Item 1. Business
General
Edelbrock Corporation (the “Company”) is one of America’s leading manufacturers and marketers of specialty performance automotive and motorcycle aftermarket parts. The Company designs, manufactures, distributes and markets a wide range of high quality performance products, including intake manifolds, carburetors, cylinder heads, camshafts, exhaust systems, and other components designed for most domestic V8 and selected V6 engines and import 4 cylinder engines. In addition to the above, the Company’s product line includes shock absorbers, motorcycle brake rotors, and other plumbing type products such as fuel filters, fuel lines, and brake lines. These products are designed to enhance street, off-road, recreational and competition vehicle performance through increased horsepower, torque and driveability. The Company also designs and markets products to enhance engine and vehicle appearance, such as chrome and polished aluminum air cleaners, valve covers and breathers. In 1994, the Company introduced performance aluminum cylinder heads and intake manifolds for the Harley-Davidson Evolution engine, which are distributed and marketed through over 5,000 motorcycle performance shops nationwide. In 1995, the Company acquired substantially all of the assets of QwikSilver II, Inc. of Apple Valley, California, a manufacturer of aftermarket Harley-Davidson and other motorcycle carburetors and air cleaners.
In 1998, the Company entered the performance shock absorber market for a range of all aftermarket applications with certain restrictions utilizing RICOR Racing and Development, L.P.’s (“RICOR”) patented “inertia active system.” In connection therewith, the Company entered into a royalty agreement with RICOR and issued warrants to purchase common stock of the Company. On August 20, 2001, the Company informed RICOR via thirty day written notice that it intended to convert its license with RICOR to a non-exclusive nature. See Notes 5 and 8 of Notes to Consolidated Financial Statements.
In June 2000, the Company entered into a Product Development and Distribution Agreement with JG Engine Dynamics, Inc. (“JG”) and Automotive Systems Group Inc. (collectively, the “Licensor”) whereby the Company will pay the Licensor a percentage of net revenues derived from the sale of internal engine, exhaust, and suspension components for import aftermarket products under the “JG/Edelbrock” name. The Company paid to the Licensor cash, and issued common stock and stock warrants. In addition, the Licensor has the right to purchase Licensed Products developed by the Company. See Notes 5 and 8 of Notes to Consolidated Financial Statements.
In late December 2000, the Company purchased certain assets of Russell Performance Products, Inc. (“Russell”), a manufacturer of performance plumbing and brake lines located in Daytona Beach, Florida. In May 2001, the Company moved the operations to Torrance, California. Russell is a leading manufacturer of performance plumbing and brake lines whose current product offering of over 2,800 parts includes street-legal brake lines, oil lines, fuel lines, and filters for both automotive and motorcycle use.
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:
History
The Company was founded in 1938 in Los Angeles by O. Victor Edelbrock, Sr. Mr. Edelbrock utilized his experience as a mechanic and a winning car racer to design and produce manifolds and cylinder heads. Upon his father’s death in 1962, O. Victor Edelbrock, Jr., also a racing enthusiast who began designing manifolds in the 1960’s, assumed his father’s position as President and Chief Executive Officer of the Company. In 1967, the Company moved its operations to El Segundo, California. The Company continued designing and marketing new generations of manifolds throughout the 1960’s and 1970’s. In the 1980’s, the Company expanded its product line to include camshaft kits, valvetrain parts, exhaust systems and other performance components, thus developing the “Total Power Package” line. In 1987, the Company moved to its present location in Torrance, California and in 1990 built its own sand-cast aluminum foundry in San Jacinto, California. In the 1990’s, the Company continued to expand its product lines to include carburetors, aluminum cylinder heads, aluminum water pumps, fuel-injected manifolds and aftermarket performance parts for Harley-Davidson motorcycles. In 1995, the Company completed the construction of a 37,000 square foot building in Torrance, California to house its exhaust products division and a 15,000 square foot facility to expand the Company’s Foundry warehouse space in San Jacinto, California. In late 1997, the Company completed construction of a 45,000 square foot facility adjacent to its existing exhaust facility, which is being utilized primarily for the manufacture of shock absorbers, as well as to accommodate additional corporate expansion including warehouse overflow. In May 1998, the Company began production on a new line of performance aftermarket shock absorbers utilizing the aforementioned RICOR inertia active system. In June 2000, the Company acquired the exclusive rights to manufacture and sell internal engine, exhaust, and suspension components to the import aftermarket under the “JG/Edelbrock” name. In December 2000, the Company purchased certain assets of Russell Performance Products, Inc., a manufacturer of performance plumbing and brake lines.
In July 1997, the Company completed construction of two facilities on Company-owned property at its Foundry location in San Jacinto, California. A 12,000 square foot facility is being utilized for additional Foundry warehouse space and a 15,000 square foot facility houses the Company’s “QwikSilver” motorcycle parts division, which was relocated from Apple Valley, California.
In October 1999, the Company completed construction of a 65,950 square foot distribution facility on Company-owned property adjacent to its exhaust system and shock absorber production facility in Torrance, California. The Company is utilizing the 30,000 square foot former distribution area at its Company headquarters in Torrance for additional manufacturing capacity.
Research and Development
The Company seeks to develop new products to respond to consumer demand, to increase performance characteristics of existing product lines and to enter into new product lines. For the fiscal years ended June 30, 1999, 2000, and 2001 research and development expenditures totalled $3,237,000, $3,688,000, and $3,651,000, respectively.
Products
The Company offers over 6,400 performance automotive and motorcycle aftermarket parts for street, off-road, recreational and competition use. The Company’s products are designed to enhance the engine’s performance through increased horsepower, torque and drivability primarily by improving induction of fuel and air into and exhaust out of the engine. The Company also designs and markets products to improve appearance or drivability of the vehicle.
The Company’s present lines include, among other items, intake manifolds, which accounted for 29% of the Company’s revenues for fiscal year 1999, 28% for fiscal year 2000, and 25% for fiscal year 2001; and carburetors, which accounted for 39%, 41%, and 40% of the Company’s revenues for fiscal years 1999, 2000, and 2001, respectively. See “Item 6. Selected Consolidated Financial Data” for the Company’s revenues, operating income and total assets for each of the last three years.
Distribution, Sales and Marketing
The Company has established a balanced nationwide distribution network, which encompasses all the major channels of distribution. The Company’s policy is to offer its products at the same price and under the same terms and conditions in each of its channels of distribution. The Company’s products are sold in all 50 states and Canada, as well as to a lesser degree in Australia, Europe, New Zealand and the Pacific Rim, and distributed through the following channels:
In addition to the foregoing channels of distribution, the Company supplies select component parts to original equipment manufacturers, including Ford Motor Company, Volvo-Penta of the Americas, Inc., General Motors Corporation, and Mercruiser, Inc., a division of Brunswick Corporation. In addition, the Company’s aluminum foundry, located in San Jacinto, California, casts components for a variety of third-party manufacturers.
The Company’s sales are subject to seasonal variations. Customer orders and sales are greatest in the second, third and fourth quarters of the Company’s fiscal year in anticipation of and during the spring and summer months. Accordingly, revenues and operating income tend to be relatively higher in the third and fourth fiscal quarters. This seasonality typically results in reduced earnings for the Company’s first and second fiscal quarters because a significant portion of operating expenses are fixed throughout the fiscal year.
One customer, Auto Sales, Inc., accounted for 14.8%, 14.8%, and 14.5% of the Company’s revenues for fiscal years 1999, 2000, and 2001 respectively. Another customer, AutoZone, Inc. accounted for 10.2% of revenues for fiscal year 2000 and 10.5% in fiscal year 2001. See Note 6 of Notes to Consolidated Financial Statements of the Company.
Manufacturing
The Company conducts manufacturing operations in its Torrance, California facilities and casting operations at its aluminum foundry in San Jacinto, California. The Company manufactures products such as manifolds, cylinder heads, water pumps, shock absorbers and exhaust systems. Approximately 51% of the Company’s revenues for fiscal year 2001 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 2001, representing approximately 40% of the Company’s revenue for that fiscal year. The agreement extends through 2004 and is renewable at the option of the parties. See Note 7 of Notes to Consolidated Financial Statements.
Competition
There is significant competition in the performance automotive and motorcycle parts industries for both domestic and import. The Company competes with other companies and individuals in the manufacture and sale of performance automotive and motorcycle parts. The Company competes with, among others, Holley Performance Products, Inc. (“Holley”) in the manifold market, Holley and Federal-Mogul Corporation in the automotive carburetor market, Rancho Industries and Bilstein in the shock absorber market, Crane Cams and Competition Cams in the camshaft market, World Products and Trick Flow Specialties in the cylinder head market, Earl’s Performance Products in the performance plumbing lines, and Mr. Gasket, TransDapt and Moroso in the specialty automotive accessories market. The Company competes primarily with Harley-Davidson, Inc., S&S Cycle, Incorporated, and Mikuni of America in the motorcycle aftermarket. The Company competes primarily on the basis of product quality, brand name recognition, service and price. Some of the Company’s competitors are substantially larger and have greater financial resources than the Company.
Trademarks and Patents
The Company owns over 40 trademarks and patents used in connection with the marketing of the Company’s products, including Edelbrock®, Torker®, Torker II®, Tunnel Ram®, Signature Series®, Performer Series®, QwikSilver II®, Performer IAS® and Edelbrock Total Power Package®. 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 2002 and 2013.
Employees
As of June 30, 2001, the Company employed 645 persons in the operation of its business. The Company believes that its ability to attract and retain qualified management personnel, skilled production technicians, and marketing and administrative employees will be a key determinant of the Company’s continued success. The Company has not entered into any collective bargaining agreements with any unions and believes that its overall relations with its employees are good.
Item 2.
Item 2. Properties
The Company owns its headquarters, distribution and manufacturing facilities located in buildings of approximately 142,000, 65,590, 45,000 and 37,000 square feet, respectively, in Torrance, California, and three buildings for its Foundry operations located in approximately 73,000, 15,000, and 12,000 square feet as well as a 15,000 square foot facility for its QwikSilver division in San Jacinto, California. The 73,000 square foot facility and related land were subject to a deed of trust which secured certain indebtedness incurred in connection with the construction of the facility which had a maturity date in June 2001. The Company elected to pay off the loan early, without penalty, in March 2001. See Note 3 of Notes to Consolidated Financial Statements.
In December 1996, the Company completed construction of a 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, as of May 2001, Russell performance plumbing and brake lines.
In July 1997, the Company completed construction of 12,000 and 15,000 square foot facilities on Company-owned property at its Foundry location in San Jacinto, California. The 12,000 square foot facility is being utilized for additional Foundry warehouse space and the 15,000 square foot facility houses the Company’s QwikSilver division, which was relocated from Apple Valley, California.
In October 1999, the Company completed construction of a 65,950 square foot distribution facility on Company-owned property adjacent to its exhaust system and shock absorber production facilities.
The Company believes that its existing facilities are adequate to meet its current production requirements.
Item 3.
Item 3. Legal Proceedings
None.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders.
No matter was submitted, during the fourth quarter of the fiscal year covered by this report, to a vote of shareholders.
Executive Officers of the Company
Executive Officers
The following sets forth the name, age and business experience of the executive officers of the Company as of June 30, 2001:
Name
Age
Position
O. Victor Edelbrock
Chairman, President and Chief Executive Officer
Jeffrey L. Thompson
Executive Vice-President, Chief Operating Officer and Director
Aristedes T. Feles
Vice-President of Finance and Director
Steve Whipple
Vice-President of Sales
Wayne P. Murray
Vice-President of Manufacturing
Jack B. Mayberry
Vice-President of Research & Development
Cathleen Edelbrock
Vice-President of Advertising, Secretary and Director
Nancy Edelbrock
Treasurer
Ronald L. Webb
Executive Vice-President of Edelbrock Foundry Corp.
Rodney T. Teraishi
Controller
O. Victor Edelbrock has been Chairman, President and Chief Executive Officer of the Company since 1962. Mr. Edelbrock is the husband of Nancy Edelbrock and the father of Cathleen Edelbrock.
Jeffrey L. Thompson has been the Executive Vice-President/General Manager and Chief Operating Officer of the Company since December 1988. He was also a six year member of the board of directors of the Specialty Equipment Market Association (SEMA) and was awarded the 1999 SEMA Person of the Year Award, the automotive aftermarket’s highest individual honor. Mr. Thompson has been a director of the Company since 1994.
Aristedes T. Feles has been the Vice President of Finance since July 1997 and was previously Controller for the Company (since 1992). Prior to 1992, Mr. Feles was employed as a senior accountant at BDO Seidman, LLP (since 1989). Mr. Feles has been a director of the Company since July 1997.
Steve Whipple served as Vice-President of Sales for the Company since September 2000. Mr. Whipple was previously the National Sales Manager for the Company (since 2000). Prior to joining the Company, Mr. Whipple was the Director of Sales & Marketing for Nitrous Oxide Systems, Inc.
Wayne P. Murray has been employed in various positions by the Company since 1969 and has been Vice-President of Manufacturing for the Company since 1984.
Jack B. Mayberry has been the Vice President of Research & Development for the Company since 1995. Prior to joining the Company, Mr. Mayberry was a captain in the U.S. Navy where he served for 25 years.
Cathleen Edelbrock has been Vice-President of Advertising for the Company since 1993. Prior to 1993, Ms. Edelbrock was Director of Advertising (since 1987), and has served in various other capacities with the Company (since 1978). Ms. Edelbrock is a director of the Company. Ms. Edelbrock is the daughter of O.Victor Edelbrock Jr. and Nancy Edelbrock.
Nancy Edelbrock has been Treasurer of the Company since 1968 and has been involved in all facets of the business since 1962. Mrs. Edelbrock is the wife of O.Victor Edelbrock Jr. and the mother of Cathleen Edelbrock-Ford.
Ronald L. Webb has been Executive Vice-President of Edelbrock Foundry Corp. since 1989. Prior to 1989, Mr. Webb served as Vice-President, Operations and in various other capacities for Buddy Bar Castings (since 1958).
Rodney T. Teraishi has been Controller of the Company since August 1998. Mr. Teraishi is a Certified Public Accountant and was previously employed at BDO Seidman, LLP and Deloitte & Touche, LLP (since 1990).
Part II
Item 5.
Item 5. Market for Company’s Common Stock and Related Shareholder Matters.
The Company’s Common Stock is traded over-the-counter on the Nasdaq Stock Market under the symbol EDEL. The following table sets forth the range of high and low closing sales prices, as reported on the Nasdaq Stock Market for fiscal years 2000 and 2001. On September 18, 2001, the Company had 101 holders of record of its Common Stock with 5,076,239 shares outstanding and a closing price of $8.55.
During fiscal year ended June 30, 2001, the Company paid a dividend in the amount of $.02 per share on November 11, 2000 and on June 15, 2001. During fiscal year ended June 30, 2000, the Company paid a dividend in the amount of $.02 per share on November 11, 1999 and June 2, 2000.
In June 2000, in consideration of entering into a Product Development and Distribution Agreement with the Company, the Company issued to JG Engine Dynamics, Inc. 8,000 shares of common stock and warrants to purchase 80,000 shares of common stock at an exercise price of $11.00. The warrants vest annually on June 1st of each year through a period of 4 years with the first 25% vesting on June 1, 2001. The exercise term starts June 1, 2001 and expires on May 31, 2010. The securities were issued in a transaction exempt from registration under the Securities Act of 1933 in accordance with the requirements of Section 4 (2) thereof. See Note 8 of Notes to Consolidated Financial Statements of the Company.
Item 6.
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, 2001 and 2000 and the Income Statement Data and the Other Data for each of the three fiscal years in the period ended June 30, 2001 have been derived from the audited Consolidated Financial Statements of the Company included elsewhere in this Form 10-K. The Balance Sheet Data at June 30, 1997, 1998, and 1999 and the Income Statement Data and the Other Data for each of the two fiscal years in the period ended June 30, 1998 have been derived from audited financial statements not included herein.
Item 7.
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, 1999, 2000, and 2001. The following should be read in conjunction with the Consolidated Financial Statements and related notes appearing elsewhere herein.
Overview
The Company was founded in 1938, and is one of America’s leading manufacturers and marketers of specialty performance automotive and motorcycle aftermarket parts. The Company designs, manufactures, packages and markets performance automotive and motorcycle aftermarket parts, including intake manifolds, carburetors, shock absorbers, camshafts, cylinder heads, exhaust systems and other performance components for most domestic V8, selected V6, and selected import engines. In addition, the Company offers performance aftermarket manifolds, cylinder heads, camshafts, air cleaners, and carburetors for Harley-Davidson and off road motorcycles. The Company currently offers over 6,400 performance automotive and motorcycle aftermarket parts for street, off-road, recreational and competition use.
In late December 2000, the Company purchased certain assets of Russell Performance Products, Inc. (“Russell”), a manufacturer of performance plumbing and brake lines located in Daytona Beach, Florida. In May 2001, the Company moved the operations to Torrance, California. Russell is a leading manufacturer of performance plumbing and brake lines whose current product offering of over 2,800 parts includes street-legal brake lines, oil lines, fuel lines, and filters for both automotive and motorcycle use.
Product Mix
The Company manufactures its own products and purchases other products designed to the Company’s specifications from third-party manufacturers for subsequent packaging and distribution to the Company’s customers. Generally, the Company can achieve a higher margin on those products which it manufactures, as compared to those purchased from third-party manufacturers. Accordingly, the Company’s results of operations in any given period are affected by product mix.
Product Concentration
Historically, the Company has derived a substantial portion of its revenues from the sale of intake manifolds and carburetors. For the fiscal years ended June 30, 1999, 2000, and 2001 approximately 29%, 28%, and 25% of revenues were derived from the sales of intake manifolds and 39%, 41% 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 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, as of May 2001, Russell performance plumbing and brake lines.
In July 1997, the Company completed construction of 12,000 and 15,000 square foot facilities on Company-owned property at its Foundry location in San Jacinto, California. The 12,000 square foot facility is being utilized for additional Foundry warehouse space and the 15,000 square foot facility houses the Company’s QwikSilver division, which was relocated from Apple Valley, California.
In October 1999, the Company completed construction of a 65,950 square foot distribution facility on Company-owned property adjacent to its exhaust system and shock absorber production facility in Torrance, California.
The Company is utilizing the 30,000 square foot former distribution facility at its Company headquarters in Torrance for additional manufacturing capacity.
Seasonality
The Company’s sales are subject to seasonal variations. Customer orders and sales are greatest in the second, third and fourth quarters of the Company’s fiscal year in anticipation of and during the spring and summer months. Accordingly, revenues and operating income tend to be relatively higher in the third and fourth fiscal quarters. This seasonality typically results in reduced earnings for the Company’s first and second fiscal quarters because a significant portion of operating expenses is fixed throughout the fiscal year.
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.
Fiscal Year 2001 Compared to Fiscal Year 2000
Revenues
Revenues decreased 4.6% to $115.6 million in fiscal year 2001 from $121.2 million in fiscal year 2000. The decrease was primarily the result of a decrease in volume of approximately $3.5 million, or 7.1%, in the sale of carburetors and a decrease of $4.0 million, or 12.2%, in the sale of intake manifolds, offset by sales from the newly acquired Russell division which totaled approximately $2.7 million. Management attributes the decrease in revenues to a general economic slow down and a prolonged period of inclement weather.
Cost of Sales
Cost of sales decreased 2.1% to $72.7 million in fiscal year 2001 from $74.3 million in fiscal year 2000. As a percent of revenues, cost of sales increased to 62.9% in fiscal year 2001 from 61.3% in fiscal year 2000. The decrease in cost of sales was primarily due to a decrease in sales. The increase in cost of sales as a percentage of sales was primarily due to a change in product mix toward lower margin products, and higher labor and energy costs.
Selling, General and Administrative Expense
Selling, general and administrative expenses increased 2.7% to $31.6 million in fiscal year 2001 from $30.8 million in fiscal year 2000. This increase resulted primarily from the increase in salaries mainly from the Russell acquisition and an increase in utilities due to the energy crisis in California as well as increases in medical and workers’ compensation costs. In addition, the Company’s depreciation and maintenance type expenditures for its state-of-the-art distribution facility incurred costs for a full year in fiscal 2001 versus only a partial year for fiscal year 2000. As a percent of revenues, selling, general and administrative expenses increased to 27.3% in fiscal year 2001 from 25.4% in fiscal year 2000. This increase is mainly attributed to the above in addition to revenues being down for the current year versus prior year.
Research and Development Expense
Research and development expense remained relatively unchanged in fiscal year 2001 versus 2000. As a percent of revenue, research and development expense was 3.2% in fiscal year 2001 versus 3.0% in fiscal year 2000. The Company plans on continuing to expand its research and development program, but through improved efficiency, expenditures may decrease as a percent of revenue in the future.
Operating Income
Operating income decreased 38.4% to $7.6 million in fiscal year 2001 from $12.4 million in fiscal year 2000. This decrease was mainly a result of decreased revenues, higher operating expenses as a percent of revenues, and higher cost of goods sold as a percentage of revenues.
Interest Expense
Interest expense increased 44.4% to $283,000 in fiscal year 2001 from $196,000 in fiscal year 2000. This increase was primarily due to an increase in the principal amount of average debt outstanding mainly due to the Company utilizing its line of credit to partially fund the purchase of Russell assets as well as the Company incurring interest on the assumption of capital leases in connection with the Russell purchase.
Interest Income
Interest income decreased 41.1% to $227,000 in fiscal year 2001 from $385,000 in fiscal year 2000. This decrease was the result of a decrease in interest earned on invested cash due to lower interest rates and lower amounts of invested excess working capital.
Fiscal Year 2001 Compared to Fiscal Year 2000
Taxes on Income
The provision for income taxes decreased $1,759,000 to $2,790,000 in fiscal year 2001 from $4,549,000 in fiscal year 2000. The effective tax rates were 36.8% and 36.1% for fiscal years 2001 and 2000, respectively. The increase in the effective tax rate resulted primarily from decreases in the utilization of state and federal tax credits resulting from decreased capital equipment acquisitions and decreased research and development credits.
Net Income
The Company’s net income decreased 40.5% for fiscal year 2001 to $4.8 million in fiscal 2001 from $8.0 million in fiscal year 2000. This decrease was primarily due to the items mentioned above.
Fiscal Year 2000 Compared to Fiscal Year 1999
Revenues
Revenues increased 11.2% to $121.2 million in fiscal year 2000 from $108.9 million in fiscal year 1999. The increase was primarily the result of an increase in volume of approximately $6.5 million, or 15.2%, in the sale of carburetors, an increase of $1.5 million, or 12.8%, in the sale of aluminum cylinder heads and an increase of $2.3 million, or 7.6%, in the sale of intake manifolds.
Cost of Sales
Cost of sales increased 12.8% to $74.3 million in fiscal year 2000 from $65.9 million in fiscal year 1999. As a percent of revenues, cost of sales increased to 61.3% in fiscal year 2000 from 60.5% in fiscal year 1999. The increase in cost of sales was primarily due to an increase in sales which included a change in product mix toward lower margin products, and higher labor costs, partially offset by improved production efficiencies associated with the introduction of high-tech machining centers used in the production of manifolds, cylinder heads and water pumps.
Selling, General and Administrative Expense
Selling, general and administrative expenses increased 11.6% to $30.8 million in fiscal year 2000 from $27.6 million in fiscal year 1999. This increase resulted primarily from the increase in sales commissions, advertising expense, and salaries associated with increased sales and the Company’s depreciation and related expenditures in connection with the opening of its new state-of-the-art distribution facility. As a percent of revenues, selling, general and administrative expenses increased to 25.4% in fiscal year 2000 from 25.3% in fiscal year 1999.
Research and Development Expense
Research and development expense increased 13.9% to $3.7 million in fiscal year 2000 from $3.2 million in fiscal year 1999. As a percent of revenue, research and development expense was 3.0% in fiscal years 2000 and 1999. The Company plans on continuing to expand its research and development program.
Write-off of Uncollectible Receivable
In December 1998, the Company wrote-off approximately $400,000 of unsecured trade receivables relating to Champion Auto Stores, Inc., a Minnesota-based automotive parts retailer, who filed a voluntary petition for reorganization under Chapter 11 of the Federal Bankruptcy Code in May 1998 and was further converted to Chapter 7 Liquidation in December 1998. The $400,000 write-off represented all of the outstanding receivable balance, a portion of which was previously reserved.
Fiscal Year 2000 Compared to Fiscal Year 1999
Settlement Expense
On January 6, 1999, the Company was served with a complaint filed by Super Shops in the United States Bankruptcy Court for the Central District of California wherein Super Shops sought to recover approximately $1.8 million in allegedly preferential payments made by Super Shops to the Company in the ninety days prior to the commencement of Super Shops’ Chapter 11 case. In June 1999, the Company settled this claim with Super Shops. The terms of the settlement, which were accepted, included a cash settlement in the amount of $190,000 payable in eight equal monthly installments. Edelbrock has forgone its claim for potential recovery of its unsecured trade receivable from Super Shops.
Operating Income
Operating income increased 6.3% to $12.4 million in fiscal year 2000 from $11.7 million in fiscal year 1999. This increase was mainly a result of increased revenues and lower operating expenses as a percent of revenues, offset by higher cost of goods sold as a percentage of revenues.
Interest Expense
Interest expense decreased 3.4% to $196,000 in fiscal year 2000 from $203,000 in fiscal year 1999. This decrease was primarily due to decrease in the principal amount of average debt outstanding.
Interest Income
Interest income increased 26.6% to $385,000 in fiscal year 2000 from $304,000 in fiscal year 1999. This increase was the result of an increase in interest earned on invested cash.
Taxes on Income
The provision for income taxes increased $205,000 to $4,549,000 in fiscal year 2000 from $4,344,000 in fiscal year 1999. The effective tax rates were 36.1% and 36.9% for fiscal years 2000 and 1999, respectively. The decrease in the effective tax rate resulted primarily from increases in state tax credits relating to capital equipment acquisitions and increased research and development credits.
Net Income
The Company’s net income increased 8.3% to $8.0 million in fiscal year 2000 from $7.4 million in fiscal year 1999. This increase was primarily due to the items mentioned above.
Quarterly Results
The following table sets forth unaudited operating data for each of the specified quarters of fiscal years 2000 and 2001. 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.
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 $8.0 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 $8.0 million, all of which was available to the Company as of September 24, 2001. The line of credit borrowings are at the applicable bank’s prime rate (6.75% at June 30, 2001). The line of credit agreement expires on February 1, 2002. Under the Revolving Credit Facility, the Company is subject to certain customary restrictive financial requirements. The Company has been and is in compliance with all such financial covenants as of September 24, 2001.
Net cash provided by operating activities was $11.1 million, $9.4 million and $5.7 million in fiscal years 1999, 2000, and 2001, respectively. Because of the seasonality of the Company’s business, more funds from operating activities are generated in its third and fourth fiscal quarters.
Accounts payable decreased $1.1 million for fiscal year 2001 compared to fiscal year 2000 primarily as a result of timing of payment terms from a principal supplier.
Accounts receivable decreased by $854,000 for fiscal year 2001 compared to fiscal year 2000, while sales decreased $5.5 million for fiscal year 2001 compared to fiscal year 2000. The decrease in accounts receivable in fiscal year 2001 was primarily due to the timing of payments from customers in connection with the Company’s dating programs and decreased sales, offset by accounts receivables acquired in connection with the acquisition of Russell Performance.
Inventories increased by $5.7 million for fiscal year 2001 compared to fiscal year 2000 while cost of sales decreased $1.6 million for fiscal year 2001 compared to fiscal year 2000. The increase in inventories was primarily due to the Russell purchase acquisition and timing differences pertaining to raw material purchases from fiscal year 2001 versus fiscal year 2000.
The Company’s total capital expenditures were $5.8 million in fiscal year 1999, $11.3 million in fiscal year 2000, and $7.6 million in fiscal year 2001. The $7.6 million of capital expenditures for fiscal year 2001 included expenditures for the Russell Performance Products, Inc. acquisition, and the purchase of computerized machining equipment and office equipment. The Company anticipates making capital expenditures of $4.5 - $6.0 million in fiscal year 2002 primarily for additional capital equipment to increase the Company’s production capacity.
The Company believes that funds generated from operations and funds available under the Revolving Credit Facility will be adequate to meet its working capital, debt service and capital expenditure requirements through fiscal year 2002.
Inflation
General inflation over the last three years has not had a material effect on the Company’s cost of doing business and it is not expected to have a material effect in the foreseeable future.
"Safe Harbor” Statement under the Private Securities Litigation Reform Act of 1995: Any statements set forth above which are not historical facts are forward-looking statements that involve known and unknown risks and uncertainties that could cause actual results to differ materially from those in the forward-looking statements. Potential risks and uncertainties include such factors as the financial strength and competitive pricing environment of the automotive and motorcycle aftermarket industries, product demand, market acceptance, manufacturing efficiencies, new product development, the success of planned advertising, marketing and promotional campaigns, and other risks identified herein and in other documents filed by the Company with the Securities and Exchange Commission.
Item 7A.
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 an $8 million line of credit with an interest rate based on the bank’s prime rate (currently 6.75%). It expires on February 1, 2002. 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 fiscal year ended June 30, 2001 and as of September 24, 2001, 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.
Item 8.
Item 8. Financial Statements and Supplementary Data.
See Item 14 for an index to the consolidated financial statements and supplementary financial information which are included herewith.
Item 9.
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.
A report on Form 8-K was filed with the Securities and Exchange Commission on February 8, 1999 under Item 4. Changes in Registrant’s Certifying Accountant.
Part III
Item 10.
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.
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.
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” and is incorporated herein by reference.
Item 13.
Item 13. Certain Relationships and Related Transactions.
None.
Part IV
Item 14.
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
Financial Statements and Schedules. See Index to Financial Statements which appears on page 24 hereof.
Other Financial Data. See Summary of Selected Financial Data, which appears in “Item 6. Selected Financial Data.”
Reports on Form 8-K.
The Company filed no Reports on Form 8-K during the last quarter of the 2001 fiscal year.
Exhibits. The exhibits listed on the Exhibit Index following the signature page hereof are filed herewith in response to this Item.
EDELBROCK CORPORATION
EXHIBIT INDEX
EDELBROCK CORPORATION
EXHIBIT INDEX
EDELBROCK CORPORATION
EXHIBIT INDEX
*
Management Contract or compensatory plan or arrangement which is separately identified in accordance with Item 14(a)(3) of Form 10-K.
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.
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.
EDELBROCK CORPORATION
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, 2000 and 2001, and the related consolidated statements of income, shareholders’ equity, and cash flows for each of the three years in the period ended June 30, 2001. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Edelbrock Corporation as of June 30, 2000 and 2001, and the consolidated results of its operations and its consolidated cash flows for each of the three years in the period ended June 30, 2001, in conformity with accounting principles generally accepted in the United States of America.
We have also audited Schedule II for each of the three years in the period ended June 30, 2001. In our opinion, this schedule presents fairly, in all material respects, the information required to be set forth therein.
GRANT THORNTON LLP
Los Angeles, California
August 24, 2001
EDELBROCK CORPORATION
CONSOLIDATED BALANCE SHEETS
See accompanying notes to consolidated financial statements.
EDELBROCK CORPORATION
CONSOLIDATED BALANCE SHEETS
See accompanying notes to consolidated financial statements.
EDELBROCK CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
See accompanying notes to consolidated financial statements.
EDELBROCK CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
Years Ended June 30, 1999, 2000, and 2001
See accompanying notes to consolidated financial statements.
EDELBROCK CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
See accompanying notes to consolidated financial statements.
EDELBROCK CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Supplemental schedule of non-cash investing and financing activities:
On December 21, 2000, the Company purchased certain assets of Russell Performance Products, Inc., a manufacturer of performance plumbing and brake lines. The purchase was accounted for under the purchase method of accounting. In conjunction with the acquisition, liabilities were assumed as follows:
Goodwill is included in fair value of assets acquired and is being amortized over 10 years. Included in the liabilities assumed are capital lease obligations of $122,000 of which $19,000 is current. In January 2001, the Company purchased, at their fair market value, certain leased machinery and equipment located at the Russell location in Florida from the lessors of the equipment for approximately $282,000.
See accompanying notes to consolidated financial statements.
EDELBROCK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Business and Summary of Significant 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 two 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, Goodwill, and License Agreement
Property, plant and equipment, Goodwill, and License Agreement are stated at cost. Depreciation and amortization are computed, primarily utilizing the straight-line method, over the estimated useful lives of the assets as follows:
Long-Lived Assets
Long-lived assets, such as property and equipment, license agreements, and real estate properties, are evaluated for impairment when events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable through the estimated undiscounted future cash flows from the use of these assets. When any such impairment exists, the related assets will be written down to fair value. No impairment losses have been recorded through June 30, 2001.
EDELBROCK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Business and Summary of Significant Accounting Policies (Continued)
Revenue Recognition
Revenue is recognized upon shipment of the products.
Taxes on Income
Deferred tax assets and liabilities are recorded for differences between the financial statement and tax bases of the assets and liabilities that will result in taxable or deductible amounts in the future based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. Income tax expense is recorded for the amount of income tax payable or refundable for the period increased or decreased by the change in deferred tax assets and liabilities during the period.
Concentration of Credit Risk
Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of temporary cash investments and trade accounts receivable.
The Company places its temporary cash investments with various financial institutions and, by policy, limits the amount of credit exposure to any one financial institution. The Company believes that no significant credit risk exists as these investments are made with high-credit-quality financial institutions.
The Company’s business activities and accounts receivable are with customers in the automotive and motorcycle industries located primarily throughout the United States. The Company performs ongoing credit evaluations of its customers and maintains allowances for potential credit losses totaling $500,000 at June 30, 2000 and 2001.
Fair Value
The Company has cash and cash equivalents, receivables, accounts payable, accrued expenses, and short-term borrowings for which the carrying value approximates fair value due to the short-term nature of these instruments.
The fair value of the Company’s long-term debt is estimated based on the market values of financial instruments with similar terms. Management believes that the fair value of the long-term debt approximates its carrying value.
Stock-Based Compensation
The Company accounts for stock-based employee compensation as prescribed by APB Opinion No. 25, “Accounting for Stock Issued to Employees,” and has adopted the disclosure provisions of Statement of Financial Accounting Standards 123, “Accounting for Stock-based Compensation” (“SFAS 123”). SFAS 123 requires pro forma disclosures of net income and net income per share as if the fair value based method of accounting for stock-based awards had been applied. Under the fair value based method, compensation cost is recorded based on the value of the award at the grant date and is recognized over the service period.
Goodwill and Intangible Assets
In July 2001, the FASB also issued Statement of Financial Accounting Standards No. 142, Goodwill and Intangible Assets which supersedes APB Opinion No. 17, Intangible Assets. SFAS 142 eliminates the current requirement to amortize goodwill and indefinite-lived intangible assets, addresses the amortization of intangible assets with a defined life and addresses the impairment testing and recognition for goodwill and intangible assets. SFAS 142 will apply to goodwill and intangible assets arising from transactions completed before and after the Statement’s effective date. SFAS 142 is effective for fiscal year 2003; however, early adoption is allowed in fiscal year 2002. The Company is currently assessing the Statement and has not yet made a determination of the impact adoption will have on its consolidated financial statements.
EDELBROCK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Business and Summary of Significant Accounting Policies (Continued)
Basic and Diluted Net Income Per Share Information
Basic net income per share is based upon the weighted average number of common shares outstanding. Diluted net income per share is based on the assumption that options and warrants are included in the calculation of diluted net income per share, except when their effect would be anti-dilutive. Dilution is computed by applying the treasury stock method. Under this method, options and warrants are assumed to be exercised at the beginning of the period (or at the time of issuance, if later), and as if funds obtained thereby were used to purchase common stock at the average market price during the period. Below is the calculation of basic and diluted net income per share for each of the past three fiscal years:
The following options and warrants were excluded from the computation of diluted net income per share as a result of the exercise price exceeding the average market price of the common shares.
Advertising Costs
Advertising costs are expensed as incurred and are included in selling, general and administrative expenses. Advertising expenses amounted to $9,156,000, $10,555,000 and $10,113,000 for fiscal years ended June 30, 1999, 2000, and 2001, respectively.
Segment Reporting
The Company is centrally managed and operates in one business segment: specialty performance automotive and motorcycle aftermarket parts.
Reclassifications
Certain prior period amounts have been reclassified for comparison with the 2001 presentation.
EDELBROCK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 2 - Inventories
Inventories consist of the following:
Note 3 - Long-Term Debt, Capital Lease Obligation, and Revolving Line of Credit
The Company’s long-term debt consists of the following:
Principal payments are due on long-term debt as follows:
The Company has one unsecured line of credit agreement with a bank, which provides total loan commitment not to exceed $8,000,000. All line of credit financing is at the bank’s prime rate (6.75% at June 30, 2001). This agreement expires in February 2002. There were no borrowings on the line as of June 30, 2000 and 2001. This obligation contains covenants, among other items, relating to various financial ratios. The Company was in compliance with all such covenants at June 30, 2001.
EDELBROCK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 3 - Long-Term Debt, Capital Lease Obligation, and Revolving Line of Credit (continued)
The Company’s capital lease obligations are summarized as follows:
Minimum lease payments under capital lease obligations are as follows:
Included in property, plant and equipment in the accompanying consolidated balance sheets are the following assets held under capital leases:
EDELBROCK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 4 - Taxes on Income
The provision for taxes on income consists of the following:
The differences between the U.S. federal statutory tax rate and the Company’s effective rate are as follows:
The components of deferred taxes at June 30, 2000 and 2001 are as follows:
EDELBROCK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 4 - Taxes on Income (continued)
The classification of the net deferred tax liability between current and non-current is as follows:
Note 5 - Commitments and Contingencies
Royalty and Development Fee Agreements
In February 1996, the Company entered into a Royalty Agreement with RICOR Racing and Development L.P. (“RICOR”) whereby the Company would pay RICOR a percentage of revenue derived from the sale of shock absorbers based on the following:
On February 19, 1999, the Royalty Agreement was amended where the Company will pay RICOR 6% of all licensed sales (see Note 8). Royalty expense under this agreement amounted to $702,000, $750,000, and $750,000 for fiscal year ended June 30, 1999, 2000, and 2001, respectively. On August 20, 2001, the Company informed RICOR via thirty day written notice that it intended to convert its license with RICOR to a non-exclusive nature.
In June 2000, the Company entered into a Product Development and Distribution Agreement (License Agreement) with JG Engine Dynamics, Inc. (JG) and Automotive Systems Group Inc. (collectively the Licensor) whereby the Company will pay the Licensor 5% of net revenues derived from the sale of internal engine, exhaust, and suspension components for import aftermarket products. In connection with this agreement, the Company paid to the Licensor cash of $144,000 and issued common stock and warrants with a fair value of $81,000 and $617,000, respectively (see Note 8). The Company capitalized the total $842,000 cost of this License Agreement and is amortizing the asset over its estimated useful life of 10 years.
Note 5 - Commitments and Contingencies (continued)
Retirement Plans
An employee stock ownership plan (“ESOP”) was established July 1, 1979 covering substantially all employees of Edelbrock Corporation who have attained one year of service. The minimum annual contribution is 1% of the total salaries or wages of plan participants and may be supplemented with additional amounts at the discretion of the Board of Directors. During fiscal year 1998, Edelbrock Corporation established a 401(k) defined contribution plan to enhance the existing ESOP for participating employees. During fiscal year 2001, the Company combined all of its retirement plans for Edelbrock Corporation into one all inclusive 401(k) defined contribution plan. At the discretion of the Board of Directors, Edelbrock Corporation can match participant directed contributions and provide discretionary contributions. Edelbrock Corporation currently matches 50% up to 4% of a participant’s contribution to this plan.
Contributions to the Edelbrock Corporation Plan amounted to $595,000 for the year ended June 30, 1999 and $636,000 for the year ended June 30, 2000. For the year ended June 30, 2001, Edelbrock Corporation contributed $577,000 to this 401(k) plan which first funded the match with the remaining balance utilized as a discretionary contribution.
Edelbrock Foundry Corp. maintains a defined contribution profit sharing plan (the “Plan”) covering substantially all employees who have attained one year of service. Contributions to the Plan are at the discretion of the Company’s Board of Directors; however, contributions cannot exceed 15% of the total salaries or wages of the plan participants. During fiscal year 1998, Edelbrock Foundry Corp. established a 401(k) defined contribution plan to enhance the existing plan for participating employees. During fiscal year 2001, Edelbrock Foundry Corp. combined its retirement plans into one all inclusive 401(k) defined contribution plan. At the discretion of the Board of Directors, Edelbrock Foundry Corp. can match participant directed contributions and provide discretionary contributions. Edelbrock Foundry Corp. currently matches 50% up to 4% of a participant's contribution to this plan.
Contributions to the Edelbrock Foundry Corp. Plan amounted to $65,000 for the years ended June 30, 1999 and 2000. For the year ended June 30, 2001, Edelbrock Foundry Corp. contributed $55,000 which first funded the match with the remaining balance utilized as a discretionary contribution.
Federal law limits the maximum annual contribution to the lesser of $35,000 or 25% of the total salaries or wages of a plan participant. The Company had accrued contributions of $649,000 and $605,000 at June 30, 2000 and 2001, respectively.
EDELBROCK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 5 - Commitments and Contingencies (continued)
Employment Agreements
The Company has an employment agreement with its President and Chief Executive Officer for a term expiring on June 30, 2004. The agreement provides for a base salary of $300,000 per year, with an annual raise and bonus to be determined by the Compensation Committee of the Board of Directors based on such factors as the performance of the officer and the financial results of the Company. Upon termination of the officer’s employment during the term of the agreement for any reason other than “cause,” death or voluntary termination, the Company will be obligated to make a lump sum severance payment in an amount equal to the then current annual base compensation plus an amount equal to the bonus paid the year prior to such termination.
The Company also has similar employment agreements with three other officers, two of which have a term expiring on June 30, 2004 and the third expiring on October 31, 2005. Pursuant to these employment agreements, the officers are entitled to an aggregate base salary of $545,000. Each officer is entitled to an annual bonus to be determined by the Compensation Committee of the Board of Directors based on such factors as the performance of the officer and the financial results of the Company.
Note 6 - Major Customers
During the fiscal years ended June 30, 1999, 2000, and 2001, one customer accounted for 14.8%, 14.8%, and 14.5% of revenues, respectively. Another customer accounted for 10.2% of revenues during fiscal year ended June 30, 2000 and 10.5% of revenues during fiscal year ended June 30, 2001.
Note 7 - Dependence on Key Supplier
The Company has entered into an agreement expiring in December 2004 with a key supplier that requires, among other things, that (i) the Company sell only carburetors manufactured by the supplier, (ii) the Company purchase a minimum number of carburetors from the supplier and (iii) the Company prices the carburetors so as to remain market competitive. The Company’s minimum obligation under this agreement aggregates $55,616,000, or $13,904,000 each calendar year. Sales of these carburetors accounted for 40% of the Company’s revenues for the year ended June 30, 2001. 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
Treasury Stock
At June 30, 2000 and 2001, the Company is holding 206,100 and 206,900 shares of its common stock in treasury. The excess of the purchase price over the par value of the common stock has been reflected as a reduction of paid in capital.
EDELBROCK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 8 - Shareholders’ Equity - (Continued)
1994 Incentive Equity Plan
The Company adopted the Edelbrock Corporation 1994 Incentive Equity Plan (the “Plan”) that authorizes the granting of options to purchase shares of Common Stock, stock appreciation rights, restricted shares, deferred shares, performance shares and performance units. The maximum number of shares of Common Stock transferred, plus the number of shares of Common Stock covered by outstanding awards granted under the Plan, shall not, in the aggregate exceed 562,500. The stock options have been granted at the current quoted market price at the date of grant.
1994 Stock Option Plan For Non-Employee Directors
Additionally, the Company adopted the Edelbrock Corporation 1994 Stock Option Plan for Non-Employee Directors (“Director Plan”), which authorizes the granting of non-qualified stock options to certain non-employee directors of the Company. The maximum number of shares granted under the Director Plan shall not exceed 25,000 shares of Common Stock. Initial grants of options under the Director Plan totaled 14,000. Three grants of 3,500 shares each were made at the initial offering price of $12.50 per share and one grant of 3,500 shares was granted at a price of $12.75 per share. In November 1998, one director resigned and exercised his vested options; the Company then elected a new director and granted 3,500 shares at a price of $16.375 per share. In November 2000, one director resigned and forfeited his vested options. In March 2001, the Company elected a new director and granted 3,500 shares at a price of $10.56 per share.
A summary of changes in common stock options during 1999, 2000, and 2001 are as follows:
On February 2, 1996, the Company issued warrants to purchase 100,000 shares of common stock at $14.75 per share to RICOR Racing and Development L.P. (“RICOR”). The warrants were granted at the current quoted market price at the date of grant. The warrants originally vested 20% on December 31 of each year for a period of five years with the first 20% vesting on December 31, 1996.
EDELBROCK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 8 - Shareholders’ Equity (continued)
On February 19, 1999, for consideration of Amendment No. 4 to the Licensing Agreement (see Note 5), the Company accelerated the vesting allowing the Warrants to purchase 100,000 shares to become fully exercisable at the date of the amendment. In addition, the Company issued two sets of Warrants to purchase 22,414 and 11,501 shares of common stock at $18.00 and $22.00 per share, respectively, to RICOR. The Warrants were granted at a price higher than the current quoted market price at the date of grant. The first set of warrants vest at 33.3% on December 31 of each year for a period of three years. The second set of warrants vest at 20% on December 31 of each year for a period of 5 years. The Warrants expire on February 18, 2002 and 2006, respectively.
On June 26, 2000, the Company issued 8,000 shares of common stock at $10.125 per share to Automotive Systems Group Inc. and issued warrants to purchase 80,000 shares of the Company’s common stock at an exercise price of $11.00 to JG Engine Dynamics, Inc. The warrants vest annually on June 1st of each year through a period of 4 years with the first 25% vesting on June 1, 2001. The exercise term starts June 1, 2001 and expires on May 31, 2010 (see Note 5).
A summary of changes in stock warrants during 1999, 2000, and 2001 are as follows.
EDELBROCK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 8 - Shareholders’ Equity (concluded)
Stock - Based Compensation
FASB Statement 123, “Accounting for Stock-Based Compensation,” requires the Company to provide pro forma information regarding net income and income per share as if compensation cost for the Company’s stock option plans had been determined in accordance with the fair value based method prescribed in FASB Statement 123. The Company estimates the fair value of each stock option at the grant date by using the Black-Scholes option-pricing model with the following weighted-average assumptions used for grants in fiscal 1999, 2000, and fiscal 2001: dividend yield of zero percent, risk-free interest rate of 6 percent, expected lives of ten years, and expected volatility of 28%, 64%, and 65%, respectively. Under the accounting provisions of FASB Statement 123, the Company’s net income and income per share for 1999, 2000, and 2001 would have been reduced to the pro forma amounts indicated below:
The following table summarizes information about stock options and warrants outstanding at June 30, 2001:
Stock Options:
No options were granted during the year ended June 30, 2000. The weighted average fair value of options granted during the year ended June 30, 2001 was $5.29.
Warrants:
The weighted average fair value of warrants granted during the years ended June 30, 2000 and 2001 were $7.72 and $5.20, respectively.
EDELBROCK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 9 - Legal Proceedings
As previously reported, in September 1997, Super Shops Inc. filed a voluntary petition for relief under chapter 11 of the United States Bankruptcy code, 11 U.S.C. § § 101-l330 (the “Bankruptcy Code”). At the time of Super Shops’ filing, the Company was one of Super Shops’ largest unsecured creditors and in December 1997, Edelbrock wrote-off approximately $1.9 million of unsecured trade receivables relating to Super Shops. On January 6, 1999, the Company was served with a complaint filed by Super Shops in the United States Bankruptcy Court for the Central District of California wherein Super Shops sought to recover approximately $1.8 million in allegedly preferential payments made by Super Shops to the Company in the ninety days prior to the commencement of Super Shops’ Chapter 11 case. In June 1999, the Company settled this claim with Super Shops. The terms of the settlement, which were accepted by Super Shops, Inc. and approved by the bankruptcy court, included a cash settlement in the amount of $190,000 payable in eight equal monthly installments, and Edelbrock has forgone its claim for potential recovery of its unsecured trade receivable from Super Shops.
EDELBROCK CORPORATION
SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS