<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 25, 1997 Commission File Number 34-24802
-------------- --------
EDELBROCK CORPORATION
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 33-0627520
- ---------------------------------------- --------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
2700 California Street, Torrance, California 90503
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(310)781-2222
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Registrant's telephone number, including area code
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
----- -----
As of May 8, 1997, the Company had 5,247,831 shares of Common Stock outstanding.
<PAGE> 2
EDELBROCK CORPORATION
FORM 10-Q FOR THE QUARTER ENDED MARCH 25, 1997
INDEX
<TABLE>
<CAPTION>
Page
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<S> <C>
Part I FINANCIAL STATEMENTS
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of March 25, 1997
and June 30, 1996............................................... 3
Consolidated Statements of Income for the Three Months
and Nine Months Ended March 25, 1997 and 1996.................. 4
Condensed Consolidated Statements of Cash Flows for the Nine
Months Ended March 25, 1997 and 1996 ........................... 5
Notes to Consolidated Interim Financial Statements ............... 6
Item 2. Management's Discussion and Analysis of Financial Conditions and
Results of Operations .......................................... 7-11
Part II OTHER INFORMATION.......................................................... 12
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</TABLE>
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EDELBROCK CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 25, June 30,
1997 1996
----------- -----------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents ............ $ 3,377,000 $ 8,771,000
Accounts receivable, net ............. 24,172,000 17,973,000
Inventories .......................... 12,540,000 9,735,000
Prepaid expenses and other ........... 574,000 436,000
----------- -----------
Total current assets ..................... 40,663,000 36,915,000
Property, plant and equipment, net ....... 30,507,000 27,382,000
Other .................................... 2,868,000 2,133,000
----------- -----------
Total assets ............................. $74,038,000 $66,430,000
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable ..................... $12,659,000 $ 9,454,000
Accrued expenses ..................... 2,301,000 2,537,000
Current portion of long-term debt .... 975,000 971,000
----------- -----------
Total current liabilities ................ 15,935,000 12,962,000
Long-term debt ........................... 3,107,000 3,148,000
Deferred income taxes .................... 1,972,000 1,900,000
Shareholders' equity ..................... 53,024,000 48,420,000
----------- -----------
Total liabilities and shareholders' equity $74,038,000 $66,430,000
=========== ===========
</TABLE>
The accompanying notes are an integral part of the interim financial statements.
3
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EDELBROCK CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
Three months ended Nine months ended
March 25, March 25,
---------------------------- -----------------------------
1997 1996 1997 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues .............................. $20,619,000 $18,854,000 $60,120,000 $54,233,000
Cost of sales ......................... 12,474,000 11,316,000 36,430,000 32,292,000
----------- ----------- ----------- -----------
Gross profit ...................... 8,145,000 7,538,000 23,690,000 21,941,000
----------- ----------- ----------- -----------
Operating expenses
Selling, general and administrative 5,099,000 4,923,000 15,003,000 14,573,000
Research and development .......... 605,000 405,000 1,761,000 1,239,000
----------- ----------- ----------- -----------
Total operating expenses .......... 5,704,000 5,328,000 16,764,000 15,812,000
----------- ----------- ----------- -----------
Operating income ...................... 2,441,000 2,210,000 6,926,000 6,129,000
Interest expense ...................... 86,000 108,000 260,000 334,000
Interest income ....................... 21,000 51,000 241,000 361,000
Other income .......................... 273,000 102,000 277,000 274,000
----------- ----------- ----------- -----------
Income before taxes on income ......... 2,649,000 2,255,000 7,184,000 6,430,000
Taxes on income ....................... 980,000 846,000 2,658,000 2,411,000
----------- ----------- ----------- -----------
Net income ............................ $ 1,669,000 $ 1,409,000 $ 4,526,000 $ 4,019,000
=========== =========== =========== ===========
Net income per share .................. $0.32 $0.27 $0.86 $0.77
=========== =========== =========== ===========
Weighted average number of shares
outstanding ....................... 5,246,000 5,241,000 5,243,000 5,240,000
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the interim financial statements.
4
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EDELBROCK CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Nine months ended
March 25,
------------------------------
1997 1996
----------- ------------
<S> <C> <C>
Increase (Decrease) in Cash and Cash Equivalents
Operating activities
Net income ......................................... $ 4,526,000 $ 4,019,000
Depreciation and amortization ...................... 2,888,000 2,546,000
Net change in operating assets and liabilities ..... (7,049,000) (7,898,000)
----------- ------------
Net cash provided by (used in) operating activities .... 365,000 (1,333,000)
----------- ------------
Investing activities
Capital expenditures ............................... (6,022,000) (3,075,000)
Proceeds from sale of property, plant & equipment .. 222,000 64,000
----------- ------------
Net cash used in investing activities .................. (5,800,000) (3,011,000)
----------- ------------
Financing activities
Proceeds from sale of common stock under option plan 78,000 8,000
Debt repayments .................................... (37,000) (793,000)
----------- ------------
Net cash provided by (used in) financing activities .... 41,000 (785,000)
----------- ------------
Net decrease in cash and cash equivalents .............. (5,394,000) (5,129,000)
Cash and Cash Equivalents at beginning of period ....... 8,771,000 10,298,000
----------- ------------
Cash and Cash Equivalents at end of period ............. $ 3,377,000 $ 5,169,000
============ ============
Supplemental disclosure of cash flow information
Cash paid during the period for
Interest ........................................... $ 260,000 $ 334,000
============ ============
Income taxes ....................................... $ 2,611,000 $ 3,275,000
============ ============
</TABLE>
The accompanying notes are an integral part of the interim financial statements.
5
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EDELBROCK CORPORATION
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION
The consolidated interim financial statements of Edelbrock Corporation (the
"Company") at March 25, 1997 and for the three and nine month periods ended
March 25, 1997, are unaudited, but include all adjustments (consisting only of
normal recurring adjustments) which the Company considers necessary for a fair
presentation. The June 30, 1996 balance sheet was derived from the balance sheet
included in the Company's audited consolidated financial statements as included
in the Company's Form 10-K for its fiscal year ended June 30, 1996 (File No.
0-24802). Certain amounts have been reclassified to conform to the March 25,
1997 presentation.
These unaudited financial statements have been prepared in accordance with
generally accepted accounting principles for interim financial information and
with the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes, and
should be read in conjunction with the Company's audited consolidated financial
statements included in the Form 10-K indicated above. Operating results for the
three and nine month periods ended March 25, 1997 are not necessarily indicative
of the results that may be expected for the fiscal year ending June 30, 1997.
NOTE 2 - INVENTORIES
Inventories at March 25, 1997 and June 30, 1996 consisted of the following:
<TABLE>
<CAPTION>
March 25, June 30,
----------- ----------
(Unaudited)
<S> <C> <C>
Raw materials ................. $ 7,825,000 $5,421,000
Work in process ............... 626,000 626,000
Finished goods ................ 4,089,000 3,688,000
----------- ----------
$12,540,000 $9,735,000
=========== ==========
</TABLE>
6
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Item 2. Management's Discussion and Analysis of Financial Conditions and
Results of Operations
The following is a discussion and analysis of the consolidated financial
condition and results of operations of the Company for the three and nine months
ended March 25, 1997. The following should be read in conjunction with the
Consolidated Interim 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, camshafts, cylinder heads, exhaust systems, shock absorbers and
other performance components for most domestic V8 and selected V6 engines. The
Company currently offers over 1,600 performance automotive and motorcycle
aftermarket parts for street, off-road, recreational and competition vehicle
use. In addition, the Company offers performance aftermarket manifolds,
camshafts, cylinder heads, air cleaners, and carburetors for Harley-Davidson and
other selected brand motorcycles.
In early May 1997, the Company entered the performance shock absorber
aftermarket utilizing RICOR Racing and Development, L.P.'s patented "inertia
sensitive system." Initially, the Company will produce shock absorbers for a
variety of two-and four-wheel drive applications for Ford, Chevrolet and
Chrysler manufactured vehicles.
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 the product mix of the
Company's sales during the period. 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, which has
negatively affected the Company's gross margins.
Manufacturing Capacity
In November 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 for the manufacture of
performance aftermarket shock absorbers, to expand exhaust system manufacturing
and to house additional warehouse overflow.
Seasonality
The Company's sales are subject to seasonal variations. Customer orders and
sales are greatest in the 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 fourth fiscal
quarter.
7
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THREE MONTHS ENDED MARCH 25, 1997, COMPARED TO THREE MONTHS ENDED
MARCH 25, 1996:
Revenues
Revenues increased 9.4% to $20.6 million for the three months ended March 25,
1997 from $18.9 million for the same period of 1996. This increase was primarily
the result of an increase of approximately $1.1 million, or 13.6%, in the sale
of carburetors and an increase of approximately $500,000, or 54.0%, in the sale
of automotive aluminum cylinder heads.
Cost of Sales
Cost of sales increased 10.2% to $12.5 million for the three months ended March
25, 1997 from $11.3 million for the same period of 1996. As a percent of
revenues, cost of sales increased to 60.5% for the three months ended March 25,
1997 from 60.0% for the same period of 1996. This increase in cost of sales was
primarily due to an increase in sales of third-party manufactured products. See
"Product Mix" on page 7.
Selling, General and Administrative Expense
Selling, general and administrative expense increased 3.6% to $5.1 million for
the three months ended March 25, 1997 from $4.9 million for the same period of
1996. This increase was primarily due to increased advertising expense and sales
commissions associated with increased sales. As a percent of sales, selling,
general and administrative expense decreased to 24.7% for the three months ended
March 25, 1997 from 26.1% for the same period of 1996.
Research and Development Expense
Research and development expense increased 49.4% to $605,000 for the three
months ended March 25, 1997 from $405,000 for the same period of 1996. The
increase was primarily the result of expenditures relating to the development of
the Company's new line of performance aftermarket shock absorbers and other
Company manufactured products.
Interest Expense
Interest expense decreased 20.4% to $86,000 for the three months ended March 25,
1997 from $108,000 for the same period of 1996. The decrease was primarily due
to a decrease in the principal amount of average debt outstanding.
Interest Income
Interest income decreased 58.8% to $21,000 for the three months ended March 25,
1997 from $51,000 for the same period in 1996. The decrease was primarily due to
a decrease in the balance of invested funds raised from the Company's initial
public offering.
8
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Other Income
Other income increased to $273,000 for the three months ended March 25, 1997
from $102,000 for the same period in 1996. In the current year, the Company sold
a real estate property and received proceeds that resulted in a $277,000 pre-tax
gain. In the prior year, the Company received net proceeds of $112,000 from the
settlement of a lawsuit against a supplier of defective foundry furnace
equipment relating to the 1990 construction of the refractory furnaces at the
Company's aluminum foundry.
Taxes on Income
The provision for income taxes increased to $980,000 for the three months ended
March 25, 1997 from $846,000 for the 1996 period. The effective tax rate
decreased to 37.0% for the 1997 period from 37.5 % for the 1996 period.
Net Income
The Company's net income for the three months ended March 25, 1997 increased
18.5% to $1.7 million from $1.4 million for the same period of 1996. This
increase was the result of the items mentioned above.
NINE MONTHS ENDED MARCH 25, 1997, COMPARED TO NINE MONTHS ENDED
MARCH 25, 1996
Revenues
Revenues increased 10.9% to $60.1 million for the nine months ended March 25,
1997 from $54.2 million for the same period of 1996. This increase was primarily
the result of an increase of approximately $5.3 million, or 25.0%, in the sale
of carburetors, an increase of approximately $900,000, or 30.3%, in the sale of
aluminum cylinder heads, and an increase of approximately $258,000 or 19.4%, in
the sale of Harley-Davidson aftermarket products. These increases were offset by
an approximate $908,000, or 5.0%, decrease in the sale of manifolds.
Cost of Sales
Cost of sales increased 12.8% to $36.4 million for the nine months ended March
25, 1997 from $32.3 million for the same period of 1996. As a percent of
revenues, cost of sales increased to 60.6% for the nine months ended March 25,
1997 from 59.5% for the same period of 1996. This increase in cost of sales was
primarily due to an increase in sales of third-party manufactured products. See
"Product Mix" on page 7.
Selling, General and Administrative Expense
Selling, general and administrative expense increased 3.0% to $15.0 million for
the nine months ended March 25, 1997 from $14.6 million for the same period of
1996. This increase was primarily due to increased advertising expense and sales
commissions associated with increased sales. As a percent of sales, selling,
general and administrative expense decreased to 25.0% for the nine months ended
March 25, 1997 from 26.9% for the same period of 1996.
9
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Research and Development Expense
Research and development expense increased 42.1% to $1.8 million for the nine
months ended March 25, 1997 from $1.2 million for the same period of 1996. The
increase was primarily the result of expenditures relating to the development of
the Company's new line of performance aftermarket shock absorbers and other
related Company manufactured products.
Interest Expense
Interest expense decreased 22.2% to $260,000 for the nine months ended March 25,
1997 from $334,000 for the same period of 1996. The decrease was primarily due
to a decrease in the principal amount of average debt outstanding.
Interest Income
Interest income decreased 33.2% to $241,000 for the nine months ended March 25,
1997 from $361,000 for the same period in 1996. This decrease was primarily due
to a decrease in the balance of invested funds raised from the Company's initial
public offering.
Other Income
Other income increased to $277,000 for the nine months ended March 25, 1997 from
$274,000 for the same period in 1996. During the nine months ended March 25,
1997, the Company sold a a real estate property that resulted in a $277,000
pre-tax gain. During the nine months ended March 25, 1996, the Company sold a
piece of equipment that resulted in a $172,000 pre-tax gain and received net
proceeds of $112,000 from the settlement of a lawsuit against a supplier of
defective foundry furnace equipment relating to the 1990 construction of the
refractory furnaces at the Company's aluminum foundry.
Taxes on Income
The provision for income taxes increased to $2.7 million for the nine months
ended March 25, 1997 from $2.4 million for the 1996 period. The effective tax
rate decreased to 37.0% for the 1997 period from 37.5% for the 1996 period.
Net Income
The Company's net income for the nine months ended March 25, 1997 increased
12.6% to $4.5 million from $4.0 million for the same period of 1996. This
increase was the result of the items mentioned above.
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 revolving
credit facility ("Revolving Credit Facility"). The Company maintains a $2.0
million revolving credit facility which expires on February 1, 1998. Due to
seasonal demand for the Company's products, the Company builds inventory during
the first and second fiscal quarters in advance of the typically stronger
selling periods during the fourth fiscal quarter.
10
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The Company believes that funds generated from operations and funds available
under the Revolving Credit Facility together with cash balances will be adequate
to meet its working capital, debt service and capital expenditure requirements
through the next twelve months. The Company anticipates making capital
expenditures of approximately $7.0 million in fiscal year 1997, which includes
expenditures for the construction of the recently completed 45,000 square-foot
facility to house the Company's shock absorber division, expand exhaust system
manufacturing and house additional Corporate expansion including warehouse
overflow; the installation of a new computer mainframe system and related
software; machinery for the shock absorber facility; and additional capital
equipment to increase the Company's production capacity.
NEW ACCOUNTING STANDARDS
On March 3, 1997, the FASB issued Statement of Financial Accounting Standards
No. 128, Earnings per Share (SFAS 128). This pronouncement provides a different
method of calculating earnings per share than is currently used in accordance
with APB 15, Earnings per Share. SFAS 128 provides for the calculation of Basic
and Diluted earnings per share. Basic earnings per share includes no dilution
and is computed by dividing income available to common shareholders by the
weighted average number of common shares outstanding for the period. Diluted
earnings per share reflects the potential dilution of securities that could
share in the earnings of an entity, similar to fully diluted earnings per share.
This pronouncement is effective for fiscal years ending after December 15, 1997.
The Company does not expect that adoption of this standard will have a material
effect on its reported earnings per share amounts.
SAFE HARBOR FOR FORWARD-LOOKING STATEMENTS
Except for historical information contained herein, statements of this report
are forward-looking statements that are made pursuant to the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995.
Forward-looking statements involve known and unknown risks and uncertainties
which may cause the Company's actual results in future periods to differ
materially from forecast results. Those risks and uncertainties include, among
others, the financial strength and competitive pricing environment of the
automotive and motorcycle aftermarket industry, product demand,
market-acceptance, manufacturing efficiencies and new product development.
11
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Not applicable.
Item 2. Changes in Securities
Not applicable.
Item 3. Defaults upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
Item 5. Other Information
Not applicable.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10.1 Amendment No. 1 to License Agreement, dated February 21,
1997 by and between Edelbrock Corporation and RICOR Racing and
Development, L.P..
27.1 Financial Data Schedule.
(b) There were no reports on Form 8-K filed during the nine months March
25, 1997.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
EDELBROCK CORPORATION
Registrant
Date: May 8, 1997 JEFFREY L. THOMPSON
Jeffrey L. Thompson
Executive Vice President,
Chief Operating Officer and
Director
<PAGE> 1
EXHIBIT 10.1
AMENDMENT NO 1.
TO
LICENSE AGREEMENT
This Amendment No. 1 (the "Amendment") to License Agreement dated
February 2, 1996 (the "License Agreement") is made as of February 21, 1997 by
and between RICOR Racing and Development L.P., a California limited partnership
("Licensor"), Ricor, Inc., a California corporation ("Ricor, Inc."), Edelbrock
Corporation, a Delaware corporation ("Licensee"), and, with respect to Sections
2, 5(a), 5(b) and 5(h) only, Mr. Don Richardson, an individual residing in the
State of California.
RECITALS
A. Licensor possesses certain intellectual property rights,
including patent rights, trademark rights, trade secrets, proprietary
information, technical information, know-how and use data relating to
manufacturing techniques and design specifications for shock absorbers.
B. Licensor and Licensee entered into the License Agreement
pursuant to which Licensee obtained a license to make, use and sell such shock
absorbers in a certain territory and in certain markets subject to the terms,
conditions and restrictions set forth in the License Agreement.
C. Licensor and Licensee desire to amend the License
Agreement pursuant and subject to the terms and conditions of this Amendment.
In consideration of these premises and of the mutual promises contained
in this Amendment and in the License Agreement, the parties hereby agree as
follows:
1. Definitions. Except as otherwise set forth herein, all defined
terms as used herein shall have the same meaning as in the License Agreement,
with the following exceptions:
(a) Section 1.5 of the License Agreement shall be restated
in its entirety as follows:
1.5 Exclusive Territory. "Exclusive Territory" means all of
the countries of the world, except for Central and South
America, Asia, the Far and Middle East and the island nations of
the South Pacific (such as Indonesia and the Philippines) (the
"Excluded Territory"), but including Australia, New Zealand and
the countries of the Caribbean. From and after one year from the
date of
1
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this Amendment, the term "Exclusive Territory" shall mean all of
the countries of the world except for (i) any countries situated
in the Excluded Territory with respect to which Licensor has
entered into a definitive agreement providing exclusive
aftermarket rights under the Licensed Patents, Trademarks and
Technical Information to make, use, sell, advertise and
distribute Licensed Items to a party other than Licensee and
(ii) the Non-Exclusive Territory as defined herein.
(b) Section 1.6 of the License Agreement shall be restated
in its entirety as follows:
1.6 Field of Use. "Field of Use" means the non-OEM
aftermarket for all applications that have the ability to
utilize the Licensed Items and Technical Information (excluding
military vehicle applications sold to the French military in the
country of France and racing applications in Europe and Africa
as defined in the Letter Agreement dated September 28, 1995, by
and between Don Richardson and Pierre DeFrenne).
(c) Section 1.12 of the License Agreement shall be restated
in its entirety as follows:
1.12 Non-Exclusive Territory. "Non-Exclusive Territory" means
any countries situated in the Excluded Territory with respect to
which Licensor has entered into a definitive agreement providing
non-exclusive aftermarket rights under the Licensed Patents,
Trademarks and Technical Information to make, use, sell,
advertise and distribute Licensed Items to a party other than
Licensee.
(d) Section 1.15 of the License Agreement shall be restated in its
entirety as follows:
1.15 RICOR Shock Absorbers. "RICOR Shock Absorbers" means
shock absorbers containing Licensor's proprietary "inertia
sensitive system" embodied in the Licensed Patents and Technical
Information, including both single and multiple-tube
applications.
2. Additional Patents, Improvements and Discoveries
Section 2.4 of the License Agreement shall be restated in its
entirety as follows:
2.4 Additional Patents, Improvements and Discoveries.
Licensor and/or Don Richardson will promptly notify Licensee
whenever either of them has
2
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filed an application for a patent in the United States Patent
and Trademark Office pertaining to the subject matter of the
Licensed Items, upon any material change in the status of any
Licensed Patents or upon discovery of any improvement to or
derivation of any Licensed Patent. All of such new patents,
Improvements, derivations or discoveries (collectively, the
"Rights") shall remain the property of Licensor and/or Don
Richardson, provided that Licensor and/or Don Richardson pays
all costs and expenses of ownership of the Rights and provided
that such Rights shall be added to Exhibit A to the License
Agreement and become licensed to Licensee to the same extent as
other rights licensed under the license Agreement at no
additional cost or consideration. In the event Licensor and/or
Don Richardson, within a reasonable time after notification of
Licensee, chooses not to secure ownership of any Right which may
result in a patent, Licensee shall have the right to take
ownership of such Right without any additional consideration to
Licensor provided that Licensee pays all costs and expenses of
ownership of any such Rights. Licensor and Don Richardson agree
that, upon the reasonable request of Licensee and without
further consideration, they will execute and deliver to Licensee
such documents and will take such other actions as may be
necessary and appropriate in order to vest in Licensee the full
legal rights in any Right assumed by Licensee under this Section
2.4.
3. Additional Performance Standards
(a) In addition to the minimum net sales price goals set
forth in Section 8.1(b) of the License Agreement, Licensor or Licensee, at
either party's discretion and option shall have the right to terminate the
License Agreement including this Amendment or to convert any license granted
hereunder or thereunder into a nonexclusive license, in respect of any region
designated below, in the event Licensee fails to "address the market" in such
region in accordance with the following schedule:
<TABLE>
<CAPTION>
TERRITORY "ADDRESS BY" DATES
--------- ------------------
<S> <C>
Europe July 1, 1999
Australia/New Zealand July 1, 1999
Asia/Far East (excluding Middle East)
(if not addressed by Licensor) July 1, 1999
South Pacific Nations (if not
addressed by Licensor) July 1, 1999
Central and South America (if not
addressed by Licensor) July 1, 2000
</TABLE>
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Middle East (if not addressed by Licensor) July 1, 2001
Africa July 1, 2002
(b) Failure by Licensee to meet an "address by" date with
respect to a particular region will not permit Licensor or Licensee to
terminate the license or convert the license into a nonexclusive license with
respect to any other region.
(c) The term "address the market" means the taking of willful
efforts towards commercializing RICOR Shock Absorbers for aftermarket
applications in the region, including commencement of research and development
and marketing efforts, either directly or through a third party sublicensee,
consistent with and similar to the efforts undertaken by Licensee to
commercialize RICOR Shock Absorbers for the North American aftermarket. Merely
entering into a sublicense without taking the efforts referred to in the
previous sentence shall not be sufficient for this purpose.
(d) Licensor's or Licensee's right to terminate or convert due
to failure to meet an "address by" date shall be exercisable by Licensor or
Licensee by six (6) months written notice to the other party. If, during such
six (6) month period, Licensee takes action sufficient to "address the market"
as defined above, Licensor or Licensee shall withdraw its notice, which shall
be deemed of no further effect.
4. Advances, Loans and Prepaid Royalties
-------------------------------------
(a) Section 2.5(g) of the License Agreement shall be
deleted in its entirety.
(b) In lieu of Section 2.5(g), the parties agree as
follows: The parties understand and acknowledge that Licensee has paid to
Licensor the amount of $50,000 and has loaned to the Licensor the amount of
$160,000 (with interest accrued to date of $8,524.58) (the "Loan"). In addition
to the foregoing, on the date of execution of this Amendment, Licensee shall
advance to Licensor the amount of $140,000. From and after the date of this
Amendment, all of such amounts, totalling $358,524.58, shall be deemed as
advances on royalties and upon execution of this Amendment the Loan shall be
cancelled.
Beginning one year from the date of execution of this
Amendment, Licensee shall be entitled to deduct from royalty payments required
to be made under the License Agreement an aggregate of $358,524.58 (plus all
amounts designated as "prepaid royalties" paid pursuant to the Consulting
Agreement referred to in Section 5(a) of this Amendment), which deduction, if
taken, shall be reflected on the appropriate royalty statement furnished under
the License Agreement and in no event shall the deduction with respect to any
royalty payment exceed 50% of such payment. Prior to one year from the date of
this Amendment Licensee shall not be entitled to any royalty set-off in respect
of any amounts loaned or advanced.
4
<PAGE> 5
5. Development Provisions
(a) Don Richardson Consulting. In addition to its support
obligations set forth in the License Agreement, Licensor shall cause Don
Richardson, and Don Richardson hereby agrees, to provide consulting services
and advice to Licensee, at the request of Licensee from time to time, in
connection with the research and development of patents, improvements,
derivations, discoveries and other inventions in connection with the subject
matter of the Licensed Items and Technical Information. In exchange for such
services Licensee shall pay to Licensor, for a period of one year, the amount
of $12,500 per month, of which $7,500 per month shall be credited against
future royalties beginning one year from the date of this Amendment as set
forth in Section 4(b) of the Amendment. From and after one year from the date
of the Amendment, Licensee shall pay to Licensor $5,000 per month for such
services, provided, that either party may terminate the agreement set forth in
this Section 5(a) on thirty (30) days prior written notice, such termination
not to affect any other term or provision of this Amendment or the License
Agreement. Licensee shall reimburse Licensor for all reasonable pre-approved
expenses incurred by Licensor in reasonable transportation, room and board of
Licensor personnel while at any facility of Licensee.
(b) Confidentiality. Mr. Don Richardson, by executing this
Amendment, hereby personally agrees to keep confidential any and all
Confidential Information with respect to Licensee to the same extent as
Licensor and Licensee have agreed to maintain the confidentiality of each
other's Confidential Information as set forth in Article 9 of the License
Agreement.
(c) Research and Development Employees. Upon execution of
this Amendment, Licensee, Licensor and Ricor, Inc. shall use their reasonable
efforts to cause Licensee to hire certain current employees of Licensor and/or
Ricor, Inc., as designated by Licensee ("Ricor Employees"), for the purpose of
conducting shock absorber research and development. Any employment by Licensee
of any Ricor Employees shall be on similar terms to current employees of
Licensee engaged in similar work. Licensee understands and acknowledges that
employment of any current Licensee employee is subject to the approval of the
particular employee and Licensor can offer no guarantee of acceptance of
employment by any Ricor Employee. Licensor and Ricor, Inc. reserve the right to
continue to employ any person not employed by Licensee for whatever reason.
(d) Purchase of Equipment. Licensor shall sell and
Licensee shall purchase certain equipment and inventory owned by Ricor, Inc.
for a purchase price of $95,000 pursuant to an asset purchase agreement in
substantially the form attached hereto as Exhibit A.
(e) Licensor Development Needs. Licensee recognizes that
Licensor may, from time to time, desire to use Licensee's development resources
in connection with any additional aftermarket licenses in the territories
excluded from the definition of Exclusive
5
<PAGE> 6
Territory and in connection with OEM commercialization efforts as set forth in
Section 6 of this Amendment. Licensee agrees that it will use its reasonable
best efforts to make such development resources available to Licensor when
reasonably requested by Licensor subject to payment to Licensee by Licensor or
any licensee of Licensor of usual and customary development fees to be
negotiated in good faith from time to time by the parties. Such fees shall be
based on Licensee's cost plus usual and customary profit and shall be
substantially in accordance with the schedule of costs outlined in Exhibit B
hereto.
(f) Payment of Licensor/Ricor, Inc. Rent, Utilities, Etc.
Licensee shall promptly pay, upon submission of monthly bills in accordance
with Licensee's instructions, all rent, utilities and other approved costs in
respect of the Ricor, Inc. development facility in Sutter Creek, California,
provided, that any increase in rent from the current level shall be paid only
upon approval of such increase by Licensee. In addition, Licensor may from time
to time request additional material, equipment and supplies, payment for which
shall be in the sole discretion of Licensee.
(g) Indemnification. In addition to the indemnification
obligations set forth in Section 7.3 of the License Agreement, Licensee agrees
to include any claims, demands, liabilities, actions, suits, proceedings
losses, damages, judgments, expenses and/or costs (including without limitation
reasonable attorneys' fees and related costs) based on or arising out of any
claims or demands by any third party that a Licensed Item or Licensed Items
were improperly or defectively designed and such improper or defective design
was caused by acts or omissions of Licensee, provided that Licensee shall not be
responsible for indemnifying Licensor to the extent that such improper or
defective design was caused by acts or omissions of Don Richardson, Licensor
and/or Ricor, Inc.
(h) Richardson Covenant Not to Compete. During such time as
Licensee is paying Licensor pursuant to Section 5(a) hereof and for a period of
two (2) years thereafter, Don Richardson agrees not to, directly or indirectly,
own more than 10% of, manage, operate, join, control, assist or participate in
the ownership, management, operation or control of any business which, directly
or indirectly, competes with the Licensee in the business of making, using and
selling shock absorbers within the Exclusive Territory. The restrictive
covenant contained in this Section 5(h) shall be suspended during any time
during the period that Licensee shall not be engaged in the business of making,
using or selling RICOR Shock Absorbers.
6. OEM Provisions.
(a) All OEM markets and applications shall remain the sole
and exclusive property of Licensor; however, Licensor and Licensee agree to
work together to exploit the OEM market on the terms outlined below.
(b) Licensee and Licensor understand and acknowledge that
in certain circumstances it may be beneficial for Licensee to market certain
OEM applications under
6
<PAGE> 7
the "Edelbrock umbrella", by which it is meant use of Licensee's name,
expertise and facilities in order to validate and strengthen the image of RICOR
Stock Absorbers to potential OEM licensees. In the event Licensor deems it
beneficial to market its technology to the OEM market under the Edelbrock
umbrella, Licensee agrees to make available to Licensor its name, facilities,
expertise and/or personnel, the extent and nature of which shall be determined
by agreement of the parties on a case-by-case basis, taking into account
Licensor's needs and Licensee's resources.
(c) In the event Licensee independently encounters what it believes
to be a significant OEM opportunity, Licensee shall make every reasonable effort
to promptly notify Licensor of such opportunity and shall make available
appropriate resources of Licensee to assist Licensor in exploiting such
opportunity.
(d) If Licensee contributes to the securing of any OEM license or
other arrangement, whether by permitting Licensor to market OEM under the
Edelbrock umbrella and/or by introducing Licensor to a significant OEM
opportunity, Licensee shall be entitled to receive a percentage of all fees and
royalties actually received from any such license or arrangement, which
percentage shall generally be assumed to be 20% but shall be subject to
adjustment by the Committee (as defined below) in light of the relative
contribution and efforts of each Licensor and Licensee. In addition, Licensor
shall be entitled to receive a percentage of any consideration actually
received by Licensee in connection with the manufacture by Licensee of any
Licensed Items for the OEM market or to the extent Licensee participates in the
chain of distribution with respect to any Licensed Items for the OEM market,
which percentage shall generally be assumed to be 20% but shall be subject to
adjustment by the Committee (as defined below).
(e) The Committee shall consist of six members, three of which shall
be appointed by Licensee ("Licensee Members") and three of which shall be
appointed by Licensor ("Licensor Members"). The initial Licensee Members shall
be Messrs. Victor Edelbrock, Jeffrey Thompson and Jack Mayberry. The initial
Licensor Members shall be Messrs. Don McNerney, Don Richardson and Barry
Harkins. The Committee shall meet from time to time as needed to further the
commitments and obligations of the parties set forth in this Amendment and the
License Agreement. The Committee shall endeavor to seek 100% consensus in all
matters; however, in the event 100% consensus cannot be achieved, approval of a
majority of the Committee members shall be required for any action to be
effective. Should any Licensee Member resign or die or become disabled, the
vacancy shall be filled by a member or an affiliate of Licensor's organization
as selected by a majority of the remaining Licensor Members. The Committee may
act by unanimous written consent in lieu of a meeting. The presence in person or
telephonically of each Committee member shall be required to constitute a
quorum, except that any Committee member may designate another Committee member
as his proxy with respect to any particular meeting or action.
<PAGE> 8
(f) In the event the Committee is deadlocked and cannot
come to an agreement on any particular matter, the parties agree to submit such
matter for binding resolution to a mutually-agreeable third-party who is not an
affiliate of, advisor to, employee of or otherwise associated with either of
Licensor or Licensee. Subject in all cases to the rights of the parties to seek
arbitration under the License Agreement or any other rights, the parties agree
that the decision of such third-party shall be binding and that such third-party
shall be entitled to consider any and all information such person believes is
relevant to a resolution of the matter.
7. Miscellaneous
(a) Other Licensor Agreements. In the event Licensor
enters into any agreement in respect of aftermarket territories not included in
the Exclusive Territory licensed hereby, Licensor shall include in such license
a prohibition on the licensees, any sublicensees, any suppliers or any
manufacturers thereunder from selling any RICOR Shock Absorbers falling within
the scope of the Licensed Patents or Technical Information for aftermarket
applications in any territory exclusively licensed to Licensee under this
Amendment and the License Agreement, and shall designate Licensee as a third
party beneficiary of such prohibition. Licensor agrees that any person who is
known to violate such prohibition shall be treated as a third party infringer
as set forth in Section 5.3 of the License Agreement and further agrees that it
will cooperate with Licensee to permit Licensee to enforce such prohibition as
a third party beneficiary. Licensor represents and warrants to Licensee that
the license agreement with Pierre DeFrenne referred to in Section 1(b) of this
Agreement and the License Agreement are the only agreements under which the
Licensed Patents and Technical Information are licensed to any third party.
(b) Press Releases. There shall be no public disclosure by
Licensor or any of its agents or affiliates of the contents of this Amendment
or of the transactions contemplated herein unless and until agreed to in
writing by Licensee. Licensee may make disclosure of the contents of this
Amendment and/or of the transactions contemplated hereby at its discretion,
provided, that Licensee shall make all reasonable efforts to allow Licensor the
opportunity to review any press releases mentioning Licensor or its technology
prior to release. Nothing herein shall in any way affect Licensee's obligations
to comply with applicable laws relating to the disclosure of public information.
(c) Dispute Resolution. The parties understand and
acknowledge that certain provisions of this Amendment are subject to
interpretation, including, but not limited to the definition of "address the
market" in Section 3(c) hereof. Without in any way limiting the rights of the
parties to seek arbitration under the License Agreement or any other rights, the
parties agree that in the event of a dispute regarding any matter under this
Amendment or the License Agreement the parties will attempt to resolve the
dispute through the Committee.
8
<PAGE> 9
(d) Effect of Amendment. Except as otherwise modified hereby, the
terms of the License Agreement shall remain in full force and effect.
IN WITNESS WHEREOF, the parties have executed this Amendment as of the
date first written above.
RICOR RACING AND DEVELOPMENT, L.P. EDELBROCK CORPORATION
205 Amador Road 2700 California Street
Sutter Creek, CA 95685 Torrance, CA 90503
By: RICOR, Inc., its General
Partner
/s/ DON RICHARDSON By: /s/ VICTOR EDELBROCK
- -------------------------------- -------------------------------
Don Richardson Victor Edelbrock
President President
RICOR, Inc.
By: /s/ DON RICHARDSON
-----------------------------
Don Richardson
President
With respect to Sections 2, 5(a), 5(b)
and 5(h) hereof only:
/s/ DON RICHARDSON
- --------------------------------
Don Richardson
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