SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the quarterly period ended September 30, 2005
OR
|_| Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from ______ to ___________
Commission File Number: 000-50243
GIANT MOTORSPORTS, INC.
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(Exact Name of Registrant as Specified in Its Charter)
Nevada 33-1025552
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
13134 State Route 62, Salem, Ohio 44460
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(Address of Principal Executive Offices) (Zip Code)
(330) 332-8534
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(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the 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 |_|
As of November 11, 2005 the registrant had 10,445,000 shares of common stock,
$.001 par value, issued and outstanding.
Transitional Small Business Disclosure Format (Check one): Yes |_|; No |X|
GIANT MOTORSPORTS, INC.
INDEX TO FORM 10-QSB
PAGE
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheet as of
September 30, 2005 (Unaudited) 3
Condensed Consolidated Statements of Income
for the Nine and Three Months Ended September 30, 2005
and 2004 (Unaudited) 5
Condensed Consolidated Statements of Cash Flow for the
Nine Months Ended September 30, 2005 and 2004 (Unaudited) 6
Notes to Condensed Consolidated Financial Statements (Unaudited) 7
Item 2. Management's Discussion and Analysis or Plan of Operation 17
Item 3. Controls and Procedures 23
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 23
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 23
Item 3. Defaults upon Senior Securities 23
Item 4. Submission of Matters to a Vote of Security Holders 23
Item 5. Other Information 23
Item 6. Exhibits 24
SIGNATURES 25
2
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements
GIANT MOTORSPORTS, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
September 30, 2005
(Unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 703,605
Accounts receivable, net 3,375,001
Accounts receivable, affiliates 249,966
Inventories 17,316,251
Accounts receivable, employees 24,138
Notes receivable, officers 147,216
Deferred federal income taxes 8,500
Prepaid expenses 35,369
-----------
TOTAL CURRENT ASSETS 21,860,046
-----------
FIXED ASSETS, NET 1,845,008
-----------
OTHER ASSETS
Intangibles, net 1,621,450
Deferred federal income taxes 1,600
Deposits 48,000
-----------
TOTAL OTHER ASSETS 1,671,050
-----------
$25,376,104
===========
The accompanying notes are an integral part of the condensed consolidated
financial statements.
3
GIANT MOTORSPORTS, INC.
CONDENSED CONSOLIDATED BALANCE SHEET (CONTINUED)
September 30, 2005
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable $ 674,863
Notes payable, floor plans 15,474,363
Note payable, officer 236,316
Accounts payable, trade 1,773,410
Accrued expenses 314,656
Accrued warranty 22,500
Accrued income taxes 694,300
Customer deposits 352,142
Current portion of long-term debt 214,760
-----------
TOTAL CURRENT LIABILITIES 19,757,310
LONG-TERM DEBT, NET 837,600
-----------
TOTAL LIABILITIES 20,594,910
-----------
COMMITMENTS - NOTE J
STOCKHOLDERS' EQUITY
Preferred stock, $.001 par value, authorized 5,000,000 shares,
5,000 shares designated as Series A Convertible,
$1,000 stated value, 2,870 shares issued and outstanding at
September 30, 2005 2,870,000
Common stock, $.001 par value, authorized 75,000,000 shares
10,445,000 shares at issued and outstanding at September 30, 2005 10,445
Paid-in capital 719,114
Retained earnings 1,181,635
-----------
TOTAL STOCKHOLDERS' EQUITY 4,781,194
-----------
$25,376,104
===========
The accompanying notes are an integral part of the condensed consolidated
financial statements.
4
GIANT MOTORSPORTS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) For
the nine and three months ended September 30, 2005 and 2004
Nine Months Ended Three Months Ended
September 30, September 30, September 30, September 30,
2005 2004 2005 2004
------------ ------------ ------------ ------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
OPERATING INCOME
Sales $ 81,480,719 $ 58,937,527 $ 26,397,387 $ 25,773,937
Finance, insurance and extended service revenues 2,304,164 1,339,985 852,118 551,150
------------ ------------ ------------ ------------
TOTAL OPERATING INCOME 83,784,883 60,277,512 27,249,505 26,325,087
COST OF MERCHANDISE SOLD 73,271,992 52,996,143 23,331,187 23,099,271
------------ ------------ ------------ ------------
GROSS PROFIT 10,512,891 7,281,369 3,918,318 3,225,816
------------ ------------ ------------ ------------
OPERATING EXPENSES
Selling expenses 5,788,545 3,705,101 2,176,542 1,762,275
General and administrative expenses 2,931,266 1,916,998 1,060,287 741,949
------------ ------------ ------------ ------------
8,719,811 5,622,099 3,236,829 2,504,224
------------ ------------ ------------ ------------
INCOME FROM OPERATIONS 1,793,080 1,659,270 681,489 721,592
------------ ------------ ------------ ------------
OTHER INCOME AND (EXPENSE)
Other income, net 99,560 17,313 65,420 9,940
Interest expense, net (601,933) (508,369) (181,183) (202,296)
------------ ------------ ------------ ------------
(502,373) (491,056) (115,763) (192,356)
------------ ------------ ------------ ------------
INCOME BEFORE INCOME TAXES 1,290,707 1,168,214 565,726 529,236
INCOME TAXES 413,000 485,700 240,000 240,100
------------ ------------ ------------ ------------
NET INCOME ATTRIBUTABLE TO
COMMON SHAREHOLDERS $ 877,707 $ 682,514 $ 325,726 $ 289,136
============ ============ ============ ============
BASIC EARNINGS PER SHARE $ 0.08 $ 0.07 $ 0.03 $ 0.03
============ ============ ============ ============
DILUTED EARNINGS PER SHARE $ 0.07 $ 0.06 $ 0.03 $ 0.03
============ ============ ============ ============
WEIGHTED AVERAGE SHARES OUTSTANDING
BASIC 10,432,839 10,425,000 10,445,000 10,425,000
============ ============ ============ ============
DILUTED 11,748,223 11,351,740 12,380,869 11,425,000
============ ============ ============ ============
The accompanying notes are an integral part of the condensed consolidated
financial statements.
5
GIANT MOTORSPORTS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW (UNAUDITED)
For the nine months ended September 30, 2005 and 2004
2005 2004
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 877,707 $ 682,514
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation 238,789 109,420
Amortization 97,500 --
Deferred federal income taxes (39,000) (273,300)
Issuance of common stock for services 11,600 --
(Increase) in accounts receivable, net (909,632) (2,793,656)
(Increase) in accounts receivable, employees (24,138) --
(Increase) in inventories (778,164) (3,257,721)
(Increase) decrease in accounts receivable affiliates (184,143) 315,343
(Increase) decrease in prepaid expenses 26,506 (91,339)
Decrease (increase) in deposits 19,240 (25,000)
Increase (decrease) in customer deposits 8,002 656,883
Increase in deferred service contract income -- 765,170
Increase in accounts payable trade 546,424 167,102
Increase in accounts payable affiliate -- --
Increase in accrued income taxes 301,000 559,000
Increase in accrued expenses 142,375 66,094
Decrease in accrued warranty (67,500) --
------------ ------------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 266,566 (3,119,490)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of fixed assets (734,558) (681,243)
Covenant not to compete incurred (130,000) --
------------ ------------
NET CASH (USED IN) INVESTING ACTIVITIES (864,558) (681,243)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Short-term borrowings (payments) on notes (750,137) 24,000
Increase (decrease) in floor plan liability (2,314,343) 3,705,464
Long-term borrowings on note -- 1,250,000
Payments on long-term debt (158,667) (66,830)
Payments on note payable to officer (7,256) --
(Increase) decrease in notes receivable from officers 106,813 (122,842)
Distributions -- (366,000)
Net proceeds from preferred stock issuance 2,563,000 --
Issue 1,000,000 stock warrants -- 15,000
Repurchase 8,000,000 shares of common stock -- (21,250)
------------ ------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (560,590) 4,417,542
------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQ (1,158,582) 616,809
CASH AND CASH EQUIVALENTS, beginning of Period 1,862,187 587,917
------------ ------------
CASH AND CASH EQUIVALENTS, end of Period $ 703,605 $ 1,204,726
============ ============
OTHER SUPPLEMENTARY CASH FLOW INFORMATION
Short-term borrowings incurred for the acquisition of assets $ -- $ 1,675,000
============ ============
Note payable to officer incurred for the acquisition of assets $ 243,572 $ --
============ ============
Income taxes paid $ 151,000 $ --
============ ============
Interest paid $ 395,406 $ 515,720
============ ============
Stock issued for outside services $ 11,600 $ --
============ ============
The accompanying notes are an integral part of the condensed consolidated
financial statements.
6
GIANT MOTORSPORTS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2005 and 2004
(UNAUDITED)
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation:
The condensed consolidated financial statements included herein have been
prepared pursuant to the rules and regulations of the Securities and Exchange
Commission. The condensed consolidated financial statements and notes are
presented as permitted on Form 10-QSB and do not contain information included in
the Company's annual consolidated statements and notes. Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with accounting principles generally accepted in the United States of
America have been condensed or omitted pursuant to such rules and regulations,
although the Company believes that the disclosures are adequate to make the
information presented not misleading. It is suggested that these condensed
consolidated financial statements be read in conjunction with the December 31,
2004 audited financial statements and accompanying notes thereto. While
management believes the procedures followed in preparing these condensed
consolidated financial statements are reasonable, the accuracy of the amounts
are in some respects dependent upon the facts that will exist, and procedures
that will be accomplished by the Company later in the year.
These condensed consolidated financial statements reflect all adjustments,
including normal recurring adjustments which, in the opinion of management, are
necessary to present fairly the consolidated operations and cash flows for the
periods presented.
Organization:
Giant Motorsports, Inc. (the Company), through its wholly-owned subsidiaries,
W.W. Cycles, Inc. doing business as Andrews Cycles and Chicago Cycles, Inc.
doing business as Chicago Cycle Center, operates two retail dealerships of
motorcycles, all terrain vehicles, scooters and personal watercraft in
northeastern Ohio and northern Illinois. On December 30, 2003, the stockholders
of W.W. Cycles, Inc. entered into a Stock Purchase and Reorganization Agreement
in which effective January 16, 2004 W.W. Cycles, Inc. was issued an aggregate of
8,000,000 restricted shares of common stock, $.001 par value, of American Busing
Corporation in exchange for all of the outstanding shares of the common stock of
the Company, resulting in W.W. Cycles, Inc. becoming a wholly-owned subsidiary
of American Busing Corporation, an inactive public company. The acquisition was
accounted for as a reverse merger whereby, for accounting purposes, WW Cycles,
Inc. is considered the accounting acquirer and the historical financial
statements of WW Cycles, Inc. became the historical financial statements of
Giant Motorsports, Inc. Effective April 5, 2004 American Busing Corporation
changed its name to Giant Motorsports, Inc. On April 30, 2004, Giant
Motorsports, Inc. acquired substantially all of the assets and certain
liabilities of Chicago Cycle Center pursuant to an Asset Purchase Agreement and
entered into a Noncompetition Agreement with one of the former owners and
entered into an Employment Agreement with the other former owner.
7
GIANT MOTORSPORTS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 2005 and 2004
(UNAUDITED)
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Principles of Consolidation:
The condensed consolidated financial statements include the accounts of the
Company and all of its wholly owned subsidiaries. All significant inter-company
accounts and transactions have been eliminated in consolidation.
Cash and Cash Equivalents:
Cash and cash equivalents include amounts held in demand deposit accounts and
overnight investment accounts. The Company considers all highly liquid
investments with original maturities of three months or less to be cash
equivalents.
Contracts in Transit:
Contracts in transit represent customer finance contracts evidencing loan
agreements or lease agreements between the Company, as creditor, and the
customer, as borrower, to acquire or lease a vehicle whereby a third-party
finance source has given the Company initial, non-binding approval to assume the
Company's position as creditor. Funding and approval from the finance source is
provided upon the finance source's review of the loan or lease agreement and
related documentation executed by the customer at the dealership. These finance
contracts are typically funded within ten days of the initial approval of the
finance transaction by the third-party finance source. The finance source is not
contractually obligated to make the loan or lease to the customer until it gives
its final approval and funds the transaction. Until such final approval is
given, contracts in transit represent amounts due from the customer to the
Company. See Note B for additional information.
Allowance for Doubtful Accounts:
Accounts are written off when management determines that an account is
uncollectible. Recoveries of accounts previously written off are recorded when
received. An estimated allowance for doubtful accounts is determined to reduce
the Company's receivables to their carrying value, which approximates fair
value. The allowance is estimated based on historical collection experience,
specific review of individual customer accounts, and current economic and
business conditions. Historically, the Company has not incurred any significant
credit related losses. Management has determined that an allowance of $25,000 is
necessary at September 30, 2005.
Revenue Recognition:
Vehicle Sales:
The Company records revenue when vehicles are delivered and title has passed to
the customer, when vehicle service or repair work is performed and when parts
are delivered. Sales promotions that are offered to customers are accounted for
as a reduction to the sales price at the time of sale. Incentives, rebates and
holdbacks offered by manufacturers directly to the Company are recognized at the
time of sale if they are vehicle specific, or as earned in accordance with the
manufacturer program rules and are recorded as a reduction of cost of
merchandise sold.
8
GIANT MOTORSPORTS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 2005 and 2004
(UNAUDITED)
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Revenue Recognition (continued):
Finance, Insurance and Extended Service Revenues:
The Company arranges financing for customers through various financial
institutions and receives a commission from the lender equal to the difference
between the interest rates charged to customers and the interest rates set by
the financing institution. The Company also receives commissions from the sale
of various third party insurance products to customers and extended service
contracts. These commissions are recorded as revenue at the time the customer
enters into the contract. The Company is not the obligor under any of these
contracts. In the case of finance contracts, a customer may prepay or fail to
pay their contract, thereby terminating the contract. Customers may also
terminate extended service contracts, which are fully paid at purchase, and
become eligible for refunds of unused premiums. In these circumstances, a
portion of the commissions the Company receives may be charged back based on the
relevant terms of the contracts. The revenue the Company records relating to
commissions is net of an estimate of the ultimate amount of chargebacks the
Company will be required to pay. Such estimates of chargeback experience is
based on our historical chargeback expense arising from similar contracts. The
Company also acts as the warrantor on certain extended service contracts and
defers the revenue and recognized it over the life of the contract on a
straight-line basis.
Fair Value of Financial Instruments:
Financial instruments consist of cash and cash equivalents, accounts receivable,
accounts payable and debt, including floor plan notes payable. The carrying
amount of all significant financial instruments approximates fair value due
either to length or maturity or variable interest rates that approximate
prevailing market rates.
Inventories:
Parts and accessories inventories are stated at the lower of cost or market
using the first-in, first-out method. Vehicle inventories are stated at the
lower of cost or market using the specific identification method.
Concentration of Credit Risk:
Financial instruments that potentially subject the Company to credit risk
consist of cash equivalents and accounts receivable.
The Company's policy is to review the amount of credit exposure to any one
financial institution and place investments with financial institutions
evaluated as being creditworthy. In the ordinary course of business, the Company
has bank deposits and overnight repurchase agreements that may exceed federally
insured limits. At September 30, 2005, the Company had $1,762,088 in excess of
the federally insured limit.
9
GIANT MOTORSPORTS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 2005 and 2004
(UNAUDITED)
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Concentration of Credit Risk(continued):
Concentration of credit risk, with respect to accounts receivable-customers, is
limited through the Company's credit evaluation process. The Company reviews the
credit history before extending credit. Generally, the Company does not require
collateral from its customers
Property and Equipment:
Property, equipment, and leasehold improvements are stated at cost. Maintenance
and repairs that do not add materially to the value of the asset nor appreciably
prolong its useful life are charged to expense as incurred. Gains or losses on
the disposal of property and equipment are included in the determination of
income.
Depreciation of property and equipment and amortization of leasehold
improvements are provided using the straight-line method over the following
estimated useful lives:
Fixtures, and equipment................. 3-7 years
Vehicles ............................... 5 years
Leasehold Improvements.................. 10 years
Impairment of Long-Lived Assets:
Long-lived assets are reviewed for impairment whenever events such as product
discontinuances, product dispositions or other changes in circumstances indicate
that the carrying amount may not be recoverable. An impairment loss is
recognized when the carrying amount of a long-lived asset exceeds the sum of
non-discounted cash flows expected to result from the asset's use and eventual
disposition. An impairment loss is measured as the amount by which the carrying
amount exceeds its fair value, which is typically calculated using discounted
expected future cash flows. The discount rate to these cash flows is based on
the Company's weighted average cost of capital, which represents the blended
after-tax costs of debt and equity. There were no indications of impairments at
September 30, 2005.
Income Taxes:
Income taxes are calculated using the liability method specified by Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes."
At September 30, 2005, income taxes are provided for amounts currently due and
deferred amounts arising from temporary differences between income for financial
reporting and income tax purposes.
10
GIANT MOTORSPORTS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 2005 and 2004
(UNAUDITED)
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Advertising Costs:
Advertising costs are expensed when incurred. Charges to operations amounted to
$1,653,923 and $815,241 for the nine months ended September 30, 2005 and 2004
respectively.
Earnings Per Share of Common Stock:
Historical net income per share is computed using the weighted average number of
shares of common shares outstanding. Diluted earnings per share (EPS) include
additional dilution from common stock equivalents, such as stock issuable
pursuant to the exercise of stock options and warrants. Common stock equivalents
were not included in the computation of diluted earnings per share when the
Company reports a loss because to do so would be anti-dilutive for the periods
presented.
The following is a reconciliation of the computation for basic and diluted EPS:
Nine Months Ended
September 30 September 30
2005 2004
----------- -----------
Net Income $ 877,707 $ 682,514
=========== ===========
Weighted-average common shares outstanding (Basic) 10,432,839 10,425,000
Weighted-average common stock equivalents:
Warrants 1,315,384 926,740
----------- -----------
Weighted-average common shares outstanding (Diluted) 11,748,223 11,351,740
=========== ===========
Use of Estimates:
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect certain reported amounts of assets and liabilities and 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.
11
GIANT MOTORSPORTS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 2005 and 2004
(UNAUDITED)
NOTE B - ACCOUNTS RECEIVABLE, NET
Accounts receivable consisted of receivables due from customers and dealers,
manufactures, employees, and finance companies for contracts in transit and is
net of an allowance for doubtful accounts of $25,000 at September 30, 2005.
NOTE C - INVENTORIES
Inventories consisted of vehicles and parts and accessories.
NOTE D - FIXED ASSETS
Fixed assets consisted of the following:
September 30
2005
------------
Fixtures and equipment $ 1,885,531
Vehicles 350,747
Leasehold improvements 264,328
------------
2,500,606
Less accumulated depreciation 655,598
------------
NET FIXED ASSETS $ 1,845,008
============
Depreciation expense charged to operations amounted to $238,789 for the nine
months ended September 30, 2005.
NOTE E - NOTES RECEIVABLE OFFICERS
Notes receivable officers consisted of advances to officers and advances to
companies that the officers own bearing interest at 6% with no stipulated
repayment terms. Interest income on these notes amounted to $8,259 for the nine
months ended September 30, 2005. It is anticipated the loans will be repaid by
December 31, 2005. The interest income is "netted" against interest expense for
financial statement purposes.
12
GIANT MOTORSPORTS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 2005 and 2004
(UNAUDITED)
NOTE F - NOTES PAYABLE - FLOOR PLANS
The Company has various floor plan financing agreements aggregating $15,474,363
at September 30, 2005. Interest is payable monthly and fluctuates with prime and
varies based on the type of unit financed and the length of time the unit
remains on the floor plan (ranging from 3% to 18% at September 30, 2005).
Principle payments are due upon the sale of the specific unit financed. The
floor plans are collateralized by substantially all corporate assets.
NOTE G - NOTES PAYABLE
Notes payable consisted of a $425,000 loan payable to Kings Motorsports, Inc. at
September 30, 2005 for the purchase of the assets of Chicago Cycles, Inc.
bearing interest at 6%, payable in full April 30, 2005. This note has been
renegotiated with regards to the repayment terms. It has been extended until
April 2006. The note has been paid in full as of October 13, 2005.
The Company has a $250,000 revolving line of credit with a bank, which
aggregates $249,863 at September 30, 2005. The revolving line of credit has no
stipulated repayment terms. This loan bears interest at prime (6.75% at
September 30, 2005) plus one percent and is collateralized by substantially all
of the Company's assets.
NOTE H - NOTE PAYABLE - OFFICER
Note payable to officer consisted of non-interest bearing advances from an
officer of the Company with no stipulated repayment terms. It is anticipated the
loans will be repaid by December 31, 2005.
NOTE I - LONG-TERM DEBT
Long-term debt consisted of various notes aggregating $1,052,360 at September
30, 2005. This amount matures at various times ranging from 2005 to 2009,
bearing interest at various rates ranging from 7.25% to 8% per year. The notes
are collateralized by substantially all of the Company's assets. The short-term
portion of long-term debt amounted to $214,760 as of September 30, 2005.
13
GIANT MOTORSPORTS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 2005 and 2004
(UNAUDITED)
NOTE J - LEASES
The Company leases its Illinois subsidiary retail facility under a ten year
agreement with a ten year renewal option. The payments on the lease will
commence in August 2005 at a monthly rent of $33,333 through May 2006 then
increasing to $40,000 per month from June 2006 through May 2007, $45,000 per
month from June 2007 through May 2008, $46,667 from June 2008 through May 2009
and then increasing 3% annually for the remaining term of the lease. The Company
will also be liable for a proportionate share of expenses and taxes over a
specified amount.
The following is a summary of future minimum lease payments under operating
leases that have initial or remaining noncancellable terms in excess of one year
as of September 30, 2005:
YEAR ENDING AMOUNT
----------- -------
2005 $ 156,367
2006 875,093
2007 947,209
2008 986,159
2009 1,009,810
2010 1,032,905
-------------
$ 5,007,542
=============
NOTE L - INCOME TAXES
Income taxes (credit) consisted of the following:
2005
-------------
Federal:
Current $ 411,000
Deferred (31,500)
-------------
379,500
-------------
State:
Current 41,000
Deferred (7,500)
-------------
33,500
-------------
TOTAL $ 413,000
=============
Income taxes paid amounted to $151,000 for the nine months ended September 30,
2005.
14
GIANT MOTORSPORTS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 2005 and 2004
(UNAUDITED)
NOTE K - INCOME TAXES (CONTINUED)
Deferred tax assets (liabilities) consisted of the following:
2005
--------
Deferred tax assets - current and long-term:
Goodwill and depreciation $ 1,600
========
NOTE L - RELATED PARTY TRANSACTIONS
Related Party Transactions:
Accounts receivable, affiliates consisted of the following:
2005
--------
Noninterest bearing advances to Marck's Real
Estate, LLC., a limited liability company
affiliated through common ownership
interest to be repaid within one year $249,966
========
Note receivable officers amounted to $147,261 at September 30, 2005 (See Note
E).
Note payable officer amounted to $236,316 at September 30, 3005 (See Note I).
The Company leases its Ohio subsidiary retail facility from a shareholder under
a five-year agreement with two five-year renewal terms. Charges to operations
amounted to $171,000 for the nine months ended September 30, 2005.
NOTE M - COMMON STOCK
The Company has 75,000,000 shares of common stock authorized, with 10,445,000
shares issued and outstanding at September 30, 2005. During the nine months
ended September 30, 2005, the Company issued 10,000 shares of common stock each
to two individuals who have performed outside services for the Company. The
stock was issued on June 16, 2005 when the fair market value of the stock was
$0.57 per share.
NOTE N - PREFERRED STOCK
The Company has 5,000,000 shares of preferred stock authorized, with a par value
of $.001 per share. Of such 5,000,000 shares of authorized preferred stock,
5,000 shares have been designated as Series A Convertible Preferred Stock, of
which 2,870 shares are issued and outstanding at September 30, 2005. On
September 16, 2005, the Company issued 2,870 shares of Series A Convertible
Stock, with a stated value of $1,000 per share, to accredited investors in a
private placement offering. Each share of Series A Convertible Preferred Stock
is convertible into 2,000 shares of the Company's common stock at September 30,
2005. The Company also issued in the private placement (i) warrants allowing
the investors to purchase up to 5,740,000 shares of the Company's common stock
and (ii) an option allowing the placement agent to purchase 287 shares of Series
A Convertible Preferred Stock and warrants to purchase up to 574,000 shares of
common stock.
15
GIANT MOTORSPORTS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 2005 and 2004
(UNAUDITED)
NOTE O - SUBSEQUENT EVENTS
The Company has renegotiated the terms and payoff amount with Kings Motorsports,
Inc. The balance of the loan, which amounted to $425,000, was due in full on
April 30, 2005. The balance was subsequently paid in full on October 13, 2005.
16
Item 2. Management's Discussion and Analysis or Plan of Operation
Certain statements in this report, including statements in the
following discussion, may constitute forward-looking statements made pursuant to
the Safe Harbor provisions of the Private Securities Litigation Reform Act of
1995. The Company would like to caution readers regarding certain
forward-looking statements in this document and in all of its communications to
shareholders and others, press releases, securities filings, and all other
communications. Statements that are based on management's projections, estimates
and assumptions are forward-looking statements. The words "believe," "expect,"
"anticipate," "intend," "will," and similar expressions generally identify
forward-looking statements. While the Company believes in the veracity of all
statements made herein, forward-looking statements are necessarily based upon a
number of estimates and assumptions that, while considered reasonable by the
Company, are inherently subject to significant business, economic and
competitive uncertainties and contingencies and known and unknown risks. Many of
the uncertainties and contingencies can affect events and the Company's actual
results and could cause its actual results to differ materially from those
expressed in any forward-looking statements made by, or on behalf of, the
Company.
General.
Our goal is to become one of the largest dealers of power sports vehicles
in the United States through acquisitions and internal growth.
The motorsports industry is highly fragmented with an estimated 4,000
retail stores throughout the United States. We are attempting to capitalize upon
the consolidation opportunities available and increase our revenues and income
by acquiring additional dealers and improving our performance and profitability.
We plan to maximize the operating and financial performance of our
dealerships by achieving certain efficiencies that will enhance internal growth
and profitability. By consolidating our corporate and administrative functions,
we believe we can reduce overall expenses, simplify dealership management and
create economies of scale.
We will specifically target dealers in markets with strong buyer
demographics that, due to under-management or under-capitalization, are unable
to realize their market share potential and can benefit substantially from our
systems and operating strategy.
Together with our two wholly-owned subsidiaries, we own and operate two
retail power sports superstores. Our core brands include Suzuki, Yamaha, Honda,
Ducati and Kawasaki. Our superstores operate under the names "Andrews Cycles"
and "Chicago Cycles." Andrews Cycles is located in Salem, Ohio, has
approximately 50 employees and operates from an approximately 75,000 square foot
facility. Chicago Cycles is located in the Chicago metropolitan area, has
approximately 81 employees and operates from an approximately 95,000 square foot
facility in Skokie, Illinois, pursuant to a ten-year lease we entered into in
October 2004.
17
Loan Transactions.
On April 30, 2004, we paid $1,675,000 of the purchase price for Chicago
Cycles by issuing to Kings Motorsports a 6% $1,675,000 aggregate principal
amount note (the "Note"), which Note initially provided for payment as follows:
(i) $500,000 on July 29, 2004, (ii) $250,000 on October 27, 2004, and (iii) the
remaining $925,000, plus accrued but unpaid interest on April 30, 2005. We
repaid all outstanding principal and interest on the Note, remaining due and
payable, on October 13, 2005.
To fund the amount payable at closing for Chicago Cycles, we borrowed
$1,250,000 from The Fifth Third Bancorp Bank (the "Bank"), pursuant to a term
loan. This loan, which initially matured on May 31, 2004, was refinanced with
the Bank through a term loan amortized over a 72 month period, but is payable in
full on May 31, 2007, bearing interest at prime plus one percent (7.75% at
September 30, 2005). Our payment obligations under this term loan also are
personally guaranteed by Russell Haehn and Gregory Haehn. This loan is also
secured by a first priority lien on all of our assets (including, without
limitation, the Chicago Cycles assets). As of September 30, 2005, the
outstanding amount of this term loan, including accrued interest thereon, was
$1,041,680.
On April 20, 2004, pursuant to a $500,000 aggregate principal amount
promissory note bearing interest at the rate of fourteen (14%) percent per annum
(the "Bridge Note"), we received, from a third party, an aggregate principal
amount bridge loan (the "Bridge Loan"). All outstanding principal on the Bridge
Note was due on October 15, 2004. To secure the repayment of principal and
interest on the Bridge Note, each of Russell Haehn and Gregory Haehn (i) pledged
to the lender 150,000 shares (300,000 shares in the aggregate) of common stock
owned by each of them, and (ii) guaranteed all of our payment obligations to the
lender. As partial consideration for the Bridge Loan, we issued to the lender a
five-year warrant to purchase 100,000 shares of common stock, at an exercise
price of $2.25 per share. We also granted the lender certain piggyback
registration rights with respect to the shares of common stock underlying the
warrant. We used the $500,000 Bridge Loan proceeds for working and operating
capital. On October 15, 2004, we repaid $250,000 of the principal amount
outstanding under the Bridge Loan. Pursuant to a letter agreement entered into
with the lender on October 6, 2004, payment of the remaining $250,000 of
principal and all accrued interest thereon was extended until January 15, 2005.
We paid the lender $2,500 in consideration for the extension. In September 2005,
the lender assigned its rights to $50,000 of the $250,000 principal amount then
outstanding to an affiliate of the lender, who in turn converted it into Series
A Preferred Shares and Series A Warrants in our September 2005 Private
Placement. On September 20, 2005, we used net proceeds from our September 2005
Private Placement, in the amount of $203,383.26 to repay the remaining
outstanding principal amount of the Bridge Loan and all accrued and unpaid
interest thereon.
We also have obtained two revolving lines of credit with the Bank, each in
the maximum amount of $250,000. The lines of credit bear interest at the rates
of 14% per annum and prime plus one percent (7.75% at September 30, 2005),
respectively, and have no stipulated repayment terms. At September 30, 2005, the
aggregate amount of principal and interest outstanding on these credit lines was
$249,863. These lines of credit are secured by a lien on substantially all of
our assets.
Financing Activities.
In September 2005, the Company sold to accredited investors, in a private
placement offering (the "September 2005 Private Placement"), 2,870 Series A
Preferred Shares and warrants to purchase up to of 5,740,000 shares of common
stock (the "Series A Warrants"), resulting in the receipt by the Company of
$2,820,000 of gross cash proceeds. These securities are convertible into the
shares of our common stock. After deduction of all offering expenses for the
September 2005 Private Placement, including the placement agent's commissions
and a nonaccountable expense allowance, the Company received net proceeds of
$2,485,163. The Company used these net proceeds for debt repayment, legal fees,
and general working capital purposes.
18
Revenue Recognition:
Vehicle Sales:
The Company records revenue when vehicles are delivered and title has
passed to the customer, when vehicle service or repair work is performed and
when parts are delivered. Sales promotions that are offered to customers are
accounted for as a reduction to the sales price at the time of sale. Incentives,
rebates and holdbacks offered by manufacturers directly to the Company are
recognized at the time of sale if they are vehicle specific, or as earned in
accordance with the manufacturer program rules and are recorded as a reduction
of cost of merchandise sold.
Finance, Insurance and Extended Service Revenues:
The Company arranges financing for customers through various financial
institutions and receives a commission from the lender equal to the difference
between the interest rates charged to customers and the interest rates set by
the financing institution. The Company also receives commissions from the sale
of various third party insurance products to customers and extended service
contracts. These commissions are recorded as revenue at the time the customer
enters into the contract. The Company is not the obligor under any of these
contracts. In the case of finance contracts, a customer may prepay or fail to
pay their contract, thereby terminating the contract. Customers may also
terminate extended service contracts, which are fully paid at purchase, and
become eligible for refunds of unused premiums. In these circumstances, a
portion of the commissions the Company receives may be charged back based on the
relevant terms of the contracts. The revenue the Company records relating to
commissions is net of an estimate of the ultimate amount of chargebacks the
Company will be required to pay. Such estimates of chargeback experience are
based on our historical chargeback expense arising from similar contracts. The
Company also acts as the warrantor on certain extended service contracts and
defers the revenue and recognizes it over the life of the contract on a
straight-line basis.
Results of Operations.
Nine Months Ended September 30, 2005 Compared to Nine Months Ended September 30,
2004
Revenues:
Revenues for the nine months ended September 30, 2005 were $83,784,883
representing an increase of $23,507,371 (39%) from the $60,277,512 reported for
the nine months ended September 30, 2004. Our results were impacted
significantly, in a positive manner, by the acquisition of Chicago Cycles on
April 30, 2004, and the inclusion of the additional revenues generated by
Chicago Cycles during the nine months ended September 30, 2005. These results
also reflect a generally higher level of sales activities at both of our
locations and our move to the larger facility in Chicago. Additionally, our
sales increase can also be attributed to our aggressive marketing and
advertising campaigns.
Cost of Sales:
Cost of sales for the nine months ended September 30, 2005 increased by
$20,275,849 (38%) from 2004. This increase reflects the additional cost of units
needed to realize the increase in sales, and is also significantly impacted by
the inclusion of the costs of Chicago Cycles' sales beginning in April 30, 2004,
and our move to the larger facility in Chicago.
19
Operating Expenses:
Selling, general and administrative expenses for the nine months ended
September 30, 2005 were $8,719,811, an increase of $3,097,712 (55%) over the
same period in 2004. The aggregate increase in such costs were principally
related to (i) additional selling, general and administrative expenses relating
to Chicago Cycles, commencing April 30, 2004, including increases of
approximately $671,000 in compensation payable to our salespersons and
$1,307,000 in advertising expenses, during the nine months ended September 30,
2005 and (ii) an approximate $85,000 increase in legal, accounting, auditing and
other professional fees, during the nine months ended September 30, 2005, which
additional fees were primarily associated with the ongoing compliance and
maintenance requirements of being a public company and our September 2005
Private Placement. Net interest expense increased approximately $93,564 to
$601,933 in the nine months ended September 30, 2005 as compared to the same
period in 2004. This increase is primarily due to (i) interest payable by the
Company relating to the loans we acquired to pay for Chicago Cycles and the
Bridge Loan, and (ii) an increase in interest bearing floor plan inventory, and
most significantly the addition of the floor plan inventory of Chicago Cycles.
Operating Income:
We had income from operations before other income (expense) for the nine
months ended September 30, 2005 of $1,793,080, as compared to income from
operations of $1,659,270 for the same period in 2004. This increase in income
from operations during the nine months ended September 30, 2005 as compared to
the same period in 2004, is a result of greater sales volume and an increase in
gross margin on our sales. Depreciation and amortization was approximately
$239,000 for the nine months ended September 30, 2005, as compared to $109,500
for the same period in 2004.
Income before Taxes:
We had income before provision for taxes, for the nine months ended
September 30, 2005 of $1,290,707, as compared with income before provision for
taxes of $1,168,214 for the same period in 2004. This increase in income before
taxes during the nine months ended September 30, 2005 as compared to the same
period in 2004, is a result of our greater sales volume and an increase in gross
margin on our sales. We had taxes of $413,000 for the nine months ended
September 30, 2005, as compared to taxes of $485,700 for the same period in
2004. Income taxes during the current period were reduced due in part to a net
operating loss carryforward from the first quarter of 2005.
Net Income:
We had net income of $877,707 for the nine months ended September 30,
2005, as compared to net income of $682,514 for the same period in 2004. This
increase in net income during the nine months ended September 30, 2005 as
compared to the same period in 2004, is a result of our greater sales volume, an
increase in gross margin on our sales, and the reduced income taxes for the
current period.
Three Months Ended September 30, 2005 Compared to Three Months Ended September
30, 2004
Revenues:
Revenues for the three months ended September 30, 2005 were $27,249,505
representing an increase of $924,418 (4%) from the $26,325,087 reported for the
three months ended September 30, 2004. Our results, during the three months
ended September 30, 2005, were impacted, in a positive manner, by a generally
higher level of sales activities at both of our locations and our move to the
larger facility in Chicago. Additionally, our sales increase can also be
attributed to our aggressive marketing and advertising campaigns.
20
Cost of Sales:
Cost of sales for the three months ended September 30, 2005 increased by
$231,916 (1%) from 2004. This increase reflects the additional cost of units
needed to realize the increase in sales, and is also impacted by our move to the
larger facility in Chicago.
Operating Expenses:
Selling, general and administrative expenses for the three months ended
September 30, 2005 were $3,236,829, an increase of $732,605 (29%) over the same
period in 2004. The aggregate increase in such costs were principally related to
(i) additional selling, general and administrative expenses relating to Chicago
Cycles, commencing April 30, 2004, including increases of approximately $230,000
in compensation payable to our salespersons and $588,000 in advertising
expenses, during the three months ended September 30, 2005 and (ii) an
approximate $35,000 increase in legal, accounting, auditing and other
professional fees, during the three months ended September 30, 2005, which
additional fees were primarily associated with the ongoing compliance and
maintenance requirements of being a public company and our September 2005
Private Placement. Net interest expense decreased approximately $21,113 to
$181,183 in the three months ended September 30, 2005 as compared to the same
period in 2004. This decrease is primarily due to a significant reduction in our
floor plan financing liability.
Operating Income:
We had income from operations before other income (expense) for the three
months ended September 30, 2005 of $681,489, as compared to income from
operations of $721,592 for the same period in 2004. This decrease in income from
operations during the three months ended September 30, 2005 as compared to the
same period in 2004, is primarily attributable to a relatively small increase in
the gross margin on our sales during the three months ended September 30, 2005
as compared to the same period in 2004, along with a significant increase in our
selling, general and administrative expenses, during the three months ended
September 30, 2005. Depreciation and amortization was approximately $125,500 for
the three months ended September 30, 2005, as compared to $49,550 for the same
period in 2004.
Income before Taxes:
We had income before provision for taxes, for the three months ended
September 30, 2005 of $565,726, as compared with income before provision for
taxes of $529,236 for the same period in 2004. This increase in income before
taxes during the three months ended September, 2005 as compared to the same
period in 2004, is almost entirely attributable to an increase of $55,480 in
other income, resulting from the Company's recapture of forfeited customer
deposits, and the $21,113 decrease in net interest expense, during those
comparable periods. We had taxes of $240,000 for the three months ended
September 30, 2005, as compared to taxes of $240,100 for the same period in
2004. This reflects the small percentage increase in income for those periods.
Net Income:
We had net income of $325,726 for the three months ended September 30,
2005, as compared to net income of $289,136 for the same period in 2004. This
increase in net income during the three months ended September 30, 2005 as
compared to the same period in 2004, is primarily attributable to the same
factors that attributed to the increase in net income before taxes for those
comparable periods.
21
Liquidity and Capital Resources.
Our primary source of liquidity has been cash generated by operations and
borrowings under various credit facilities. At September 30, 2005, we had
$703,605 in cash and cash equivalents, compared to $469,588 at June 30, 2005.
Until required for operations, our policy is to invest excess cash in bank
deposits and money market funds. Net working capital at September 30, 2005 was
$2,102,736 compared to $(669,204) at June 30, 2005. The Company's significant
increase in net working capital at September 30, 2005 as compared to at June 30,
2005, was mostly attributable to the $2,485,163 in net proceeds raised by the
Company in its September 2005 Private Placement, which, among other things, was
used to repay some of the Company's outstanding indebtedness.
The Company receives floor plan financing from six different motorcycle
manufacturers for whom the Company sells the manufacturers' products. The
Company uses such floor plan financing to assist it in financing and carrying
the Company's inventory necessary to achieve the Company's sales goals. Such
manufacturer's collateral includes all unit inventory plus a general lien on all
assets of Andrews Cycles and Chicago Cycles.
The Company has acquired the loans described under the heading Loan
Transactions above. Although the Company believes that its current borrowing
facilities together with its cash generated from operations, will be adequate to
meet its working capital requirements for its current operating levels, the
Company may in the future attempt to raise additional financing through the sale
of its debt and/or equity securities.
Seasonality
Our two main products - motorcycles and all terrain vehicles ("ATVs") are
subject to seasonality. Traditionally, the motorcycle season begins in late
February or early March and runs until September. In September/October, the sale
of ATVs increases while motorcycle sales decrease.
Impact of Inflation.
General inflation in the economy has driven the operating expenses of many
businesses higher, and, accordingly we have experienced increased salaries and
higher prices for supplies, goods and services. We continuously seek methods of
reducing costs and streamlining operations while maximizing efficiency through
improved internal operating procedures and controls. While we are subject to
inflation as described above, our management believes that inflation currently
does not have a material effect on our operating results, but there can be no
assurance that this will continue to be so in the future.
Critical Accounting Policy and Estimates.
Our Management's Discussion and Analysis or Plan of Operation section
discusses our consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States of
America, as promulgated by the PCAOB. The preparation of these financial
statements requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. On an on-going basis, management evaluates its estimates and
judgments, including those related to revenue recognition, accrued expenses,
financing operations, and contingencies and litigation. Management bases its
estimates and judgments on historical experience and on various other factors
that are believed reasonable under the circumstances, the results of which form
the basis for making judgments about the carrying value of assets and
liabilities that are not readily apparent from other sources. Actual results may
differ from these estimates under different assumptions or conditions. The most
significant accounting estimates inherent in the preparation of our financial
statements include estimates as to the appropriate carrying value of certain
assets and liabilities which are not readily apparent from other sources. These
accounting policies are described at relevant sections of this discussion and
analysis and in the notes to the consolidated financial statements included in
this annual report.
22
Item 3. Controls and Procedures
The term "disclosure controls and procedures" is defined in Rules
13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"). This term refers to the controls and procedures of a company
that are designed to ensure that information required to be disclosed by a
company in the reports that it files under the Exchange Act is recorded,
processed, summarized and reported within the required time periods. Our Chief
Executive Officer and our Chief Financial Officer have evaluated the
effectiveness of our disclosure controls and procedures as of December 31, 2004.
They have concluded that, as of that date, our disclosure controls and
procedures were effective at ensuring that required information will be
disclosed on a timely basis in our reports filed under the Exchange Act.
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Information is provided in our Current Report on Form 8-K filed with the
Securities and Exchange Commission on September 22, 2005.
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
23
Item 6. Exhibits
(a) Exhibits (Filed herewith)
31.1 Certification of the Chief Executive Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002 (Rule 13a-4(a))
31.2 Certification of the Chief Financial Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002 (Rule 13a-4(a))
32.1 Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002 (Rule 13a-14(b)).
32.2 Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002 (Rule 13a-14(b)).
24
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
GIANT MOTORSPORTS, INC.
Date: November 11, 2005 /s/ Russell A. Haehn
--------------------------------------------
Name: Russell A. Haehn
Title: Chairman of the Board of Directors,
Chief Executive Officer, Secretary
and a Director
(Principal Executive Officer)
Date: November 14, 2005 /s/ Gregory A. Haehn
--------------------------------------------
Name: Gregory A. Haehn
Title: President, Chief Operating Officer,
Treasurer, and a Director
(Principal Financial Officer)
25