<PAGE> 1
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10 - QSB
(Mark One)
[ X ] QUARTERLY REPORT UNDER SECTION 13 OF 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended September 30, 1998
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from ________ to _________
COMMISSION FILE NUMBER 0-23705
AUTOMOTIVE PERFORMANCE GROUP, INC.
(EXACT NAME OF SMALL BUSINESS ISSUER AS SPECIFIED IN ITS CHARTER)
DELAWARE 86-0850090
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER IDENTIFICATION NUMBER)
INCORPORATION OR ORGANIZATION)
1207 N. MILLER ROAD, TEMPE, ARIZONA 85281
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(602) 449-3125
--------------
(ISSUER'S TELEPHONE NUMBER)
------------------------------------------------
(FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR, IF
CHANGED SINCE LAST REPORT.)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS
Check whether the registrant filed all documents and reports required to be
filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by a court
Yes [ ] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: On November 10, 1998, the registrant
had 5,879,046 outstanding shares of Common Stock, par value $.0001.
Transitional Small Business Disclosure Format (Check One):
Yes [ ] No [X]
<PAGE> 2
Part I. Financial Information
Item 1. Financial Statements
<PAGE> 3
Automotive Performance Group, Inc. and Subsidiaries
CONSOLIDATED CONDENSED BALANCE SHEET
(Unaudited)
ASSETS
<TABLE>
<CAPTION>
September 30,
1998
------------
<S> <C>
Current Assets
Cash $ 1,018,043
Accounts receivable, net of allowance for
doubtful accounts of $40,600 585,665
Inventories 718,595
Prepaid expenses and other 98,098
Notes receivable 1,573,000
------------
Total current assets 3,993,401
Property, Plant and Equipment 4,149,201
Other Assets 118,305
------------
$ 8,260,907
============
LIABILITIES
Current Liabilities
Line of Credit $ 939,200
Current maturities of long-term obligations 612,526
Accounts payable 2,361,413
Accrued liabilities 166,452
------------
Total current liabilities 4,079,591
Long-Term Obligations, less current maturities 1,238,283
Stockholders' Equity (Deficit)
Preferred stock - authorized 13,000,000 shares
of $.0001 par value; 1,650,000 issued and
outstanding 166
Common Stock - authorized 130,000,000 shares
of $.0001 par value; 5,879,046 shares issued
and outstanding 588
Additional contributed capital 36,255,504
Cumulative translation adjustment (118,820)
Accumulated deficit (33,194,405)
------------
2,943,033
------------
$ 8,260,907
============
</TABLE>
<PAGE> 4
Automotive Performance Group, Inc. and Subsidiaries
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
For the three months ended For the nine months ended
September 30, September 30,
--------------------------------- ---------------------------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues $ 1,058,289 $ 1,456,277 $ 5,464,834 $ 6,567,970
Expenses
Direct expenses 307,703 2,223,616 4,450,544 5,016,311
Selling, general and administrative 1,334,483 589,910 3,613,283 3,008,585
Salaries, payroll taxes and benefits 658,006 187,751 2,089,555 865,698
Professional expenses 694,322 612,544 2,013,331 1,582,404
Depreciation and amortization 522,512 790,099 1,606,120 1,993,802
Inventory writedown 322,298 -- 971,661 --
Loss on investments in affiliates 100,355 44,498 246,371 44,498
------------ ------------ ------------ ------------
3,939,679 4,448,418 14,990,865 12,511,298
Operating loss (2,881,390) (2,992,141) (9,526,031) (5,943,328)
Other income (expense)
Interest expense (69,428) (196,979) (591,320) (385,340)
Interest income 4,364 8,386 34,927 8,386
Legal settlements (339,875) -- (344,875) --
Other expense (300,949) -- (119,453) --
------------ ------------ ------------ ------------
(705,888) (188,593) (1,020,721) (376,954)
Loss from continuing operations
before discontinued operations
and extraordinary item (3,587,278) (3,180,734) (10,546,752) (6,320,282)
Discontinued operations
Loss from operations of discontinued
venue and race sanctioning divisions -- (2,695,664) (345,247) (4,542,416)
------------ ------------ ------------ ------------
Loss before extraordinary item (3,587,278) (5,876,398) (10,891,999) (10,862,698)
Extraordinary item
Gain from extinguishment of debt -- -- 293,663 --
------------ ------------ ------------ ------------
NET LOSS $ (3,587,278) $ (5,876,398) $(10,598,336) $(10,862,698)
============ ============ ============ ============
Loss per common share
Loss before discontinued operations
and extraordinary item $ (0.62) $ (1.50) $ (2.30) $ (6.78)
Discontinued operations -- (1.27) (0.07) (4.88)
Extraordinary item -- -- 0.06 --
------------ ------------ ------------ ------------
$ (0.62) $ (2.77) $ (2.31) $ (11.66)
============ ============ ============ ============
</TABLE>
<PAGE> 5
Automotive Performance Group, Inc. and Subsidiaries
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
For the nine months ended
September 30,
--------------------------------
1998 1997
----------- ------------
<S> <C> <C>
Increase (Decrease) in Cash
Cash flows from operating activities
Net cash used in operating activities $(7,204,883) $ (8,039,598)
Cash flows from investing activities:
Purchase of property, plant and equipment (96,855) (2,432,332)
Proceeds from the disposal of equipment 1,973,741 85,666
Cash acquired in Klein acquisition 112,134 --
Decrease (increase) in notes receivable 32,738 (1,159,050)
Investment in affiliates -- (75,728)
----------- ------------
Net cash provided by (used in) investing activities 2,021,758 (3,581,444)
Cash flows from financing activities:
Borrowings on line of credit, net 998,054 --
Payments on long-term obligations (1,258,862) (525,114)
Proceeds from issuance of preferred stock 2,951,439 --
Proceeds from long-term obligations -- 969,865
Proceeds from notes payable, net -- 1,039,976
Proceeds from affiliated party notes payable, net -- 9,030,719
Capital contributions to Team Scandia -- 968,824
----------- ------------
Net cash provided by financing activities 2,690,631 11,484,270
Effect of exchange rate on cash -- (64,134)
----------- ------------
Net decrease in cash (2,492,494) (200,906)
Cash at beginning of period 3,510,537 1,007,008
----------- ------------
Cash at end of period $ 1,018,043 $ 806,102
=========== ============
Cash paid during the period for interest $ 254,577 $ 213,317
=========== ============
</TABLE>
<PAGE> 6
Automotive Performance Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - FINANCIAL STATEMENTS
The unaudited consolidated financial statements of the Company and its
subsidiaries have been prepared by the Company pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted pursuant to such rules and regulations. The results of operations for
interim periods are not necessarily indicative of the results to be expected for
the entire fiscal year ending December 31, 1998.
In the opinion of management, all adjustments, consisting only of normal
recurring adjustments, necessary for a fair presentation of the financial
information for the period indicated, have been included.
NOTE 2 - INVENTORIES
Inventories are stated at the lower of cost (on a first-in, first-out basis)
or market and consisted of the following at:
<TABLE>
<CAPTION>
September 30, 1998
(unaudited)
-------------
<S> <C>
Raw materials $135,940
Finished goods 582,655
--------
$718,595
========
</TABLE>
NOTE 3 - LOSS PER COMMON SHARE
In 1997, the Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards No. 128, Earnings per Share, which replaced the
calculation of primary and fully diluted earnings per share with basic and
diluted earnings per share. Unlike primary earnings per share, basic earnings
per share excludes any dilutive effects of options, warrants, and convertible
securities. Diluted earnings per share is very similar to the previously
reported fully diluted earnings per share.
Basic loss per share is computed by dividing net loss by the weighted average
number of shares of common stock outstanding during each period. The weighted
average number of common shares outstanding was 5,841,906 and 2,120,911 for the
three months ended September 30, 1998 and 1997, respectively, and 4,589,314 and
931,666 for the nine months ended September 30, 1998 and 1997, respectively. The
computations for loss per share assuming dilution for the periods ended
September 30, 1998 and 1997, were anti-dilutive; and therefore, are not
included.
NOTE 4 - ACQUISITION
Effective April 17, 1998 through a series of mergers, International Motor
Sports Group, Inc. (IMSG) exchanged 108,930,887 shares of its common stock for
an equal number of shares of Automotive Performance Group, Inc.'s (APGI and the
Company) common stock and Klein Engines and Competition Components, Inc. (Klein)
exchanged 7,833,902 shares of its common stock for an equal number of shares of
APGI. These transactions resulted in IMSG being the accounting acquirer in the
transaction. The acquisition has been accounted for under the purchase method of
accounting.
<PAGE> 7
Automotive Performance Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
NOTE 5 - CONVERSION OF RELATED PARTY NOTES PAYABLE
Effective March 31, 1998, IMSG and its subsidiary, Team Scandia, Inc.,
converted unsecured demand notes payable to related parties into shares of
IMSG's common stock. The demand notes of $15,938,000 plus imputed interest of
$686,259 were converted into 66,497,036 shares of IMSG's common stock or
3,324,852 shares giving effect to the 20 to 1 reverse stock split. On March 30,
1998, the shareholders increased the number of authorized shares of common stock
from 50,000,000 to 130,000,000 and the number of authorized shares of preferred
stock from 5,145,000 to 13,000,000. The shareholders also approved a 20-for-1
reverse stock split effective April 17, 1998, the effective date of the business
combination described in note 4. All per share losses and references to common
stock, warrants and options have been retroactively restated to reflect the
decreased number of common shares outstanding.
NOTE 6 - PREFERRED STOCK
In June 1998, the Company issued 500,000 shares of Series A Preferred Stock
at $2 per share to a director and officer of the Company in conjunction with a
private placement of 1,650,000 preferred shares which are convertible to Common
shares of the Company at a conversion rate of one share of Common stock for each
share of Preferred stock. In August 1998, the remaining 1,150,000 shares of
preferred stock were placed with accredited investors.
NOTE 7 - CONTINGENCIES
The Company is involved in certain claims arising in the normal course of
business (see further discussion in Part II - Item 1). An estimate of the
possible loss resulting from these matters cannot be made; however, the Company
believes that the ultimate resolution of these matters will not have a material
effect on its financial position or results of operations.
NOTE 8 - SUBSEQUENT EVENTS
In November 1998, the Company entered into a loan agreement with a financial
institution maturing in May 1999, whereby the Company will have available a
$1,000,000 borrowing facility. Borrowings under this facility bear interest at
6.65%. A member of the Board of Directors guaranteed the debt. The proceeds from
this line will be used for general corporate purposes and in the Company's
acquisition activities.
A $720,000 equipment loan that originally matured in October 1998 has been
converted to a note payable due over 18 months. A member of the Board of
Directors guaranteed this note. As consideration for these financial guarantees,
172,000 warrants to purchase common stock of the Company were issued at $.01 per
share.
<PAGE> 8
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Management's Discussion and Analysis of Financial Condition and Results
of Operations contains forward-looking statements that involve risks and
uncertainties. All forward-looking statements are based on information available
to the Company on the date hereof, and the Company assumes no obligation to
update any such forward-looking statements. The Company's actual results could
differ materially from those anticipated in these forward-looking statements as
a result of a number of factors, including those set forth below.
This Analysis should be read in conjunction with the consolidated financial
statements and related notes contained herein.
OVERVIEW
Automotive Performance Group, Inc. ("APG", "the Company") was formed to be
the parent company for several high-performance automotive and specialty
chemical related operating subsidiaries. The objective of the Company is to
develop and successfully market a broad spectrum of integrated mutually
supportive brands of products and services for the high-performance automotive
and specialty chemicals industries.
Royal Purple Motor Oil ("Royal Purple")
Royal Purple markets and retails exclusively a line of high performance
synthetic lubricants under the "Royal Purple" brand name. These products have
been received enthusiastically in retail markets as well as in the high
performance motor racing arena.
Royal Purple has established a relationship with NAPA Auto Parts whereby NAPA
has become the primary retail outlet for the Royal Purple product line. Royal
Purple sales through NAPA have increased significantly in 1998 as compared to
1997. Future increases are expected to require significantly increasing working
capital to support inventory requirements and may strain our supplier's current
production capacity.
It is estimated that the total motor oil market is approximately $4 billion
in the United States, of which $800 million is estimated to be synthetic sales.
The synthetic oil market is believed to be dominated by two brands, Mobil and
Castrol, which control approximately 52% and 42% of the market, respectively.
Currently, Royal Purple controls less than 1% of the synthetic lubricant market.
Team Scandia
Team Scandia has interests in racing teams that operate in major racing
platforms in the United States. These racing teams are used as high-profile
platforms to market the Royal Purple Motor Oil product line and obtain
sponsorship from major corporations. Teams and team interests include a 50%
ownership stake in Scandia Bodine Racing, LLC, a racing team that competes in
the National Association for Stock Car Auto Racing ("NASCAR") Winston Cup
series; a 50% ownership in Cristen Powell Enterprises, LLC, and in Jimmy Kite
Enterprises, LLC, companies of a prominent National Hot Rod Association ("NHRA")
drag racer and well-received Indianapolis Racing League ("IRL") driver,
respectively.
Team Scandia is an award winning motor sports race team that has competed in
the IRL and NHRA Top Fuel series during the last two years. The support
requirement to operate racing teams in the individual Championships is
substantial.
During 1998, Team Scandia received sponsorship from Reebok of approximately
$1 million. At this time, it is not certain if Reebok will continue to sponsor
Team Scandia in 1999. Although the Company is hopeful that sponsorship can be
obtained, Team Scandia will not participate in racing events without such
sponsorship. Team Scandia will continue to provide services to other teams.
Klein Engines and Competition Components, Inc. ("Klein Engines")
Klein Engines manufactures high performance engines and components for use in
the Indianapolis Racing League ("INDY"), American Sprint Car Series, and World
of Outlaws sprint cars. The INDY engine market is dominated by Roush
(controlling approximately 40% of the market share), Brayton, and Comptech (each
controlling approximately 15% of the market). Klein Engines is one of the newest
companies to manufacture and refurbish INDY racing engines, and currently
controls less than 1% of the market.
The high quality of Klein engines is one of the key elements for future sales
growth. During 1998, one IRL
<PAGE> 9
team contracted with Klein Engines for engines and services. It is anticipated
that at least one, and possibly two, additional IRL teams will contract with
Klein Engines for the 1999 race season.
Klein engines currently contracts to provide engines and or services to three
Sprint teams.
D3 Design Works, Inc. ("D3")
Located in Issaquah, Washington, D3 is a full service design agency that
integrates cutting edge technology and professional marketing support into the
overall design process. D3 primarily functions as an "in-house" agency, offering
the following services to all of the Company's subsidiaries: design and
production of marketing proposals and presentations; website design, maintenance
and hosting; email configuration and hosting, and general technical
communications support.
Results of Operations
For the nine months ended September 30, 1998, the Company reported sales of
$5.5 million and net losses of $10.6 million. Percentage of sales and net loss
by subsidiary for this period are as follows:
<TABLE>
<CAPTION>
Percentage of Percentage of
Subsidiary Consolidated Sales Net Loss
- ------------ ------------------ --------
<S> <C> <C>
Royal Purple 21% 21%
Team Scandia 42% 34%
Klein Engines 36% 19%
D3 Design Works 1% --
APG / Corporate -- 26%
--- ---
100% 100%
=== ===
</TABLE>
Professional expenses of approximately $2 million were incurred during the
nine months ended September 30, 1998, as compared with professional expenses of
$1.6 million during the same period in 1997. The 1998 professional expenses
primarily related to legal and accounting fees for services rendered in
connection with the filing of Form 10 (which allowed the company to become a
fully reporting company with the SEC), subsequent Form 10-QSB and Form 8-Ks,
merger and acquisition activities, outstanding litigation, and audit services
performed for the Company and subsidiaries.
For the nine months ended September 30, 1998 and 1997, the Company recorded a
loss from discontinued operations for discontinued venue and race sanctioning
divisions of $345,000 and $4.5 million, respectively.
A $290,000 extraordinary gain was recorded in the nine months ended September
30, 1998. This gain represents forgiveness of a note payable to an affiliate of
the Company. There was no such gain for the comparable period in 1997.
Team Scandia
Team Scandia qualified two Royal Purple Motor Oil sponsored IRL cars for the
Indy 500 in 1998. This aggressive program contributed substantially to the
operating losses for 1998. Estimated costs associated with this effort were $3
million.
Race team asset sales have funded a reduction in trade payables and equipment
debt, and have contributed to the daily operating cash needs of Team Scandia. It
is expected that additional asset sales will continue at the current rate at
least during the fourth quarter of 1998.
Headcount at Team Scandia has been reduced from 40 personnel at December 31,
1997, to 20 at September 30, 1998. Further headcount reductions are anticipated
during the fourth quarter. Optimal headcount for Team Scandia is anticipated to
be 12.
Klein Engines
During the first nine months in 1998, Klein Engines evaluated the
profitability of its product lines. As a result of this evaluation, the Company
has focused its manufacturing efforts on IRL and Outlaw Sprint Cars, and
inventory write downs of approximately $1 million were realized as inventory for
other engine product lines became obsolete.
Headcount reduction from 25 at December 31, 1997 to 10 at September 30, 1998,
resulted in higher severance costs during 1998, but will contribute to future
profitability.
<PAGE> 10
LIQUIDITY AND CAPITAL RESOURCES
The Company's ability to mobilize cash, or liquidity, comes from a number of
sources both internally, primarily asset sales and capital lease financing, and
externally, through private placement of preferred stock and financing
agreements with lending institutions.
The Company experienced negative cash flow from operations of $7.2 million
for the nine months ended September 30, 1998, compared with $8 million used in
operating activities for the same period in 1997. The 1998 negative cash flow
resulted primarily from the net loss for the period, partially offset by non
cash depreciation, amortization, losses from affiliates, and write down of
impaired goodwill. Additionally, accounts payable increased approximately
$700,000.
Capital expenditures during the nine months ended September 30, 1998, were
approximately $100,000. During the fourth quarter of 1998, new accounting
software and a network server will be purchased and installed. Capital
expenditures relating to this project are expected to be approximately $70,000.
No further material capital expenditures are expected.
The Company anticipates that its computer software applications will be
compatible with the year 2000. The Company is dependent, however, on numerous
vendors and customers, which may incur disruptions as a result of year 2000
software issues. No assurance can be given that the Company's results of
operations will not be impacted by this industry wide issue.
Team Scandia and Klein Engines have not been able to make timely payments to
their trade and other creditors from time to time. As of September 30, 1998,
Team Scandia and Klein Engines had past due payables of approximately $930,000
and $515,000, respectively. The company is currently seeking sources of working
capital financing sufficient to fund delinquent balances and meet ongoing trade
obligations (including asset sales and private placements, as discussed below).
During the nine months ended September 30, 1998, approximately $2 million in
assets have been sold to meet operating needs of the Company, at a gain of
approximately $90,000. These asset sales have been primarily accomplished in
Team Scandia and Klein Engines. Team Scandia sold racing assets with a $925,000
net book value, and realized a gain of $275,000. Klein Engines sold property
with a net book value of $820,000, and realized a loss of $180,000. The Company
is currently evaluating the sale and leaseback of the remaining real property
held by Klein Engines. Net book value at September 30, 1998 for this real
property was approximately $1.8 million.
In May 1998, the Company obtained two $500,000 credit facilities, which are
guaranteed by a member of the Board of Directors. As of September 30, 1998,
there was $60,000 remaining credit available on these facilities. One of the
$500,000 credit facilities matured on October 30, 1998. The Company is currently
in negotiations with the bank to extend the facility due date; however, the bank
could demand payment on the facility.
In November 1998, the Company obtained a $1 million revolving credit
facility, which is guaranteed by a member of the Board of Directors. The
proceeds from this line will be used in the Company's acquisition activities,
and for general corporate purposes. Additionally, the same party guaranteed a
$720,000 equipment loan, which originally matured in October 1998. The balance
is to be paid in 18 monthly installments.
During the third quarter of 1998, the Company completed a $3.3 million
private placement of Series A Preferred stock priced at $2.00 per share. The
offering commenced in the second quarter of 1998, and $1 million was received
prior to June 30, 1998. The net proceeds to the Company of approximately $3
million were used primarily for operations, Royal Purple inventory purchases,
settlement of Klein Engines and Team Scandia accounts payable, outstanding debt
reduction, and legal settlements.
The Company is currently marketing a second private placement of Series A
Preferred Stock, which is priced at $2.50 per share. The net proceeds from the
sale of the 4,000,000 shares are estimated to be approximately $8.9 million. The
Company expects to use the net proceeds of the offering for working capital, to
finance the growth in sales of Royal Purple, general corporate purposes, as well
as for future acquisitions. The Series A Preferred Stock will not be registered
under the Securities Act of 1933, as amended, and may not be offered or sold
until registered under the Securities Act, or unless sold under an exemption
from
<PAGE> 11
registration requirements.
POTENTIAL MERGERS AND ACQUISITIONS
Subsequent to September 30, 1998, the Company has entered into letters of
intent to acquire the following companies: Advanced Chemistry & Technology,
Inc., Products for People, Inc., The Wax Shop, Inc., Boyd's Wheels, Inc., Hot
Rods by Boyd, and Westland Associates, Inc. These companies fall within the
Company's acquisition strategy, which is focused on four market areas: specialty
chemicals, lubricants, car care products, and automotive image products.
The letters of intent are non-binding and there can be no assurance that the
Company will enter definitive agreements with the aforementioned parties or that
any of these potential acquisitions will ultimately be consummated.
RELATED PARTY TRANSACTIONS
Significant related party transactions have been eliminated in consolidation.
Additionally, certain property leased by the Company for $20,000 per month is
owned by a member of the Board of Directors. The lease for this facility expires
in December 1998. It is uncertain at this time if the lease will be renewed.
As discussed above, a member of the Board of Directors has provided certain
financial guarantees for the Company. As consideration for these financial
guarantees, 272,000 warrants to purchase common stock of the Company were issued
at $.01 per share.
SEASONALITY
Many of the Company's products are tied to the racing industry. The season
for the racing circuits primarily runs from January through October. Revenues
realized in the first, second, and third quarters tend to be higher than
revenues in the fourth quarter.
FORWARD-LOOKING STATEMENTS
Matters discussed herein contain forward-looking statements. The Company's
actual results may differ significantly from results indicated by
forward-looking statements. Factors that might cause some differences include,
but are not limited to, changes in the public's interest in racing, and shifts
in leisure time pursuit preferences; changes in government regulations affecting
racing, sponsors, customers, the Company, or its subsidiaries; risks generally
involved in the high performance automotive business including, but not limited
to, product liability risk as a result of high performance engines and certain
specialty chemicals which are intended to improve automotive performance,
sometimes in extreme or severe conditions; the ability of the Company to
continue to produce quality products at competitive prices in markets which are
historically intensely competitive; the ability of the Company's supplier of
Royal Purple Motor Oil to continue to meet increasing demand; the ability of the
Company to attract new teams to contract with Klein Engines; the Company's
ability to obtain sponsorship for Team Scandia; the Company's ability to raise
sufficient debt and equity capital to meet increased operating and acquisition
requirements; the Company's ability to recruit and retain key personnel;
unfavorable results in litigation which the Company is currently involved in, or
may become subject to; the ability to effectively integrate the personnel and
operations of acquired companies; compliance with hazardous waste disposal
regulations and standards; and the Company's history of operating losses and
limited operating history.
<PAGE> 12
Part II. Other Information
ITEM 1. -- LEGAL PROCEEDINGS
The Company or its subsidiaries is engaged in various litigations, none of which
are believed by Management to involve claims for damages against the Company or
its subsidiaries of more than 10% of the Company's assets. IMSG is engaged in
arbitration with Brett Bodine and Scandia Bodine with respect to control of that
entity and management procedures by Mr. Bodine. The various other lawsuits,
either as plaintiff or defendant, involving alleged breaches of contract relate
primarily to sponsorship agreements and race car drivers associated with Team
Scandia; certain drivers have alleged breach of employment contract, additional
prize money earned and sought punitive damages. Management is vigorously
defending these actions and has not made any contingency allowance for an
unfavorable outcome.
ITEM 2. -- CHANGES IN SECURITIES AND USE OF PROCEEDS
(a) In August 1998, the Company completed a private placement of 1,650,000
shares of its Series A Preferred Stock at $2 per share convertible to common
shares with registration rights. The Series A Preferred Stock is senior to
common stock and has the rights and preferences relative to common stock set
forth hereunder.
CONVERSION PROVISIONS
The holder of a share of Series A Preferred Stock is entitled to
convert such share into 1 share of Common Stock at any time subsequent to the
close of the placement referred to in Item 5 hereunder, but not later than June
30, 1999.
During the third quarter of 1998, holders of greater than 51% of the
1,650,000 Series A Preferred Shares notified the Company of their election to
have the Preferred shares converted into registered common shares. The Company
has begun this process.
DIVIDEND PREFERENCE, LIQUIDATION RIGHTS
In the event of any voluntary or involuntary liquidation, dissolution
or winding up of the Company, the holders of the Preferred Stock (unless subject
to conversion or converted) will be entitled to a liquidation preference in the
amount of $2.00 per share less cumulative dividends. In the event of a dividend,
Preferred Shares (unless subject to conversion or converted) will be entitled to
a ten percent preference (on a share to share not class to class basis), but not
after cumulative dividends per Share of $2.00 have been received. The balance of
the dividend will be shared pro rata on a share for share basis with common
shares; thus, if all Preferred Shares are sold, (unless additional shares are
sold at the option of the Company) 1,650,000 Shares, and no more Common Shares
are sold, the Preferred Shareholders as a group would have a $3,300,000
preference on liquidation (less cumulative dividends) and would as a group share
dividends with Common Shareholders on a ratio of 1,650,000 to 5,880,000 or
approximately 28%. After Preferred Shares are converted at 1-1, they participate
with other Common Shareholders in dividends or distributions pro rata, and there
is no liquidation or dividend preference.
VOTING RIGHTS
The holders of the Preferred Stock will be entitled to vote share for
share with Common Shares. Thus, all Preferred Shareholders (until conversion)
would vote approximately 12% of the shares relative to Common Shares if no
additional Common Shares are sold.
REGISTRATION RIGHTS
Registration rights may only be exercised by Holders of Preferred
Shares if the majority of Preferred Shares request a conversion to Common
Shares, and at the time of notification of conversion also request registration
of Shares to be received in the conversion. In addition, in the event of a
mandatory conversion by the Company, Holders of Preferred Shares will be given
the opportunity for the majority thereof to request registration of the Shares
to be received. The Company will use its best efforts to register all the Common
shares to be received.
<PAGE> 13
To exercise the conversion and registration election, Preferred
Shareholders must send their Shares to the Transfer Agent of the Company,
together with the election for registration. Said shares will be held by the
Transfer Agent until the Registration is effected. Preferred Shares will retain
voting rights while the Registration is being effected, but will not be entitled
to any other rights, such as dividends or preferences. Costs of registration
will be borne by the Company. Preferred Shareholders may be required by the
Company to execute documents required for the Registration.
(b) see (a) above
(c) Effective June 30, 1998, the Company issued 500,000 shares of Preferred
Stock for total consideration of $1,000,000 to a director and officer. Effective
August 31, 1998, the Company issued 1,150,000 shares of Preferred Stock for
total consideration of $2,300,000 to accredited investors. The Company relied
upon the exemption provided by Rule 506 of Regulation D in connection with
issuance of shares. The investors represented to the Company that they were
accredited investors as defined in Rule 501 of Regulation D, that they were
acquiring shares for investment intent and not with a view to distribution. Each
investor represented that they were acquiring the securities for themselves and
not for other persons and acknowledged that they had been advised in writing
that the securities were not registered under the Securities Act and could not
be resold unless registered under the Act or an exemption was available. The
certificates representing the shares issued in connection with the Private
Placement contained a legend setting forth restrictions on transferability and
resale of the securities.
ITEM 5. -- OTHER INFORMATION
In August 1998, the Company completed a private placement of 1,650,000 shares
of its Series A Preferred Stock at $2 per share to accredited investors,
including a director/officer of the Company.
Effective November 2, 1998, the Company commenced a private placement of
4,000,000 shares of Series A Preferred Stock at $2.50 per share to accredited
investors. The terms of the offering are consistent with the private placement
completed in August 1998. The estimated net proceeds to the Company are
approximately $8.9 million. Proceeds received are proposed to be applied to
legal, accounting, and printing costs associated with the offering, working
capital, financing the growth in sales of Royal Purple, general corporate
purposes, and future acquisitions. The Series A Preferred Stock will not be
registered under the Securities Act of 1933, as amended, and may not be offered
or sold until registered under the Securities Act, or unless sold under an
exemption from registration requirements.
Subsequent to September 30, 1998, the Company has entered into letters of
intent to acquire the following companies: Advanced Chemistry & Technology,
Inc., Products for People, Inc., The Wax Shop, Inc., Boyd's Wheels, Inc., Hot
Rods by Boyd, and Westland Associates, Inc. These companies fall within the
Company's acquisition strategy, which is focused on four market areas: specialty
chemicals, lubricants, car care products, and automotive image products.
The letters of intent are non-binding and there can be no assurance that the
Company will enter definitive agreements with the aforementioned parties or that
any of these potential acquisitions will ultimately be consummated.
Dean Willard, who was appointed Chairman of the Board in September 1998, has
been elected Chief Executive Officer for the Company, effective November 1,
1998. Andrew Evans has relinquished the post and will remain a member of the
Board of Directors as well as the President of Team Scandia.
<PAGE> 14
ITEM 6. -- EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits to Part II
Exhibit 27.1 Financial Data Schedule
(b) Reports on Form 8-K
The Company filed an Amended Current Report on Form 8-K dated September 9, 1998
containing amended information related to the Amended Form 8-K dated July 1,
1998 announcing the merger of International Motor Sports Group, Inc. ("IMSG")
and Klein Engines and Competition Components, Inc. ("Klein") into Automotive
Performance Group, Inc ("APG").
The Company filed an Amended Current Report on Form 8-K dated July 1, 1998
containing amended information related to the Form 8-K dated May 5, 1998
announcing the merger of IMSG and Klein into APG.
The Company filed a Current Report on Form 8-K dated May 5, 1998 announcing the
merger of IMSG with Klein into APG and containing the related merger agreement
and unaudited pro forma financial information.
The items omitted are either inapplicable or are items to which the answer is
negative.
<PAGE> 15
AUTOMOTIVE PERFORMANCE GROUP, INC.
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
AUTOMOTIVE PERFORMANCE GROUP, INC.
November 13, 1998 /s/ DEAN M. WILLARD
--------------------
Dean M. Willard
Chairman of the Board and Chief Executive Officer
/s/ TAMMY M. POWERS
--------------------
Tammy M. Powers
Chief Financial Officer
<PAGE> 16
EXHIBIT INDEX
-------------
Exhibit
No. Description
------- -----------
27.1 Financial Date Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 1,018,043
<SECURITIES> 0
<RECEIVABLES> 2,199,265
<ALLOWANCES> 40,600
<INVENTORY> 718,595
<CURRENT-ASSETS> 3,993,401
<PP&E> 12,998,829
<DEPRECIATION> 8,849,628
<TOTAL-ASSETS> 8,260,907
<CURRENT-LIABILITIES> 4,079,591
<BONDS> 738,583
0
166
<COMMON> 588
<OTHER-SE> 2,942,279
<TOTAL-LIABILITY-AND-EQUITY> 8,260,907
<SALES> 5,464,834
<TOTAL-REVENUES> 5,464,834
<CGS> 4,450,544
<TOTAL-COSTS> 4,450,544
<OTHER-EXPENSES> 11,004,649
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 591,320
<INCOME-PRETAX> (10,546,752)
<INCOME-TAX> 0
<INCOME-CONTINUING> (10,546,752)
<DISCONTINUED> (345,247)
<EXTRAORDINARY> 293,663
<CHANGES> 0
<NET-INCOME> (10,598,336)
<EPS-PRIMARY> (2.31)
<EPS-DILUTED> (2.31)
</TABLE>
