<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 December 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 February 4, 2000, the Company had 5,174,339 shares of Common Stock
outstanding.
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EDELBROCK CORPORATION
FORM 10-Q FOR THE QUARTER ENDED DECEMBER 25, 1999
INDEX
<TABLE>
<CAPTION>
Part I FINANCIAL STATEMENTS Page
----
<S> <C> <C>
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of December 25, 1999
and June 30, 1999............................................................ 3
Consolidated Statements of Income for the Three Months
and Six Months Ended December 25, 1999 and 1998............................. 4
Condensed Consolidated Statements of Cash Flows for the Six
Months Ended December 25, 1999 and 1998 ...................................... 5
Notes to Consolidated Interim Financial Statements ............................. 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations ....................................................... 7-11
Item 3. Quantitative and Qualitative Disclosure About Market Risk....................... 12
Part II OTHER INFORMATION ............................................... 13-15
</TABLE>
2
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EDELBROCK CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 25, June 30,
1999 1999
----------- -----------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents ........... $ 4,006,000 $13,685,000
Accounts receivable, net ............ 25,635,000 23,976,000
Inventories ......................... 18,809,000 17,155,000
Prepaid expenses and other .......... 1,301,000 1,261,000
----------- -----------
Total current assets ..................... 49,751,000 56,077,000
Property, plant and equipment, net ....... 39,375,000 36,708,000
Other .................................... 1,456,000 1,467,000
----------- -----------
Total assets ............................. $90,582,000 $94,252,000
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable .................... $10,791,000 $16,037,000
Accrued expenses .................... 3,816,000 4,548,000
Current portion of long-term debt ... 72,000 69,000
----------- -----------
Total current liabilities ................ 14,679,000 20,654,000
Long-term debt ........................... 2,028,000 2,065,000
Deferred income taxes .................... 2,842,000 2,882,000
Shareholders' equity ..................... 71,033,000 68,651,000
----------- -----------
Total liabilities and shareholders' equity $90,582,000 $94,252,000
=========== ===========
</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 Six months ended
December 25, December 25,
---------------------------- -----------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues ................................. $28,522,000 $25,602,000 $54,166,000 $48,197,000
Cost of sales ............................ 17,498,000 15,789,000 33,397,000 29,334,000
----------- ----------- ----------- -----------
Gross profit ........................ 11,024,000 9,813,000 20,769,000 18,863,000
----------- ----------- ----------- -----------
Operating expenses
Selling, general and administrative . 7,475,000 6,403,000 14,302,000 12,675,000
Research and development ............ 870,000 763,000 1,654,000 1,441,000
Write-off of uncollectible receivable -- 400,000 -- 400,000
----------- ----------- ----------- -----------
Total operating expenses ............ 8,345,000 7,566,000 15,956,000 14,516,000
----------- ----------- ----------- -----------
Operating income ......................... 2,679,000 2,247,000 4,813,000 4,347,000
Interest expense ......................... 49,000 51,000 99,000 102,000
Interest income .......................... 151,000 66,000 300,000 172,000
----------- ----------- ----------- -----------
Income before taxes on income ............ 2,781,000 2,262,000 5,014,000 4,417,000
Taxes on income .......................... 1,029,000 838,000 1,855,000 1,635,000
----------- ----------- ----------- -----------
Net income ............................... $ 1,752,000 $ 1,424,000 $ 3,159,000 $ 2,782,000
=========== =========== =========== ===========
Basic net income per share ............... $ 0.34 $ 0.27 $ 0.61 $ 0.53
=========== =========== =========== ===========
Diluted net income per share ............. $ 0.34 $ 0.27 $ 0.60 $ 0.52
=========== =========== =========== ===========
Basic weighted average number
of shares outstanding .................... 5,191,000 5,249,000 5,206,000 5,253,000
=========== =========== =========== ===========
Diluted weighted average number
of shares outstanding .................... 5,214,000 5,309,000 5,257,000 5,311,000
=========== =========== =========== ===========
</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>
Six months ended
Increase (Decrease) in Cash and Cash Equivalents December 25,
-------------------------------
1999 1998
------------ ------------
<S> <C> <C>
Operating activities
Net income ................................... $ 3,159,000 $ 2,782,000
Write-off of uncollectible receivable ........ -- 400,000
Depreciation and amortization ................ 2,608,000 2,207,000
Net change in operating assets and liabilities (9,411,000) (7,792,000)
------------ ------------
Net cash used in operating activities ............. (3,644,000) (2,403,000)
------------ ------------
Investing activities
Capital expenditures ......................... (5,324,000) (1,897,000)
Other ........................................ 100,000 183,000
------------ ------------
Net cash used in investing activities ............. (5,224,000) (1,714,000)
------------ ------------
Financing activities
Proceeds from issuance of common stock
under stock option plan .................. 34,000 154,000
Payments to acquire treasury stock ........... (705,000) (212,000)
Dividends paid on common stock ............... (106,000) --
Debt repayments .............................. (34,000) (30,000)
------------ ------------
Net cash used in financing activities ........ (811,000) (88,000)
------------ ------------
Net decrease in cash and cash equivalents ......... (9,679,000) (4,205,000)
Cash and cash equivalents at beginning of period .. 13,685,000 8,370,000
------------ ------------
Cash and cash equivalents at end of period ........ $ 4,006,000 $ 4,165,000
============ ============
Supplemental disclosure of cash flow information
Cash paid during the period for
Interest ..................................... $ 99,000 $ 102,000
============ ============
Income taxes ................................. $ 2,215,000 $ 2,200,000
============ ============
</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 December 25, 1999 and for the three and six month periods ended
December 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, 1999 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, 1999
(File No. 0-24802).
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 six month periods ended December 25, 1999 are not necessarily
indicative of the results that may be expected for the fiscal year ending June
30, 2000.
NOTE 2 - INVENTORIES
Inventories at December 25, 1999 and June 30, 1999 consisted of the following:
<TABLE>
<CAPTION>
December 25, June 30,
----------- ------------
(Unaudited)
<S> <C> <C>
Raw materials $ 9,323,000 $ 8,671,000
Work in process 1,916,000 1,923,000
Finished goods 7,570,000 6,561,000
----------- -----------
$18,809,000 $17,155,000
=========== ===========
</TABLE>
6
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Item 2. Management's Discussion and Analysis of Financial Condition 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 six months
ended December 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, fuel injection systems, exhaust systems,
Performer IAS Shock Absorbers and other performance components for most domestic
V8 and selected V6 engines. In addition, the Company offers performance
aftermarket manifolds, camshafts, cylinder heads, air cleaners, and carburetors
for Harley-Davidson and selected off-road motorcycles. The Company currently
offers over 3,000 performance automotive and motorcycle aftermarket parts for
street, off-road, recreational and competition vehicle use.
Product Mix
The Company manufactures its own products and purchases other products designed
to the Company's specifications from third-party manufacturers for subsequent
packaging and distribution to the Company's customers. Generally, the Company
can achieve a higher margin on those products which it manufactures as compared
to those purchased from third-party manufacturers. Accordingly, the Company's
results of operations in any given period are affected by the 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 October 1999, the Company completed construction of a 65,950 square foot
distribution facility on Company-owned property adjacent to its exhaust system
and shock absorber production facilities in Torrance, California. The Company is
now utilizing the former 30,000 square foot distribution area at its
headquarters for additional manufacturing capacity.
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 third and
fourth fiscal quarters.
7
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THREE MONTHS ENDED DECEMBER 25, 1999 COMPARED TO THREE MONTHS ENDED
DECEMBER 25, 1998:
Revenues
Revenues increased 11.4% to $28.5 million for the three months ended December
25, 1999 from $25.6 million for the same period of 1998. This increase was
primarily the result of an increase of approximately $2.0 million, or 19.8%, in
the sale of Edelbrock carburetors and an increase of approximately $0.5 million,
or 19.7%, in the sale of aluminum automotive cylinder heads.
Cost of Sales
Cost of sales increased 10.8% to $17.5 million for the three months ended
December 25, 1999 from $15.8 million for the same period of 1998. As a percent
of revenues, cost of sales decreased to 61.3% for the three months ended
December 25, 1999 from 61.7% for the same period of 1998. This decrease in cost
of sales was primarily due to an increase in production efficiency through the
increased utilization of new and existing machinery and equipment.
Selling, General and Administrative Expense
Selling, general and administrative expense increased 16.7% to $7.5 million for
the three months ended December 25, 1999 from $6.4 million for the same period
of 1998. As a percent of revenues, selling, general and administrative expense
increased to 26.2% for the three months ended December 25, 1999 from 25.0% for
the same period of 1998. This increase was primarily due to increased
advertising expense and sales commissions associated with increased sales.
Additionally, expenses during the current quarter were effected by the Company's
move to its new distribution facility as well as expansion of its current
production facilities which included the 30,000 square foot facility vacated by
the former distribution center.
Research and Development Expense
Research and development expense increased 14.0% to $870,000 for the three
months ended December 25, 1999 from $763,000 for the same period of 1998. As a
percent of revenues, research and development expense increased to 3.1% for the
three months ended December 25, 1999 from 3.0% for the same period of 1998. This
increase was primarily due to the addition of personnel to the Company's
research and development staff to meet the rising demand for its products and
other ventures.
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 for voluntary petitions 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.
8
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Interest Expense
Interest expense decreased 3.9% to $49,000 for the three months ended December
25, 1999 from $51,000 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 128.8% to $151,000 for the three months ended December
25, 1999 from $66,000 for the same period in 1998. The 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 $1,029,000 for the three months
ended December 25, 1999 from $838,000 for the 1998 period. The effective tax
rate for both periods was approximately 37%.
Net Income
The Company's net income for the three months ended December 25, 1999 increased
23.0% to $1.8 million from $1.4 million for the same period of 1998. This
increase was the result of the items mentioned above.
SIX MONTHS ENDED DECEMBER 25, 1999 COMPARED TO SIX MONTHS ENDED
DECEMBER 25, 1998:
Revenues
Revenues increased 12.4% to $54.2 million for the six months ended December 25,
1999 from $48.2 million for the same period of 1998. This increase was primarily
the result of an increase of approximately $3.5 million, or 18.8%, in the sale
of Edelbrock carburetors, an increase of approximately $1.1 million or 23.0%, in
the sale of aluminum cylinder heads, and an increase of approximately $0.9
million, or 5.9%, in the sale of aluminum intake manifolds.
Cost of Sales
Cost of sales increased 13.9% to $33.4 million for the six months ended December
25, 1999 from $29.3 million for the same period of 1998. As a percent of
revenues, cost of sales increased to 61.7% for the six months ended December 25,
1999 from 60.9% for the same period of 1998. This increase in cost of sales was
primarily due to increased labor costs and depreciation and a change in sales
mix toward outside manufactured products (mainly carburetors) for which the
Company achieves lower margins.
Selling, General and Administrative Expense
Selling, general and administrative expense increased 12.8% to $14.3 million for
the six months ended December 25, 1999 from $12.7 million for the same period of
1998. This increase was due primarily to increased sales commissions and freight
costs associated with increased sales and increases in advertising expenditures
and costs associated with the Company's move to its new distribution facility as
well as expansion of its current production facilities which included the 30,000
square foot facility vacated by the former distribution center. As a percent of
revenues, selling, general and administrative expense increased to 26.4% for the
six months ended December 25, 1999 from 26.3% for the same period of 1998.
9
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Research and Development Expense
Research and development expense increased 14.8% to $1.7 million for the six
months ended December 25, 1999 from $1.4 million for the same period of 1998. As
a percent of revenues, research and development expense increased to 3.1% for
the six months ended December 25, 1999 from 3.0% for the same period of 1998.
This increase was primarily due to the addition of personnel to the Company's
research and development staff to meet the rising demand for its products.
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 for voluntary petitions 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.
Interest Expense
Interest expense decreased 2.9% to $99,000 for the six months ended December 25,
1999 from $102,000 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 74.4% to $300,000 for the six months ended December
25, 1999 from $172,000 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 $1.9 million for the six months
ended December 25, 1999 from $1.6 million for the 1998 period. The effective tax
rate for both periods was approximately 37%.
Net Income
The Company's net income for the six months ended December 25, 1999 increased
13.6% to $3.2 million from $2.8 million for the same period of 1998. This
increase was primarily 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 $2.0 million
revolving credit facility ("Revolving Credit Facility") which expires on
February 1, 2002. 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.
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 $6.5 - $8.5 million in fiscal year 2000 primarily
for construction of its new distribution facility and additional capital
equipment to increase production capacity.
YEAR 2000 COMPLIANCE
Prior to December 31, 1999, management of the Company completed its review of
internal information systems, manufacturing and engineering equipment, and
facilities, as well as surveys of key vendors and service providers for Year
2000 risks. As of the date of this filing, the Company has experienced no
disruptions or other significant problems related to Year 2000 issues.
Additionally, to date, there have been no Year 2000 related failures with
respect to supplies or services from vendors or service providers who have
advised the Company of disruptions or other significant problems related to Year
2000 issues. To date, there have been no Year 2000 related problems reported
from customers regarding the Company's products.
However, if Year 2000 issues develop subsequent to the date of this filing,
which impact the ability of vendors or service providers to adequately supply
the Company, there could be a material adverse impact on the Company's
operations. Additionally, if the Company's products were to incur Year 2000
performance problems, there could be an adverse impact on results of operations
and financial condition due to increased warranty costs, litigation expenses and
other material liabilities, or a loss of customers.
The Company did not incur significant costs related to year 2000 issues during
the previous six month period and does not expect to incur material Year 2000
transition costs in the future.
"SAFE HARBOR" STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM
ACT OF 1995:
Any statements set forth above which are not historical facts are
forward-looking statements that involve known and unknown risks and
uncertainties that could cause actual results to differ materially from those in
the forward-looking statements. Potential risks and uncertainties include such
factors as the financial strength and competitive pricing environment of the
automotive and motorcycle aftermarket industries, product demand, market
acceptance, manufacturing efficiencies, new product development, the success of
planned advertising, marketing and promotional campaigns, the success of the
Company's, its vendors', and its suppliers' Year 2000 compliance programs and
other risks identified herein and in other documents filed by the Company with
the Securities and Exchange Commission.
11
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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 8.5%). It expires on February 1, 2002.
Because the interest rate on the Revolving Credit Facility is variable, the
Company's cash flow may be affected by increases in the prime rate. Management
does not 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 December 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 $7,083. If the prime rate rose 100 basis points, the
monthly interest payment would equal $7,912. 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.
12
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PART II - OTHER INFORMATION
Item 1. Changes in Securities
Not applicable.
Item 2. Defaults upon Senior Securities
Not applicable.
Item 3. Submission of Matters to a Vote of Security Holders
On November 23, 1999, the Company held its Annual Meeting of Shareholders in
Torrance, California. At that meeting, the shareholders elected all eight
directors nominated by the Board of Directors. The number of votes cast for or
against for each director were as follows:
<TABLE>
<CAPTION>
Number of Votes Cast
-------------------------
For Against Unvoted
--------- ---------- ----------
<S> <C> <C> <C>
O. Victor Edelbrock 5,107,085 13,950 100,904
Jeffrey L. Thompson 5,042,029 79,006 100,904
Aristedes T. Feles 5,041,929 79,106 100,904
Cathleen Edelbrock-Ford 5,042,029 79,006 100,904
Timothy D. Pettit 5,106,929 14,106 100,904
Jerry Herbst 5,106,985 14,050 100,904
Alexander Michalowski 5,106,485 14,550 100,904
Richard M. Wilbur 5,106,929 14,106 100,904
</TABLE>
In addition, the shareholders approved by a vote of 5,118,446 for, 1,668
abstained, 100,904 unvoted, and 921 against, the ratification of the appointment
of Grant Thornton LLP as independent auditors of the Company for the fiscal year
ending June 30, 2000.
Item 4. Other Information
Not applicable.
Item 5. Exhibits and Reports on Form 8-K
Exhibits
10.1 Business Loan Agreement between Edelbrock Corporation and
Bank of America, NT and SA
27.1 Financial Data Schedule
Reports on Form 8-K
There were no reports on Form 8-K filed during the three months ended
December 25, 1999.
13
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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: February 4, 2000 ARISTEDES T. FELES
---------------------------
Aristedes T. Feles
Vice President Finance,
Chief Financial Officer and
Director
14
<PAGE> 1
EXHIBIT 10.1
BANK OF AMERICA BUSINESS LOAN AGREEMENT
This Agreement dated as of JANUARY 26, 2000, is between Bank of America, N.A.
(the "Bank") and
Edelbrock Corporation (the "Borrower").
1. LINE OF CREDIT AMOUNT AND TERMS
1.1 LINE OF CREDIT AMOUNT.
(a) During the availability period described below, the Bank will provide a
line of credit to the Borrower. The amount of the line of credit (the
"Commitment") is Two Million and 00/100 Dollars ($2,000,000.00).
(b) This is a revolving line of credit with a within line facility for
letters of credit. During the availability period, the Borrower may
repay principal amounts and reborrow them.
(c) The Borrower agrees not to permit the outstanding principal balance of
the line of credit plus the outstanding amounts of any letters of
credit, including amounts drawn on letters of credit and not yet
reimbursed, to exceed the Commitment.
1.2 Availability Period. The line of credit is available between the date of
this Agreement and February 1, 2002, (the "Expiration Date") unless the
Borrower is in default.
1.3 Interest Rate.
(a) Unless the Borrower elects an optional interest rate as described below,
the interest rate is the Bank's Prime Rate.
(b) The Prime Rate is the rate of interest publicly announced from time to
time by the Bank as its Prime Rate. The Prime Rate is set by the Bank
based on various factors, including the Bank's costs and desired return,
general economic conditions and other factors, and is used as a
reference point for pricing some loans. The Bank may price loans to its
customers at, above, or below the Prime Rate. Any change in the Prime
Rate shall take effect at the opening of business on the day specified
in the public announcement of a change in the Bank's Prime Rate.
1.4 REPAYMENT TERMS.
(a) The Borrower will pay interest on March 1, 2000, and then monthly
thereafter until payment in full of any principal outstanding under this
line of credit.
(b) The Borrower will repay in full all principal and any unpaid interest or
other charges outstanding under this line of credit no later than the
Expiration Date. Any amount bearing interest at an optional interest
rate (as described below) may be repaid at the end of the applicable
interest period, which shall be no later than thirty (30) days after the
Expiration Date.
1.5 Optional Interest Rates. Instead of the interest rate based on the
Bank's Prime Rate, the Borrower may elect the optional interest rates listed
below during interest periods agreed to by the Bank and the Borrower. The
optional interest rates shall be subject to the terms and conditions described
later in this Agreement. Any principal amount bearing interest at an optional
rate under this Agreement is referred to as a "Portion." The following optional
interest rates are available:
(a) Short Term Fixed Rates.
1.6 Letters of Credit.
(a) This line of credit may be used for financing:
(i) commercial letters of credit with a maximum maturity of 180 days
but not to extend more than 180 days beyond the Expiration Date.
The commercial letter of credit will require drafts payable at
sight.
(ii) standby letters of credit with a maximum maturity of 365 days
but not to extend more than 365 days beyond the Expiration Date.
(iii) The amount of letters of credit outstanding at any one time
(including amounts drawn on letters of credit and not yet
reimbursed) may not exceed Two Million and 00/100 Dollars
($2,000,000.00).
<PAGE> 2
(b) The Borrower agrees:
(i) any sum drawn under a letter of credit may, at the option of the
Bank, be added to the principal amount outstanding under this
Agreement. The amount will bear interest and be due as described
elsewhere in this Agreement.
(ii) if there is a default under this Agreement, to immediately
prepay and make the Bank whole for any outstanding letters of
credit.
(iii) the issuance of any letter of credit and any amendment to a
letter of credit is subject to the Bank's written approval and
must be in form and content satisfactory to the Bank and in
favor of a beneficiary acceptable to the Bank. Without limiting
the foregoing, no letter of credit may be issued that contains a
provision providing that the maturity date will be automatically
extended each year for an additional year unless the Bank gives
written notice to the contrary.
(iv) to sign the Bank's form Application and Agreement for Commercial
Letter of Credit or Application and Agreement for Standby Letter
of Credit.
(v) to pay any issuance and/or other fees that the Bank notifies the
Borrower will be charged for issuing and processing letters of
credit for the Borrower.
2. OPTIONAL INTEREST RATES
2.1 OPTIONAL RATES. Each optional interest rate is a rate per year. Interest
will be paid on the last day of each interest period, and on the first day of
each month during the interest period. At the end of any interest period, the
interest rate will revert to the rate based on the Prime Rate, unless the
Borrower has designated another optional interest rate for the Portion. No
Portion will be converted to a different interest rate during the applicable
interest period. Upon the occurrence of an event of default under this
Agreement, the Bank may terminate the availability of optional interest rates
for interest periods commencing after the default occurs.
2.2 SHORT TERM FIXED RATE. The election of Short Term Fixed Rates shall be
subject to the following terms and requirements:
(a) The "Short Term Fixed Rate" means the fixed interest rate the Bank and
the Borrower agree will apply during the applicable interest period.
(b) The interest period during which the Short Term Fixed Rate will be in
effect will be no shorter than 30 days and no longer than one year.
(c) Each Short Term Fixed Rate Portion will be for an amount not less than
the following:
(i) for interest periods of 91 days or longer, Five Hundred Thousand
Dollars ($500,000).
(ii) for interest periods of between 30 days and 90 days, One Million
Dollars ($1,000,000).
(d) A Short Term Fixed Rate may be elected only for the entire principal
amount outstanding under this Agreement.
(e) Each prepayment of a Short Term Fixed Rate Portion, whether voluntary,
by reason of acceleration or otherwise, will be accompanied by the
amount of accrued interest on the amount prepaid, and a prepayment fee
as described below. A "prepayment" is a payment of an amount on a date
earlier than the scheduled payment date for such amount as required by
this Agreement.
(f) The prepayment fee shall be equal to the amount (if any) by which:
(i) the additional interest which would have been payable during the
interest period on the amount prepaid had it not been prepaid,
exceeds
(ii) the interest which would have been recoverable by the Bank by
placing the amount prepaid on deposit in the domestic
certificate of deposit market, the eurodollar deposit market, or
other appropriate money market selected by the Bank for a period
starting on the date on which it was prepaid and ending on the
last day of the interest period for such Portion (or the
scheduled payment date for the amount prepaid, if earlier).
<PAGE> 3
3. DISBURSEMENTS, PAYMENTS AND COSTS
3.1 Requests for Credit. Each request for an extension of credit will be
made in writing in a manner acceptable to the Bank, or by another means
acceptable to the Bank.
3.2 Banking Days. Unless otherwise provided in this Agreement, a banking day
is a day other than a Saturday or a Sunday on which the Bank is open for
business in California. All payments and disbursements which would be due on a
day which is not a banking day will be due on the next banking day. All payments
received on a day which is not a banking day will be applied to the credit on
the next banking day.
3.3 Interest Calculation. Except as otherwise stated in this Agreement, all
interest and fees, if any, will be computed on the basis of a 360-day year and
the actual number of days elapsed. This results in more interest or a higher fee
than if a 365-day year is used. Installments of principal which are not paid
when due under this Agreement shall continue to bear interest until paid.
3.4 Default Rate. Upon the occurrence of any default under this Agreement,
principal amounts outstanding under this Agreement will at the option of the
Bank bear interest at the Bank's Prime Rate plus 2 percentage points. This will
not constitute a waiver of any default.
3.5 Interest Compounding. At the Bank's sole option in each instance, any
interest, fees or costs which are not paid when due under this Agreement shall
bear interest from the due date at the Bank's Prime Rate plus 1 percentage
points. This may result in compounding of interest.
4. CONDITIONS
The Bank must receive any documents and other items it may reasonably require,
including but not limited to the following items, in form and content acceptable
to the Bank, before it is required to extend any credit to the Borrower under
this Agreement.
4.1 Authorizations. Evidence that the execution, delivery and performance by
the Borrower of this Agreement and any instrument or agreement required under
this Agreement have been duly authorized.
4.2 Other Items. Any other items that the Bank reasonably requires.
5. REPRESENTATIONS AND WARRANTIES
When the Borrower signs this Agreement, and until the Bank is repaid in full,
the Borrower makes the following representations and warranties. Each request
for an extension of credit constitutes a renewed representation:
5.1 Organization of Borrower. The Borrower is a corporation duly formed and
existing under the laws of the state where organized.
5.2 Authorization. This Agreement has been duly authorized and is
enforceable without conflict with any laws or any other obligation of the
Borrower.
5.3 Enforceable Agreement. This Agreement is a legal, valid and binding
agreement of the Borrower, enforceable against the Borrower in accordance with
its terms, and any instrument or agreement required hereunder, when executed and
delivered, will be similarly legal, valid, binding and enforceable.
5.4 No Conflicts. This Agreement does not conflict with any law, agreement,
or obligation by which the Borrower is bound.
5.5 Financial Information. All financial and other information that has been
or will be supplied to the Bank is:
(a) sufficiently complete to give the Bank accurate knowledge of the
Borrower's (and any guarantor's) and any trustor's financial condition,
including all material contingent liabilities.
(b) in compliance with all government regulations that apply.
Since the date of the financial statement specified above, there has been no
material adverse change in the business condition (financial or otherwise),
operations, properties or prospects of the Borrower (or any guarantor) or any
trustor.
<PAGE> 4
5.6 Lawsuits. There is no lawsuit, tax claim or other dispute pending or
threatened against the Borrower which, if lost, would impair the Borrowers
financial condition or ability to repay the loan, except as have been disclosed
in writing to the Bank.
5.7 Permits, Franchises. The Borrower possesses all permits, memberships,
franchises, contracts and licenses required and all trademark rights, trade name
rights, patent rights and fictitious name rights necessary to enable it to
conduct the business in which it is now engaged.
5.8 Location of Borrower. The Borrower's place of business (or, if the
Borrower has more than one place of business, its chief executive office) is
located at the address listed under the Borrower's signature on this Agreement.
6. COVENANTS
The Borrower agrees, so long as credit is available under this Agreement and
until the Bank is repaid in full:
6.1 Use of Proceeds. To use the proceeds of the credit only for short term
operating capital and to issue commercial and standby letters of credit to
support general purposes except for worker's compensation insurance.
6.2 Financial Information. To provide the following financial information
and statements in form and content acceptable to the Bank, and such additional
information as requested by the Bank from time to time:
(a) Within 150 days of the Borrower's fiscal year end, the Borrower's annual
financial statements. These financial statements must be audited (with
an unqualified opinion) by a Certified Public Accountant acceptable to
the Bank. The statements shall be prepared on a consolidated basis and
must be accompanied by a Borrower prepared consolidating income
statement.
(b) Within 45 days of the period's end, the Borrower's quarterly financial
statements. The statements shall be prepared with a consolidated balance
sheet and both consolidated and consolidating income statements.
6.3 Current Ratio. To maintain on a consolidated basis a ratio of current
assets to current liabilities of at least 1.5:1.0.
6.4 Tangible Net Worth. To maintain on a consolidated basis tangible net
worth equal to at least Sixty Million Dollars ($60,000,000), assessed
quarterly.
"Tangible net worth" means the gross book value of the Borrower's assets
(excluding goodwill, patents, trademarks, trade names, organization expense,
unamortized debt discount and expense, capitalized or deferred research and
development costs, deferred marketing expenses, deferred receivables, and other
like intangibles) less total liabilities, including but not limited to accrued
and deferred income taxes, and any reserves against assets.
6.5 Total Liabilities to Tangible Net Worth. To maintain on a consolidated
basis a ratio of total liabilities to tangible net worth not exceeding 1.5:1.0.,
assessed quarterly.
"Total liabilities" means the sum of current liabilities plus long-term
liabilities.
6.6 Debt Coverage Ratio. To maintain on a consolidated basis, a debt
coverage ratio of at least 1.50:1, assessed quarterly.
"Debt coverage ratio" is defined as net profit plus depreciation divided by the
current portion of long term debt.
6.7 Other Debts. Not to have outstanding or incur any direct or contingent
liabilities (other than those to the Bank), or become liable for the liabilities
of others, without the Bank's written consent. This does not prohibit:
(a) Acquiring goods, supplies, or merchandise on normal trade credit.
(b) Endorsing negotiable instruments received in the usual course of
business.
(c) Obtaining surety bonds in the usual course of business.
(d) Liabilities and lines of credit in existence on the date of this
Agreement disclosed in writing to the Bank.
(e) Additional purchase money indebtedness for equipment.
(f) Additional purchase money obligations for the acquisition of real
property not to exceed Three Million Dollars ($3,000,000) in the
aggregate at any time.
<PAGE> 5
6.8 Other Liens. Not to create, assume, or allow any security interest or
lien (including judicial liens) on property the Borrower now or later owns,
except:
(a) Deeds of trust and security agreements in favor of the Bank.
(b) Liens for taxes not yet due.
(c) Liens outstanding on the date of this Agreement disclosed in writing to
the Bank.
(d) Additional purchase money security interests in property acquired after
the date of this Agreement which secures indebtedness, to the extent
permitted elsewhere in this Agreement.
(e) Additional liens which secure obligations in a total principal amount
not exceeding Three Million Dollars ($3,000,000) to the extent permitted
elsewhere in this Agreement.
6.9 Paydown Period. To reduce the amount of advances outstanding under this
Agreement to zero for a period of at least 30 consecutive days in each
line-year. "Line-year" means the period between the date of this Agreement and
February 1, 2001, and each subsequent one-year period (if any).
6.10 Notices to Bank. To promptly notify the Bank in writing of:
(a) any lawsuit over Five Hundred Thousand Dollars ($500,000) against the
Borrower (or any guarantor).
(b) any substantial dispute between the Borrower (or any guarantor) and any
government authority.
(c) any event of default under this Agreement, or any event which, with
notice or lapse of time or both, would constitute an event of default.
(d) any material adverse change in the Borrower's (or any guarantor's)
business condition (financial or otherwise), operations, properties or
prospects, or ability to repay the credit.
(e) any change in the Borrower's name, legal structure, place of business,
or chief executive office if the Borrower has more than one place of
business.
(f) any actual material contingent liabilities of the Borrower (or any
guarantor), and any such material contingent liabilities which are
reasonably foreseeable.
6.11 Audits. To allow the Bank and its agents to inspect the Borrower's
properties and examine, audit, and make copies of books and records at any
reasonable time. If any of the Borrower's properties, books or records are in
the possession of a third party, the Borrower authorizes that third party to
permit the Bank or its agents to have access to perform inspections or audits
and to respond to the Bank's requests for information concerning such
properties, books and records.
6.12 Compliance with Laws. To comply with the laws (including any fictitious
name statute), regulations, and orders of any government body with authority
over the Borrower's business.
6.13 General Business Insurance. To maintain insurance satisfactory to the
Bank as to amount, nature and carrier covering property damage (including loss
of use and occupancy) to any of the Borrowers properties, public liability
insurance including coverage for contractual liability, product liability and
workers' compensation, and any other insurance which is usual for the Borrower's
business.
6.14 Additional Negative Covenants. Not to, without the Bank's written
consent:
(a) engage in any business activities substantially different from the
Borrower's present business.
(b) liquidate or dissolve the Borrower's business.
(c) enter into any consolidation, merger, or other combination, or become a
partner in a partnership, a member of a joint venture, or a member of a
limited liability company except when cash contributions to partnerships
and or joint ventures do not exceed Two Million Dollars ($2,000,000) in
the aggregate at any one time.
(d) sell, assign, lease, transfer or otherwise dispose of any assets for
less than fair market value, or enter into any agreement to do so.
(e) sell, assign, lease, transfer or otherwise dispose of all or a
substantial part of the Borrowers business or the Borrower's assets
except in the ordinary course of the Borrower's business.
<PAGE> 6
(f) enter into any sale and leaseback agreement covering any of its existing
fixed assets.
(g) acquire or purchase a business or its assets for a consideration,
including assumption of direct or contingent debt, in excess of Five
Hundred Thousand Dollars ($500,000) in the aggregate, which shall not be
unreasonably withheld.
(h) voluntarily suspend its business for more than 10 consecutive days in
any 30 day period, except for normal holidays.
6.15 ERISA Plans. Promptly during each year, to pay contributions adequate to
meet at least the minimum funding standards under ERISA with respect to each and
every Plan; file each annual report required to be filed pursuant to ERISA in
connection with each Plan for each year; and notify the Bank within ten (10)
days of the occurrence of any Reportable Event that might constitute grounds for
termination of any capital Plan by the Pension Benefit Guaranty Corporation or
for the appointment by the appropriate United States District Court of a trustee
to administer any Plan. "ERISA" means the Employee Retirement Income Security
Act of 1974, as amended from time to time. Capitalized terms in this paragraph
shall have the meanings defined within ERISA.
7. HAZARDOUS WASTE INDEMNIFICATION
The Borrower will indemnify and hold harmless the Bank from any loss or
liability directly or indirectly arising out of the use, generation,
manufacture, production, storage, release, threatened release, discharge,
disposal or presence of a hazardous substance. This indemnity will apply whether
the hazardous substance is on, under or about the Borrowers property or
operations or property leased to the Borrower. The indemnity includes but is not
limited to attorneys' fees (including the reasonable estimate of the allocated
cost of in-house counsel and staff). The indemnity extends to the Bank, its
parent, subsidiaries and all of their directors, officers, employees, agents,
successors, attorneys and assigns. "Hazardous substances" means any substance,
material or waste that is or becomes designated or regulated as "toxic,"
"hazardous," "pollutant," or "contaminant" or a similar designation or
regulation under any federal, state or local law (whether under common law,
statute, regulation or otherwise) or judicial or administrative interpretation
of such, including without limitation petroleum or natural gas. This indemnity
will survive repayment of the Borrowers obligations to the Bank.
8. DEFAULT
If any of the following events occurs, the Bank may do one or more of the
following: declare the Borrower in default, stop making any additional credit
available to the Borrower, and require the Borrower to repay its entire debt
immediately and without prior notice. If an event of default occurs under the
paragraph entitled "Bankruptcy," below, with respect to the Borrower, then the
entire debt outstanding under this Agreement will automatically be due
immediately.
8.1 Failure to Pay. The Borrower fails to make a payment under this
Agreement when due.
8.2 False Information. The Borrower (or any guarantor) has given the Bank
false or misleading information or representations.
8.3 Bankruptcy. The Borrower (or any guarantor) or any trustor files a
bankruptcy petition, a bankruptcy petition is filed against the Borrower (or any
guarantor) or any trustor or the Borrower (or any guarantor) or any trustor
makes a general assignment for the benefit of creditors.
8.4 Receivers. A receiver or similar official is appointed for the Borrowers
(or any guarantors) or any trustor's business, or the business is terminated.
8.5 Lawsuits. Any lawsuit or lawsuits are filed against the Borrower (or any
guarantor) in an aggregate amount of Two Hundred Fifty Thousand Dollars
($250,000) or more in excess of any insurance coverage.
8.6 Judgments. Any judgments or arbitration awards are entered against the
Borrower (or any guarantor), or the Borrower (or any guarantor) enters into any
settlement agreements with respect to any litigation or arbitration, in an
aggregate amount of Two Hundred Fifty Thousand Dollars ($250,000) or more in
excess of any insurance coverage.
8.7 Government Action. Any government authority takes action that the Bank
believes materially adversely affects the Borrower's (or any guarantors)
financial condition or ability to repay.
8.8 Material Adverse Change. A material adverse change occurs, or is
reasonably likely to occur, in the Borrowers (or any guarantors) business
condition (financial or otherwise), operations, properties or prospects, or
ability to repay the credit.
<PAGE> 7
8.9 Default under Related Documents. Any guaranty, subordination agreement,
security agreement, deed of trust, or other document required by this Agreement
is violated or no longer in effect.
8.10 Other Bank Agreements. The Borrower (or any guarantor) fails to meet the
conditions of, or fails to perform any obligation under any other agreement the
Borrower (or any guarantor) has with the Bank or any affiliate of the Bank. If,
in the Bank's opinion, the breach is capable of being remedied, the breach will
not be considered an event of default under this Agreement for a period of
thirty (30) days after the date on which the Bank gives written notice of the
breach to the Borrower; provided, however, that the Bank will not be obligated
to extend any additional credit to the Borrower during that period.
8.11 Other Breach Under Agreement. The Borrower fails to meet the conditions
of, or fails to perform any obligation under, any term of this Agreement not
specifically referred to in this Article. This includes any failure or
anticipated failure by the Borrower to comply with any financial covenants set
forth in this Agreement, whether such failure is evidenced by financial
statements delivered to the Bank or is otherwise known to the Borrower or the
Bank.
9. ENFORCING THIS AGREEMENT; MISCELLANEOUS
9.1 GAAP. Except as otherwise stated in this Agreement, all financial
information provided to the Bank and all financial covenants will be made under
generally accepted accounting principles, consistently applied.
9.2 California Law. This Agreement is governed by California law.
9.3 Successors and Assigns. This Agreement is binding on the Borrowers and
the Bank's successors and assignees. The Borrower agrees that it may not assign
this Agreement without the Bank's prior consent. The Bank may sell
participations in or assign this loan, and may exchange financial information
about the Borrower with actual or potential participants or assignees. If a
participation is sold or the loan is assigned, the purchaser will have the right
of set-off against the Borrower.
9.4 Arbitration. Any claim or controversy ("Claim") between the parties,
whether arising in contract or tort or by statute including, but not limited to,
Claims resulting from or relating to this Agreement shall, upon the request of
either party, be resolved by arbitration in accordance with the Federal
Arbitration Act (Title 9, US Code). Arbitration proceedings will be conducted in
accordance with the rules for arbitration of financial services disputes of
J.A.M.S./Endispute. The arbitration shall be conducted in any U.S. state where
real or tangible personal property collateral for the credit is located or if
there is no such collateral, in California. The arbitration hearing shall
commence within ninety (90) days of the demand for arbitration and close within
ninety (90) days of commencement, and any award, which may include legal fees,
shall be issued (with a brief written statement of the reasons therefore) within
thirty (30) days of the close of hearing. Any dispute concerning whether a claim
is arbitrable or barred by the statute of limitations shall be determined by the
arbitrator. This arbitration provision is not intended to limit the right of any
party to exercise self-help remedies, to seek and obtain interim or provisional
relief of any kind or to initiate judicial or non-judicial foreclosure against
any real or personal property collateral.
9.5 Severability; Waivers. If any part of this Agreement is not enforceable,
the rest of the Agreement may be enforced. The Bank retains all rights, even if
it makes a loan after default. If the Bank waives a default, it may enforce a
later default. Any consent or waiver under this Agreement must be in writing.
9.6 One Agreement. This Agreement and any related security or other
agreements required by this Agreement, collectively:
(a) represent the sum of the understandings and agreements between the Bank
and the Borrower concerning this credit;
(b) replace any prior oral or written agreements between the Bank and the
Borrower concerning this credit; and
(c) are intended by the Bank and the Borrower as the final, complete and
exclusive statement of the terms agreed to by them. In the event of any
conflict between this Agreement and any other agreements required by
this Agreement, this Agreement will prevail.
9.7 Indemnification. The Borrower will indemnify and hold the Bank harmless
from any loss, liability, damages, judgments, and costs of any kind relating to
or arising directly or indirectly out of (a) this Agreement or any document
required hereunder, (b) any credit extended or committed by the Bank to the
Borrower hereunder, and (c) any litigation or proceeding related to or arising
out of this Agreement, any such document, or any such credit. This indemnity
includes but is not limited to attorneys' fees (including the allocated cost of
in-house counsel). This indemnity extends to the Bank, its
<PAGE> 8
parent, subsidiaries and all of their directors, officers, employees, agents,
successors, attorneys, and assigns. This indemnity will survive repayment of the
Borrower's obligations to the Bank. All sums due to the Bank hereunder shall be
obligations of the Borrower, due and payable immediately without demand.
9.6 Prior Agreement Superseded. This Agreement supersedes the Business Loan
Agreement entered into as of January 23, 1997 between the Bank and the
Borrower, and any credit outstanding thereunder shall be deemed to be
outstanding under this Agreement.
This Agreement is executed as of the date stated at the top
BANK OF AMERICA, N.A. EDELBROCK CORPORATION
x /s/ ROBERT J. LOVIE x /s/ JEFFREY L. THOMPSON
----------------------------------- ---------------------------------
By: Robert J. Lovie, Vice President By: Jeffrey L. Thompson
Executive Vice President
Address in Notices:
Address where notices to the
Bank are to be sent:
Los Angeles West Commercial Banking Office
#01417 2700 California Street
2049 Century Park East, Suite 200 Torrance, CA 90503
Los Angeles, CA 90067
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<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-2000
<PERIOD-START> JUL-01-1999
<PERIOD-END> DEC-25-1999
<CASH> 4,006,000
<SECURITIES> 0
<RECEIVABLES> 26,135,000
<ALLOWANCES> 500,000
<INVENTORY> 18,809,000
<CURRENT-ASSETS> 49,751,000
<PP&E> 68,601,000
<DEPRECIATION> 29,226,000
<TOTAL-ASSETS> 90,582,000
<CURRENT-LIABILITIES> 14,679,000
<BONDS> 0
0
0
<COMMON> 52,000
<OTHER-SE> 70,981,000
<TOTAL-LIABILITY-AND-EQUITY> 90,582,000
<SALES> 54,166,000
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<CGS> 33,397,000
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<OTHER-EXPENSES> 15,956,000
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<INCOME-TAX> 1,855,000
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