1% distortion from an audio amplifier is pretty bad. The peaks are squashed because it is actually clipping but the clipping is not severe. The graph of distortion vs output power shows the distortion suddenly increasing as the output power is increased.
In my experience with testing many amp topologies at different power ratings, when the peaks are squashed or cut off this indicates higher levels than 1% THD. 1% THD is not "pretty bad" in fact it is unlikely that you would detect 1% THD at 1kHz. Here is an article where a blind test was conducted in the detection of THD:
http://www.axiomaudio.com/distortionIn this article an interesting conclusion was stated:
"For detecting distortion at levels of less than 10%, the test frequencies had to be greater than 500 Hz. At 40 Hz, listeners accepted 100% distortion before they complained. The noise test tones had to reach 8,000 Hz and above before 1% distortion became audible, such is the masking effect of music. Anecdotal reports of listeners' ability to hear low frequency distortion with music programming are unsupported by the Axiom tests, at least until the distortion meets or exceeds the actual music playback level."
In the vast majority of cases where an amplifier is reaching it's max output at 1% THD into a dynamic load, the drivers in the system are producing substantially more THD than the amplifier anyway.