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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, 1999 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
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 6, 1999, the Company had 5,243,439 shares of Common Stock outstanding.
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EDELBROCK CORPORATION
FORM 10-Q FOR THE QUARTER ENDED MARCH 25, 1999
INDEX
<TABLE>
<CAPTION>
Part I FINANCIAL STATEMENTS Page
----
<S> <C>
Item 1. Interim Financial Statements
Condensed Consolidated Balance Sheets as of March 25, 1999
and June 30, 1998............................................... 3
Consolidated Statements of Income for the Three Months
and Nine Months Ended March 25, 1999 and 1998.................. 4
Condensed Consolidated Statements of Cash Flows for the Nine
Months Ended March 25, 1999 and 1998 ........................... 5
Notes to Consolidated Financial Statements ....................... 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations .......................................... 7-12
Part II OTHER INFORMATION.......................................................... 13
</TABLE>
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EDELBROCK CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 25, June 30,
1999 1998
----------- -----------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents ............ $ 4,217,000 $ 8,370,000
Accounts receivable, net ............. 28,792,000 21,222,000
Inventories .......................... 16,348,000 16,776,000
Prepaid expenses and other ........... 1,448,000 1,288,000
----------- -----------
Total current assets ..................... 50,805,000 47,656,000
Property, plant and equipment, net ....... 35,529,000 35,676,000
Other .................................... 1,349,000 1,643,000
----------- -----------
Total assets ............................. $87,683,000 $84,975,000
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable ..................... $12,848,000 $14,724,000
Accrued expenses ..................... 3,555,000 3,610,000
Current portion of long-term debt .... 67,000 62,000
----------- -----------
Total current liabilities ................ 16,470,000 18,396,000
Long-term debt ........................... 2,072,000 2,123,000
Deferred income taxes .................... 2,832,000 2,725,000
Shareholders' equity ..................... 66,309,000 61,731,000
----------- -----------
Total liabilities and shareholders' equity $87,683,000 $84,975,000
=========== ===========
</TABLE>
The accompanying notes are an integral part of the interim financial statements.
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EDELBROCK CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
Three months ended Nine months ended
March 25, March 25,
------------------------------ ------------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues ................................ $26,973,000 $22,837,000 $75,170,000 $66,080,000
Cost of sales ........................... 16,480,000 13,697,000 45,814,000 40,305,000
----------- ----------- ----------- -----------
Gross profit ........................ 10,493,000 9,140,000 29,356,000 25,775,000
----------- ----------- ----------- -----------
Operating expenses
Selling, general and administrative . 6,733,000 5,699,000 19,408,000 16,771,000
Research and development ............ 746,000 590,000 2,187,000 1,765,000
Write-off of uncollectible receivable -0- -0- 400,000 1,878,000
Settlement expense (Note 3) ......... 190,000 -0- 190,000 -0-
----------- ----------- ----------- -----------
Total operating expenses ............ 7,669,000 6,289,000 22,185,000 20,414,000
----------- ----------- ----------- -----------
Operating income ........................ 2,824,000 2,851,000 7,171,000 5,361,000
Interest expense ........................ 50,000 68,000 152,000 206,000
Interest income ......................... 56,000 29,000 228,000 221,000
----------- ----------- ----------- -----------
Income before taxes on income ........... 2,830,000 2,812,000 7,247,000 5,376,000
Taxes on income ......................... 1,046,000 1,040,000 2,681,000 1,989,000
----------- ----------- ----------- -----------
Net income .............................. $ 1,784,000 $ 1,772,000 $ 4,566,000 $ 3,387,000
=========== =========== =========== ===========
Basic net income per share .............. $ 0.34 $ 0.34 $ 0.87 $ 0.65
=========== =========== =========== ===========
Diluted net income per share ............ $ 0.34 $ 0.33 $ 0.86 $ 0.63
=========== =========== =========== ===========
Basic weighted average number
of shares outstanding ................. 5,257,000 5,253,000 5,255,000 5,251,000
Effect of diluted stock options and
warrants ............................ 49,000 145,000 55,000 147,000
----------- ----------- ----------- -----------
Diluted weighted average number
of shares outstanding ................. 5,306,000 5,398,000 5,310,000 5,398,000
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the interim financial statements.
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EDELBROCK CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Nine months ended
Increase (Decrease) in Cash and Cash Equivalents March 25,
-------------------------------
1999 1998
----------- -----------
<S> <C> <C>
Operating activities
Net income ........................................ $ 4,566,000 $ 3,387,000
Write-off of uncollectible receivable ............. 400,000 1,878,000
Depreciation and amortization ..................... 3,452,000 3,130,000
Net change in operating assets and liabilities .... (9,548,000) (5,503,000)
----------- -----------
Net cash provided by (used in) operating activities ... (1,191,000) 2,892,000
----------- -----------
Investing activities
Capital expenditures .............................. (3,304,000) (6,111,000)
Other ............................................. 411,000 357,000
----------- -----------
Net cash used in investing activities ................. (2,893,000) (5,754,000)
----------- -----------
Financing activities
Proceeds from issuance of common stock
under stock option plan ....................... 234,000 146,000
Payments to acquire treasury stock ................ (222,000) -0-
Debt repayments ................................... (46,000) (42,000)
----------- -----------
Net cash provided by (used in) financing activities (34,000) 104,000
----------- -----------
Net decrease in cash and cash equivalents ............. (4,153,000) (2,758,000)
Cash and cash equivalents at beginning of period ...... 8,370,000 9,744,000
----------- -----------
Cash and cash equivalents at end of period ............ $ 4,217,000 $ 6,986,000
=========== ===========
Supplemental disclosure of cash flow information
Cash paid during the period for
Interest .......................................... $ 152,000 $ 206,000
=========== ===========
Income taxes ...................................... $ 3,050,000 $ 1,869,000
=========== ===========
</TABLE>
The accompanying notes are an integral part of the interim financial statements.
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EDELBROCK CORPORATION
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION
The consolidated interim financial statements of Edelbrock Corporation (the
"Company" or "Edelbrock") at March 25, 1999 and for the three and nine month
periods ended March 25, 1999, are unaudited, but include all adjustments
(consisting only of normal recurring adjustments) which the Company considers
necessary for a fair presentation. The June 30, 1998 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, 1998 (File No. 0-24802). Certain amounts have been reclassified to conform
to the March 25, 1999 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 for a
complete presentation, 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,
1999 are not necessarily indicative of the results that may be expected for the
fiscal year ending June 30, 1999.
NOTE 2 - INVENTORIES
Inventories at March 25, 1999 and June 30, 1998 consisted of the following:
<TABLE>
<CAPTION>
March 25, June 30,
----------- -----------
(Unaudited)
<S> <C> <C>
Raw materials ...... $ 9,307,000 $10,493,000
Work in process .... 818,000 930,000
Finished goods ..... 6,223,000 5,353,000
----------- -----------
$16,348,000 $16,776,000
=========== ===========
</TABLE>
NOTE 3 - LEGAL PROCEEDINGS
As previously disclosed, in September 1997, Super Shops, Inc. ("Super Shops")
filed a voluntary petition for relief under chapter 11 of the United States
Bankruptcy code, 11 U.S.C. Section Section 101-l330 (the "Bankruptcy Code"). At
the time of Super Shops' filing, the Company was one of Super Shops' largest
unsecured creditors and in December 1997, Edelbrock wrote-off approximately $1.9
million of unsecured trade receivables relating to Super Shops. On January 6,
1999, the Company was served with a complaint filed by Super Shops in the United
States Bankruptcy Court for the Central District of California wherein Super
Shops sought to recover approximately $1.8 million in allegedly preferential
payments made by Super Shops to the Company in the ninety days prior to the
commencement of Super Shops' Chapter 11 case. In March 1999, the Company offered
to settle this claim with Super Shops. The terms of the offer include a cash
settlement in the amount of $190,000 payable in eight equal monthly
installments, and Edelbrock will forgo its claim for potential recovery of its
unsecured trade receivable from Super Shops. The Company has been informed that
Super Shops has accepted such settlement offer subject to bankruptcy court
approval. As of May 6, 1999, there has been no court objection to the settlement
offer. There can be no assurance that the bankruptcy court will approve such
settlement terms. If the bankruptcy court fails to approve such settlement
terms, there can be no
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assurance that final resolution of such claim will not have a material adverse
effect on the Company's results of operations.
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, 1999. 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, Performer IAS Shock
Absorbers and other performance components for most domestic V8 and selected V6
engines. The Company currently offers over 2,000 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
offroad motorcycles.
In May 1998, the Company entered the performance shock absorber aftermarket
utilizing RICOR Racing and Development, L.P.'s patented "inertia sensitive
system." The Company is currently producing shock absorbers for approximately
200 different two-and four-wheel drive applications for Ford, Chevrolet,
Chrysler and various foreign 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 product mix of the
Company's sales during the period.
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 February 1999, the Company began construction of a 65,950 square foot
distribution facility on Company-owned property adjacent to its exhaust system
and shock absorber production facilities in Torrance, California. The Company
expects this facility to be fully operational in September 1999. The Company
will convert the existing 30,000 square foot distribution center at its Company
headquarters in Torrance into additional manufacturing space.
Seasonality
The Company's sales are subject to seasonal variations. Customer orders and
sales are typically 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
third and fourth fiscal quarters.
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THREE MONTHS ENDED MARCH 25, 1999, COMPARED TO THREE MONTHS ENDED
MARCH 25, 1998:
Revenues
Revenues increased 18.1% to $27.0 million for the three months ended March 25,
1999 from $22.8 million for the same period of 1998. This increase was primarily
the result of an increase of approximately $1.6 million, or 18.7%, in the sale
of Edelbrock Performer Series carburetors; an increase of approximately $1.1
million, or 62.6 %, in the sale of aluminum automotive cylinder heads, and an
increase of approximately $1.0 million, or 14.4%, in the sale of aluminum
automotive intake manifolds.
Cost of Sales
Cost of sales increased 20.3% to $16.5 million for the three months ended March
25, 1999 from $13.7 million for the same period of 1998. As a percent of
revenues, cost of sales increased to 61.1% for the three months ended March 25,
1999 from 60.0% for the same period of 1998. This increase in cost of sales was
primarily due to an increase in sales of Edelbrock carburetors for which the
company achieves a lower margin and an increase in labor cost and depreciation
expense associated with the acquisition and operation of new manufacturing
capital equipment.
Selling, General and Administrative Expense
Selling, general and administrative expense increased 18.1% to $6.7 million for
the three months ended March 25, 1999 from $5.7 million for the same period of
1998. This increase was primarily due to increased advertising expense and sales
commissions. As a percent of revenues, selling, general and administrative
expense was 25.0% for the three months ended March 25, 1999 and 1998.
Research and Development Expense
Research and development ("R & D") expense increased 26.4% to $746,000 for the
three months ended March 25, 1999 from $590,000 for the same period of 1998. As
a percent of revenues, R & D expense increased to 2.8% for the three months
ended March 25, 1999 from 2.6% for the same period of 1998. The increase is
mainly attributed to an increase in depreciation for R & D equipment.
Settlement Expense
As previously disclosed, in September 1997, Super Shops Inc. filed a voluntary
petition for relief under chapter 11 of the United States Bankruptcy code, 11
U.S.C. Section Section 101-l330 (the "Bankruptcy Code"). At the time of Super
Shops' filing, the Company was one of Super Shops' largest unsecured creditors
and in December 1997, Edelbrock wrote-off approximately $1.9 million of
unsecured trade receivables relating to Super Shops. On January 6, 1999, the
Company was served with a complaint filed by Super Shops in the United States
Bankruptcy Court for the Central District of California wherein Super Shops
sought to recover approximately $1.8 million in allegedly preferential payments
made by Super Shops to the Company in the ninety days prior to the commencement
of Super Shops' Chapter 11 case. In March 1999, the Company offered to settle
this claim with Super Shops. The terms of the offer include a cash settlement in
the amount of $190,000 payable in eight equal monthly installments, and
Edelbrock will forgo its claim for potential recovery of its unsecured trade
receivable from Super Shops. The Company has been informed that Super Shops has
accepted such settlement offer subject to bankruptcy court approval. As of May
6, 1999, there has been no court objection to the settlement offer. There can be
no assurance that the bankruptcy court will approve such settlement terms. If
the bankruptcy court fails to approve such settlement terms, there can be no
assurance that final
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resolution of such claim will not have a material adverse effect on the
Company's results of operations.
Interest Expense
Interest expense decreased 26.5% to $50,000 for the three months ended March 25,
1999 from $68,000 for the same period of 1998. The decrease was primarily due to
a decrease in the principal amount of average debt outstanding.
Interest Income
Interest income increased to $56,000 for the three months ended March 25, 1999
compared to $29,000 in the same period for 1998. The increase was the result of
an increase in the balance of the Company's excess working capital investments.
Taxes on Income
The provision for income taxes was $1.0 million for the three months ended March
25, 1999 and 1998. The effective tax rate for both periods was approximately
37%.
Net Income
The Company's net income for the three months ended March 25, 1999 as compared
to the same period of 1998 remained substantially unchanged at $1.8 million. Net
income for the current quarter was primarily affected by increased cost of sales
and R & D expenses as well as the settlement expense, as noted above.
NINE MONTHS ENDED MARCH 25, 1999, COMPARED TO NINE MONTHS ENDED MARCH 25, 1998
Revenues
Revenues increased 13.8% to $75.2 million for the nine months ended March 25,
1999 from $66.1 million for the same period of 1998. This increase was primarily
the result of an increase of approximately $0.6 million, or 61.5%, in the sale
of shock absorbers; an increase of $3.4 million, or 13.4%, in the sale of
Edelbrock Performer Series carburetors; an increase of approximately $2.1
million, or 38.0%, in the sale of aluminum automotive cylinder heads; and, an
increase of approximately $3.3 million, or 17.2%, in the sale of aluminum
automotive intake manifolds.
Cost of Sales
Cost of sales increased 13.7% to $45.8 million for the nine months ended March
25, 1999 from $40.3 million for the same period of 1998. This increase in cost
of sales was primarily due to an increase in labor costs and depreciation
expense associated with the acquisition of new manufacturing capital equipment.
As a percent of revenues, cost of sales was 61.0% for the nine months ended
March 25, 1999 and 1998.
Selling, General and Administrative Expense
Selling, general and administrative expense increased 15.7% to $19.4 million for
the nine months ended March 25, 1999 from $16.8 million for the same period of
1998. As a percent of revenues, selling, general and administrative expense
increased to 25.8% for the nine months ended March 25, 1999 from 25.4% for the
same period of 1998. This increase was due primarily to increased sales
commissions associated with increased sales, increases in advertising
expenditures, and
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costs associated with the upgrade of the company's database system and company
wide implementation of the QS-9000 quality standard.
Research and Development Expense
Research and development ("R & D") expense increased to $2.2 million for the
nine months ended March 25, 1999 compared to $1.8 million for the same period of
1998. As a percent of revenues, R & D expense increased to 2.9% for the nine
months ended March 25, 1999 from 2.7% for the same period of 1998. The increase
is mainly attributed to an increase in depreciation for R & D equipment.
Write-off of Uncollectible Receivable
In December 1998, the Company wrote-off approximately $400,000 of unsecured
trade receivables relating to Champion Auto Stores, Inc., a Minnesota-based
automotive parts retailer, who filed a voluntary petition for reorganization
under Chapter 11 of the Federal Bankruptcy Code in May 1998 and was further
converted to Chapter 7 Liquidation in December 1998. The $400,000 write-off
represents all of the outstanding receivable balance, a portion of which was
previously reserved.
In December 1997, the Company wrote-off approximately $1.9 million of unsecured
trade receivables relating to Super Shops, Inc., which filed a voluntary
petition for reorganization under Chapter 11 of the Federal Bankruptcy Code and
further obtained court approval in February 1998 to begin a "Going Out of
Business Sale" under Chapter 11 of the Federal Bankruptcy Code.
Settlement Expense
As previously disclosed, in September 1997, Super Shops Inc. filed a voluntary
petition for relief under chapter 11 of the United States Bankruptcy code, 11
U.S.C. Section Section 101-l330 (the "Bankruptcy Code"). At the time of Super
Shops' filing, the Company was one of Super Shops' largest unsecured creditors
and in December 1997, Edelbrock wrote-off approximately $1.9 million of
unsecured trade receivables relating to Super Shops. On January 6, 1999, the
Company was served with a complaint filed by Super Shops in the United States
Bankruptcy Court for the Central District of California wherein Super Shops
sought to recover approximately $1.8 million in allegedly preferential payments
made by Super Shops to the Company in the ninety days prior to the commencement
of Super Shops' Chapter 11 case. In March 1999, the Company offered to settle
this claim with Super Shops. The terms of the offer include a cash settlement in
the amount of $190,000 payable in eight equal monthly installments, and
Edelbrock will forgo its claim for potential recovery of its unsecured trade
receivable from Super Shops. The Company has been informed that Super Shops has
accepted such settlement offer subject to bankruptcy court approval. As of May
6, 1999, there has been no court objection to the settlement offer. There can be
no assurance that the bankruptcy court will approve such settlement terms. If
the bankruptcy court fails to approve such settlement terms, there can be no
assurance that final resolution of such claim will not have a material adverse
effect on the Company's results of operations.
Interest Expense
Interest expense decreased 26.2% to $152,000 for the nine months ended March 25,
1999 from $206,000 for the same period of 1998. The decrease was primarily due
to a decrease in the principal amount of average debt outstanding.
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Interest Income
Interest income increased 3.2 % to $228,000 for the nine months ended March 25,
1999 from $221,000 for the same period in 1998. This increase was primarily due
to an increase in the balance of the Company's excess working capital
investments.
Taxes on Income
The provision for income taxes increased to $2.7 million for the nine months
ended March 25, 1999 from $2.0 million for the 1998 period. The effective tax
rate for both periods was approximately 37%.
Net Income
The Company's net income for the nine months ended March 25, 1999 increased
34.8% to $4.6 million from $3.4 million for the same period of 1998. This
increase in net income for the current year was primarily the result of the
difference in the write-off amount of the uncollectible receivables from the
current period as compared to the prior year, as noted 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 $2.0 million
revolving credit facility ("Revolving Credit Facility") which expires on
February 1, 2000. 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 third and fourth fiscal quarters.
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 $5.5 - $7.0 million in fiscal year 1999 primarily
for construction of its new distribution facility and additional capital
equipment to increase production capacity.
YEAR 2000 COMPLIANCE
Computers, software and other equipment utilizing microprocessors that use only
two digits to identify a year in a date field may be unable to process
accurately certain date-based information at or after the year 2000. This is
commonly referred to as the "Year 2000 or Y2K issue," and the Company is
addressing this issue on several different fronts. First, the Company has
requested Year 2000 compliance certification from each of its major vendors and
suppliers for their hardware or software products and for their internal
business applications and processes. Second, the Company has established a
separate team to coordinate solutions to the Year 2000 issue for its own
internal information systems, for which it has completed all remediation for
Year 2000 compliance in the fourth calendar quarter of 1998. As part of its
initial phase of its Year 2000 readiness, the Company installed Oracle
applications and database. In order to complete the Year 2000 readiness program
for its information systems, the Company upgraded its existing Oracle
applications (Version 10.6) to release 10.7. Amounts incurred in connection with
the Year 2000 compliance program were not material to the Company's financial
condition or results of operations. The Company does not believe that its
business will be adversely affected by the Year 2000 issue in any material
respect. Nevertheless, achieving Year 2000 compliance is dependent on many
factors, some of which are not completely within the Company's control,
including without limitation, the availability and cost of trained personnel
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and effectiveness of software upgrades used by the Company and its vendors and
suppliers. Should either the Company's internal systems or the internal systems
of one or more significant vendors or suppliers fail to achieve Year 2000
compliance, the Company's business and its results of operations could be
adversely affected. For Year 2000 issues which, if not timely resolved, could
have a significant impact on the Company's operations, the Company has developed
contingency plans. These plans include utilizing alternative vendors and service
providers and have been designed to minimize the impact of failure to achieve
Year 2000 compliance.
"SAFE HARBOR" STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995:
Any statements set forth above which are not historical facts are
forward-looking statements that involve known and unknown risks and
uncertainties that could cause actual results to differ materially from those in
the forward-looking statements. Potential risks and uncertainties include such
factors as the financial strength and competitive pricing environment of the
automotive and motorcycle aftermarket industries, product demand, market
acceptance, manufacturing efficiencies, new product development, the success of
planned advertising, marketing and promotional campaigns, the success of the
Company's, its vendors', and its suppliers' Year 2000 compliance programs and
other risks identified herein and in other documents filed by the Company with
the Securities and Exchange Commission.
Item 3. Quantitative and Qualitative Disclosure About Market Risk
The Company's exposure to interest rate changes is primarily related to its
variable rate debt which may be outstanding from time to time under the
Company's Revolving Credit Facility with Bank of America, NT & SA. The Company's
Revolving Credit Facility is a $2 million line of credit with an interest rate
based on the prime rate (currently 7.75%). It expires on February 1, 2000.
Because the interest rate on the Revolving Credit Facility is variable, the
Company' cash flow may be affected by increases in the prime rate. Management
does not 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 March 25, 1999, the
Company's outstanding balance on the Revolving Credit Facility was zero. Even if
the Company were to draw down on the line prior to its expiration and an
unpredicted increase in the prime rate occurred, it would not likely have a
material effect.
Sensitivity Analysis
To assess exposure to interest rate changes, the Company has performed a
sensitivity analysis assuming the Company had a $1 million balance outstanding
under the Revolving Line of Credit. The monthly interest payment, if the rate
stayed constant, would be $6,458. If the prime rate rose 100 basis points, the
monthly interest payment would equal $7,292. The Company does not believe the
risk resulting from such fluctuations is material nor that the payment required
would have a material effect on cash flow.
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings
As previously disclosed, in September 1997, Super Shops Inc. filed a
voluntary petition for relief under chapter 11 of the United States
Bankruptcy code, 11 U.S.C. Sections 101-1330 (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 March 1999, the Company offered to settle this claim
with Super Shops. The terms of the offer include a cash settlement in the
amount of $190,000 payable in eight equal monthly installments, and
Edelbrock will forgo its claim for potential recovery of its unsecured
trade receivable from Super Shops. The Company has been informed that
Super Shops has accepted such settlement offer subject to bankruptcy court
approval. As of May 6, 1999, there has been no court objection to the
settlement offer. There can be no assurance that the bankruptcy court will
approve such settlement terms. If the bankruptcy court fails to approve
such settlement terms, there can be no assurance that final resolution of
such claim will not have a material adverse effect on the Company's
results of operations.
Item 2. Changes in Securities
On February 19, 1999, for consideration of Amendment No. 4 to its
Licensing Agreement with RICOR Racing and Development L.P. (RICOR), the
Company amended its Warrant agreement with RICOR. The amendment
accelerated the vesting scheduling allowing the 100,000 shares of warrants
granted to RICOR to become fully exercisable at the date of the amendment.
In addition, the Company also issued two new sets of warrants to RICOR.
The first set consists of 11,501 shares of warrants to purchase Edelbrock
common stock at $22.00 a share and expires in 5 years. The second set
consists of 22,414 shares of warrants to purchase Edelbrock common stock
at $18.00 a share and expires in 3 years. The foregoing issuances were
issued in a transaction exempt from registration under the Securities Act
of 1933 in accordance with the requirements of Section 4(2) thereof.
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
Exhibits
10.1 Amendment No. 4 to License Agreement between Edelbrock Corporation,
RICOR Racing and Development L.P., Ricor, Inc. and Mr. Don
Richardson
13
<PAGE> 14
10.2 Amendment to Warrant Agreement dated February 2, 1996 between
Edelbrock Corporation and RICOR Racing and Development L.P.
27.1 Financial Data Schedule
Reports on Form 8-K
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.
14
<PAGE> 15
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 6, 1999 ARISTEDES T. FELES
-----------------------------------------
Aristedes T. Feles
Vice President Finance,
Chief Financial Officer and
Director
15
<PAGE> 1
EXHIBIT 10.1
AMENDMENT NO. 4
TO
LICENSE AGREEMENT
This Amendment No. 4 ("Amendment No. 4") to License Agreement dated
February 2, 1996, as amended by Amendment No. 1 to License Agreement ("Amendment
No. 1") dated February 21, 1997, Amendment No. 2 to License Agreement
("Amendment No. 2") made effective as of April 1, 1998 and Amendment No. 3 to
License Agreement ("Amendment No. 3") made as of November 10, 1998
(collectively, the "License Agreement") is made effective as of February 19,
1999 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 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 an exclusive 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 No. 4.
In consideration of these premises and of the mutual promises
contained in this Amendment No. 4 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(b) of Amendment No. 1 is eliminated in its entirety
and Section 1.6 of the License Agreement is restated in its entirety as follows:
1.6 Field of Use. "Field of Use" means all markets and applications
including, but not limited to, the OEM market and 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 and applications for use in bicycles).
-1-
<PAGE> 2
(b) Sections 1.5, 1.12 and 1.17 of the License Agreement, Sections
1(a) and 1(c) of Amendment No. 1 and Section 1(a) of Amendment No. 2 are
eliminated in their entirety.
2. Grant of License. Section 2 of Amendment No. 3 is eliminated in its
entirety and Section 2.1 of the License Agreement is restated as follows:
2.1 Grant of License. Licensor hereby grants to Licensee solely
within the Field of Use, the worldwide non-transferable exclusive
right and license to use the Technical Information and under the
Licensed Patents and Trademarks, to manufacture, have manufactured
use, sell, advertise and distribute Licensed Items and Advertising
Material.
3. Additional Performance Standards. Section 3 of Amendment No. 1
entitled Additional Performance Standards is eliminated in its entirety.
4. OEM Provisions. Section 6 of Amendment No. 1 entitled OEM Provisions,
Section 7(a) of Amendment No. 1 and Sections 1 and 5 of Amendment No. 3 are
eliminated in their entirety.
5. Advances, Loans and Royalties
(a) Section 3 of Amendment No. 3 is eliminated in its entirety and
Section 2.5(a) of the License Agreement is restated as follows:
(a) Royalties Payable on Sales by Licensee. Subject to paragraph (f)
below, for all sales made in 1999 or thereafter, Licensee shall pay to
Licensor a 6% royalty on sales of Licensed Items.
(b) Section 2.5(b) of the License Agreement is eliminated in its
entirety and restated as follows:
(b) Royalties Payable on Sales by Sublicensees and on Sales of Piston
Assembly. In the event any sublicense is granted by Licensee
hereunder, including sublicenses to OEMs, Licensee shall pay to
Licensor an amount equal to 50% of all royalties including any other
fees or amounts received from any such sublicensee with respect to any
such sublicense (excluding amounts received as reimbursement of
expenses, indemnification payments and the like); provided, that in
the event Licensee enters into a sublicense with any direct or
indirect Affiliate of Licensee, Licensor shall receive the same
royalty for Licensed Items sold by any such sublicensee as if such
Licensed Items had been sold by Licensee.
One hundred percent (100%) of any fees paid by sublicensees pursuant
to the above sentence shall be taken into account for
-2-
<PAGE> 3
purposes of determining if Licensee has met the Minimum Annual Net
Sales goals provided for in Section 8.1(b) and all amounts paid to
Licensor pursuant to the above sentence shall be taken into account
for purposes of determining if Licensee has paid the aggregate royalty
payable on the total minimum annual Net Sales Price as provided for in
Section 8.1(d).
For all sales by Licensee into the OEM market of piston assemblies
manufactured by Licensee containing Licensed Items, Licensor and
Licensee shall negotiate in good faith the royalty to be paid to
Licensor provided that such royalty shall result in the profit
Licensee retains not exceeding a mark up of actual costs incurred by
Licensee of 1.54% (a 35% gross margin), net of deduction of the
royalty paid to Licensor. For any sales made by Licensee pursuant to
the immediately preceding sentence, 100% of the sales made by Licensee
containing Licensed Items shall be taken into account for determining
if Licensee has met the Minimum Annual Net Sales goals provided for in
Section 8.1(b), and the proportionate royalty paid to Licensor shall
be taken into account for purposes of determining if Licensee has paid
the aggregate royalty on the total minimum annual Net Sales Price as
provided for in Section 8.1(d).
(c) Section 2(a) of Amendment No. 2 is deleted in its entirety and
Section 2.5(g) of the Licence Agreement is restated as follows:
(g) Licensee shall pay to Licensor commencing January 1, 1999 and
continuing for the term of the License Agreement minimum monthly
royalty payments equal to 1/12 of the annual royalty required to be
paid pursuant to the Minimum Annual Net Sales goals set forth in
Section 8.1(b) of the License Agreement (as restated in this Amendment
No. 4). Upon execution of this Amendment No. 4, Licensee shall pay to
Licensor the monthly minimum royalty payments for January and February
1999, less any 1999 royalty payments paid to date. Failure to make a
monthly payment shall have the same effect as failure to make the
minimum annual royalty payments as set forth in Section 8.1 of the
License Agreement. Such monthly payments shall be deemed royalty
payments for purposes of the License Agreement and shall be subject to
Section 2.5 thereof.
The parties understand and acknowledge that Licensee has advanced
royalty payments to Licensor in the amount of $308,521.58. Commencing
January 1, 2004, in recognition of these advance royalty payments,
Licensee shall deduct from the monthly minimum royalty payments due
from Licensee to Licensor $8,570.04 per month for thirty-six (36)
months until all such prepaid royalties have been repaid in full. If
the License
-3-
<PAGE> 4
Agreement is terminated prior to repayment in full of the prepaid
royalty, Licensor shall within 30 days of the termination of the
License Agreement, pay to Licensee the full amount of the prepaid
royalty still outstanding.
Notwithstanding the foregoing, if the License Agreement is converted
by Licensor or Licensee into a non-exclusive agreement in accordance
with its terms, Licensee shall be relieved of any requirement to pay
minimum royalties hereunder. In such case, amounts due to Licensee in
recognition of the advance royalty payments made by Licensee shall be
deducted from any royalty payments due from Licensee to Licensor under
the non-exclusive license until all prepaid royalties have been paid
in full.
(d) Section 8.1(b) of the License Agreement is restated in its
entirety as follows:
(d) Notwithstanding the foregoing and subject to paragraph (d) of
this Section 8.1, Licensor of Licensee, at either party's discretion and
option, shall have the right to terminate this Agreement or to convert any
license granted hereunder into a non-exclusive license in the event Licensee
fails to meet the following goals:
<TABLE>
<CAPTION>
Minimum Annual
Period Net Sales Price
------ ---------------
<S> <C>
From January 1, 1999 to December 31, 1999 $12,500,000
From January 1, 2000 to December 31, 2000 $12,500,000
From January 1, 2001 to December 31, 2001 $12,500,000
From January 1, 2002 to December 31, 2002 $12,500,000
From January 1, 2003 to December 31, 2003 $12,500,000
From January 1, 2004 to December 31, 2004 $20,000,000
From January 1, 2005 to December 31, 2005 $25,000,000
From January 1, 2006 to December 31, 2006 $30,000,000
From January 1, 2007 to December 31, 2007 $35,000,000
From January 1, 2008 to December 31, 2008 $40,000,000
From January 1, 2009 to December 31, 2009 $40,000,000
Each calendar year thereafter $40,000,000
</TABLE>
6. Licensee Negotiation Right. Notwithstanding anything to the contrary
contained herein or in the License Agreement, commencing June 1, 2003, Licensee
shall have the option to request of Licensor that the terms of the License
Agreement be renegotiated between the Licensee and the Licensor. Following such
request, executives of Licensee and Licensor shall meet over a 90 day period
and in good faith attempt to come to an agreement on revised terms for the
License Agreement. If after 90 days from the date Licensee gave notice of its
desire to exercise it negotiation rights pursuant to this Section 6, Licensor
and Licensee have not reached agreement on the revised terms of the License
Agreement, then Licensee shall have the option to
-4-
<PAGE> 5
convert the license granted hereunder to a non-exclusive license, in which case
Licensee shall have no further obligation to meet the Minimum Annual Net Sales
Price goals set forth in Section 8.1(d) of the License Agreement, to make the
minimum monthly royalty payments provided for in Section 2.5(g) of the License
Agreement, or to make the Development Fee payments provided for in Section 7 of
this Amendment No. 4.
7. Development Fees. Commencing March 1, 1999 and continuing through
December 31, 2003, Licensee agrees to reimburse Licensor for expenses incurred
which are directly related to the development by Licensor of Twin Tube and other
new shock absorber technology (collectively referred to as "New Show Absorber
Technology") up to a maximum of $33,333 per month (to an annual maximum of
$400,000) (the "Development Fee"). Licensor shall only be entitled to the
Development Fee to the extent that its expenses incurred fall within the
categories of expenses and dollar limits established for such categories of
expenses specified in the Monthly Expense Budget established by Licensor and
Licensee. Budget overruns shall not be reimbursed by Licensee (unless mutually
agreed to in writing by Licensor and Licensee). The initial Monthly Expense
Budget of Licensor shall be as follows: salary and overhead - $7,800; outside
consulting - $6,533; consulting-Yoder, plus expenses - $9,000; and Don
Richardson's salary, plus expenses - $10,000. Each month Licensor (with the
assistance of Licensee) shall provide Licensee with a detailed accounting which
documents the expenses it incurred in the prior month in connection with the
development of the New Shock Absorber Technology and which indicates which
category of the Monthly Expense Budget the expenses fall within. The accounting
shall include a report of hours spent and the status of the development efforts
of Licensor. Within 10 days following receipt of such accounting Licensee shall
pay directly each consultant, employee, vendor or supplier for those expenses
directly related to the development of the New Shock Absorber Technology which
fall within but do not exceed the dollar limits for each category of expense
established in the Monthly Expense Budget. The Monthly Expense Budget may be
modified from time to time with the written agreement of Licensor and Licensee.
Notwithstanding the foregoing, (1) until March 1, 2002, Licensee will pay
to Yoder out of the Development Fee the monthly consulting fee set forth in the
budget above, and (2) until December 31, 2003, Licensee will pay to Don
Richardson out of the Development Fee the salary set forth in the budget above,
so long as Licensor continues to actively develop the New Shock Absorber
Technology.
If the License Agreement is terminated or converted by Licensor or
Licensee into a non-exclusive agreement in accordance with its terms, Licensee
shall be relieved of any requirement to pay the Development Fee hereunder.
Notwithstanding anything to the contrary contained herein or in the
License Agreement, Licensor hereby grants to Licensee an exclusive, royalty
free perpetual license, with all rights to sublicense, of all developments of
Licensor funded with the Development Fee whether or not patentable, developed,
discovered or acquired by Licensor during the term of the License Agreement.
Licensor hereby grants to Licensee an exclusive, royalty-free perpetual license
with all rights to sublicense, of all of Licensor's manufacturing know-how,
technologies and techniques developed by Licensor utilizing the Development Fee.
-5-
<PAGE> 6
8. Warrants. Upon execution of this Amendment No. 4, Licensee and
Licensor shall execute the Warrant Agreements, in substantially the form
attached hereto as Exhibits A and B, providing for Licensee to issue to
Licensor three year warrants to purchase up to 22,313 shares of Licensee common
stock and five year warrants to purchase up to 11,501 shares of Licensee common
stock, all on the terms and subject to the conditions set forth in the Warrant
Agreements.
9. Effect of Amendment. Except as otherwise modified hereby, the terms
of the License Agreement shall remain in full force and effect.
10. Effective Date of Amendment No. 4. This Amendment No. 4 shall become
effective upon the consent of the limited partners of Licensor to the execution
of this Amendment No. 4 by Licensor as called for by Licensor's Limited
Partnership Agreement, as amended. Within two business days of receiving the
consent, Licensor shall provide Licensee with written notice that the consent
has been received.
IN WITNESS WHEREOF, the parties have executed this Amendment No. 4 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
/s/ DON RICHARDSON
- -------------------------------
Don Richardson
-6-
<PAGE> 1
EXHIBIT 10.2
AMENDMENT TO WARRANT AGREEMENT
This AMENDMENT ("Amendment") to WARRANT AGREEMENT dated as of February 2,
1996 ("Warrant Agreement"), is made effective as of February 19, 1999 by and
between Edelbrock Corporation, a Delaware corporation (the "Company") and RICOR
Racing and Development, L.P., a California limited partnership ("RICOR").
WITNESSETH:
WHEREAS, pursuant to the Warrant Agreement, the Company issued to RICOR
warrants (the "Warrants") to purchase up to 100,000 shares of the Company's
Common Stock, par value $.01 per share; and
WHEREAS, this Amendment is made in partial consideration for the execution
by RICOR of Amendment No. 4, dated as of even date herewith ("Amendment No. 4"),
of that certain License Agreement dated February 2, 1996 by and between the
Company and RICOR.
NOW, THEREFORE, in consideration of the premises, the agreements herein
set forth and in Amendment No. 4 and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereto
agree as follows:
1. Vesting of Warrant Shares. Upon the execution of Amendment No. 4 by
Company and RICOR and the approval of the execution by RICOR of Amendment No. 4
by RICOR's limited partners, the vesting schedule of the Warrants set forth in
the Warrant Agreement will accelerate and the warrants will be fully
exercisable and will be Vested Shares.
2. Definitions. Except as otherwise set forth herein, all defined terms
as used herein shall have the same meanings as in the Warrant Agreement.
3. Effect of Amendment. Except as otherwise modified hereby, the terms
of the Warrant Agreement shall remain in full force and effect.
4. Counterparts. This Amendment may be executed in any number of
counterparts and each of such counterparts shall for all purposes be deemed to
be an original and such counterparts shall together constitute but one and the
same instrument.
1
<PAGE> 2
IN WITNESS WHEREOF, the parties hereto have cause this Amendment to be
duly executed, as of the day and year first above written.
[SEAL] EDELBROCK CORPORATION
By: /s/ VICTOR EDELBROCK
-------------------------
Name: Victor Edelbrock
Title: President
Attest:
/s/ SIGNATURE
- --------------------
Name:
Title: Secretary
RICOR RACING AND DEVELOPMENT, L.P.
By: RICOR, Inc., its General Partner
By: /s/ DON RICHARDSON
----------------------------
Name: Don Richardson
Title: President
2
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> MAR-25-1999
<CASH> 4,217,000
<SECURITIES> 0
<RECEIVABLES> 29,292,000
<ALLOWANCES> 500,000
<INVENTORY> 16,348,000
<CURRENT-ASSETS> 50,805,000
<PP&E> 61,085,000
<DEPRECIATION> 25,556,000
<TOTAL-ASSETS> 87,683,000
<CURRENT-LIABILITIES> 16,470,000
<BONDS> 2,072,000
0
0
<COMMON> 52,400
<OTHER-SE> 66,256,600
<TOTAL-LIABILITY-AND-EQUITY> 87,683,000
<SALES> 75,170,000
<TOTAL-REVENUES> 75,170,000
<CGS> 45,814,000
<TOTAL-COSTS> 45,814,000
<OTHER-EXPENSES> 21,785,000
<LOSS-PROVISION> 400,000
<INTEREST-EXPENSE> 152,000
<INCOME-PRETAX> 7,247,000
<INCOME-TAX> 2,681,000
<INCOME-CONTINUING> 4,566,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,566,000
<EPS-PRIMARY> 0.87
<EPS-DILUTED> 0.86
</TABLE>
