Redline Performance plans IPO
February 10, 2003
Filed under Features
Redline Performance Products Inc., the developer of high performance snowmobiles based near San Diego in Vista, Calif., is planning an initial public stock offering (IPO) and said it hopes to raise $15 million through the effort.
Redline has filed a preliminary registration statement with the Securities and Exchange Commission, and its underwriter has issued a preliminary prospectus, commonly called a “red herring” because it doesn’t provide all the details on the offering. The preliminary prospectus also can be changed prior to the offering.
In the prospectus, dated Jan. 15, 2003, Redline says it plans to sell 2.5 million shares of common stock at a price between $4 and $6 per share. Redline expects to net $10.24 million from the sale.
The company hopes to have its shares listed on the American Stock Exchange under the symbol “RED.”
If all the shares are sold, there would be 4.9 million shares outstanding after the offering. The additional shares would come from conversion of options under Redline’s stock option plans and other conversions,
Proceeds from the sale would be used for repayment of debt, working capital, sales and marketing and development and production of the company’s high performance snowmobiles.
Company officials weren’t available to discuss the IPO plans because government regulations limit promotion prior to such offerings.
No date has been set for the offering, but it will begin “as soon as possible after the Registration Statement becomes effective,” according to the prospectus.
Difficult sales project
Redline’s task won’t be an easy one. The stock market is down and Redline is still only a development company; it’s never built a production machine. Furthermore, the firm reported losses of nearly $8 million from the time it was organized in December 1999 through September 2002. The company says it expects these losses to continue and “will likely not achieve profitability before 2006.”
For investors who watched the dot.com companies crash and burn among promises of future profits, Redline’s position isn’t a strong one.
Redline’s business plan calls for it to build snowmobiles at prices that are significantly higher than prices of other snowmobiles. The company notes that this approach “is unproven and may not be successful, which would impair our ability to generate revenues or operate profitably and could result in the failure of our business.”
Building and selling a high priced snowmobile in a weak economy through an industry that’s clogged with inventory that was about 10% above last year’s level in December seems like a difficult task. The problem is compounded by slumping U.S. sales that are off about 20%.
The company also notes in its prospectus that its key management team has little experience in manufacturing snowmobiles or similar products. It’s built only seven functional prototype snowmobiles, and only two of those used production tooling. The problems facing the Redline management team — making the leap from an R&D operation to a manufacturing company — are huge.
The situation is similar to that of Excelsior-Henderson Motorcycle Company, which could not coordinate its cash flow and production steps sufficiently to make machines at a profit. Redline machines use 400 parts from outside vendors. The failure to deliver by any one of these suppliers could cause serious production problems. The company plans to actually outsource assembly of the machines to a third party, a move that further complicates the manufacturing process.
Even if Redline is able to produce machines next year, it still has to sell them and service them through a dealer network in North America. The company admits that it does not have any dealers under contract. Making the situation more difficult is the fact that Redline previously signed up dealers in 2000 and 2001, but allowed those agreements to lapse because it could not produce snowmobiles in time.