 1999. YEAR 2000 COMPLIANCE Computers, software and other equipment utilizing microprocessors that use only two digits to identify a year in a date field may be unable to process accurately certain date-based information at or after the year 2000. This is commonly referred to as the "Year 2000 issue," and the Company is addressing this issue on several different fronts. First, the Company has requested Year 2000 compliance certification from each of its major vendors and suppliers for their hardware or software products and for their internal business applications and processes. Second, the Company has established a separate team to coordinate solutions to the Year 2000 issue for its own internal information systems, with a goal of having all of its internal systems Year 2000 compliant by the end of 1998, although no assurances are made that this goal will be met. As part of its initial phase of its Year 2000 readiness, the Company installed Oracle applications and database. In order to complete the Year 2000 readiness program for it's information systems, the Company will upgrade to release 10.7 of the Oracle applications. The Company has spent approximately $1.6 million to date on hardware, software and labor to achieve Year 2000 readiness and does not anticipate that additional amounts incurred in connections with Year 2000 compliance program will be material to its financial condition or results of operations. The Company does not believe that its business will be adversely affected by the Year 2000 issue in any material respect. Nevertheless, achieving Year 2000 compliance is dependent on many factors, some of which are not completely within the Company's control, including without limitation, the availability and cost of trained personnel and effectiveness of software upgrades used by the Company and its vendors and suppliers. Should either the Company's internal systems or the internal systems of one or more significant vendors or suppliers fail to achieve Year 2000 compliance, the Company's business and its results of operations could be adversely affected. 15 16 RECENT ACCOUNTING PRONOUNCEMENTS Statement of Financial Accounting Standards No. 129, "Disclosure of Information about Capital Structure" is effective for financial statement periods ending after December 15, 1997. The new standard reinstates various disclosure requirements previously in effect under Accounting Principles Board Opinion No. 15, which has been superseded by SFAS No. 128. The adoption of SFAS No. 129 had no effect on the Company's financial position or results of operation. Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" is effective for financial statements with fiscal years beginning after December 15, 1997. Earlier application is permitted. SFAS No. 130 establishes standards for reporting and display of comprehensive income and its components in a full set of general purpose financial statements. The Company does not expect the adoption of SFAS No. 130 to have a material effect, if any, on its financial position or results of operations. Statement of Financial Accounting Standards No. 131 "Disclosure about Segments of an Enterprise and Related Information" is effective for financial statements with fiscal years beginning after December 15, 1997. The new standard requires that public business enterprises report certain information about operating segments in complete sets of financial statements of the enterprise and in condensed financial statements of interim periods issued to shareholders. It also requires that public business enterprises report certain information about their products and services, geographic areas in which they operate and their major customers. The Company does not expect the adoption of SFAS No. 131 to have a material effect, if any, on its results of operations. INFLATION General inflation over the last three years has not had a material effect on the Company's cost of doing business and it is not expected to have a material effect in the foreseeable future. "SAFE HARBOR" STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995: Any statements set forth above which are not historical facts are forward-looking statements that involve known and unknown risks and uncertainties that could cause actual results to differ materially from those in the forward-looking statements. Potential risks and uncertainties include such factors as the financial strength and competitive pricing environment of the automotive and motorcycle aftermarket industries, product demand, market acceptance, manufacturing efficiencies, new product development, the success of planned advertising, marketing and promotional campaigns, the success of the Company's, its vendors', and its suppliers' Year 2000 compliance programs and other risks identified herein and in other documents filed by the Company with the Securities and Exchange Commission. Item 7A. Quantitative and Qualitative Disclosure about Market Risk. The Company's exposure to interest rate changes is primarily related to its variable rate debt which may be outstanding from time to time under the Company's Revolving Credit Facility with Bank of America, NT&SA. The Company's Revolving Credit Facility is a $2 million line of credit with an interest rate based on the prime rate (currently 8.5%). It expires on February 1, 1999. 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 1998 and as of September 25, 1998, 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 $7,083. If the prime rate rose 100 basis points, the monthly interest payment would equal $7,916. 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. 16 17 Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure. None. PART III Item 10. Directors of the Company The information required by Item 10 will be set forth in the Proxy Statement under the caption "Directors of the Company" and is incorporated herein by reference. Item 11. Executive Compensation. The information required by Item 11 will be set forth on the Proxy Statement under the caption "Executive Compensation" and is incorporated herein by reference. Item 12. Security Ownership of Certain Beneficial Owners and Management. The information required by Item 12 will be set forth on the Proxy Statement under the caption "Security Ownership of Certain Beneficial Owners and Management" an is incorporated herein by reference. Item 13. Certain Relationships and Related Transactions. None PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K. Financial Statements and Schedules. See Index to Financial Statements which appears on page 20 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 1998 fiscal year. Exhibits. The exhibits listed on the Exhibit Index following the signature page hereof are filed herewith in response to this Item. 17 18 EDELBROCK CORPORATION EXHIBIT INDEX
Number and Sequential Description of Page Exhibit Number ------- ------ 3.(i).1 Form of Amended and Restated Certificate of Incorporation of the Company (filed as Exhibit 3(i).1 to the Company's Registration Statement on Form S-1 (File No. 33-83258) and incorporated herein by reference) 3(ii).1 Form of Amended and Restated Bylaws of the Company (filed as Exhibit 3(ii).1 to the Company's Registration Statement on Form S-1 (File No. 33-83258) and incorporated herein by reference) 4.1 Specimen Common Stock Certificate (filed as Exhibit 4.1 to the Company's Registration Statement on Form S-1 (File No. 33-83258) and incorporated herein by reference) 4.2 Form of Edelbrock Corp. Employee Stock Ownership Plan (filed as Exhibit 4.2 to the Company's Registration Statement on Form S-1 (File No. 33-83258) and incorporated herein by reference) 10.1 Form of Indemnification Agreement entered into with officers and directors of the Company (filed as Exhibit 10.1 to the Company's Registration Statement on Form S-1 (File No. 33-83258) and incorporated herein by reference) 10.2 Mutual Agreement between Weber U.S.A.and Edelbrock (filed as Exhibit 10.2 to the Company's Registration Statement on Form S-1 (File No. 33-83258) and incorporated herein by reference) 10.3 Form of Employment Agreement with O. Victor Edelbrock, Jr. (filed as Exhibit 10.2 to the Company's Registration Statement on Form S-1 (File No. 33-83258) and incorporated herein by reference)* 10.4 Form of Employment Agreement with Jeffrey L. Thompson (filed as Exhibit 10.4 to the Company's Registration Statement on Form S-1 (File No. 33-83258) and incorporated herein by reference)* 10.5 Form of Employment Agreement with Ronald L. Webb (filed as Exhibit 10.6 to the Company's Registration Statement on Form S-1 (File No. 33-83258) and incorporated herein by reference)* 10.6 Form of Benefit Plans - 1994 Incentive Equity Plan - 1994 Stock Option Plan for Non-Employee Directors(filed as Exhibit 10.7 to the Company's Registration Statement on Form S-1 (File No. 33-83258) and incorporated herein by reference) 10.7 Business Loan Agreement between Edelbrock Corporation and Bank of America, NT&SA (filed as Exhibit 10.9 to the Company's Registration Statement on Form S-1 (File No. 33-83258) and incorporated herein by reference)
18 19 EDELBROCK CORPORATION EXHIBIT INDEX
Number and Sequential Description of Page Exhibit Number ------- ------ 10.8 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, 1996 between Edelbrock Corporation and RICOR Racing and Development, L.P. (filed as Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the Quarter Ended December 25, 1995 and incorporated herein by reference). 10.10 Warrant Agreement dated February 2, 1996 between Edelbrock Corporation and RICOR Racing and Development L.P. (filed as Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for the Quarter Ended December 25, 1995 and incorporated herein by reference). 10.11 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, 1996 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, 1997). 10.13 Amendment No. 1 to License Agreement, dated February 21, 1997 by and between Edelbrock Corporation and RICOR Racing and Development, L.P. (filed as Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the Quarter Ended March 25, 1997). 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' Quarterly Report on Form 10-Q for the Quarter ended December 25, 1997). 21.1 Subsidiaries of the Company (filed as Exhibit 21.1 to the Company's Registration Statement on Form S-1 (File No. 33-83258) and incorporated herein by reference) 23.2 Consent of BDO Seidman, LLP 24.1 Powers of Attorney 27.1 Financial Data Schedule
*Management Contract or compensatory plan or arrangement which is separately identified in accordance with Item 14(a)(3) of Form 10-K. 19 20 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on it behalf by the undersigned, thereunto duly authorized. September 25, 1998 EDELBROCK CORPORATION By: JEFFREY L. THOMPSON ----------------------------------------- Jeffrey L. Thompson Executive Vice President, Chief Operating Officer and Director Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature Title Date --------- ----- ---- * - --------------------------------------------- O. Victor Edelbrock President, Chief Executive September 25, 1998 Officer and Chairman of the Board (Principal Executive Officer) JEFFREY L. THOMPSON - --------------------------------------------- Jeffrey L. Thompson Executive Vice President and September 25, 1998 Director * - --------------------------------------------- Aristedes T. Feles Vice-President, Finance and Director September 25, 1998 (Principal Financial Officer and Principal Accounting Officer) * - --------------------------------------------- Cathleen Edelbrock-Ford Vice President of Advertising, September 25, 1998 and Director * - --------------------------------------------- E. A. Breitenbach Director September 25, 1998 * - --------------------------------------------- Alexander Michalowski Director September 25, 1998 * - --------------------------------------------- Jerry Herbst Director September 25, 1998 * - --------------------------------------------- Richard Wilbur Director September 25, 1998 JEFFREY L. THOMPSON - --------------------------------------------- *By: Jeffrey L. Thompson September 25, 1998 Attorney-in-fact
20 21 EDELBROCK CORPORATION INDEX TO FINANCIAL STATEMENTS
Page -- Report of independent certified public accountants .................... 22 Consolidated financial statements Balance sheets ............................................... 23 Statements of income ......................................... 25 Statements of shareholders' equity ........................... 27 Statements of cash flows ..................................... 28 Notes to consolidated financial statements ................... 30
21 22 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS To the Board of Directors and Shareholders of Edelbrock Corporation We have audited the accompanying consolidated balance sheets of Edelbrock Corporation as of June 30, 1997 and 1998, and the related consolidated statements of income, shareholders' equity, and cash flows for each of the years in the three year period ended June 30, 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 audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Edelbrock Corporation at June 30, 1997 and 1998 and the results of its operations and its cash flows for each of the years in the three year period ended June 30, 1998, in conformity with generally accepted accounting principles. BDO SEIDMAN, LLP Los Angeles, California September 4, 1998 22 23 EDELBROCK CORPORATION CONSOLIDATED BALANCE SHEETS
June 30, --------------------------- 1997 1998 ----------- ----------- Assets Cash and cash equivalents $ 9,744,000 $ 8,370,000 Accounts receivable, net of allowance for doubtful accounts of $300,000 for 1997 and $500,000 for 1998 19,876,000 21,222,000 Inventories (Note 2) 13,048,000 16,776,000 Prepaid expenses and other 1,203,000 1,288,000 ----------- ----------- Total current assets 43,871,000 47,656,000 ----------- ----------- Property, plant and equipment (Note 3) Land 4,658,000 6,242,000 Buildings and improvements 12,330,000 12,696,000 Machinery and equipment 26,311,000 30,548,000 Office equipment 2,626,000 3,012,000 Furniture and fixtures 821,000 953,000 Transportation equipment 4,440,000 4,621,000 ----------- ----------- 51,186,000 58,072,000 Less accumulated depreciation and amortization 19,268,000 22,396,000 ----------- ----------- Property, plant and equipment, net 31,918,000 35,676,000 Real estate properties 1,282,000 902,000 Other 797,000 741,000 ----------- ----------- Total assets $77,868,000 $84,975,000 =========== ===========
See accompanying notes to consolidated financial statements. 23 24 EDELBROCK CORPORATION CONSOLIDATED BALANCE SHEETS
June 30, --------------------------- 1997 1998 ----------- ----------- Liabilities and shareholders' equity Current liabilities Accounts payable $13,444,000 $14,724,000 Accrued expenses Payroll and bonuses 1,487,000 1,770,000 Retirement plans (Note 5) 568,000 527,000 Commissions 515,000 844,000 Income taxes payable 453,000 441,000 Other -- 28,000 Current portion of long-term debt (Note 3) 976,000 62,000 ----------- ----------- Total current liabilities 17,443,000 18,396,000 Long-term debt, less current portion (Note 3) 2,178,000 2,123,000 Deferred income taxes (Note 4) 2,597,000 2,725,000 ----------- ----------- Total liabilities 22,218,000 23,244,000 ----------- ----------- Commitments and contingency (Notes 5 and 7) Shareholders' equity Common stock (Note 8) Common stock, par value $.01 per share; authorized 15,000,000 shares; 5,248,440 and 5,257,616 shares issued and outstanding 52,400 52,400 Paid-in capital 17,027,100 17,308,100 Retained earnings 38,570,500 44,370,500 ----------- ----------- Total shareholders' equity 55,650,000 61,731,000 ----------- ----------- Total liabilities and shareholders' equity $77,868,000 $84,975,000 =========== ===========
See accompanying notes to consolidated financial statements. 24 25 EDELBROCK CORPORATION CONSOLIDATED STATEMENTS OF INCOME
Year Ended June 30, ------------------------------------------- 1996 1997 1998 ----------- ----------- ----------- Revenues (Note 6) $79,032,000 $87,120,000 $95,504,000 Cost of sales 47,043,000 52,163,000 57,410,000 ----------- ----------- ----------- Gross profit 31,989,000 34,957,000 38,094,000 ----------- ----------- ----------- Operating expenses Selling, general and administrative 20,392,000 21,308,000 24,281,000 Research and development 2,227,000 2,874,000 2,972,000 Provision for uncollectible receivable -- -- 1,878,000 ----------- ----------- ----------- Total operating expenses 22,619,000 24,182,000 29,131,000 ----------- ----------- ----------- Operating income 9,370,000 10,775,000 8,963,000 Interest expense 344,000 340,000 269,000 Interest income 523,000 317,000 410,000 Other income 274,000 469,000 -- ----------- ----------- ----------- Income before taxes on income 9,823,000 11,221,000 9,104,000 Taxes on income (Note 4) 3,346,000 4,076,000 3,304,000 ----------- ----------- ----------- Net income $ 6,477,000 $ 7,145,000 $ 5,800,000 =========== =========== ===========
See accompanying notes to consolidated financial statements. 25 26 EDELBROCK CORPORATION CONSOLIDATED STATEMENTS OF INCOME
Year Ended June 30, ------------------------------------------------- 1996 1997 1998 ------------- ------------- ------------- Net income per share Basic net income per share $ 1.24 $ 1.36 $ 1.10 ============= ============= ============= Diluted net income per share $ 1.22 $ 1.34 $ 1.08 ============= ============= ============= Basic weighted average number of shares outstanding 5,241,000 5,244,000 5,252,000 ============= ============= ============= Diluted weighted average number of shares outstanding 5,311,000 5,352,000 5,388,000 ============= ============= =============
See accompanying notes to consolidated financial statements. 26 27 EDELBROCK CORPORATION CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Total Common Stock Paid-in Retained Shareholders' Shares Amount Capital Earnings Equity ----------- ----------- ----------- ----------- ----------- Balance, June 30, 1995 5,240,000 $ 52,400 $16,922,100 $24,948,500 $41,923,000 Net income for year -- -- -- 6,477,000 6,477,000 Stock options exercised 1,604 -- 20,000 -- 20,000 ----------- ----------- ----------- ----------- ----------- Balance June 30, 1996 5,241,604 52,400 16,942,100 31,425,500 48,420,000 Net income for year 7,145,000 7,145000 Stock options exercised 6,836 -- 85,000 -- 85,000 ----------- ----------- ----------- ----------- ----------- Balance June 30, 1997 5,248,440 52,400 17,027,100 38,570,500 55,650,000 Net income for year -- -- -- 5,800,000 5,800,000 Fair value of stock options granted -- -- 75,000 -- 75,000 Stock options exercised 9,176 -- 206,000 -- 206,000 ----------- ----------- ----------- ----------- ----------- Balance June 30, 1998 5,257,616 $ 52,400 $17,308,100 $44,370,500 $61,731,000 =========== =========== =========== =========== ===========
27 28 CONSOLIDATED STATEMENTS OF CASH FLOWS INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
Year Ended June 30, --------------------------------------------- 1996 1997 1998 ----------- ----------- ----------- Cash flows from operating activities Net income $ 6,477,000 $ 7,145,000 $ 5,800,000 Adjustments to reconcile net income to net cash provided by operating activities Allowance for doubtful accounts -- 155,000 200,000 Provision for uncollectible receivable -- -- 1,878,000 Depreciation and amortization of property, plant and equipment 3,646,000 3,922,000 4,232,000 Gain from sale of property, plant and equipment (149,000) (24,000) (208,000) Depreciation and amortization of real estate properties 30,000 22,000 15,000 (Gain) loss from sale of real estate properties 34,000 (274,000) -- Fair value of stock options granted -- -- 75,000 Increase(decrease) in deferred income taxes (108,000) 337,000 (4,000) Equity in net income of partnerships (151,000) (421,000) (181,000) Increase (decrease) from changes in Accounts receivable (3,985,000) (2,058,000) (3,424,000) Inventories (489,000) (3,313,000) (3,728,000) Prepaid expenses and other assets 88,000 (406,000) 47,000 Other assets (367,000) 365,000 56,000 Accounts payable (314,000) 3,989,000 1,280,000 Accrued expenses (540,000) 486,000 587,000 ----------- ----------- ----------- Net cash provided by operating activities 4,172,000 9,925,000 6,625,000 ----------- ----------- ----------- Cash flows from investing activities Acquisition of property, plant and equipment (4,342,000) (8,602,000) (8,076,000) Proceeds from sale of property, plant and equipment 345,000 168,000 295,000 Acquisition of real estate properties (5,000) (57,000) -- Proceeds from sale of real estate properties, net -- 369,000 391,000 Investments in partnerships (64,000) -- -- Distributions from partnerships 143,000 50,000 154,000 ----------- ----------- ----------- Net cash used in investing activities (3,923,000) (8,072,000) (7,236,000) ----------- ----------- -----------
See accompanying notes ton consolidated financial statements. 28 29 EDELBROCK CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
Year Ended June 30, ------------------------------------------------ 1996 1997 1998 ------------ ------------ ------------ Cash flows from financing activities Net proceeds from issuance of common stock 20,000 85,000 206,000 Proceeds from issuance of long-term debt 8,000 -- -- Principal payments on long-term debt (1,804,000) (965,000) (969,000) ------------ ------------ ------------ Net cash used in financing activities (1,776,000) (880,000) (763,000) ------------ ------------ ------------ Net increase (decrease) in cash and cash equivalents (1,527,000) 973,000 (1,374,000) Cash and cash equivalents, beginning of year 10,298,000 8,771,000 9,744,000 ------------ ------------ ------------ Cash and cash equivalents, end of year $ 8,771,000 $ 9,744,000 $ 8,370,000 ============ ============ ============ Supplemental disclosure of cash flow information: Cash paid during the year for: Interest $ 422,000 $ 340,000 $ 263,000 ============ ============ ============ Income taxes $ 4,375,000 $ 3,712,000 $ 3,275,000 ============ ============ ============
See accompanying notes to consolidated financial statements. 29 30 EDELBROCK CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - BUSINESS AND SUMMARY OF ACCOUNTING POLICIES Business Edelbrock Corporation and its wholly-owned subsidiaries, Edelbrock Foundry Corp. and Edelbrock II, Inc. (collectively "the Company") are engaged in the design, manufacture, distribution and marketing of performance automotive and motorcycle aftermarket parts. Basis of Presentation The consolidated financial statements include the accounts of Edelbrock Corporation and its wholly-owned subsidiaries. All material intercompany accounts and transactions have been eliminated. The Company also has investments in various real estate partnerships. These investments are accounted for using the equity method of accounting. Accounting Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, contingent liabilities, revenues, and expenses at the date and for the periods that the financial statements are prepared. Actual results could differ from those estimates. Cash Equivalents For purposes of the consolidated statements of cash flows, the Company considers all highly liquid debt instruments purchased with an initial maturity of three months or less to be cash equivalents. Inventories Inventories, which consist of raw materials, work in process, and finished goods, are stated at the lower of cost (first-in, first-out method) or market. Property, Plant, Equipment and Depreciation Property, plant and equipment are stated at cost. Depreciation is computed, primarily utilizing the straight-line method, over the estimated useful lives of the assets as follows:
Estimated Useful Life* (in years) ---------- Buildings and improvements 7-40 Machinery and equipment 3-7 Office equipment 5 Furniture and fixtures 7 Transportation equipment 3-10
*The average life more closely reflects the high end of the range. Long-Lived Assets Long-lived assets, such as property and equipment, and real estate properties, are evaluated for impairment when events or changes in circumstances indicate that they 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, 1998. 30 31 EDELBROCK CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - BUSINESS AND SUMMARY OF ACCOUNTING POLICIES (CONTINUED) Revenue Recognition Revenue is recognized upon shipment of the products. Taxes on Income The Company accounts for income taxes in accordance with the provisions of Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes." SFAS 109 requires that the recognition of deferred tax assets and liabilities for the expected future income tax consequences of events that have been recognized in a Company's financial statements or tax return. Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts for income tax purposes using enacted tax rates in effect in the years in which the temporary differences are expected to reverse. 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 $300,000 at June 30, 1997 and $500,000 at June 30,1998. Fair Value The Company has cash and cash equivalents, receivables, and accounts payable for which the carrying value approximates fair value due to the short-term nature of these instruments. The fair value of the Company's long-term debt is estimated based on the market values of financial instruments with similar terms. Management believes that the fair value of the long-term debt approximates its carrying value. 31 32 EDELBROCK CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - BUSINESS AND SUMMARY OF ACCOUNTING POLICIES (CONTINUED) Stock-Based Compensation As of July 1, 1996, the Company adopted Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS 123), which establishes a fair value method of accounting for stock-based compensation plans. In accordance with SFAS 123, the Company has chosen to continue to account for stock-based compensation utilizing the intrinsic value method prescribed in APB 25. Accordingly, compensation cost for stock options is measured as the excess, if any, of the fair market price of the Company's stock at the date of grant over the amount an employee must pay to acquire the stock. Also, in accordance with SFAS 123, the Company has provided footnote disclosure with respect to stock-based employee compensation. The cost of stock-based compensation is measured at the grant date based on the value of the award and recognizes this cost over the service period. The value of the stock-based award is determined using a pricing model whereby compensation cost is the excess of the fair market value of the stock as determined by the model at grant date or other measurement date over the amount an employee must pay to acquire the stock. Recent Accounting Pronouncements Statement of Financial Accounting Standards No. 129, "Disclosure of Information about Capital Structure" is effective for financial statement periods ending after December 15, 1997. The new standard reinstates various disclosure requirements previously in effect under Accounting Principles Board Opinion No. 15, which has been superseded by SFAS No. 128. The adoption of SFAS No. 129 had no effect on the Company's financial position or results of operation Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" is effective for financial statements with fiscal years beginning after December 15, 1997. Earlier application is permitted. SFAS No. 130 establishes standards for reporting and display of comprehensive income and its components in a full set of general purpose financial statements. The Company does not expect the adoption of SFAS No. 130 to have a material effect, if any, on its financial position or results of operations. Statement of Financial Accounting Standards No. 131 "Disclosure about Segments of an Enterprise and Related Information" is effective for financial statements with fiscal year beginning after December 15, 1997. The new standard requires that public business enterprises report certain information about operating segments in complete sets of financial statements of the enterprise and in condensed financial statements of interim periods issued to shareholders. It also requires that public business enterprises report certain information about their products and services, geographic areas in which they operate and their major customers. The Company does not expect the adoption of SFAS No. 131 to have a material effect, if any, on its results of operations. 32 33 EDELBROCK CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Earnings Per Share Information The Company adopted Statement of Financial Accounting Standards No. 128 "Earnings per Share," in fiscal year ended June 30, 1998. This pronouncement provides a different method of calculating earnings per share than was used in accordance with APB 15, Earnings per Share. SFAS 128 provides for the calculation of Basic and Diluted earnings per share. Basic earnings per share is based on the weighted effect of all common shares issued and outstanding, and is calculated by dividing net income available to common stockholders by the weighted average shares outstanding during the period. Diluted earnings per share is calculated by dividing net income available to common stockholders by the weighted average number of common shares used in the basic earnings per share calculation plus the number of common shares that would be issued assuming conversion of all potentially dilutive common shares outstanding. All historical earnings per share data have been restated to conform to this presentation. Below is the calculation of basic and diluted earnings per share for each of the past three fiscal years:
Fiscal Year Ended -------------------------------------------------------- June 30, 1996 June 30, 1997 June 30, 1998 ------------- ------------- ------------- (In Thousands, Except per Share Data) Net Income $6,477 $7,145 $5,800 ------ ------ ------ Weighted average shares outstanding - Basic 5,241 5,244 5,252 Employee stock options and other 70 108 136 ------ ------ ------ Weighted average shares outstanding - Diluted 5,311 5,352 5,388 ====== ====== ====== Earnings per common share: Basic $ 1.24 $ 1.36 $ 1.10 Diluted $ 1.22 $ 1.34 $ 1.08
Reclassification Certain prior period amounts have been reclassified for comparison with the 1998 presentation. NOTE 2 - INVENTORIES Inventories consist of the following:
June 30, -------------------------------- 1997 1998 ----------- ----------- Raw materials $ 8,005,000 $10,493,000 Work in process 948,000 930,000 Finished goods 4,095,000 5,353,000 ----------- ----------- $13,048,000 $16,776,000 =========== ===========
33 34 EDELBROCK CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 3 - LONG-TERM DEBT AND REVOLVING LINE OF CREDIT The Company's long-term debt consists of the following:
June 30, -------------------------- 1997 1998 ---------- ---------- Mortgage note (a) $2,108,000 $2,052,000 Industrial Redevelopment Bonds (b) 920,000 -0- Other 126,000 133,000 ---------- ---------- 3,154,000 2,185,000 Less current portion 976,000 62,000 ---------- ---------- $2,178,000 $2,123,000 ========== ==========
(a) Mortgage note, collateralized by a trust deed on real estate with a net book value of $3,504,000 at June 30, 1998, payable in monthly principal and interest payments, totalling approximately $22,000, at an interest rate of 10%, due June 2001. (b) Industrial Redevelopment Bonds, City of San Jacinto, California, issued to finance the purchase and installation of foundry equipment, collateralized by a standby letter of credit for $953,120 at June 30, 1997. The standby letter of credit was collateralized by a financing statement and security agreement on the foundry equipment. These bonds were paid off during fiscal 1998. Principal payments are due on long-term debt as follows:
Years Ending June 30, Amount 1999 $ 62,000 2000 69,000 2001 2,054,000 Thereafter -0- ---------- $2,185,000 ==========
The Company has one unsecured line of credit agreement with a bank, which provides total loan commitment not to exceed $2,000,000. All line of credit financing is at the bank's prime rate (8.5% at June 30, 1998). This agreement expires in February 1999. There were no borrowings on the line at June 30, 1997 and 1998. This obligation contains covenants, among other items, relating to various financial ratios. The Company was in compliance with all such covenants at June 30, 1998. 34 35 EDELBROCK CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 4 - TAXES ON INCOME The provision for taxes on income consists of the following:
Year Ended June 30, --------------------------------------------- 1996 1997 1998 ----------- ----------- ----------- Current Federal $ 2,768,000 $ 3,450,000 $ 2,738,000 State 686,000 746,000 571,000 ----------- ----------- ----------- 3,454,000 4,196,000 3,309,000 ----------- ----------- ----------- Deferred Federal (188,000) (546,000) (140,000) State 80,000 426,000 135,000 ----------- ----------- ----------- (108,000) (120,000) (5,000) ----------- ----------- ----------- $ 3,346,000 $ 4,076,000 $ 3,304,000 =========== =========== ===========
The differences between the U.S. federal statutory tax rate and the Company's effective rate are as follows:
Year Ended June 30, -------------------------- 1996 1997 1998 ---- ---- ---- U.S. federal statutory tax rate 34.0% 34.0% 34.0% State income taxes (net of federal benefits) 6.3 6.8 6.4 State income tax credits (5.9) (2.6) (2.3) Federal income tax credits (0.0) (1.6) (1.6) Other (0.3) (0.3) (0.2) ---- ---- ---- Effective tax rate 34.1% 36.3% 36.3% ==== ==== ====
The components of deferred taxes at June 30, 1997 and 1998 are as follows:
1997 1998 ---------- ---------- Deferred tax assets State income taxes $ 269,000 $ 191,000 Uniform capitalization rule 156,000 178,000 Accrued vacation 155,000 149,000 Deferred gains 15,000 15,000 Allowance for doubtful accounts 102,000 170,000 Inventory reserve -0- 82,000 Other -0- 61,000 ---------- ---------- $ 697,000 $ 846,000 ========== ========== Deferred tax liabilities: Depreciation and amortization 1,243,000 $1,458,000 Like kind exchange 1,272,000 1,272,000 State tax deferred items 205,000 135,000 ---------- ---------- $2,720,000 $2,865,000 ========== ==========
35 36 EDELBROCK CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 5 - COMMITMENTS Royalty Agreement In February 1996, the Company entered into a Royalty Agreement with RICOR Racing and Development L.P. ("RICOR") whereby the Company will pay RICOR a percentage of revenue derived from the sale of shock absorbers based on the following:
Aggregate Net Sales Price Royalty ----------------------------------------- ------- Up to $4,000,000 8% From $4,000,001 to $8,000,000 7% $8,000,001 and above 6%
Royalty expense under this agreement amounted to $12,000 for fiscal year ended June 30, 1997 and $381,000 for fiscal year ended June 30, 1998. There was no expense incurred during 1996. Retirement Plans An employee stock ownership plan ("ESOP") was established July 1, 1979 covering substantially all employees of Edelbrock Corporation who have attained one year of service. The minimum annual contribution is 1% of the total salaries or wages of plan participants and may be supplemented with additional amounts at the discretion of the Board of Directors. During fiscal year 1997, Edelbrock Corporation established a 401(k) defined contribution plan to enhance the existing ESOP for participating employees. The Company intends to match 50% of a certain portion of participants' contribution to this plan. The maximum annual contribution for both plans cannot exceed 25% of the total salaries or wages of the plan participants. Contributions to the ESOP amounted to $513,000 for the year ended June 30, 1996 and $513,000 for both plans for the years ended June 30, 1997 and 1998. Edelbrock Foundry Corp. maintains a defined contribution profit sharing plan (the "Plan") covering substantially all employees who have attained one year of service. Contributions to the Plan are at the discretion of the Company's Board of Directors; however, contributions cannot exceed 15% of the total salaries or wages of the plan participants. During fiscal year 1997, Edelbrock Foundry Corp. established a 401(k) defined contribution plan to enhance the existing plan for participating employees. The Company intends to match 50% of a certain portion of participants' contribution to this plan. Contributions to the Plan amounted to $55,000 for the year ended June 30, 1996 and $55,000 for both plans for the years ended June 30, 1997 and 1998. The Company had accrued contributions of $568,000 and $527,000 at June 30, 1997 and 1998, respectively. Employment Agreements The Company has an employment agreement with its President and Chief Executive Officer for a term expiring on June 30, 1999. The agreement provides for a base salary of $300,000 per year, with an annual raise and bonus to be determined by the Compensation Committee of the Board of Directors based on such factors as the performance of the officer and the financial results of the Company. Upon termination of the officer's employment during the term of the agreement for any reason other than "cause," death or voluntary termination, the Company will be obligated to make a lump sum severance payment in an amount equal to the then current annual base compensation plus an amount equal to the bonus paid the year prior to such termination. The Company also has similar employment agreements with two other officers, each having a term expiring on June 30, 1999. Pursuant to these employment agreements, the two officers are entitled to an aggregate base salary of $415,000. Each officer is entitled to an annual bonus to be determined by the Compensation Committee of the Board of Directors based on such factors as the performance of the officer and the financial results of the Company. 36 37 EDELBROCK CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 6 - MAJOR CUSTOMERS For the year ended June 30, 1996 two customers accounted for 12.7% and 16% or revenues. For the year ended June 30, 1997, two customers accounted for 11.7% and 12.9% of revenues. During fiscal year ended June 30, 1998 one customer accounted for 16.0% of revenues. NOTE 7 - DEPENDENCE ON KEY SUPPLIER The Company has entered into an agreement expiring in 1999 with a key supplier that requires, among other things, that (i) the Company sell only carburetors manufactured by the supplier, (ii) the Company purchase a minimum number of carburetors from the supplier and (iii) the Company prices the carburetors so as to remain market competitive. The Company's minimum obligation under this agreement aggregates $55,616,000, or $13,904,000 each calendar year. These carburetors accounted for 40% of the Company's revenues for the year ended June 30, 1998. 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. 37 38 EDELBROCK CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 8 - SHAREHOLDERS' EQUITY (CONTINUED) The options vest 20% on October 19 of each year for a period of five years. The first 20% vested on October 19, 1995. A summary of changes in common stock options during 1996, 1997 and 1998 are as follows:
Number of Weighted Average Aggregate Shares Price Per Share Value ------- --------------- ---------- Outstanding at June 30, 1995 357,179 $ 12.51 $4,468,309 Granted -- -- -- Exercised 1,604 12.50 20,050 Cancelled 8,070 12.50 100,875 ------- ---------- ---------- Outstanding at June 30, 1996 347,505 12.51 4,347,384 Granted 23,000 17.52 402,960 Exercised 6,836 12.50 85,450 Cancelled 9,341 12.50 116,762 ------- ---------- ---------- Outstanding at June 30, 1997 354,328 12.84 4,548,132 Granted 17,500 19.10 334,265 Exercised 9,176 12.45 114,231 Cancelled 1,957 12.50 24,463 ------- ---------- ---------- Outstanding at June 30, 1998 360,695 $ 13.15 $4,743,703 ======= ========== ========== Options exercisable (vested) at June 30, 1998 196,717 $ 12.63 $2,484,463 ======= ========== ==========
1994 Stock Option Plan For Non-Employee Directors Additionally, the Company adopted the Edelbrock Corporation 1994 Stock Option Plan for Non-Employee Directors ("Director Plan"), which authorizes the granting of non qualified stock options to certain non-employee directors of the Company. The maximum number of shares granted under the Director Plan shall not exceed 25,000 shares of Common Stock. Initial grants of options under the Director Plan totaled 14,000, three grants of 3,500 shares each were granted at the initial offering price of $12.50 per share and one grant of 3,500 shares was granted at a price of $12.75 per share. Stock Warrants On February 2, 1996 the Company issued Warrants to purchase 100,000 shares of common stock at $14.75 per share to RICOR Racing and Development L.P. The Warrants were granted at the current quoted market price at the date of grant. The Warrants vest 20% on December 31 of each year for a period of five years with the first 20% vesting on December 31, 1996. The Warrants expire on February 2, 2006. Stock - Based Compensation FASB Statement 123, "Accounting for Stock-Based Compensation," requires the Company to provide pro forma information regarding net income and earnings per share as if compensation cost for the Company's stock option plans had been determined in accordance with the fair value based method prescribed in FASB Statement 123. The Company estimates the fair value of each stock option at the grant date by using the Black-Scholes option-pricing model with the following weighted-average assumptions used for grants in fiscal 1997 and fiscal 1998: dividend yield of zero percent, risk-free interest rate of 6 percent, expected lives of ten years, and expected volatility of 8.11 and 9.27 respectively. Under the accounting provisions of FASB Statement 123, the Company's net income and income per share for 1997 and 1998 would have been reduced to the pro forma amounts indicated below: 38 39 EDELBROCK CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 8 - SHAREHOLDERS' EQUITY (CONCLUDED)
Year Ended June 30, ---------------------------------------- 1997 1998 ------------- ------------- Net income As reported $ 7,145,000 $ 5,800,000 Pro forma $ 6,805,000 $ 5,563,000 Income per share As reported - Basic $ 1.36 $ 1.10 As reported - Diluted $ 1.34 $ 1.08 Pro forma - Basic $ 1.30 $ 1.06 Pro forma - Diluted $ 1.25 $ 1.03
Due to the fact that the Company's stock option programs vest over five years; the above pro forma numbers are not indicative of the financial impact had the disclosure provisions of FASB 123 been applicable to all years of previous grants. The numbers above do not include the effect of options granted prior to 1996 that vested in 1996 and 1997. The following table summarizes information about stock options and warrants outstanding at June 30, 1998:
Options and Warrants Outstanding Options and Warrants Number Number Weighted-Average Exercisable Exercisable Range of Exercise Outstanding Remaining Weighted-Average at Weighted-Average Prices at 6/30/98 Contractual Life Exercise Price 6/30/98 Exercise Price --------------- ---------- ---------------- -------------- ------- -------------- $12.50 326,695 6.30 $ 12.50 196,017 $ 12.50 $12.75 - $13.50 7,500 6.81 $ 13.15 4,500 $ 13.15 $14.75 100,000 7.66 $ 14.75 40,000 $ 14.75 $16.00 - $19.50 40,500 8.88 $ 18.20 4,600 $ 17.52 --------------- ------- ---- --------- -------- --------- $12.50 - $19.50 474,695 6.82 $ 13.47 245,117 $ 12.97 =============== ======= ==== ========= ======== =========
The weighted average fair value of options granted during the year ended June 30, 1997 and June 30, 1998 were $7.82 and $8.55, respectively. 39 EX-23.2 2 CONSENT OF BDO SEIDMAN, LLP 1 Exhibit 23.2 Consent of Independent Certified Public Accountants Edelbrock Corporation We hereby consent to the use in the Registration Statement on Form S-8, Registration Number 33-91354, of our report dated September 4, 1998, relating to the audit of the consolidated financial statements of Edelbrock Corporation, which are contained in and incorporated by reference to the Annual Report on Form 10-K for the year ended June 30, 1998. BDO SEIDMAN, LLP Los Angeles, California September 25, 1998 40 EX-24.1 3 POWERS OF ATTORNEY 1 Exhibit 24.1.a POWER OF ATTORNEY KNOWN ALL MEN BY THESE PRESENTS, that the undersigned hereby constitutes and appoints Jeffrey L. Thompson and Aristedes T. Feles, and each of them, the true and lawful attorney and attorneys-in-fact, with full power of substitution and resubstitution, for him and in his name, place and stead, to sign on his behalf as director or officer or both, as the case may be, of Edelbrock Corporation, a Delaware corporation (the "Company"), the Company's annual report on Form 10-K for the fiscal year ended June 30, 1998, and to sign any and all amendments to such annual report, and to deliver and file the same, with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorney or attorneys-in-fact, and each of them with or without the others, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he/she might or could do in person, hereby ratifying and confirming all that said attorney or attorneys-in-fact, or any of them or their substitute or substitutes, may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney this 24th day of September, 1998. O. VICTOR EDELBROCK ------------------- O. Victor Edelbrock 2 Exhibit 24.1.b POWER OF ATTORNEY KNOWN ALL MEN BY THESE PRESENTS, that the undersigned hereby constitutes and appoints Jeffrey L. Thompson and Aristedes T. Feles, and each of them, the true and lawful attorney and attorneys-in-fact, with full power of substitution and resubstitution, for him and in his name, place and stead, to sign on his behalf as director or officer or both, as the case may be, of Edelbrock Corporation, a Delaware corporation (the "Company"), the Company's annual report on Form 10-K for the fiscal year ended June 30, 1998, and to sign any and all amendments to such annual report, and to deliver and file the same, with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorney or attorneys-in-fact, and each of them with or without the others, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he/she might or could do in person, hereby ratifying and confirming all that said attorney or attorneys-in-fact, or any of them or their substitute or substitutes, may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney this 24th day of September, 1998. JEFFREY L. THOMPSON ------------------- Jeffrey L. Thompson 3 Exhibit 24.1.c POWER OF ATTORNEY KNOWN ALL MEN BY THESE PRESENTS, that the undersigned hereby constitutes and appoints Jeffrey L. Thompson and Aristedes T. Feles, and each of them, the true and lawful attorney and attorneys-in-fact, with full power of substitution and resubstitution, for him and in his name, place and stead, to sign on his behalf as director or officer or both, as the case may be, of Edelbrock Corporation, a Delaware corporation (the "Company"), the Company's annual report on Form 10-K for the fiscal year ended June 30, 1998, and to sign any and all amendments to such annual report, and to deliver and file the same, with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorney or attorneys-in-fact, and each of them with or without the others, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he/she might or could do in person, hereby ratifying and confirming all that said attorney or attorneys-in-fact, or any of them or their substitute or substitutes, may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney this 24th day of September, 1998. ARISTEDES T. FELES ------------------ Aristedes T. Feles 4 Exhibit 24.1.d POWER OF ATTORNEY KNOWN ALL MEN BY THESE PRESENTS, that the undersigned hereby constitutes and appoints Jeffrey L. Thompson and Aristedes T. Feles, and each of them, the true and lawful attorney and attorneys-in-fact, with full power of substitution and resubstitution, for him and in his name, place and stead, to sign on his behalf as director or officer or both, as the case may be, of Edelbrock Corporation, a Delaware corporation (the "Company"), the Company's annual report on Form 10-K for the fiscal year ended June 30, 1998, and to sign any and all amendments to such annual report, and to deliver and file the same, with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorney or attorneys-in-fact, and each of them with or without the others, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he/she might or could do in person, hereby ratifying and confirming all that said attorney or attorneys-in-fact, or any of them or their substitute or substitutes, may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney this 24th day of September, 1998. CATHLEEN EDELBROCK-FORD ----------------------- Cathleen Edelbrock-Ford 5 Exhibit 24.1.e POWER OF ATTORNEY KNOWN ALL MEN BY THESE PRESENTS, that the undersigned hereby constitutes and appoints Jeffrey L. Thompson and Aristedes T. Feles, and each of them, the true and lawful attorney and attorneys-in-fact, with full power of substitution and resubstitution, for him and in his name, place and stead, to sign on his behalf as director or officer or both, as the case may be, of Edelbrock Corporation, a Delaware corporation (the "Company"), the Company's annual report on Form 10-K for the fiscal year ended June 30, 1998, and to sign any and all amendments to such annual report, and to deliver and file the same, with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorney or attorneys-in-fact, and each of them with or without the others, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he/she might or could do in person, hereby ratifying and confirming all that said attorney or attorneys-in-fact, or any of them or their substitute or substitutes, may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney this 24th day of September, 1998. AL BREITENBACH -------------- Al Breitenbach 6 Exhibit 24.1.f POWER OF ATTORNEY KNOWN ALL MEN BY THESE PRESENTS, that the undersigned hereby constitutes and appoints Jeffrey L. Thompson and Aristedes T. Feles, and each of them, the true and lawful attorney and attorneys-in-fact, with full power of substitution and resubstitution, for him and in his name, place and stead, to sign on his behalf as director or officer or both, as the case may be, of Edelbrock Corporation, a Delaware corporation (the "Company"), the Company's annual report on Form 10-K for the fiscal year ended June 30, 1998, and to sign any and all amendments to such annual report, and to deliver and file the same, with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorney or attorneys-in-fact, and each of them with or without the others, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he/she might or could do in person, hereby ratifying and confirming all that said attorney or attorneys-in-fact, or any of them or their substitute or substitutes, may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney this 24th day of September, 1998. ALEXANDER MICHALOWSKI --------------------- Alexander Michalowski 7 Exhibit 24.1.g POWER OF ATTORNEY KNOWN ALL MEN BY THESE PRESENTS, that the undersigned hereby constitutes and appoints Jeffrey L. Thompson and Aristedes T. Feles, and each of them, the true and lawful attorney and attorneys-in-fact, with full power of substitution and resubstitution, for him and in his name, place and stead, to sign on his behalf as director or officer or both, as the case may be, of Edelbrock Corporation, a Delaware corporation (the "Company"), the Company's annual report on Form 10-K for the fiscal year ended June 30, 1998, and to sign any and all amendments to such annual report, and to deliver and file the same, with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorney or attorneys-in-fact, and each of them with or without the others, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he/she might or could do in person, hereby ratifying and confirming all that said attorney or attorneys-in-fact, or any of them or their substitute or substitutes, may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney this 24th day of September, 1998. RICHARD WILBUR -------------- Richard Wilbur 8 Exhibit 24.1.h POWER OF ATTORNEY KNOWN ALL MEN BY THESE PRESENTS, that the undersigned hereby constitutes and appoints Jeffrey L. Thompson and Aristedes T. Feles, and each of them, the true and lawful attorney and attorneys-in-fact, with full power of substitution and resubstitution, for him and in his name, place and stead, to sign on his behalf as director or officer or both, as the case may be, of Edelbrock Corporation, a Delaware corporation (the "Company"), the Company's annual report on Form 10-K for the fiscal year ended June 30, 1998, and to sign any and all amendments to such annual report, and to deliver and file the same, with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorney or attorneys-in-fact, and each of them with or without the others, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he/she might or could do in person, hereby ratifying and confirming all that said attorney or attorneys-in-fact, or any of them or their substitute or substitutes, may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney this 24th day of September, 1998. JERRY HERBST ------------ Jerry Herbst EX-27.1 4 FINANCIAL DATA SCHEDULE
5 YEAR JUN-30-1998 JUL-01-1997 JUN-30-1998 8,370,000 0 21,722,000 500,000 16,776,000 47,656,000 58,072,000 22,396,000 84,975,000 18,396,000 2,123,000 0 0 52,400 61,678,600 47,656,000 95,504,000 95,504,000 57,410,000 57,410,000 29,131,000 0 269,000 9,104,000 3,304,000 5,800,000 0 0 0 5,800,000 1.10 1.08
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