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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
AMENDED
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported) April 8, 1998
................................................................................
AUTOMOTIVE PERFORMANCE GROUP, INC
(Exact name of registrant as specified in its charter)
Delaware 0-23705 860850090
(State or other jurisdiction (Commission (IRS Employer
of incorporation) File Number) Identification No.)
1207 N. Miller Road Tempe, Arizona 85281
(Address of principal executive offices) (Zip Code)
(602) 967-5990
Registrant's telephone number, including area code
................................................................................
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ITEM 1. CHANGES OF CONTROL OF REGISTRANT.
(a) A change of control of the Registrant occurred effective April 17, 1998,
when an Agreement and Plan of Merger with International Motor Sports Group
Holding, Inc. ("IMSG-H") became effective. Under said Agreement, on the
effective date IMSG-H merged into the Registrant and was extinguished. The
shareholders of IMSG-H all became shareholders of the Registrant.
Prior to the Merger, there were 7,833,902 common shares and no preferred shares
of the Registrant issued and outstanding. Pursuant to the Merger, there were
issued 108,930,887 common shares and no preferred shares to the shareholders of
IMSG-H pro rata. As of the Effective date, there were 116,764,789 shares issued
and outstanding, of which 93.3% were held by former shareholders of IMSG-H, and
6.7% were held by previous shareholders of the Registrant. In addition, previous
shareholders of IMSG-H also had the rights to purchase shares by Warrants and
employee stock options, which rights continued as to the Registrant.
Effective on the Merger date, the shares issued and outstanding were reduced 20
to 1; said reduction also applied to all shares subject to warrants and options.
Therefore, immediately after the Effective date there were 5,838,239.45 shares
outstanding.
All of the four Directors of the Registrant continued as Directors, and the
President of the Registrant became Vice Chairman, and remained as President of
the Klein Engines and Competition Components, Inc., a Delaware Company. Andrew
Evans, Chairman and President of IMSG-H became the Chairman and President of the
Registrant and a Director pursuant to the terms of the Merger. Subsequently, two
additional Directors and one-non-voting Director who also was appointed
Secretary were elected (who subsequently resigned for business reasons unrelated
to management of the Company). The names of the entire Board were filed in a
prior 8-K on May 1, 1998. Thomas Klein retired from the Company as President of
Klein Engines, Vice Chairman and Director on June 22, 1998, but remains as a
consultant.
Three shareholders of IMSG-H controlled most of the shares. Those shareholders
are all under the effective direction of Andrew Evans. Those shareholders are
Dominion Income Management, Inc., Dominion Income Management, Inc. Profit
Sharing Plan, and Maritime Capital Partners, LP. Acquisition of control of the
Registrant was effected solely by exchange of shares whereby additional initial
shares of the Registrant were issued for all of the shares of IMSG-H.
(b) Although warrants and options exist with respect to former shareholders of
IMSG-H, exercise thereof would not change the control of the Registrant.
(c) Exhibit: Attached hereto as Exhibit 1 is the Agreement of Merger between
APGI and IMSG-H whereby the Change of Control described in Item One was
effected.
ITEM 2. ACQUISITION
(a) Merger and Acquisition:Reorganization
Effective April 6, 1998, Klein Engines and Competition Components, Inc., a
Nevada Company, in order to effect a change of domicile merged into Klein
Engines and Competition Components, Inc., a Delaware Company, and was
extinguished.
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Effective April 9, 1998, Klein Engines and Competition Components, Inc., a
Delaware Company, was succeeded as an Issuer under the Exchange Act by
Automotive Performance Group, Inc., a Delaware Company pursuant to an Agreement
and Plan of Merger pursuant to Sec. 251(g) of the Delaware Corporate Code. Klein
Engines and Competition Components, Inc., a Delaware Company, is now a wholly
owned subsidiary of Automotive Performance Group, Inc., a Delaware Company, and
all of the former shareholders of Klein Engines and Competition Components,
Inc., a Delaware Company, are now shareholders of Automotive Performance Group,
Inc., a Delaware Company. Assets and liabilities of Klein Engines and
Competition Components, Inc. were not assumed by Automotive Performance Group,
Inc.
No change of control or change in relative ownership occurred as a result of
these transactions, and shareholders subsequent to these transactions had the
same class of shares as prior thereto. No change in Management occurred as a
result of these transactions.
(b) Successor Issuer Election
Under Rule 12g-3 of the Exchange Act, the succeeding Companies, described above,
as they are elective reporting companies, may make an election to be successor
issuers and to assume the reporting status of Klein Engines and Competition
Components, Inc., a Nevada Company.
Effective April 9, 1998, Automotive Performance Group, Inc. hereby assumed the
status of successor to Klein Engines and Competition Components, Inc. for
Exchange Act reporting purposes only.
(c) Acquisition.
Effective April 17, 1998, Automotive Performance Group, Inc., merged with
IMSG-H, the parent of International Motor Sports Group, Inc., a Delaware
Corporation ("IMSG"), in a transaction whereby IMSG-H was extinguished and IMSG
became a wholly owned subsidiary of Automotive Performance Group, Inc., and the
shareholders of IMSG took control of Automotive Performance Group, Inc. as
described in Item 1. Exhibit 1, referenced in said Item contains the Agreement
for that transaction. Assets and liabilities of IMSG were not assumed by
Automotive Performance Group, Inc.
ITEM 4. CHANGE OR SUBSTITUTION OF ACCOUNTANTS
The independent certified public accountant for IMSG is Grant Thornton, LLP.
IMSG was the accounting acquirer in the transaction described in Item 2(a).
Arthur Andersen, LLP was the independent certified public accountant for Klein
Engines and Competition Components, Inc. prior to the transaction described in
Item 2(a). the Board of Directors of Automotive Performance Group, Inc. intends
for Grant Thornton LLP to continue as the independent certified public
accountants for the Company and its subsidiaries.
ITEM 7. FINANCIAL STATEMENTS
Attached hereto as Exhibit 2 are the Pro Forma Consolidated Financial Statements
of the merged and reorganized Companies described in Items 1,2 as of March 31,
1998, the audited Consolidated Financial Statements of IMSG and its
subsidiaries as of December 31, 1997, and unaudited Balance Sheets and
Statements of Operations for IMSG and Subsidiaries as of and for the three
months ended March 31, 1998 and 1997. Audited Financial statements of Klein
Engines and Competition Components, Inc. (the
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predecessor for reporting purposes and wholly owned subsidiary of Automotive
Performance Group, Inc) are incorporated by reference from the statements
included as Exhibits to the Form 10 SB filing by that Company made February 2,
1998. The Pro Forma Consolidated Financial Statements of the merged and
reorganized Companies as of December 31, 1997 are incorporated by reference
from the 8-K filing of Klein Engines and Competition Components, Inc. made
May 1, 1998.
ITEM 8. CHANGE OF FISCAL YEAR
Pursuant to the Merger Agreement, the Registrant, which had a fiscal year ending
Sept 30, adopted a common fiscal year with IMSG-H of December 31st.
As Exhibits hereto are the following
EXHIBIT 1: AGREEMENT OF MERGER BETWEEN APGI AND IMSG-H
EXHIBIT 2: PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
Signed this 1st day of July, 1998 by:
Joe Marenda, Treasurer /S/
- ----------------------------
Joe Marenda, Treasurer
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EXHIBIT INDEX
Exhibit Number Description
- -------------- -----------------------------------
1 AGREEMENT OF MERGER BETWEEN APGI AND IMSG-H
2 PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
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EXHIBIT 1
AGREEMENT AND PLAN OF MERGER
OF
INTERNATIONAL MOTOR SPORTS GROUP-HOLDING, INC.,
A DELAWARE CORPORATION
INTO
AUTOMOTIVE PERFORMANCE GROUP, INC.,
A DELAWARE CORPORATION
TABLE OF CONTENTS
ARTICLE I THE MERGER
ARTICLE II DESCRIPTION OF THE TRANSACTION
ARTICLE III CLOSING AND EFFECTIVE DATE
ARTICLE IV REPRESENTATIONS AND WARRANTIES OF APGI
ARTICLE V REPRESENTATIONS AND WARRANTIES OF IMSG-H
ARTICLE VI COVENANTS OF THE PARTIES
ARTICLE VII OBLIGATION TO CLOSE: CONDITIONS
ARTICLE VIII SURVIVAL OF REPRESENTATIONS
ARTICLE IX SURVIVAL OF REPRESENTATIONS.
WARRANTIES AND COVENANTS OF IMSG-H
ARTICLE X TERMINATION
ARTICLE XI MISCELLANEOUS
-i-
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AGREEMENT AND PLAN OF MERGER
OF
INTERNATIONAL MOTOR SPORTS GROUP-HOLDING, INC.,
A DELAWARE CORPORATION
INTO
AUTOMOTIVE PERFORMANCE GROUP, INC.,
A DELAWARE CORPORATION
AGREEMENT AND PLAN OF MERGER (the "Agreement") dated as of March 20, 1998,
by and among INTERNATIONAL MOTOR SPORTS GROUP-HOLDING, INC., a Delaware
corporation ("IMSG-H"), and AUTOMOTIVE PERFORMANCE GROUP, INC., a Delaware
corporation ("APGI").
The Board of Directors of IMSG-H and APGI, deeming the merger of IMSG-H
with and into APGI (herein the "Surviving Corporation"), in accordance with the
applicable laws of the State of Delaware (the "Merger") to be desirable and in
the best interests of their respective stockholders, and desiring to adopt the
Plan of Reorganization resulting in a tax-free reorganization ("reorganization")
within the meaning of 368(a) of the Internal Revenue Code of 1986, as amended:
NOW, THEREFORE, in consideration of the mutual promises herein made and in
consideration of the representations, warranties and covenants herein contained,
the parties agree as follows:
ARTICLE I
THE MERGER
1.1 Merger. APGI and IMSG-H shall execute and deliver the Agreement of
Merger effective as of April 10, 1998. The merger shall be effective, subject to
the terms and conditions of this Agreement and the Plan of Merger as promptly as
possible after Closing, to be held at the offices of IMSG-H in Seattle,
Washington, or such other place as determined by IMSG-H, or such date as the
parties may select (the "Closing Date"). Subject to Article III, Section 3.3,
the merger shall be made effective by IMSG-H filing the Certificate of Merger in
accordance with the General Corporation Laws of the State of Delaware. The date
on which the merger shall become effective is herein referred to as the
"Effective Date."
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ARTICLE II
DESCRIPTION OF THE TRANSACTION
2.1 Description of the Transaction. Pursuant to the terms and conditions
of this Agreement, IMSG-H will merge with and into APGI on the Effective Date.
Upon the Effective Date of the merger, the following will occur:
(a) Corporate Existence. The separate corporate existence of
IMSG-H shall cease and APGI shall become the owner without other transfer of all
of the rights and property of the merged corporations, and APGI shall become
subject to the debts and liabilities of IMSG-H in the same manner as if the APGI
had itself incurred them.
(b) Certificate of Incorporation. Except as provided by this
Agreement and the Certificate of Merger, the Certificate of Incorporation of
APGI in effect and as of the effective date will remain the Certificate of
Incorporation of the Surviving Corporation without any modification or amendment
in the Merger.
(c) Bylaws. The Bylaws of the APGI in effect at and as of the
effective date will remain the Bylaws of the Surviving Corporation without any
modifications or amendment in the merger, except that the Corporation may have
from one to nine Directors.
(d) Officers and Directors. The Officers and Directors of APGI in
office at and as of the effective date will remain the Directors and Officers of
APGI until the first annual meeting of the shareholders of APGI following the
effective date. There will also be added one director as of the Effective Date.
The Articles of Incorporation of APGI shall also be amended to provide that one
or more non-voting Directors may be appointed by the Board of Directors and one
or more Advisory Board Members may be selected by the board of Directors. As of
the Effective Date, APGI will be changed to the following Board of Directors:
Andrew L. Evans, Director
Thomas G. Klein, Director
James R. Medley, Director
Terry Nish, Director
William Tempero, Director
(e) Reduction in Outstanding Shares. Immediately after the
Effective Date the shares of APGI that are issued and outstanding after the
merger shall be reduced 20 for 1 so that each 20 shares that are outstanding
prior to the effective date, after giving effect to the merger, shall be
exchanged for 1 share. All shareholders shall be required to forthwith exchange
their shares as provided herein and any shares not so exchanged shall become
void within the time set by the Board of directors of APGI. The authorized
capital of APGI shall not be affected by said share reduction. Any options or
rights of shareholders as of the Effective Date shall
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be reduced proportionally 20 to 1 without further action by APGI or amendment of
any Agreements with respect thereto. No fractional shares shall be issued, and
fractional shares shall be settled by APGI as determined by the Board of
Directors.
2.2 Share Exchange. Upon the Effective Date of the Merger:
(a) Transfer of IMSG-H Shares. Each IMSG-H Share (other than any
Dissenting Share) shall be converted into the right to receive one APGI Share
(the exchange ratio of one to one Shares is referred to herein as the
"Conversion Ratio"),
(b) Fractional Interest. No fractional interests will be issued in
exchange for shares of IMSG-H. Cash will be paid for such interests of IMSG-H
which would result in receipt of a fractional interest of APGI.
(c) Dissenting Shares. Each Dissenting Share shall be converted
into the right to receive payment from the respective corporate party to the
merger with respect thereto and in accordance with the provisions of the
Delaware General Corporation Law, and
(d) IMSG-H-Owned Shares. Each IMSG-H-owned share of APGI shall be
canceled.
(e) Adjustment of Conversion Ratio. The Conversion Ratio shall be
subject to equitable adjustment in the event of any stock split, stock dividend,
reverse stock split or other change of in the number of IMSG-H Shares
outstanding. No IMSG-H Share shall be deemed to be outstanding or to have rights
other than those set forth above in this Agreement.
(f) APGI Shares. Each share of APGI issued and outstanding as of
the Effective Date will remain issued and outstanding subject to the reduction
of shares set forth above.
2.3 Procedure for Issuance of Shares. Immediately after the Effective
Date of the Merger:
(a) The APGI will furnish to Bank of New York (the "Transfer
Agent") a stock certificate (issued in the name of the Transfer Agent or its
nominee) representing that number of APGI Shares reflection the reduction of
shares provided hereabove equal to the product of (i) the Conversion Ratio times
(ii) the number of outstanding IMSG-H Shares (other than any Dissenting Shares
and APGI-owned Shares) and the APGI will cause the Transfer Agent to mail a
letter of transmittal (with instructions for its use) in the form attached
hereto as Closing Exhibit B to each record holder of outstanding IMSG-H Shares
for the holder to use in surrendering the certificates which represented his or
its IMSG-H Shares in exchange for a certificate representing the number of
IMSG-H Shares to which it is entitled. APGI will also furnish to the Transfer
Agent a stock certificate (issued
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in the name of the Transfer Agent or its nominee) representing that number of
APGI Shares to which the shareholders of APGI prior to the merger shall be
entitled after the reduction of shares provided herein after the merger and the
APGI will cause the Transfer Agent to mail a letter of transmittal (with
instructions for its use) in the form attached hereto as Closing Exhibit B to
each record holder of outstanding APGI Shares for the holder to use in
surrendering the certificates which represented his or its APGI Shares in
exchange for a certificate representing the number of APGI Shares to which he or
she or it is entitled.
(b) Neither IMSG-H nor APGI will pay any dividend or make any
distribution on IMSG-H Shares or APGI shares (with a record date at or after the
Effective Date) to any record holder of outstanding IMSG-H or APGI until the
Effective Date.
(c) APGI may cause the Transfer Agent to return any APGI Shares
and dividends and distributions thereon remaining unclaimed for 180 days after
the Effective Time, and thereafter each remaining record holder of outstanding
IMSG-H Shares shall be entitled to look to IMSG-H (subject to abandoned
property, escheat, and other similar laws) as a general creditor thereof with
respect to IMSG-H Shares and dividends and distributions thereon to which he or
it is entitled upon surrender of his or its certificates.
(d) APGI shall pay all charges and expenses incurred in connection
with the issuance of new shares by APGI in connection with this Agreement.
ARTICLE III
CLOSING AND EFFECTIVE DATE
3.1 Time and Place. The exchange of items described in Section 3.2 below
("the Closing") shall be held at the offices of IMSG-H, in Seattle, Washington,
at 5:00 p.m., local time, on April 15, 1998, or at such other time and place as
determined by IMSG-H.
3.2 Actions at Closing. At the Closing (i) APGI will deliver to IMSG-H
the various certificates, instruments and documents referred to in Paragraph 4.6
of this Agreement, (ii) IMSG-H will deliver to APGI the various certificates,
instruments and documents referred to in Paragraph 5.6 below, and (iii) pursuant
to Section 3.3, IMSG-H shall file with the Secretary of the State of Delaware,
the Certificate of Merger in the form attached hereto as Closing Exhibit D (the
"Certificate of Merger") on or before the fifth day after the Closing and (iv)
the APGI will deliver to the Transfer Agent in the manner provided in Paragraph
2.3, the Certificate evidencing APGI's shares issued in the merger.
3.3 Effective Date. The merger becomes effective the later of April 15,
1998, or three days after the date the Form 10 filed with the U.S. Securities
and Exchange Commission for Klein Engines & Competition Components, Inc. becomes
effective, whichever is later or in any event upon such time as the
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Certificate of Merger is filed with the Secretary of State of the State of
Delaware, subject to the right of the Directors of APGI and IMSG-H to reject the
merger as otherwise provided herein but unless rejected, in no event, no later
than five days after the time of Closing set forth in Section 3.1.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF APGI
APGI, represents and warrants to IMSG-H as of the date of the execution of
this Agreement, as of the Closing Date, and as of the Effective Date (all
representations and warranties regarding APGI shall apply to APGI and to any
other entity which is a member of the same "control group of corporations" as
APGI under Section 1563 of the Internal Revenue Code): APGI incorporates by
reference the Form 10 filing with the SEC by Klein Engines & Competition
Components, Inc., a Nevada corporation and agrees at Closing to update and
correct said filing if any material event has occurred.
THE PARTIES ACKNOWLEDGE THAT THE INFORMATION SET FORTH IN THE FORM 120
FILING WITH THE SEC PROVIDES ADEQUATE ASSURANCE FOR THE BOARD OF DIRECTORS OF
IMSG-H TO RELAY UPON IN ENTERING INTO THIS MERGER. ACCORDINGLY, APGI MAKES NO
FURTHER WARRANTY OR REPRESENTATION OTHER THAN AS SET FORTH IN THIS ARTICLE AND
AS SET FORTH IN THE FORM 10.
4.1 Organization, Qualification and Corporate Power. APGI is a
corporation duly organized, validly existing and in good standing under the laws
of the State of Delaware. APGI is duly authorized to conduct business and is in
good standing under the laws of each jurisdiction where such qualification is
required except where the lack of such qualification would not have a material
adverse effect on the financial condition of APGI and its subsidiaries taken as
a whole or on the ability of the parties to consummate the transactions
contemplated by this Agreement. APGI has full corporate power and authority to
carry on the businesses in which it is engaged and to own and use the properties
owned by it.
4.2 Authorized and Outstanding Stock. APGI's authorized capital stock
consists of 143,000,000 shares of capital stock divided into two classes;
130,000,000 Shares of $.0001 par value Common Stock, of which 7,833,902 shares
are issued and outstanding as of February 28, 1998; and 13,000,000 Shares of
$.0001 par value preferred stock, none of which had been issued as of the
Effective Date of the merger. All outstanding shares of APGI have been duly
authorized and validly issued, fully paid, nonassessable and issued in full
compliance with the preemptive rights of any existing shareholders and in full
compliance with all applicable federal and state securities laws.
Except for the Incentive Stock Option Agreement, and Registration Rights
Agreement of Thomas G. Klein that are part of the transactions contemplated by
this Agreement, no shares of APGI's capital stock have been reserved for
issuance for any purposes, and there are no outstanding rights, subscriptions,
warrants,
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options, conversion rights, commitments or agreements of any kind outstanding to
purchase or otherwise acquire from APGI, or to cause APGI to issue or purchase,
any shares of its capital stock, or securities or obligations of any kind
convertible into, exchangeable for, or evidencing the right to acquire any
shares of capital stock, other than set forth in Closing Exhibit E, and no
additional shares rights or warrants of APGI shall be issued from February 28
1998 to the date of Closing.
4.3 Necessary Authority. APGI has all requisite corporate power and
authority to enter into, deliver and perform this Agreement and to consummate
the transactions contemplated herein. The execution, delivery and performance of
this Agreement and the consummation of the transactions contemplated herein have
been duly authorized by all necessary action on the part of APGI's Board of
Directors and shareholder. This Agreement has been duly executed and delivered
by APGI and constitutes its valid and legally binding obligation, enforceable
against APGI in accordance with its terms, except as the same may be limited by
bankruptcy, insolvency, reorganization or other laws affecting the enforcement
of creditors' rights generally now or hereafter in effect, and subject to the
availability of equitable remedies.
4.4 No Conflicts. To the knowledge of the Directors and Officers of
APGI, the execution, delivery and performance of this Agreement by APGI and its
consummation of the transactions contemplated herein, do not and will not (i)
require the consent, approval, authorization, order, filing, registration or
qualification of or with any court, governmental authority or third person,
except that which already has been obtained, (ii) conflict with or result in any
violation of or default under any provision of APGI's existing Certificate of
Incorporation, as amended and in effect, or the Bylaws of APGI or of any
mortgage, indenture, lease, agreement or other instrument, permit, concession,
grant, franchise or license to which APGI is a party or by which it or its
properties are bound, (iii) violate any law, ordinance, rule, regulation,
judgment, order or decree applicable to APGI, or (iv) result in the creation of
any security interest, claim, lien, charge or encumbrance upon any of the
Shares. Except where the violation, conflict, breach, default, acceleration,
termination, modification, cancellation or security interests would not have a
material adverse effect on the financial condition of APGI or on the ability of
the Parties to consummate the transaction contemplated herein.
4.5 Subsidiaries. Except for the ownership of all of the issued and
outstanding Common Stock of Klein Engines & Competition Components of Delaware,
Inc., a Delaware corporation, as disclosed in Closing Exhibit F, APGI has no
other subsidiary corporation or other entity in which it has an ownership
interest. Except as disclosed in Closing Exhibit G, there is no corporation that
is a member of the same "controlled group of corporations" as APGI, as
determined under Section 1563(a) of the Code.
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4.6 Corporate Documents. Complete and correct copies of the Certificate
of Incorporation of APGI and all amendments thereto, certified by the Secretary
of State of Delaware, and of the Bylaws of APGI, as amended, certified by the
Secretary of APGI, have been furnished to IMSG-H, and no amendments to the
Certificate of Incorporation or the Bylaws have been adopted subsequent to said
furnishing. APGI is not in default in the performance, observation or
fulfillment of its Certificate of Incorporation or Bylaws. The minute books of
APGI have been furnished to IMSG-H to the extent available. The minute books
accurately reflect all material transactions and corporate events involving APGI
and all material actions taken by the directors and/or the shareholders of APGI.
All material actions taken by APGI requiring director and/or shareholder
approval were duly approved by the directors and/or the shareholders of APGI in
accordance with APGI's Certificate of Incorporation, Bylaws and applicable law.
4.7 Absence of Financial Statements. APGI is newly formed and has no
assets or liabilities other than the assets and liabilities which will have
resulted from a merger of Klein Engines & Competition Components of Delaware,
Inc. into a wholly owned subsidiary of APGI pursuant to Sec. 251(G) of the
Delaware Corporate Code by which transaction Klein Engines & Competition
Components of Delaware, Inc., will become a wholly-owned subsidiary of APGI,
which will occur on or about April 7, 1998. Klein Engine & Competition
Components, Inc., a Nevada corporation has prepared audited financial statements
as of September 30, 1997, which are attached hereto as Exhibit H and current
financial information to IMSG-H.
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF IMSG-H
Subject to the Closing Exhibits and schedules referred to in this Article
V to be submitted by IMSG-H at Closing, additional documents which will be made
available to representatives of APGI at Closing, and with the further
qualification that to the extent the information provided in the Closing
Exhibits and schedules and additional documents which will be made available to
representatives of APGI at Closing is inconsistent with any representation in
this Article, the Closing Exhibits and/or schedule or additional documents shall
be controlling, IMSG-H, represents and warrants to APGI and as of the Effective
Date.
SAID REPRESENTATIONS AND WARRANTIES MADE HEREIN BY IMSG ARE SUBJECT TO THE
EXPRESS CONDITION THAT THEY ARE MADE ON THE REASONED INFORMATION AND GOOD FAITH
BELIEF OF IMSG, ITS OFFICERS AND AGENTS, AND ARE NOT INTENDED TO BE ABSOLUTE.
5.1 Organization, Qualification and Corporate Power. IMSG-H is a
corporation duly organized, validly existing and in good standing under the laws
of the State of Delaware. IMSG-H is duly authorized to conduct business and is
in
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good standing under the laws of each jurisdiction where such qualification is
required except where the lack of such qualification would not have a material
adverse effect on the financial condition of IMSG-H and its subsidiaries taken
as a whole or on the ability of the parties to consummate the transactions
contemplated by this Agreement. IMSG-H has full corporate power and authority to
carry on the businesses in which it is engaged and to own and use the properties
owned by it.
5.2 Authorized and Outstanding Stock. IMSG-H's authorized capital stock
consists of 143,000,000 shares of capital stock divided into two classes;
130,000,000 Shares of $.0001 par value Common Stock, of which 108,930,887 shares
are issued and outstanding as of the Effective Date; and 13,000,000 Shares of
$.0001 par value preferred stock, none of which had been issued as of the
Effective Date of the merger. All outstanding shares of IMSG-H have been duly
authorized and validly issued, fully paid, nonassessable and issued in full
compliance with the preemptive rights of any existing shareholders and in full
compliance with all applicable federal and state securities laws.
Except for the Incentive Stock Option Agreement, and Grants thereunder,
Warrants, Contract Rights and the Registration Rights Agreements which have been
issued by or committed to by IMSG and its affiliates, which Warrants, Options,
and Rights are contained in the audited financial statements of IMSG-H dated
12/31/97, or as will have been otherwise disclosed to representatives of APGI,
no shares of IMSG-H's capital stock have been reserved for issuance for any
purposes, and there are no material outstanding rights, subscriptions, warrants,
options, conversion rights, commitments or agreements of any kind outstanding to
purchase or otherwise acquire from IMSG-H, or to cause IMSG-H to issue or
purchase, any shares of its capital stock, or securities or obligations of any
kind convertible into, exchangeable for, or evidencing the right to acquire any
shares of capital stock, other than set forth in Closing Exhibit 5.2.
5.3 Necessary Authority. IMSG-H has all requisite corporate power and
authority to enter into, deliver and perform this Agreement and to consummate
the transactions contemplated herein. The execution, delivery and performance of
this Agreement and the consummation of the transactions contemplated herein have
been duly authorized by all necessary action on the part of IMSG-H's Board of
Directors and shareholders. This Agreement has been duly executed and delivered
by IMSG-H and constitutes its valid and legally binding obligation, enforceable
against IMSG-H in accordance with its terms, except as the same may be limited
by bankruptcy, insolvency, reorganization or other laws affecting the
enforcement of creditors' rights generally now or hereafter in effect, and
subject to the availability of equitable remedies.
5.4 Conflicts With Authorities. To the knowledge of the Directors and
Officers of IMSG-H, the execution, delivery and performance of this Agreement by
IMSG-H and its consummation of the transactions contemplated herein, do not and
will not (i) require the consent, approval, authorization, order, filing,
registration or qualification of or with any court, governmental authority or
third person, except that which already has been obtained, (ii) conflict with or
result in any violation of
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or default under any provision of IMSG-H's existing Certificate of
Incorporation, as amended and in effect, or the Bylaws of IMSG-H or of any
mortgage, indenture, lease, agreement or other instrument, permit, concession,
grant, franchise or license to which IMSG-H is a party or by which it is bound,
(iii) violate any law, ordinance, rule, regulation, judgment, order or decree
applicable to IMSG-H, or (iv) result in the creation of any security interest,
claim, lien, charge or encumbrance upon any of the Shares. Except where the
violation, conflict, breach, default, acceleration, termination, modification,
cancellation or security interests would not have a material adverse effect on
the financial condition of IMSG-H or on the ability of the Parties to consummate
the transaction contemplated herein.
5.5 Subsidiaries. IMSG-H has no other subsidiary corporation or other
entity in which it has an ownership interest, except as disclosed in Closing
Exhibit 5.5.
5.6 Corporate Documents. Complete and correct copies of the Certificate
of Incorporation of IMSG-H and all amendments thereto, certified by the
Secretary of State of Delaware, and of the Bylaws of IMSG-H, as amended,
certified by the Secretary of IMSG-H, have been furnished to APGI , and no
amendments to the Certificate of Incorporation or the Bylaws have been adopted
subsequent to said furnishing. IMSG-H is not in default in the performance,
observation or fulfillment of its Certificate of Incorporation or Bylaws. The
minute books of IMSG-H have been furnished to APGI to the extent available. The
minute books accurately reflect all material transactions and corporate events
involving IMSG-H and all material actions taken by the directors and/or the
shareholders of IMSG-H. All material actions taken by IMSG-H requiring director
and/or shareholder approval were duly approved by the directors and/or the
shareholders of IMSG-H in accordance with IMSG-H's Certificate of Incorporation,
Bylaws and applicable law.
5.7 Financial Statements. IMSG-H will provide audited financial
statements covering the period of time from its incorporation to December 31,
1997 (The Audited Statements'). IMSG-H has no liabilities, commitments or
obligations of any nature, whether absolute, accrued, contingent, known or
unknown, due or to become due or otherwise, which are materially adverse
relative to the financial condition of APGI and IMSG as a whole to those as set
forth in the Audited Statements
ARTICLE VI
COVENANTS OF THE PARTIES
6.1 Covenants. The Parties agree as follows with respect to the period
from and after the execution of the Agreement:
(a) General. Each of the Parties will use its reasonable best
efforts to take all action and to do all things necessary, proper, or advisable
in order to consummate and make effective the transactions contemplated by this
Agreement (including satisfaction, but not waiver, of the closing conditions set
forth in Article
Page 9 of 37
<PAGE> 11
VII below).
(b) Notices and Consents. IMSG-H and APGI will give any notices
(and will cause its subsidiary to give any notices) to third parties, and will
use its reasonable best efforts to obtain (and will cause its subsidiary to use
its reasonable best efforts to obtain) any third party consents, that APGI or
IMSG-H reasonably may request in connection with the matters referred to in this
Agreement.
(c) Operation of Business. Except as disclosed in the Closing
Exhibits, each party will not (and will not cause or permit any of its
subsidiaries to) engage in any practice, take any action, or enter into any
transaction outside the ordinary course of business. Without limiting the
generality of the foregoing:
(1) Neither of the parties or their subsidiaries will
authorize or effect any change in their charters or bylaws;
(2) Neither of the parties or their subsidiaries will grant
any options, warrants, or other rights to purchase or obtain any of their
capital stock or issue, sell, or otherwise dispose of any of its capital stock;
(3) Neither of the parties or their subsidiaries will
declare, set aside, or pay any dividend or distribution with respect to their
capital stock (whether in cash or in kind), or redeem, repurchase, or otherwise
acquire any of its capital stock;
(4) Neither of the parties or their subsidiaries will issue
any note, bond, or other debt security or create, incur, assume, or guarantee
any indebtedness for borrowed money or capitalized lease obligation outside the
ordinary course of business;
(5) Neither of the parties or their subsidiaries will impose
any Security Interest upon any of its assets outside the ordinary course of
business;
(6) Neither of the parties or their subsidiaries will make
any capital investment in, make any loan to, or acquire the securities or assets
of any other Person outside the ordinary course of business;
(7) Neither of the parties or their subsidiaries will make
any change in employment terms for any of its directors, officers, and employees
outside the ordinary course of business; and
(8) Neither of the parties or their subsidiaries will commit
to any of the foregoing.
(d) Full Access. Each party will (and will cause each of its
Subsidiaries to) permit representatives of the other party to have full access
at all reasonable times, and in a manner so as not to interfere with the normal
business operations of
Page 10 of 37
<PAGE> 12
the party being reviewed to all premises, properties, personnel, books, records
(including tax records), contracts, and documents of or pertaining to each of
the parties and their subsidiaries. The Parties will treat and hold as such any
Confidential Information it receives from the other. The Parties will treat and
hold as such any confidential information it receives from any of the Parties in
the course of the reviews contemplated by this Paragraph, will not use any of
the confidential information except in connection with this merger.
(e) Notice of Developments. Each Party will give prompt written
notice to the other of any material adverse development causing a breach of any
of its own representations and warranties in the previous two Articles above. No
disclosure by any Party pursuant to this Paragraph, however, shall be deemed to
amend or supplement the Disclosure Schedule or to prevent or cure any
misrepresentation, breach of warranty, or breach of covenant.
(f) Insurance and Indemnification.
(1) The Surviving Corporation will provide each individual
who served as a director or officer of APGI at any time prior to the effective
time with liability insurance for a period of 48 months after the effective time
no less favorable in coverage and amount than any applicable insurance in effect
immediately prior to the effective time.
(2) APGI, as the Surviving Corporation in the Merger, will
observe any indemnification provisions now existing in the certificate of
incorporation or bylaws of IMSG-H for the benefit of any individual who served
as a director or officer of IMSG-H at any time prior to the effective time.
(3) APGI will indemnify each individual who served as a
director or officer of APGI, IAG-Klein, Inc., and Klein Engines & Competition
Components of Delaware, Inc. at any time prior to the effective time from and
against any and all actions, suits, proceedings, hearings, investigations,
charges, complaints, claims, demands, injunctions, judgments, orders, decrees,
rulings, damages, dues, penalties, fines, costs, amounts paid in settlement,
liabilities, obligations, taxes, liens, losses, expenses, and fees, including
all court costs and reasonable attorneys' fees and expenses, resulting from,
arising out of, relating to, in the nature of, or caused by this Agreement or
any of the transactions contemplated herein.
ARTICLE VII
OBLIGATION TO CLOSE: CONDITIONS
7.1 Conditions to Obligation of IMSG-H to Close. The obligation of
IMSG-H to consummate the transactions to be performed by it in connection with
the Closing is subject to satisfaction of the following conditions:
(a) APGI and its subsidiaries shall have procured all third party
Page 11 of 37
<PAGE> 13
consents specified above;
(b) The representations and warranties set forth above shall be
true and correct in all material respects at and as of the Closing Date;
(c) APGI shall have performed and complied with all of its
covenants hereunder in all material respects through the Closing;
(d) No action, suit, or proceeding shall be pending or threatened
before any court or quasi-judicial or administrative agency of any federal,
state, local, or foreign jurisdiction or before any arbitrator wherein an
unfavorable injunction, judgment, order, decree, ruling, or charge would (a)
prevent consummation of any of the transactions contemplated by this Agreement,
(b) cause any of the transactions contemplated by this Agreement to be rescinded
following consummation, (c) affect adversely the right of the surviving
Corporation to own the former assets, to operate the former businesses, and to
control the former Subsidiaries of either party, or (d) affect adversely the
right of any of the former Subsidiaries of either party to own its assets and to
operate its businesses (and no such injunction, judgment, order, decree, ruling,
or charge shall be in effect) there shall not be any judgment, order, decree,
stipulation, injunction, or charge in effect preventing consummation of any of
the transactions contemplated by this Agreement;
(e) APGI shall have delivered to IMSG-H a certificate to the
effect that each of the conditions specified above in Paragraph 6. l(a)-(e) is
satisfied in all respects;
(f) This Agreement and the Merger shall have received the
requisite IMSG-H stockholder approval;
(g) IMSG-H shall have received from counsel to APGI an opinion in
form and substance as set forth in Closing Exhibit 7.1(g) attached hereto;
addressed to IMSG-H, and dated as of the Closing Date; and
(h) All actions to be taken by APGI in connection with
consummation of the transactions contemplated hereby and all certificates,
opinions, instruments, and other documents required to effect the transactions
contemplated hereby will be reasonably satisfactory in form and substance to
IMSG-H.
7.2 Acceptance by APGI. Acceptance by APGI of Closing Exhibits,
schedules submitted by IMSG-H at the Closing and documents provided to
representatives of APGI will constitute full compliance and acceptance by APGI
of the conditions to Closing and all of the conditions of this Agreement.
Acceptance of all Closing Exhibits and schedules and documents of IMSG-H at
Closing will be conclusively presumed unless rejected by the Board of Directors
of APGI within five (5) calendar days of the Closing Date.
Page 12 of 37
<PAGE> 14
7.3 Conditions to Obligation of APGI to Close. The obligation of APGI to
consummate the transactions to be performed by it in connection with the Closing
is subject to satisfaction of the following conditions:
(a) This Agreement and the Merger shall have received the
requisite IMSG-H stockholder approval;
Page 13 of 37
<PAGE> 15
(b) The representations and warranties set forth above as IMSG-H
shall be true and correct in all material respects at and as of the Closing
Date;
(c) IMSG-H shall have performed and complied with all of its
covenants hereunder in all material respects through the Closing;
(d) IMSG-H shall have delivered to APGI a certificate to the
effect that each of the conditions specified above in Paragraph 6.2(a)-(c) is
satisfied in all respects;
(e) This Agreement and the Merger shall have received the
requisite APGI stockholder approval;
(f) APGI shall have received from counsel to IMSG-H an opinion in
form and substance as set forth in Closing Exhibit 7.3(f) attached hereto,
addressed to APGI, and dated as of the Closing Date;
(g) All actions to be taken by IMSG-H in connection with
consummation of the transactions contemplated hereby and all certificates,
opinions, instruments, and other documents required to effect the transactions
contemplated hereby will be reasonably satisfactory in form and substance to
APGI.
7.4 Acceptance by IMSG-H. Acceptance by IMSG-H of Closing Exhibit
schedules submitted by APGI at the Closing will constitute full compliance and
acceptance by IMSG-H of the conditions to Closing and all of the conditions of
this Agreement. Acceptance of all Closing Exhibits of APGI at Closing will be
conclusively presumed unless rejected by the Board of Directors of IMSG-H within
five (5) calendar days of the date the Closing Date.
ARTICLE VIII
SURVIVAL OF REPRESENTATIONS
8.1 Survival of Representations' Warranties and Covenants of APGI and
APGI's Shareholders. Except as otherwise specifically provided herein, the
representations, warranties of APGI and its shareholders shall survive the
Effective Date unless the context clearly indicates to the contrary and shall
continue in full force and effect.
8.2 Indemnity of IMSG-H. APGI and its shareholders, jointly and
severally and on a pro rata basis, agree to and shall indemnify IMSG-H against
any and all loss, damages or expense, resulting from any misrepresentation made
or breach of warranty given or covenant made in this Agreement or any of the
schedules or Closing Exhibits hereto, as well as from and against all debts,
claims and liabilities of APGI which have arisen or may rise because of or as a
result of, any fact, event or transaction existing, or claim before or after the
Effective Date, regardless of when the cause of action therefore shall be deemed
to arise except for:
Page 14 of 37
<PAGE> 16
(a) Any such debt, claim or liability which may be included as a
liability in the financial statements (including balance sheets) (to the extent
of the amount thereof included); and
(b) Current liabilities incurred by APGI in the ordinary and usual
course of its business between and the Effective Date; and
APGI and its shareholders agree to and shall hold harmless and indemnify
IMSG-H from and against any and all costs, expenses (including without
limitation, attorney's fees) or damages arising out of any claim, action, suit
or proceeding (including, without limitation, any action, suit or proceeding
disclosed in Closing Exhibit O) concerning any such debt, claim or liability,
whether such claim, action, suit or proceeding shall be reduced to final
judgment or shall be settled prior thereto; provided, however, that the time
during which IMSG-H may make any claim against APGI or its shareholders
hereunder shall be limited to the period specified with respect to the different
types of representations, warranties and covenants in said Section; and
provided, further, that the aggregate of all such claims must exceed the sum of
Five Thousand Dollars ($5,000.00 ) before any claim may be made the said amount
of Five Thousand Dollars ($5,000.00) being a one time deductible offset of APGI
and its shareholders against all future claims which may be made hereunder by
IMSG-H. For purposes of the time period during which claims are permissible
hereunder, claims shall be deemed made with respect to any action, suit or
proceeding disclosed in Closing Exhibit O without in any way limited the
foregoing, APGI and its Shareholders expressly recognize that this indemnity is
applicable to assessments or reassessments in respect to the United States
income taxes, or other governmental taxes or like reassessments for the years
proceeding the transaction limited only by the time period set forth in said
Section.
Seller's shareholders expressly waive any defense under applicable
Statute of Limitations with respect to the period during which indemnity of any
claim by IMSG-H hereunder if such Statutes of Limitations are inconsistent with
the time periods established in this Agreement.
8.3 Notice. If IMSG-H shall claim to have suffered any loss or damage by
reason of misrepresentation made or breach of warranty given or covenant made by
APGI or its shareholders or if IMSG-H shall claim any right of indemnity under
this Agreement, IMSG-H shall send written notice of such claim to APGI's
shareholders within the time set forth in this Agreement. Said notice shall
state in reasonable detail the representation, warranty or, covenant (including
the covenant of indemnity) with respect to which the claim is made, the facts
given rise to and the basis for the claim the amount of liability of APGI's
shareholders asserted by reason thereof.
ARTICLE IX
SURVIVAL OF REPRESENTATIONS.
WARRANTIES AND COVENANTS OF IMSG-H
Page 15 of 37
<PAGE> 17
9.1 None of the representations, warranties and covenants of IMSG-H
(other than the provisions in Article I above concerning issuance of IMSG-H's
shares, and the provisions above concerning insurance indemnification, will
survive the Effective Date.
Page 16 of 37
<PAGE> 18
ARTICLE X
TERMINATION
10.1 Termination of Agreement. Either of the Parties may terminate this
Agreement with the prior authorization of its Board of Directors (whether before
or after stockholder approval) as provided below:
(a) the Parties may terminate this Agreement by mutual written
consent at any time prior to the effective time;
(b) IMSG-H may terminate this Agreement except for Article XI by
giving written notice to APGI at any time prior to the effective date (a) in the
event APGI has breached any material representation, warranty, or covenant
contained in this Agreement in any material respect, IMSG-H has notified APGI of
this breach, and the breach has continued without cure for a period of thirty
(30) days after the notice of breach or (b) if the Closing shall not have
occurred on or before April 20, 1998, by reason of the failure of any condition
precedent under Paragraph hereof (unless the failure results primarily from
IMSG-H breaching any representation, warranty, or covenant contained in this
Agreement);
(c) APGI may terminate this Agreement except for Article XI by
giving written notice to IMSG-H at any time prior to the effective date (a) in
the event IMSG-H has breached any material representation, warranty, or covenant
contained in this Agreement in any material respect, APGI has notified IMSG-H of
the Breach, and the breach has continued without cure for a period of thirty
(30) days after the notice of breach or (b) if the Closing shall not have
occurred on or before April 20, 1998, by reason of the failure of any condition
precedent under Paragraph 9(b) hereof (unless the failure results primarily from
APGI breaching any representation, warranty, or covenant contained in this
Agreement).
10.2 Effect of Termination. If any Party terminates this Agreement
pursuant to this Article, all rights and obligations of the Parties hereunder
shall terminate without any liability of any Party to any other Party (except
for any liability of any Party then in breach).
ARTICLE XI
MISCELLANEOUS
11.1 Execution of Counterparts. For the convenience of the parties, this
Agreement may be executed in one or more counterparts, each of which shall be
deemed an original, but all of which together shall constitute one and the same
document.
11.2 Notices. All notices which are required or may be given pursuant to
the terms of this Agreement shall be in writing and shall be sufficient in all
respects if delivered personally or by registered or certified mail, postage
prepaid, as follows:
Page 17 of 37
<PAGE> 19
If to APGI: Thomas G. Klein
Automotive Performance Group, Inc.
1207 N. Miller Road
Tempe, AZ 85281
with a copy to: James Benham, Esq.
Moore & Benham, P.L.L.C.
1144 E. Jefferson Street
Phoenix, AZ 85034
If to IMSG-H to: Andrew Evans
15302 25th Drive S.E.
Mill Creek, WA 98012
with a copy to: Bruce Butcher, Esq.
Butcher & Williams, P.S.
1001 Fourth Avenue Plaza, Suite 3827
Seattle, WA 98154
or to such other address as shall be furnished in like manner by any party to
the others. Any such notice shall be deemed to have been given, received and
become effective for all purposes at the time it shall have been (i) delivered
to the addressee as indicated by the return receipt (if transmitted by mail) or
the affidavit of the messenger (if transmitted by personal delivery), or (ii)
presented for delivery to the addressee as so indicated during normal business
hours, if such delivery shall have been refused for any reason.
11.3 Assignment. Successors and Assigns. This Agreement shall be binding
upon and inure to the benefit of the parties hereto and their respective
successors and assigns. No party shall assign any of its rights or obligations
hereunder without the prior written consent of the other parties.
11.4 Applicable Laws. This Agreement shall be construed and governed by
the internal laws, and not the law of conflicts, of Washington to agreements
made and to be performed in Washington.
11.5 Entire Agreement. This Agreement, together with the Schedules and
Closing Exhibits attached hereto, constitutes the entire agreement among the
parties hereto, and no party hereto shall be bound by any communications between
them on the subject matter hereof unless such communications are in writing and
bear a date contemporaneous with or subsequent to the date hereof. Any prior
written agreements or letters of intent among the parties shall, upon the
execution of this Agreement, be null and void.
11.6 Headings. The headings in the sections of this Agreement are
inserted for convenience only and shall not constitute a part hereof or affect
the meaning or interpretation hereof.
Page 18 of 37
<PAGE> 20
11.7 Representations as to Compliance with Law. Whenever a representation
or warranty is made herein with respect to compliance with any law, that
representation means the applicable subject matter is in compliance with
applicable statutes, regulations and ordinances as in existence on the date
hereof and on the Closing Date and does not extend to any amendments or
revisions of such laws adopted subsequent to such dates.
11.8 Waiver, Discharge, Etc. This Agreement may not be released,
discharged or modified except by an instrument in writing signed on behalf of
each of the parties hereto. The failure of a party to enforce any provision of
this Agreement shall not be deemed a waiver by such party of any other provision
or subsequent breach of the same or any other obligation hereunder.
11.9 Promissory Notes owed to IMSG. To the extent that any subsidiary of
APGI shall be indebted to IMSG-H or any subsidiary thereof at the execution
hereof, APGI shall, at the election of IMSG-H guarantee and indemnify IMSG-H or
its subsidiary for the full amount of said indebtedness as if it were the
indebtedness of APGI;
IN WITNESS WHEREOF, each of the parties has executed this Agreement as of
the 20th day of March, 1998.
INTERNATIONAL MOTOR SPORTS AUTOMOTIVE PERFORMANCE
GROUP-HOLDING, INC., a GROUP, INC., a Delaware corporation
Delaware corporation
By /s/ By /s/
---------------------------------- ---------------------------------
Andrew L. Evans Thomas Klein, President
Its: CEO & President Its: President
-------------------------------- -------------------------------
Page 19 of 37
<PAGE> 21
STATE OF WASHINGTON )
) ss.
County of Snohomish )
This above instrument was acknowledged before me on the _____ day of
April, 1998, to be effective as of April 10, 1998, by Andrew L. in his
representative capacity as President of International Motor Sports
Group-Holding, Inc., a Delaware corporation.
/s/
-----------------------------------------
Notary Public
- -------------------------
Commission Expiration
STATE OF ARIZONA )
) ss.
County of Maricopa )
This above instrument was acknowledged before me on the _____ day of
April, 1998, to be effective as of April 10, 1998, by Thomas Klein in his
representative capacity as President of Automotive Performance Group, Inc., a
Delaware corporation.
/s/
-----------------------------------------
Notary Public
- -------------------------
Commission Expiration
Page 20 of 37
<PAGE> 22
CERTIFICATE OF MERGER
INTERNATIONAL MOTOR SPORTS GROUP-HOLDING, INC.,
A DELAWARE CORPORATION
INTO
AUTOMOTIVE PERFORMANCE GROUP, INC.,
A DELAWARE CORPORATION
The undersigned corporation
DOES HEREBY CERTIFY:
FIRST: That the name and state of incorporation of each of the constituent
corporations of the merger are as follows:
NAME STATE OF INCORPORATION
INTERNATIONAL MOTOR SPORTS GROUP-HOLDING, INC. Delaware
("IMSG-H")
AUTOMOTIVE PERFORMANCE GROUP, INC. Delaware
("APGI")
SECOND: That an Agreement of Merger between the parties to the merger has been
approved, adopted, certified, executed and acknowledged by each of the
constituent corporations in accordance with the requirements of section 251 of
the General Corporation Law of Delaware.
THIRD: That the name of the surviving corporation of the merger is AUTOMOTIVE
PERFORMANCE GROUP, INC. FOURTH: That the Certificate of Incorporation of
AUTOMOTIVE PERFORMANCE GROUP, INC., a Delaware corporation, which is surviving
the merger, shall be the Certificate of Incorporation of the surviving
corporation, subject to the changes set forth herein.
Page 1 of 4
<PAGE> 23
FIFTH: That the executed Agreement of Merger is on file at the principal place
of business of the surviving corporation, the address of which is 1207 N. Miller
Road, Tempe, Arizona 85284.
SIXTH: That a copy of the Agreement of Merger will be furnished by the surviving
corporation, on request and without cost, to any stockholder of any constituent
corporation.
SEVENTH: The authorized capital stock of each corporation which is a party to
the merger is as follows:
<TABLE>
<CAPTION>
Par value per share
or statement that
shares are without
Corporation Class Number of Shares par value
<S> <C> <C> <C>
IMSG-H Common 130,000,000 $ .0001
Preferred 10,000,000 $ .0001
APGI Common 130,000,000 $ .0001
Preferred 13,000,000
</TABLE>
EIGHTH: There shall be a reverse split upon the merger becoming effective such
that for each twenty shares of common stock outstanding at the effective date of
the merger, there shall be exchanged one new common share. The authorized
capital of the surviving company shall remain the same.
NINTH: The Articles of Automotive Performance Group, Inc. shall be amended as
follows:
(1) The current Article VII of said Articles shall be deleted in its entirety.
(2) A new Article VII shall be added to provide that "There may be one or more
non-voting Directors who shall be appointed and may be removed by a
majority of the Board of Directors; said Directors shall not have the
power to vote on any matter whatever and are not required for a quorum, or
for actions of the Board, but shall be given notice of all meetings and
the opportunity to attend." Said Article shall further provide "There may
be one or more Advisory Board Members who shall not have the power to vote
on any matter before the Board, and who may have such role as set forth by
the Board of Directors."
TENTH: That this Certificate of Merger shall be effective on April 15, 1998.
Page 2 of 4
<PAGE> 24
AUTOMOTIVE PERFORMANCE GROUP, INC.,
a Delaware corporation
ATTEST:
/s/
---------------------------------------
Thomas G. Klein, President
/s/
- ------------------------------
James R. Medley, Secretary
INTERNATIONAL MOTOR SPORTS
GROUP-HOLDING, INC., a Delaware corporation
ATTEST:
/s/
---------------------------------------
Andrew L. Evans, President
/s/
- ------------------------------
Maryjane Miller, Secretary
STATE OF ARIZONA )
) ss.
County of Maricopa )
This above instrument was acknowledged before me on April ___, 1998, by
Thomas G. Klein in his representative capacity as President of Automotive
Performance Group, Inc., a Delaware corporation.
/s/
-----------------------------------------
Notary Public
/s/
- ------------------------------
Commission Expiration
Page 3 of 4
<PAGE> 25
STATE OF ARIZONA )
) ss.
County of Maricopa )
This above instrument was acknowledged before me on April ____, 1998, by
James R. Medley in his representative capacity as Secretary of Automotive
Performance Group, Inc., a Delaware corporation.
/s/
-----------------------------------------
Notary Public
- ------------------------------
Commission Expiration
STATE OF WASHINGTON )
) ss.
County of Snohomish )
This above instrument was acknowledged before me on April ___, 1998, by
Andrew L. Evans in his representative capacity as President of International
Motor Sports Group-Holding, Inc., a Delaware corporation.
/s/
-----------------------------------------
Notary Public
- ------------------------------
Commission Expiration
STATE OF WASHINGTON )
) ss.
County of Snohomish )
This above instrument was acknowledged before me on April ___, 1998, by
Maryjane Miller in her representative capacity as Secretary of International
Motor Sports Group-Holding, Inc., a Delaware corporation.
/s/
-----------------------------------------
Notary Public
- ------------------------------
Commission Expiration
Page 4 of 4
<PAGE> 1
Financial Statements and Report of
Independent Certified Public Accountants
INTERNATIONAL MOTOR SPORTS
GROUP, INC. AND SUBSIDIARIES
December 31, 1997
<PAGE> 2
C O N T E N T S
<TABLE>
<CAPTION>
Page
----
<S> <C>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS 3
FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEET 4
CONSOLIDATED STATEMENTS OF OPERATIONS 5
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY 6
CONSOLIDATED STATEMENTS OF CASH FLOWS 8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 10
</TABLE>
<PAGE> 3
Report of Independent Certified Public Accountants
Board of Directors
International Motor Sports Group, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheet of International
Motor Sports Group, Inc. (a Delaware Corporation) and Subsidiaries as of
December 31, 1997, and the related consolidated statements of operations,
stockholders' equity and cash flows for the year ended December 31, 1997 and the
period September 20, 1996 (date of inception) through December 31, 1996. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on the consolidated financial statements
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall consolidated financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above, present fairly, in
all material respects, the consolidated financial position of International
Motor Sports Group, Inc. and Subsidiaries as of December 31, 1997, and the
consolidated results of their operations and their consolidated cash flows for
the year ended December 31, 1997 and the period September 20, 1996 (date of
inception) through December 31, 1996, in conformity with generally accepted
accounting principles.
Seattle, Washington
March 11, 1998
3
<PAGE> 4
International Motor Sports Group, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEET
December 31, 1997
ASSETS
<TABLE>
<CAPTION>
CURRENT ASSETS
<S> <C>
Cash $ 3,510,537
Accounts receivable (note A3) 883,272
Prepaid expenses and other 124,223
Notes receivable (note C) 1,732,812
------------
Total current assets 6,250,844
PROPERTY, PLANT AND EQUIPMENT, net (notes A4, F, G and I) 4,290,041
OTHER ASSETS
Investments in and notes receivable from affiliates (notes A1 and D) 643,833
Goodwill (note A7) 82,783
------------
$ 11,267,501
============
LIABILITIES
CURRENT LIABILITIES
Note payable to affiliate (note G) $ 287,907
Current maturities of long-term obligations 1,463,125
Deferred revenue 100,000
Provision for operating loss (note O) 40,000
Accounts payable 1,045,140
------------
Total current liabilities 2,936,172
LONG-TERM OBLIGATIONS, less current maturities (note I) 81,570
RELATED PARTY NOTES PAYABLE (note H) 16,305,500
COMMITMENTS AND CONTINGENCIES (notes D, E, K, O and P) --
STOCKHOLDERS' EQUITY (DEFICIT) (notes L, M and N)
Preferred stock - authorized 5,145,000 shares
of $.01 par value; none issued and outstanding --
Common stock - authorized, 50,000,000 shares of $.01
par value; 42,433,847 shares issued and outstanding 424,338
Additional contributed capital 14,232,494
Cumulative translation adjustment (note A2) (116,504)
Accumulated deficit (22,596,069)
------------
(8,055,741)
------------
$ 11,267,501
============
</TABLE>
The accompanying notes are an integral part of this statement.
4
<PAGE> 5
International Motor Sports Group, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
Year ended December 31, 1997 and for the period
September 20, 1996 (date of inception) through December 31, 1996
<TABLE>
<CAPTION>
September 20,
Year ended 1996 through
December 31, December 31,
1997 1996
------------ ------------
<S> <C> <C>
Revenues $ 7,135,314 $ 9,186,858
Expenses
Direct expenses 7,128,278 10,585,069
Selling, general and administrative 6,533,019 3,567,688
Depreciation expense 2,596,818 1,660,591
Loss on investments in affiliates (note A1) 932,894 --
------------ ------------
17,191,009 15,813,348
------------ ------------
Operating loss (10,055,695) (6,626,490)
Other income (expense)
Interest (575,497) (127,048)
Other (88,475) 204,659
------------ ------------
(663,972) (77,611)
------------ ------------
Loss from continuing operations before income taxes (10,719,667) (6,548,879)
Income taxes (notes A6 and J) -- --
------------ ------------
Loss from continuing operations before
discontinued operations and extraordinary item (10,719,667) (6,548,879)
Discontinued operations (note O)
Loss from operations of discontinued venue division (2,049,801) --
Gain on disposal of venue division including provision of $40,000 for
operating losses during phase-out period 1,582,832 --
Loss from operations of discontinued
race sanctioning division (3,502,602) --
Loss from disposal of race sanctioning division (1,875,120) --
------------ ------------
Loss from discontinued operations (5,844,691) --
------------ ------------
Loss before extraordinary item (16,564,358) (6,548,879)
Extraordinary item (note O1)
Gain from extinguishment of debt 517,168 --
------------ ------------
NET LOSS $(16,047,190) $ (6,548,879)
============ ============
Loss per common share (note A10)
Loss before discontinued operations and extraordinary item $ (.37) $ (.57)
Discontinued operations (.20) --
Extraordinary item .01 --
------------ ------------
NET LOSS $ (.56) $ (.57)
============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
5
<PAGE> 6
International Motor Sports Group, Inc. and Subsidiaries
STATEMENT OF STOCKHOLDERS' EQUITY
Year ended December 31, 1997 and for the period September 20, 1996
(date of inception) through December 31, 1996
<TABLE>
<CAPTION>
Preferred stock Common stock
Shares Amount Shares Amount
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Balance at September 20, 1996 -- $ -- -- $ --
Issuance of common stock in 3,430,000
conjunction with the
acquisition of SportsCar -- -- 200
Issuance of preferred stock in
conjunction with the
acquisition of SportsCar 5,145,000 1,000,000 -- --
Net loss for the period -- -- -- --
----------- ----------- ----------- -----------
Balance at December 31, 1996 5,145,000 1,000,000 3,430,000 200
Issuance of common stock
for convertible notes
and associated interest -- -- 24,092,788 275,027
Issuance of common stock
for convertible
preferred stock (5,145,000) (1,000,000) 5,145,000 51,450
Issuance of common stock
for services rendered at
fair value -- -- 766,059 7,661
</TABLE>
<TABLE>
<CAPTION>
Additional Cumulative
contributed translation Accumulated
capital adjustment deficit Total
----------- -------- ----------- -----------
<S> <C> <C> <C> <C>
Balance at September 20, 1996 $ -- $ -- $ -- $ --
Issuance of common stock in
conjunction with the
acquisition of SportsCar -- -- -- 200
Issuance of preferred stock in
conjunction with the
acquisition of SportsCar -- -- -- 1,000,000
Net loss for the period -- -- (6,548,879) (6,548,879)
----------- -------- ----------- -----------
Balance at December 31, 1996 -- -- (6,548,879) (5,548,679)
Issuance of common stock
for convertible notes
and associated interest 4,830,985 -- -- 5,106,012
Issuance of common stock
for convertible
preferred stock 948,550 -- -- --
Issuance of common stock
for services rendered at
fair value 145,551 -- -- 153,212
</TABLE>
Continued
6
<PAGE> 7
International Motor Sports Group, Inc. and Subsidiaries
STATEMENT OF STOCKHOLDERS' EQUITY - Continued
Year ended December 31, 1997 and for the period September 20, 1996
(date of inception) through December 31, 1996
<TABLE>
<CAPTION>
Preferred stock Common stock
Shares Amount Shares Amount
----- ------------ ---------- ------------
<S> <C> <C> <C> <C>
Issuance of common
stock for purchase
of APEX and Jim Epler Racing -- -- 1,000,000 10,000
Issuance of common stock
for purchase of Team Scandia
at cost, assumes pooling
as of January 1, 1996 (including
capital contributions of $968,824
in 1997 and $5,363,306 in
1996 by controlling shareholder) (note B) -- -- 8,000,000 80,000
Foreign currency translation -- -- -- --
adjustments
Net loss for the year -- -- -- --
----- ------------ ---------- ------------
-- $ -- 42,433,847 $ 424,338
===== ============ ========== ============
</TABLE>
<TABLE>
<CAPTION>
Additional Cumulative
contributed translation Accumulated
capital adjustment deficit Total
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Issuance of common
stock for purchase
of APEX and Jim Epler Racing 190,000 -- -- 200,000
Issuance of common stock
for purchase of Team Scandia
at cost, assumes pooling
as of January 1, 1996 (including
capital contributions of $968,824
in 1997 and $5,363,306 in
1996 by controlling shareholder) (note B) 8,117,408 -- -- 8,197,408
Foreign currency translation -- (116,504) -- (116,504)
adjustments
Net loss for the year -- -- (16,047,190) (16,047,190)
------------ ------------ ------------ ------------
$ 14,232,494 $ (116,504) $(22,596,069) $ (8,055,741)
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of this statement.
7
<PAGE> 8
International Motor Sports Group, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended December 31, 1997 and for the period September 20, 1996
(date of inception) through December 31, 1996
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
Increase (Decrease) in Cash
Cash flows from operating activities
Net loss $(16,047,190) $ (6,548,879)
Adjustments to reconcile net loss to
net cash used in operating activities
Depreciation and amortization 2,716,081 1,763,990
Deferred revenue (637,833) (316,667)
Forgiveness of debt (517,168) --
Equity in losses from affiliates 932,894 --
(Gain) loss on disposal of assets 72,503 (183,687)
Loss on disposition of subsidiaries 252,288 --
Common stock issued for services received 153,212 --
Changes in assets and liabilities
Accounts receivable (654,353) 749,344
Notes receivable (1,632,812) --
Prepaid expenses and other assets (110,223) 50,167
Accounts payable (1,129,147) 278,097
Accrued liabilities 218,080 (578,723)
------------ ------------
Net cash used in operating activities (16,383,668) (4,786,358)
Cash flows from investing activities
Purchase of equipment (2,217,522) (3,467,977)
Proceeds from sale of subsidiary 3,500,000 --
Proceeds from disposition of equipment 85,666 223,231
Investment in subsidiaries, less
cash received of $1,384 (1,875,784) (889,000)
Investment in affiliates (1,076,727) --
------------ ------------
Net cash used in investing activities (1,584,367) (4,133,746)
Cash flows from financing activities
Payments on long-term obligations (1,384,029) (216,519)
Proceeds from long-term obligations 969,866 1,609,250
Proceeds from note payable to affiliate, net 287,907 --
Proceeds from issuance of common stock -- 200
Proceeds from issuance of preferred stock -- 1,000,000
Capital contributions to Team Scandia 968,824 5,363,306
Proceeds from related party notes payable, net 19,745,500 1,947,000
------------ ------------
Net cash provided by financing activities 20,588,068 9,703,237
</TABLE>
Continued
8
<PAGE> 9
International Motor Sports Group, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS - Continued
Year ended December 31, 1997 and for the period September 20, 1996
(date of inception) through December 31, 1996
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Effect of exchange rate changes on cash (116,504) --
----------- -----------
Net increase in cash 2,503,529 783,133
Cash at beginning of period 1,007,008 223,875
----------- -----------
Cash at end of period $ 3,510,537 $ 1,007,008
=========== ===========
Cash paid during the period for interest $ 238,273 $ 127,048
=========== ===========
Noncash investing and financing activities:
See note R
</TABLE>
The accompanying notes are an integral part of these statements.
9
<PAGE> 10
International Motor Sports Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997
NOTE A - SUMMARY OF ACCOUNTING POLICIES
International Motor Sports Group, Inc. (the Company) was formed in September
1996 as a holding company for investments in motor sports related
businesses. The Company's wholly-owned subsidiaries include: (1) Team
Scandia, a motor sports race team that competes in the Indianapolis Racing
League and National Hot Rod Association's Top Fuel Series, (2) Royal Purple
Motor Oil, Inc., which markets and sells a line of high-performance
lubricants, (3) IMSG Properties, which operates Mosport Park, a
multi-purpose entertainment facility located outside Toronto, Ontario, and
(4) D3 Design Works, formerly "Apex Communications," which is a full-service
designing agency, specializing in digital mediums. The Company holds 50%
ownership interests in Scandia Bodine Racing LLC, a race team that competes
in NASCAR's Winston Cup series, and Jimmy Kite Enterprises, LLC and Cristen
Powell Enterprises, LLC, which are racecar drivers' entities.
A summary of significant accounting polices consistently applied in the
preparation of the accompanying consolidated financial statements follows.
1. Principles of Consolidation
The financial statements include the accounts of the Company and its wholly
owned subsidiaries. Investments in 20% to 50% owned affiliates in which
management has the ability to exercise significant influence are included
based on the equity method of accounting. All significant intercompany
balances and transactions have been eliminated.
2. Translation of Foreign Currencies
All balance sheet accounts of foreign operations are translated into US
dollars at the year-end rate of exchange, and statement of operations items
are translated at the weighted average exchange rates for the year. The
resulting translation adjustments are made directly to a separate component
of stockholders' equity. Gains and losses from other foreign currency
transactions, such as those resulting from the settlement of foreign
receivables or payables, are also included in the consolidated statement of
operations.
3. Accounts Receivable
The Company considers accounts receivable to be fully collectible;
accordingly, no allowance for doubtful accounts is provided. If amounts
become uncollectible, they will be charged to operations when that
determination is made.
10
<PAGE> 11
International Motor Sports Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997
NOTE A - SUMMARY OF ACCOUNTING POLICIES - Continued
4. Property and Equipment
Property and equipment are stated at cost less accumulated depreciation and
amortization. Depreciation and amortization are provided in amounts
sufficient to relate the cost of depreciable assets to operations over their
estimated service lives, principally on a straight-line basis. Leasehold
improvements are amortized over the lives of the respective leases or the
service lives of the improvements, whichever is shorter. Estimated service
lives of property and equipment are as follows:
<TABLE>
<S> <C>
Racing equipment 3 years
Vehicles and transportation equipment 3 to 5 years
Equipment 2 to 10 years
Leasehold improvements 2 to 10 years
</TABLE>
The straight-line method of depreciation is followed for substantially all
assets for financial reporting purposes, but accelerated methods are used
for tax purposes.
5. Revenue Recognition
Event related revenues and expenses are recognized upon completion of an
event. Revenues derived from the promotion of the sponsors' businesses are
recorded in the racing season to which they relate based on the number of
sponsored races that have occurred. Revenue from the sale of merchandise and
other goods is recognized at the time of sale.
6. Income Taxes
The Company provides for income taxes based on income reported for financial
reporting purposes. Certain charges to earnings differ as to timing from
those deducted for tax purposes; these relate primarily to accelerated
depreciation. The tax effects of these differences are recorded as deferred
income taxes.
7. Goodwill
Intangible assets represent the excess costs of acquiring subsidiaries over
the fair value of net assets acquired at the date of acquisition, which are
amortized using the straight-line method primarily over a 10-year period.
The Company periodically reviews
11
<PAGE> 12
International Motor Sports Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997
NOTE A - SUMMARY OF ACCOUNTING POLICIES - Continued
goodwill to assess recoverability. Impairment is recognized in operating
results if expected future operating undiscounted cash flows of the acquired
business are less than the carrying value of goodwill.
8. Use of Estimates
In preparing the Company's financial statements, management is required to
make estimates and assumptions that affect the reported amounts of assets
and liabilities, the disclosure of contingent assets and liabilities at the
date of the financial statements, and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
9. Fair Value of Financial Instruments
The carrying amount of all significant financial instruments approximates
fair value under the requirements of "Statement of Financial Accounting
Standards No. 107 - Disclosure About Fair Value of Financial Instruments."
These instruments are all expected to be collected, converted to equity or
paid during 1998.
10. Loss Per Share
Loss per share is based on the weighted average number of shares outstanding
during each period. The weighted average number of common shares outstanding
was 28,795,174 and 11,430,000 for the year ended December 31, 1997 and the
period September 20, 1996 through December 31, 1996, respectively. The
computation for loss per share assuming dilution for the year ended December
31, 1997 and the period September 20, 1996 through December 31, 1996 was
anti-dilutive; and therefore, is not included.
NOTE B - BUSINESS COMBINATION
Effective June 28, 1997, the Company purchased Team Scandia, Inc., from the
Chairman of the Board of the Company who had acquired it in 1995. The
acquisition was accomplished by the exchange of 8,000,000 shares of the
Company's common stock for all of the common stock of Team Scandia, Inc. The
transaction was accounted for as an exchange between enterprises under
common control and has been accounted for in a manner similar to a pooling
of interests. Therefore, the net assets
12
<PAGE> 13
International Motor Sports Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997
NOTE B - BUSINESS COMBINATION - Continued
and liabilities were accounted for at historical cost, which totaled
$937,671. The consolidated statement of operations include the results of
operations of Team Scandia, Inc. from January 1, 1996.
NOTE C - NOTES RECEIVABLE
<TABLE>
<S> <C>
Notes receivable consist of the following at December 31, 1997:
Note receivable on the sale of
subsidiary, SportsCar Racing, Inc.; 10% interest; due May
1998 (see note O2) $ 600,000
Note receivable in conjunction with
option agreement; interest at 12%, payable on demand after
January 31, 1998; collateralized by equipment
and fixtures (see note E) 600,000
Note receivable in connection with a
long-term lease; due upon final disposition of the venue
division (Mosport Park) (note O1)
532,812
----------
$1,732,812
==========
</TABLE>
NOTE D - TRANSACTIONS WITH AFFILIATES
In September 1997, the Company acquired a 50% interest in Scandia Bodine
Racing, LLC, (SBR) a NASCAR Winston Cup Team previously owned by veteran
NASCAR driver Brett Bodine. The Company paid $1,000 for class A stock for a
50% voting interest and contributed $1,000,000 for class B stock which has a
liquidation preference. The operating agreement provides that the company is
to be allocated 100% of the losses until such time as its aggregate capital
account balance related to both class A and class B stock equals zero.
Thereafter, net losses will be allocated based upon ownership percentages.
The Company will be allocated 100% of all of the SBR's profits to the extent
of prior allocations of annual net losses absorbed as described above. The
Company has recorded losses from SBR totaling approximately $880,000 as of
December 31, 1997. The Company has also guaranteed bank loans to SBR of
approximately $1,025,000. Additionally, the Company has entered into
promissory notes and advanced $500,000 to SBR for operations. These notes
bear interest at 8% and are due on demand.
13
<PAGE> 14
International Motor Sports Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997
NOTE D - TRANSACTIONS WITH AFFILIATES - Continued
In 1997, the Company acquired 50% interests in two separate racecar drivers'
enterprises for approximately $76,000 in cash and a commitment to provide up
to a total of $600,000.
NOTE E - LOAN AGREEMENT AND OPTION
On September 16, 1997, the Company entered into a loan agreement and option
with Klein Engines and Competition Components, Inc. (Klein) to provide
$560,000, evidenced by a promissory note, in exchange for an option granted
by Klein's majority stockholder to acquire all of the shares of Klein's
majority stockholder in exchange for shares of the Company's common stock.
The option expires on March 31, 1998 and requires the Company to exchange
one share of its common stock for each share of Klein stock received. The
Klein stock is being held in an escrow account until such time that the
option is exercised or expires. In conjunction with the exercise of the
option, the Company is required to enter into a five year employment
contract with the former Klein majority stockholder as president of Klein,
nominate him for the Company's board of directors, and grant options to
purchase 1,000,000 shares of the Company's common stock at $1 per share.
The note bears interest at 12% and is payable on demand after January 31,
1998. The note is collateralized by all of Klein's equipment and fixtures.
At December 31, 1997, $560,000 was outstanding under this note and the
Company had also advanced Klein an additional $40,000.
NOTE F - PROPERTY, PLANT AND EQUIPMENT - AT COST
Property, plant and equipment consist of the following at December 31, 1997:
<TABLE>
<S> <C>
Racing equipment $ 9,068,450
Vehicles and transportation equipment 2,204,371
Equipment 390,004
Office and computer equipment 335,814
Furniture and fixtures 48,133
Leasehold improvements 267,499
-----------
12,314,271
Less accumulated depreciation and amortization 8,024,230
-----------
$ 4,290,041
===========
</TABLE>
14
<PAGE> 15
International Motor Sports Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997
NOTE G - NOTES PAYABLE TO AFFILIATE
A subsidiary of the Company has a demand note payable to a related party for
up to $2,000,000, which is collateralized by all assets of IMSG Properties.
The amount outstanding totaled $287,907 at December 31, 1997. The note does
not bear interest and will be paid in full upon the sale of IMSG Properties
(note O1).
NOTE H - NOTES PAYABLE TO RELATED PARTIES
The Company has unsecured demand notes including imputed interest at 8% of
$367,500 due to related parties totaling $16,305,500 as of December 31,
1997. It is the Company's and the note holder's intention to convert the
notes payable into shares of the Company's common stock. The conversion is
contingent on the authorization of additional shares of the Company's common
stock.
NOTE I - LONG-TERM OBLIGATIONS
Long-term obligations consist of the following at December 31 1997:
<TABLE>
<S> <C>
Note payable to a bank in monthly
installments of $64,125, plus interest
at 7.85%; final payment due October 1998; collateralized by
equipment $ 641,250
Note payable to a bank in monthly installments of $51,470, plus interest at
7.5%; final payment due September 1998; collateralized by equipment
770,455
Note payable to a bank in monthly installments of $5,523, plus interest at
prime plus 2.5% (12% at December 31, 1997); final payment due June 2000;
collateralized by vehicle 113,870
Other 19,120
----------
1,544,695
Less current maturities 1,463,125
----------
$ 81,570
==========
</TABLE>
15
<PAGE> 16
International Motor Sports Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997
NOTE I - LONG-TERM OBLIGATIONS - Continued
Aggregate maturities of long-term obligations are as follows:
<TABLE>
<CAPTION>
Year ending December 31,
-----------------------
<S> <C>
1998 $1,463,125
1999 52,435
2000 29,135
----------
$1,544,695
==========
</TABLE>
NOTE J - INCOME TAXES
The Company accounts for income taxes on the liability method, as provided
by Statement of Financial Accounting Standards 109, Accounting for Income
Taxes (SFAS 109).
The income tax provision reconciled to the tax computed at the statutory
federal rate was:
<TABLE>
1997 1996
----------- -----------
<S> <C> <C>
Tax benefit at statutory rate $(5,456,000) $(2,227,000)
Non-deductible losses in affiliates 317,000 --
Non-deductible losses
of subsidiaries sold 1,987,000 279,000
Pre-acquisition losses of subsidiary accounted for as a
pooling 543,000 1,925,000
Non-deductible meals and entertainment 51,000 --
Valuation allowance 2,558,000 23,000
----------- -----------
Total $ -- $ --
=========== ===========
</TABLE>
The components of deferred taxes are as follows at December 31, 1997:
<TABLE>
<S> <C>
Deferred tax asset:
Excess of book over tax depreciation $ 195,000
Net operating loss carryforward 2,580,000
Valuation allowance (2,775,000)
-----------
$ --
===========
</TABLE>
The Company has established a valuation allowance of $2,775,000 and $23,000
as of December 31, 1997 and 1996, respectively, due to the uncertainty of
future utilization. The valuation allowance was increased by $2,752,000 and
$23,000 during the year ended December 31, 1997 and the period September 20,
1996 through December 31, 1997,
16
<PAGE> 17
International Motor Sports Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997
NOTE J - INCOME TAXES - Continued
respectively. At December 31, 1997, the Company had net operating loss
carryforwards for federal income tax reporting purposes of approximately
$7,587,000 available to offset future income which expire in 2011 and 2012.
NOTE K - COMMITMENTS AND CONTINGENCIES
1. Leases
The Company leases office equipment and conducts a portion of its operations
in leased facilities classified as operating leases and under month-to-month
agreements. The following is a schedule by years of approximate minimum
rental payments under such operating leases, which expire at various dates
through 2002.
<TABLE>
<CAPTION>
Year ending December 31,
------------------------
<S> <C>
1998 $171,700
1999 46,200
2000 37,200
2001 26,600
2002 13,700
--------
Total minimum payments required $295,400
========
</TABLE>
The leases provide for payment of taxes and other expenses by the Company.
Rent expense for leased facilities totaled approximately $586,000 and
$674,000 for the year ended December 31, 1997 and the period September 20,
1996 through December 31, 1996, respectively.
2. Legal Matters
The Company is engaged in various lawsuits, either as plaintiff or
defendant, involving alleged breaches of contract, related primarily to
sponsorship agreements and racecar drivers associated with its subsidiary,
Team Scandia, Inc. Certain drivers have alleged breach of employment
contracts, additional prize money earned and punitive damages.
Management believes that unfavorable outcomes of certain claims and
arbitration proceedings are probable. However, management intends to
vigorously defend against these claims and proceedings. The Company
17
<PAGE> 18
International Motor Sports Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997
NOTE K - COMMITMENTS AND CONTINGENCIES - Continued
has expensed and deposited into an escrow account $450,000 for probable
uninsured losses and believes that this is adequate to cover potential
claims.
3. Commitments
In February 1997, the Company formed Royal Purple Motor Oil, Inc. (Royal
Purple), in which 100 shares of Royal Purple's common stock was issued to
the Company at par value of $.01. In April 1997, IMSG acquired exclusive
retail distribution rights to market and sell a line of high performance
lubricants under the Royal Purple (TM) brand name through Royal Purple. In
consideration of the rights granted to the Company, the Company granted the
seller the option to purchase 800,000 shares of Royal Purple's common stock
that at the time of exercise, if any, will represent 20% of Royal Purple's
common stock deemed outstanding, after giving effect to such exercise. The
aggregate exercise price will be $1,000,000. Additionally, the agreement
states that the Company or its affiliates shall invest $5,000,000 in Royal
Purple over the period April 1997 through March 1999. As of December 31,
1997, the Company and its affiliates have contributed cash and sponsorship
fees of $2,555,751 to Royal Purple.
Also, the Company has issued an additional 370,000 options to employees to
purchase stock in Royal Purple for $1.25 per share. These options vest 20%
per year and will be fully vested by June 2002.
4. Employee Benefit Plan
The Company has a defined contribution 401(k) plan. All employees are
eligible for this plan upon completion of six months of service and
attainment of age 21. The Company has the option to make discretionary
contributions at year end. The Company did not make any contributions to the
plan for 1997 or 1996.
NOTE L - WARRANTS
During July through September 1997, the Company granted 675,000 common stock
warrants to directors and shareholders to purchase common stock at $1.00 per
share. The warrants are exercisable over a ten-year term and expire in
September 2007. In order to prevent dilution, the
18
<PAGE> 19
International Motor Sports Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997
NOTE L - WARRANTS - Continued
exercise price is subject to adjustment based upon recent common stock sales
as defined the warrant agreement. The exercise price adjustments are
calculated differently based upon whether the adjustment occurs in the first
eighteen months of the exercise period or thereafter.
NOTE M - STOCK OPTIONS
The Company has a stock option plan accounted for under APB Opinion 25 and
related Interpretations. The plan allows the Company to grant options to
employees for up to 6,215,000 shares of common stock. Options currently
outstanding vest over a five-year period. The options are exercisable at not
less than the market value of the Company's common stock on the date of
grant. Accordingly, no compensation cost has been recognized for the plan.
Had compensation cost for the plan been determined based on the fair value
of the options at the grant dates consistent with the method required by
Statement of Financial Accounting Standards 123, Accounting for Stock-Based
Compensation (SFAS 123), the effect on the Company's net loss would have
been immaterial.
A summary of the status of the Company's stock option plan as of December
31, 1997 and 1996, and changes during the periods ending on those dates is
presented below.
<TABLE>
<CAPTION>
1997 1996
----------------------- ------------------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
<S> <C> <C> <C> <C>
Outstanding at beginning of period 1,201,000 $ .20 -- $ --
Granted 3,275,000 .69 1,201,000 .20
Forfeited (3,926,000) .61 -- --
---------- ------- ---------- ----
Outstanding at end of period 550,000 $ .71 1,201,000 $.20
========== ======= ========== ====
</TABLE>
The options outstanding at December 31, 1997 have exercise prices of $.20
and $1 and a remaining contractual life of nine years.
19
<PAGE> 20
International Motor Sports Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997
NOTE N - CONVERTED PREFERRED STOCK
During the second quarter of fiscal 1997, all outstanding shares of the
Company's preferred stock were converted into common stock at the ratio of
one common share for each share of preferred stock. Common shares issued in
the conversion were 5,145,000 shares.
NOTE O - DISCONTINUED OPERATIONS
During 1997, the Company decided to sell its venue and race sanctioning
operations. Accordingly as of December 31, 1997, these operations were
considered discontinued and sold or offered for sale. These operations are
reflected as discontinued operations in the Company's Consolidated
Statements of Operations for the year ended December 31, 1997.
1. Venue Operations
In December 1997, the Company sold its wholly owned subsidiary, Sebring
International Raceway (Sebring), which controlled a venue, Sebring Raceway,
and the world-renowned event, the "12 Hours of Sebring" for $3,500,000. The
Company recorded a loss from Sebring's operations for the year ended
December 31, 1997 of $700,206. The gain on the sale of Sebring totaled
approximately $1,623,000. In connection with the sale, a $1,500,000 face
value promissory note was cancelled in exchange for $600,000 in cash. This
resulted in the forgiveness of debt totaling $517,168, of which $77,168
represented accrued interest. This has been reflected in the Consolidated
Statements of Operations as an extraordinary gain.
In May 1997, the Company formed IMSG Properties, a wholly owned Canadian
subsidiary, to enter into a long-term lease for a multi-purpose
entertainment facility known as Mosport Park. In conjunction with the
Company's decision to sell its venue operations, the Company entered into an
option agreement with an outside party to take an assignment of the Mosport
Park lease or to take title of the Mosport Park property if the Company
decides to purchase the said property outright. The Company has received
$100,000 as an option fee and will receive an additional $200,000 if the
option is exercised. If the Company decides to buy the property, then the
outside party will have an option to take title to the property upon payment
to the Company of a price equal to its cost, as defined in the option
agreement, plus $200,000. The option expires May 31, 1998. The assets have
been reported at the lower of the carrying amount when the decision to sell
20
<PAGE> 21
International Motor Sports Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997
NOTE O - DISCONTINUED OPERATIONS - Continued
was made, which approximated their carrying value. The current year loss
incurred related to Mosport Park of $1,349,595 and a provision of $40,000
for operating losses for 1998 has been recorded in the Company's financial
statements as discontinued operations.
2. Sanctioning Operation
In December 1997, the Company sold its wholly owned subsidiary, Professional
SportsCar Racing, Inc. (SportsCar), the primary sanctioning body for
professional sports car racing in North America.
The Company received a note for $600,000 in exchange for all the
intercompany amounts owed to the Company. The Company recorded a loss from
SportsCar's operations for the year ended December 31, 1997 of $3,502,602.
The loss on the sale of SportsCar totaled approximately $1,875,000.
NOTE P - CONCENTRATIONS OF CREDIT RISK
The Company maintains its cash balances in financial institutions, which at
times, may exceed federally insured limits. Accounts at each financial
institution are insured by the Federal Deposit Insurance Corporation up to
$100,000. Uninsured balances totaled approximately $3,650,000 as of December
31, 1997. The Company has not experienced any losses in such accounts and
believes it is not exposed to any significant credit risk on cash and cash
equivalents.
NOTE Q - NONCASH INVESTING AND FINANCING ACTIVITIES
In 1997, the Company converted $5,000,000 of convertible debt plus $104,012
of related interest into 24,092,788 shares of common stock. Additionally,
$1,000,000 of preferred stock was converted into 5,145,000 shares of common
stock.
In 1997, the Company acquired the assets and liabilities of Apex
Communications and Jim Epler Racing, Inc. in exchange for $200,000 of its
common stock. In conjunction with the acquisitions, liabilities were assumed
as follows:
21
<PAGE> 22
International Motor Sports Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997
NOTE Q - NONCASH INVESTING AND FINANCING ACTIVITIES - Continued
<TABLE>
<S> <C>
Fair value of assets acquired $ 500,946
Fair value of the Company's common stock
exchanged (200,000)
---------
Liabilities assumed $ 300,946
=========
</TABLE>
In 1997, the Company sold its subsidiary, SportCar, in exchange for a
$600,000 note receivable.
22
<PAGE> 23
Automotive Performance Group, Inc.
PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
The accompanying unaudited pro forma combined condensed financial statements
have been derived from the financial position and historical results of
operations of International Motor Sports Group, Inc. (IMSG) and Klein Engines
and Competition Components, Inc. (Klein) as of and for the three months ended
March 31, 1998. Effective April 17, 1998, Klein exchanged 7,833,902 shares of
its common stock for an equal number of shares of Automotive Performance Group,
Inc.'s (APGI) common stock, and IMSG exchanged 108,930,887 shares of its common
stock for an equal number of shares of APGI. This resulted in IMSG being the
accounting acquirer in the transaction.
The unaudited pro forma combined condensed financial statements are presented
for informational purposes only and do not purport to be indicative of the
operating results that actually would have occurred if the merger of IMSG and
Klein into Automotive Performance Group, Inc. (APGI) had been consummated on
January 1, 1998, nor which may result from future operations. The pro forma
adjustments are based on available information and certain assumptions that the
Company believes are reasonable. The acquisition has been accounted for using
the purchase method of accounting. These pro forma financial statements and the
unaudited IMSG consolidated condensed balance sheets and statements of
operations as of and for the three months ended March 31, 1998 and 1997 should
be read in conjunction with the historical financial statements and related
notes of IMSG and Klein and the merger document.
<PAGE> 24
Automotive Performance Group, Inc.
Pro Forma Combined Condensed Balance Sheet
March 31, 1998
(Unaudited)
ASSETS
<TABLE>
<CAPTION>
Pro-Forma Pro-Forma
IMSG Klein Adjustments Combined
---- ----- ----------- --------
<S> <C> <C> <C> <C>
CURRENT ASSETS
Cash $ 895,261 $ 112,134 $ - $ 1,007,395
Accounts receivable 302,246 369,361 (44,385)(1) 627,222
Prepaid expenses and other 73,770 46,831 - 120,601
Inventory - 786,349 - 786,349
Notes receivable 1,072,926 - - 1,072,926
------------- ----------- ----------- ------------
Total current assets 2,344,203 1,314,675 (44,385) 3,614,493
PROPERTY, PLANT AND EQUIPMENT, net 3,736,272 2,351,159 880,466 (2),(4) 6,967,897
OTHER ASSETS
Notes receivable 1,500,774 - (600,000)(1) 900,774
Investments in and notes receivable from affiliates 406,134 - - 406,134
Goodwill 78,644 - - 78,644
Prepaid royalties - 290,000 - 290,000
------------- ----------- ----------- ------------
$ 8,066,027 $ 3,955,834 $ 236,081 $ 12,257,942
=========== =========== ========= ============
LIABILITIES
CURRENT LIABILITIES
Note payable to affiliate $ - $ 32,950 $ - $ 32,950
Current maturities of long-term obligations 1,001,517 194,121 - 1,195,638
Accounts payable 997,367 591,817 (44,385)(1) 547,432
Credit facility - 962,500 (600,000)(1) 362,500
Deferred revenue 161,500 - - 161,500
Income taxes payable - 77,759 - 77,759
Accrued liabilities - 205,034 - 1,202,401
------------- ----------- ----------- ------------
Total current liabilities 2,160,384 2,064,181 (644,385) 3,580,180
LONG-TERM OBLIGATIONS, less current maturities 65,000 1,583,484 - 1,648,484
COMMITMENTS AND CONTINGENCIES - - - -
STOCKHOLDERS' EQUITY (DEFICIT)
Preferred stock - authorized 13,000,000 shares
of $.01 par value; none issued and outstanding - - - -
Common stock - authorized, 130,000,000 shares of $.01
par value; 5,774,487 shares issued and outstanding 1,089,309 7,862 (1,039,426)(2),(3),(5) 57,745
Additional contributed capital 30,231,782 2,554,238 117,043 (2),(3),(5) 32,903,063
Warrants - 10,000 (10,000)(2) -
Cumulative translation adjustment (145,279) - - (145,279)
Accumulated deficit (25,335,169) (2,263,931) 1,812,849 (2) (25,786,251)
------------- ----------- ----------- ------------
5,840,643 308,169 880,466 7,029,278
------------- ----------- ----------- ------------
$ 8,066,027 $ 3,955,834 $ 236,081 $ 12,257,942
============= ============ =========== ============
</TABLE>
See notes to Pro Forma Combined Condensed Balance Sheet.
<PAGE> 25
Automotive Performance Group, Inc.
NOTES TO PRO FORMA COMBINED CONDENSED BALANCE SHEET
(UNAUDITED)
(1) Elimination of intercompany notes and interest receivable.
(2) Record the merger of Klein and IMSG into APGI and record revaluation to
fair value of acquired property and equipment of Klein.
(3) Adjust common stock for 20 to 1 reverse stock split.
(4) Record depreciation on increase to fair value of Klein of acquired
property and equipment.
(5) Adjust common stock for accrued interest associated with related party
notes converted into common stock assuming conversion at the beginning
of the period.
<PAGE> 26
Automotive Performance Group, Inc.
Pro Forma Combined Statement of Operations
Three months ended March 31, 1998
(Unaudited)
<TABLE>
<CAPTION>
Pro-Forma Pro-Forma
IMSG Klein Adjustments Combined
---- ----- ----------- --------
<S> <C> <C> <C> <C>
Revenues $ 1,122,459 $ 806,377 $ - $ 1,928,836
Expenses
Direct expenses 2,483,346 1,046,962 - 3,530,308
Selling, general and administrative 632,917 415,036 - 1,047,953
Depreciation expense 561,784 43,524 11,145 (1) 616,453
Loss on investments in affiliates 2,698 - - 2,698
------------ ---------- -------- -----------
3,680,745 1,505,522 11,145 5,197,412
------------ ---------- -------- -----------
Operating loss (2,558,286) (699,145) (11,145) (3,268,576)
Other income (expense)
Interest, net (272,600) (59,550) 318,759 (2) (13,391)
Other - - - -
------------ ---------- -------- -----------
(272,600) (59,550) 318,759 (13,391)
------------ ---------- -------- -----------
Loss from continuing operations before income taxes (2,830,886) (758,695) 307,614 (3,281,967)
Income taxes - - - -
------------ ---------- -------- -----------
Loss from continuing operations before
discontinued operations and extraordinary item (2,830,886) (758,695) 307,614 (3,281,967)
Discontinued operations
Loss from operations of discontinued venue division (201,878) - - (201,878)
------------ ---------- -------- -----------
Loss before extraordinary item (3,032,764) (758,695) 307,614 (3,483,845)
Extraordinary item
Gain from extinguishment of debt 293,663 - - 293,663
------------ ---------- -------- -----------
NET LOSS $(2,739,101) $ (758,695) $ 307,614 $(3,190,182)
------------ ---------- -------- -----------
</TABLE>
<PAGE> 27
Automotive Performance Group, Inc.
NOTES TO PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
(UNAUDITED)
(1) Adjustment to increase depreciation expense resulting from the
revaluation of Klein's acquired property and equipment. The acquired
assets will be depreciated over service lives from five years to twenty
years.
(2) Adjustment to eliminate interest expense associated with related party
notes converted into common stock.
<PAGE> 28
International Motor Sports Group, Inc. and Subsidiaries
Consolidated Condensed Balance Sheets
March 31,
(Unaudited)
<TABLE>
<CAPTION>
ASSETS
1998 1997
---- ----
<S> <C> <C>
CURRENT ASSETS
Cash $ 895,261 $ 2,553,805
Accounts receivable 302,246 635,876
Prepaid expenses and other 73,770 279,460
Notes receivable 1,072,926 75,322
------------ ------------
Total current assets 2,344,203 3,544,463
PROPERTY, PLANT AND EQUIPMENT, net 3,736,272 5,888,665
OTHER ASSETS
Investments in and notes receivable from affiliates 1,906,908 --
Goodwill 78,644 2,531,586
Non-compete agreements -- 738,414
------------ ------------
$ 8,066,027 $ 12,703,128
============ ============
LIABILITIES
CURRENT LIABILITIES
Current maturities of long-term obligations $ 1,001,517 $ 4,274,000
Accounts payable 997,367 2,782,389
Credit facility -- 500,000
Deferred revenue 161,500 1,389,752
------------ ------------
Total current liabilities 2,160,384 8,946,141
LONG-TERM OBLIGATIONS, less current maturities 65,000 3,123,178
COMMITMENTS AND CONTINGENCIES -- --
STOCKHOLDERS' EQUITY (DEFICIT)
Preferred stock - 5,145,000 issued and outstanding -- 1,000,000
Common stock - authorized, 130,000,000 shares of $.01
par value; 108,930,887 shares issued and outstanding 1,089,309 200
Additional contributed capital 30,231,782 8,137,921
Cumulative translation adjustment (145,279) --
Accumulated deficit (25,335,169) (8,504,312)
------------ ------------
5,840,643 633,809
------------ ------------
$ 8,066,027 $ 12,703,128
============ ============
</TABLE>
<PAGE> 29
International Motor Sports Group, Inc. and Subsidiaries
Consolidated Condensed Statements of Operations
Three months ended March 31,
(Unaudited)
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Revenues $ 1,122,459 $ 4,178,715
Expenses
Direct expenses 2,483,346 3,148,891
Selling, general and administrative 632,917 1,986,181
Depreciation expense 561,784 968,598
Loss on investments in affiliates 2,698 --
----------- -----------
3,680,745 6,103,670
----------- -----------
Operating loss (2,558,286) (1,924,955)
Other income (expense)
Interest, net (272,600) (30,478)
----------- -----------
Loss from continuing operations before income taxes (2,830,886) (1,955,433)
Income taxes -- --
----------- -----------
Loss from continuing operations before
discontinued operations and extraordinary item (2,830,886) (1,955,433)
Discontinued operations
Loss from operations of discontinued venue division (201,878) --
----------- -----------
Loss before extraordinary item (3,032,764) (1,955,433)
Extraordinary item
Gain from extinguishment of debt 293,663 --
----------- -----------
NET LOSS $(2,739,101) $(1,955,433)
=========== ===========
</TABLE>
