UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
(Mark One)
|X| Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the quarterly period ended June 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)
(440) 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 preceding 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 |_|
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in rule 12b-2 of the Exchange Act)
Yes |_| No |X|
Indicate the number of shares outstanding of each of the Registrant's classes of
common stock, as of the latest practicable date.
As of January 20, 2006 the registrant had 10,445,000 shares of common stock,
$.001 par value, issued and outstanding.
GIANT MOTORSPORTS, INC.
INDEX TO FORM 10-Q/A
Page No.
--------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements 3
Condensed Consolidated Balance Sheets as of June 30, 2005
(Unaudited) and December 31, 2004 (Audited) 3
Condensed Consolidated Statements of Operations for the Six Months
and Three Months Ended June 30, 2005 and 2004 (Unaudited) 5
Condensed Consolidated Statements of Cash Flow for the Six Months
and Three Months Ended June 30, 2005 and 2004 (Unaudited) 6
Notes to Condensed Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial
Conditions and Results of Operations 19
Item 3. Quantitative and Qualitative Disclosures about Market Risk 28
Item 4. Controls and Procedures 29
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 31
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 31
Item 3. Defaults upon Senior Securities 31
Item 4. Submission of Matters to a Vote of Security Holders 31
Item 5. Other Information 31
Item 6. Exhibits 31
SIGNATURES 32
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
GIANT MOTORSPORTS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
June 30, 2005 Dec. 31, 2004
Unaudited Audited
-------------- --------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 469,588 $ 1,862,187
Accounts receivable, net 4,516,190 2,465,369
Accounts receivable, affiliates 65,823 65,823
Inventories 17,798,845 16,538,087
Accounts receivable, employees 42,254 --
Notes receivable, officers 135,099 254,029
Deferred federal income taxes 8,500 8,500
Prepaid expenses 37,296 61,875
Prepaid income taxes 151,000 --
-------------- --------------
TOTAL CURRENT ASSETS 23,224,595 21,255,870
-------------- --------------
FIXED ASSETS, NET 1,754,438 1,105,667
-------------- --------------
OTHER ASSETS
Intangibles, net 1,653,950 1,588,950
Deferred federal income taxes 1,600 --
Deposits 43,000 67,240
-------------- --------------
TOTAL OTHER ASSETS 1,698,550 1,656,190
-------------- --------------
$ 26,677,583 $ 24,017,727
============== ==============
The accompanying notes are an integral part of these
condensed consolidated financial statements.
3
GIANT MOTORSPORTS, INC.
CONDENSED CONSOLIDATED BALANCE SHEET (CONTINUED)
June 30, 2005 Dec. 31, 2004
Unaudited Audited
-------------- --------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable $ 1,349,863 $ 1,425,000
Notes payable, floor plans 19,380,306 17,788,706
Note payable, officer 236,361 --
Accounts payable, trade 1,442,628 1,226,986
Accrued expenses 364,909 172,281
Accrued warranty 45,000 90,000
Accrued income taxes 605,300 393,300
Customer deposits 254,672 344,140
Current portion of long-term debt 214,760 214,760
-------------- --------------
TOTAL CURRENT LIABILITIES 23,893,799 21,655,173
DEFERRED FEDERAL INCOME TAXES -- 37,400
LONG-TERM DEBT, NET 891,316 996,267
-------------- --------------
TOTAL LIABILITIES 24,785,115 22,688,840
-------------- --------------
COMMITMENTS
STOCKHOLDERS' EQUITY
Common stock, $.001 par value, authorized 75,000,000 shares,
10,445,000 shares and 10,425,000 issued and outstanding
at June 30, 2005 and December 31, 2004 10,445 10,425
Paid-in capital 1,026,114 1,014,534
Retained earnings 855,909 303,928
-------------- --------------
TOTAL STOCKHOLDERS' EQUITY 1,892,468 1,328,887
-------------- --------------
$ 26,677,583 $ 24,017,727
============== ==============
The accompanying notes are an integral part of these
condensed consolidated financial statements.
4
GIANT MOTORSPORTS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
For the six and three months ended June 30, 2005 and 2004
Six Months Ended Three Months Ended
June 30, June 30, June 30, June 30,
2005 2004 2005 2004
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
-------------- -------------- -------------- --------------
OPERATING INCOME
Sales $ 55,083,332 $ 33,163,590 $ 34,656,525 $ 22,167,499
Finance, insurance and extended service revenues 1,452,046 788,835 1,160,846 584,763
-------------- -------------- -------------- --------------
TOTAL OPERATING INCOME 56,535,378 33,952,425 35,817,371 22,752,262
COST OF MERCHANDISE SOLD 49,940,805 29,896,872 31,213,014 20,186,009
-------------- -------------- -------------- --------------
GROSS PROFIT 6,594,573 4,055,553 4,604,357 2,566,253
-------------- -------------- -------------- --------------
OPERATING EXPENSES
Selling expenses 3,612,003 1,942,826 2,145,619 1,346,762
General and administrative expenses 1,870,979 1,175,049 955,208 666,888
-------------- -------------- -------------- --------------
5,482,982 3,117,875 3,100,827 2,013,650
-------------- -------------- -------------- --------------
INCOME FROM OPERATIONS 1,111,591 937,678 1,503,530 552,603
-------------- -------------- -------------- --------------
OTHER INCOME AND (EXPENSE)
Other income, net 34,140 7,373 6,570 6,475
Interest expense, net (420,750) (306,073) (246,909) (217,359)
-------------- -------------- -------------- --------------
(386,610) (298,700) (240,339) (210,884)
-------------- -------------- -------------- --------------
INCOME BEFORE INCOME TAXES 724,981 638,978 1,263,191 341,719
PROVISION FOR INCOME TAXES 173,000 245,600 173,000 135,600
-------------- -------------- -------------- --------------
NET INCOME ATTRIBUTABLE TO
COMMON SHAREHOLDERS $ 551,981 $ 393,378 $ 1,090,191 $ 206,119
============== ============== ============== ==============
BASIC EARNINGS PER SHARE $ 0.05 $ 0.04 $ 0.10 $ 0.02
============== ============== ============== ==============
DILUTED EARNINGS PER SHARE $ 0.05 $ 0.03 $ 0.10 $ 0.02
============== ============== ============== ==============
WEIGHTED AVERAGE SHARES OUTSTANDING
BASIC 10,426,657 10,425,000 10,428,297 10,425,000
============== ============== ============== ==============
DILUTED 11,426,657 10,975,000 11,428,297 11,525,000
============== ============== ============== ==============
The accompanying notes are an integral part of these
condensed consolidated financial statements.
5
GIANT MOTORSPORTS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
For the six months ended June 30, 2005 and 2004
2005 2004
(Unaudited) (Unaudited)
-------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 551,981 $ 393,378
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation 145,810 59,870
Amortization 65,000 --
Deferred federal income taxes (39,000) (122,000)
Issue common stock for services 11,600
(Increase) in accounts receivable, net (2,050,821) (3,209,918)
(Increase) in accounts receivable, employees (42,254) --
(Increase) in inventories (1,260,758) (5,629,402)
Increase in floor plan liability 1,591,600 5,030,025
(Increase) decrease in prepaid expenses 24,579 (78,678)
(Increase) in prepaid income taxes (151,000) --
Increase (decrease) in customer deposits (89,468) 697,354
Increase in deferred service contract income -- 403,086
Increase in accounts payable trade 215,642 777,328
Increase in accounts payable affiliate -- 25,070
Increase in accrued income taxes 212,000 367,600
Increase in accrued expenses 192,628 223,087
Decrease in accrued warranty (45,000) --
-------------- --------------
NET CASH (USED IN) OPERATING ACTIVITIES (667,461) (1,063,200)
-------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of fixed assets (551,009) (666,421)
Decrease in accounts receivable affiliates -- 306,780
(Increase) decrease in notes receivable from officers 118,930 (97,539)
Covenant not to compete incurred (130,000)
Increase in deposits 24,240 --
-------------- --------------
NET CASH (USED IN) INVESTING ACTIVITIES (537,839) (457,180)
-------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES
Short-term borrowings (payments) on notes (75,137) 500,000
Long-term borrowings on note -- 1,250,000
Payments on long-term debt (104,951) (39,753)
Payments on note payable to officer (7,211) --
Distributions -- (345,667)
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 (187,299) 1,358,330
-------------- --------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (1,392,599) (162,050)
CASH AND CASH EQUIVALENTS, beginning of period 1,862,187 587,917
-------------- --------------
CASH AND CASH EQUIVALENTS, end of period $ 469,588 $ 425,867
============== ==============
The accompanying notes are an integral part of these
condensed consolidated financial statements.
6
GIANT MOTORSPORTS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
For the six months ended June 30, 2005 and 2004
2005 2004
(Unaudited) (Unaudited)
------------ ------------
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 $ 68,000 $ --
============ ============
Interest paid $ 395,406 $ 132,453
============ ============
Stock issued for outside services $ 11,600 $ --
============ ============
The accompanying notes are an integral part of these
condensed consolidated financial statements.
7
GIANT MOTORSPORTS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 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-Q 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
7,850,000 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. 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 Non-Competition Agreement with one of the
former owners and entered into an Employment Agreement with the other former
owner.
8
GIANT MOTORSPORTS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 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 June 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.
9
GIANT MOTORSPORTS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 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 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 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 June 30, 2005, the Company had $900,667 in excess of the
federally insured limit.
10
GIANT MOTORSPORTS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 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
Goodwill And Other Intangible Assets:
In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement
No. 142 "Goodwill and Other Intangible Assets". This statement addresses
financial accounting and reporting for acquired goodwill and other intangible
assets and supersedes APB opinion No. 17, "Intangible Assets". It addresses how
intangible assets that are acquired individually or with a group of other assets
(but not those acquired in a business combination) should be accounted for in
the financial statements upon their acquisition. This Statement also addresses
how goodwill and other intangible assets should be accounted for after they have
been initially recognized in the financial statements. The Company, in its
acquisitions, recognized $1,588,950 of goodwill. The Company performs its annual
impairment test for goodwill at year-end. In addition, the Company acquired a
Non-Compete Agreement in the amount of $500,000 effective January 1, 2005.
Originally the Agreement was to be amortized over two (2) years, expiring on
December 31, 2006. However, the holder of the Non-Compete Agreement violated the
agreement in June 2005, and the agreement was renegotiated to a one-year term
expiring December 31, 2005. The carrying value has been written down to a net
realizable value of $130,000 and will be amortized to the end of 2005.
Gross Carrying Accumulated
Amount Amortization
-------------- ------------
Non-Compete Agreements $ 130,000 $ 65,000
Goodwill $ 1,588,950 $ -0-
11
GIANT MOTORSPORTS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 2005 and 2004
(UNAUDITED)
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Income Taxes:
Income taxes are calculated using the liability method specified by Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes."
At June 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.
Advertising Costs:
Advertising costs are expensed when incurred. Charges to operations amounted to
$835,571 and $482,411 for the six months ended June 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
are 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:
Six Months Ended
June 30, 2005 June 30, 2004
-------------- --------------
Net Income (loss) $ 551,981 $ 393,378
============== ==============
Weighted-average common shares outstanding (Basic) 10,426,657 10,425,000
Weighted-average common stock equivalents:
Warrants 1,000,000 550,000
-------------- --------------
Weighted-average common shares outstanding (Diluted) 11,426,657 10,975,000
============== ==============
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.
12
GIANT MOTORSPORTS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 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 June 30, 2005.
NOTE C - INVENTORIES
Inventories consisted of vehicles and parts and accessories.
NOTE D - FIXED ASSETS
Fixed assets consisted of the following:
June 30, 2005
---------------
Fixtures and equipment $ 1,691,982
Vehicles 360,747
Leasehold improvements 264,328
---------------
2,317,057
Less accumulated depreciation 562,619
---------------
NET FIXED ASSETS $ 1,754,438
===============
Depreciation expense charged to operations amounted to $145,810 for the six
months ended June 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 $6,125 for the six
months ended June 30, 2005. The notes are expected to be repaid by December 31,
2005. The interest income is "netted" against interest expense for financial
statement purposes.
NOTE F - LINE OF CREDIT
The Company has a $250,000 revolving line of credit, which aggregates $249,863
at June 30, 2005. The revolving line of credit has no stipulated repayment
terms. The loan bears interest at prime (6.25% at June 30, 2005) plus one
percent, and is collateralized by substantially all of the Company's assets.
13
GIANT MOTORSPORTS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 2005 and 2004
(UNAUDITED)
NOTE G - NOTES PAYABLE - FLOOR PLANS
The Company has various floor plan financing agreements aggregating $19,380,306
at June 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 June 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 H - NOTES PAYABLE
Notes payable consisted of $850,000 loan payable to Kings Motorsports, Inc. at
June 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 Company also has an outstanding Bridge Loan with an independent funding
company bearing interest at 14%. This Bridge Loan, which is in a principal
amount of $500,000, was due in full on October 15, 2004. The Company paid
$250,000 of the outstanding principal amount by such date and also paid such
independent funding company a fee in the amount of $2,500 to extend the balance
until January 15, 2005. The Company has not made any additional principal
payments, but is currently making monthly interest payments. The balance as of
June 30, 2005 is $250,000, which is classified as a current liability.
NOTE I - NOTE PAYABLE - OFFICER
Note payable to officer consisted of non-interest bearing advances from an
officer of the Company with no stipulated repayment terms. The notes are
expected to be repaid by December 31, 2005.
NOTE J - LONG-TERM DEBT
Long-term debt consisted of various notes aggregating $1,106,076 at June 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 all long-term debt amounted to $214,760 as of June 30, 2005.
After the payment of an aggregate of $130,000 to one of the owners of King's
Motorsports, under the terms of a Non-Compete Agreement in which the Company
agreed to pay such owner a total of $500,000 in consideration for a covenant not
to compete with the Company's business (See Note A - Goodwill and Other
Intangible Assets), the Company, in May 2005, canceled the remaining payments
due thereunder, as a result of said owner's violation of the terms of the
Non-Compete Agreement. This indebtedness was no longer reflected in the
Company's financial statements as of June 30, 2005.
14
GIANT MOTORSPORTS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 2005 and 2004
(UNAUDITED)
NOTE K - 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 non-cancelable terms in excess of one year
as of June 30, 2005:
YEAR ENDING AMOUNT
----------- -------------
2005 360,917
2006 875,093
2007 947,209
2008 986,159
2009 1,009,810
2010 1,032,905
-------------
$ 5,212,093
=============
NOTE L - INCOME TAXES
Income taxes (credit) consisted of the following:
2005
-------------
Federal:
Current $ 171,000
Deferred (31,500)
-------------
139,500
-------------
State:
Current 41,000
Deferred (7,500)
-------------
33,500
-------------
TOTAL $ 173,000
=============
Income taxes paid amounted to $68,000 for the six months ended June 30, 2005.
15
GIANT MOTORSPORTS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 2005
(UNAUDITED)
NOTE L - 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 M - RELATED PARTY TRANSACTIONS
Related Party Transactions:
Accounts receivable, affiliates consisted of the following:
2005
-------------
Non-interest bearing advances to Marck's Real
Estate, LLC., a limited liability company
affiliated through common ownership
interest to be repaid within one year $ 65,824
=============
Note receivable officers amounted to $135,099 at June 30, 2005 (See Note E).
Note payable officer amounted to $236,361 at June 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 $114,000 for the six months ended June 30, 2005.
NOTE N - COMMON STOCK
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.
16
GIANT MOTORSPORTS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 2005
(UNAUDITED)
NOTE O - ACQUISITION OF KINGS MOTOTRSPORTS, INC.
On April 30, 2004, pursuant to an Asset Purchase Agreement (the "Asset
Agreement"), dated April 30, 2004 by and among the Company, King's Motorsports,
Inc., d/b/a Chicago Cycle ("Chicago Cycle"), Jason Haubner and Jerry Fokas, the
two (2) shareholders of Chicago Cycle, the Company acquired (the "Acquisition"),
substantially all of the assets of Chicago Cycle (the "Chicago Assets"). This
acquisition had been sought primarily to gain a larger market share of the
motorcycle industry. Through the acquisition, goodwill in the amount of
$1,588,950 was recognized and is being amortized over 15 years for income tax
purposes. In consideration for the Chicago Assets and pursuant to the Asset
Agreement, the Company (i) assumed certain specified liabilities of Chicago
Cycle, and (ii) agreed to pay to Chicago Cycle $2,925,000, as follows:
(a) $1,250,000 at the closing of the Acquisition (the "Initial Payment"),
and
(b) $1,675,000 through the issuance to Chicago Cycle of a 6% $1,675,000
aggregate principal amount promissory note (the "Note"). The principal amount of
the Note matures as follows:
(i) $500,000 on July 29, 2004
(ii) $250,000 on October 29, 2004, and
(iii) the remaining $925,000, plus accrued but unpaid interest on April
30, 2005.
The Note is secured by a second lien on the Chicago Assets pursuant to a
Commercial Security Agreement dated as of April 30, 2004, by and among the
Company and Chicago Cycle, and guaranteed pursuant to a Guaranty dated April 30,
2004 by and among Chicago Cycle, the Company, Russell Haehn and Gregory Haehn,
the current executive officers and controlling shareholders of the Company (each
an "Executive", and, collectively, the "Executives").
To fund the $1,250,000 Initial Payment, the Company pursuant to a Term Note
dated March 12, 2004, by and among the Company and The Fifth Third Bancorp Bank
(the "Bank") borrowed $1,250,000 (the "Initial Loan") from the Bank. The Initial
Loan, which matured on May 31, 2004, was refinanced with the Bank through a term
loan, which matures on May 31, 2010 (the "Term Loan"), which bears interest at
the rate of prime plus one percent (1%) per annum. The Company's payment
obligations under the Term Loan are guaranteed by the Executives pursuant to a
Secured Continuing Unlimited dated as of March 12, 2004 by each Executive and
the Bank. The Loan is also secured pursuant to a Security Agreement dated March
12, 2004 by and between the Bank and the Company, by a first priority lien on
all the assets of the Company (including, but not limited to, the Chicago
Assets).
17
GIANT MOTORSPORTS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 2005
(UNAUDITED)
NOTE O - ACQUISITION OF KINGS MOTOTRSPORTS, INC. (Continued)
In connection with the Acquisition and pursuant to the Asset Purchase Agreement,
the Company entered into a Non-Competition Agreement ("Non-Competition
Agreement"), dated April 30, 2004 with Mr. Haubner, pursuant to which Mr.
Haubner agreed to limit his business activities to those not competing with
Chicago Cycle until December 31, 2006. In consideration for the Non-Competition
Agreement, the Company agreed to pay Mr. Haubner a monthly fee of $20,833.
Effective June 15, 2005, Mr. Haubner violated the Agreement. The Company has
negotiated a total amount to be assigned to the Non-Competition Agreement of
$130,000, which will be paid through the end of 2005.
NOTE P - SUBSEQUENT EVENTS
The Company is in the process of renegotiating the terms and payoff amount with
Kings Motorsports, Inc. The balance of the loan, which amounted to $850,000, was
due in full on April 30, 2005. No payment has been made on the outstanding
balance. Management believes that the terms will be negotiated. As of June 30,
2005, a final settlement has not been reached. However, the repayment terms have
been extended to April 30, 2006.
18
Item 2. Management's Discussion and Analysis of Financial Conditions and
Results of Operations
Special Note of Caution Regarding Forward-Looking Statements
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, had
approximately 50 employees at June 30, 2005, and operated from an approximately
35,000 square foot facility on June 30, 2005. Chicago Cycles is located in the
Chicago metropolitan area, had approximately 81 employees at June 30, 2005 and
operated from an approximately 95,000 square foot facility in Skokie, Illinois.
19
Overview of Economic Trends
Effects of Increasing Interest Rates
Notwithstanding our increase in sales for the six month period ended June
30, 2005 compared to the same period in 2004, a significant portion of which was
due to our acquisition of Chicago Cycles in April 2004, we believe that if
interest rates on consumer loans continue to rise, as they have during the last
twelve months, this could reasonably be expected to have a material adverse
effect on the sales of our power sports products, and more specifically the
sales of new vehicles. In 2004, approximately $25 million of the approximately
$70.7 million of our power sports sales (35.3%) were financed. Although we did
not experience a material reduction in sales through June 30, 2005, the
uncertainties created in the consumer financing market as a result of continuing
increases in interest rates, can reasonably be expected to have a negative
impact on the sale of new motorcycles in the next 12 to 24 months due to the
increased costs to our customers.
We believe that consumer interest in lower-priced used motorcycles will
significantly rise, as a result of the increased costs of financing. With the
acquisition of our Chicago Cycles dealership we have added sales of used
motorcycles to our business. From January 1, 2005 through June 30, 2005,
approximately $2.9 million of Chicago Cycles' approximately $18.9 million in
revenues (15.3%) were generated from sales of used motorcycles. Although our
Andrews Cycles dealership has not yet generated material revenues from the sale
of used motorcycles, we commenced sales of used motorcycles at Andrews Cycles
during the quarter ended June 30, 2005, and intend to substantially increase
sales in 2006. We also intend to increase sales of used motorcycles at Chicago
Cycles during the remainder of 2005 and thereafter. Although there can be no
assurance, we believe that our greater focus on sales of lower-priced used
motorcycles, which generally provide larger sales margins, will help make up for
any reduction in sales of new motorcycles.
Reduction in Units by Manufacturers
Manufacturers of the motorcycles we sell have recently begun to reduce the
number of units they manufacture, normally with respect to some higher-end
models, in order to increase the price per unit. Because of our position in the
market, we believe that we are generally able to receive a larger allocation of
these models than many other dealers. Since this pricing normally results in
greater sales margins, reduced unit sales and higher pricing by manufacturers,
in the future, could result in a material increase in our revenues and profits,
provided that there are a sufficient number of customers willing to pay higher
prices for these more limited produced models.
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. As of June 30, 2005, we had paid $825,000 of the principal amount of the
Note. As of June 30, 2005, we attempted to negotiate an extended payment plan
for the payment of the outstanding balance, but were unable to enter into any
such agreement with the Holder of the Note. At such time, we did not believe
that the holder of the Note would declare the Note to be in default, and we
intended to pay the outstanding principal and interest when sufficient funds
were available. The Note is secured by a second lien on Chicago Cycles' assets,
and personally guaranteed by Russell Haehn and Gregory Haehn. Subsequent to June
30, 2005, the date of the financial statements included in this report, we made
additional payments of principal and interest on the Note until the remaining
amount due and payable was fully paid on October 13, 2005.
20
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 (7.25% at June
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 June 30, 2005, the outstanding amount of this term
loan, including accrued interest thereon, was $1,093,760.
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, a 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. We did not make any additional payments of
principal through June 30, 2005, the date of the financial statements filed with
this report, however, we continued to make monthly interest payments at the rate
of 14% per annum through such date. Subsequent to June 30, 2005, 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
shares of Series A Convertible Preferred Stock and certain warrants in a private
placement we closed in September 2005 (the "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 a revolving line of credit with the Bank, in the
maximum amount of $250,000. The line of credit bears interest at the rate of
prime plus one percent (7.25% at June 30, 2005), and has no stipulated repayment
terms. At June 30, 2005, the aggregate amount of principal and interest
outstanding on this credit line was $249,863. This line of credit is secured by
a lien on substantially all of our assets.
Anticipated Funding of Operations
The amount required to fund the growth our ongoing operations, as well as
the means by which we obtain this funding, will be wholly dependent on the
magnitude and timeframes we set for any growth in our business. Based on our
current expected growth in the next 12 to 24 months, we expect to fund our
ongoing operations as follows:
21
Cash Flow from Operations
We intend to significantly increase our cash flow from operations by
growing sales within our current business structure and through the acquisition
of other power sports dealers. Based on our current business plan, we believe
that we will begin to generate sufficient cash flows from operations to fund the
growth of our business during the third quarter of 2007. To the extent that the
growth of our business involves the acquisition of other dealers, our ability to
do so will depend on the availability of the types of financing discussed below.
Bank Financing
We have a revolving credit line with Fifth Third Bancorp in a total
available amount of $250,000 of which $249,863 was funded at June 30, 2005. At
June 30, 2005 we were exploring other bank financing which would provide us with
available funding of at least $1,000,000, and would be on more favorable terms
than our revolving credit line with the Bank. Although, we believe that an
increased amount of financing should be available to us, as result of our low
outstanding indebtedness, we cannot assure you that we will be able to obtain
financing in an amount sufficient to meet our needs to grow our business.
Certain lending institutions may not be willing to provide debt financing to us,
due to the fact that we have granted security interests in virtually all of our
inventory and accounts receivable to the manufacturers and other institutions
that provide us with floor plan financing for our motorcycles and other power
sports equipment. Lenders may refuse to accept subordinated security positions
or may require us to accept less favorable terms to provide debt financing,
which would make it more difficult for us to replace our current credit line
with lines providing more favorable terms and/or increased funding availability.
Equity Financing
At June 30, 2005 we were exploring the acquisition of equity financing in
an maximum amount of $2,500,000 for the purpose of funding our working capital
needs, as well as the repayment of indebtedness under the outstanding Note to
King's Motorsports and the Bridge Loan. We did not on such date have a
commitment for any such financing and there was no assurance that we would be
able to obtain financing on acceptable terms. Although we did not have plans to
raise funds, in addition to the amount described above, through the sale of our
equity securities, to directly fund our working capital needs, to the extent
that the growth of our business involves the acquisition of other power sports
dealers, we would most likely be required to raise additional funds through the
sale of common stock or preferred stock to consummate any of these acquisitions.
It could be difficult for us to raise funds in amounts and on terms sufficient
to fund any of these proposed acquisitions.
Funding of Future Acquisitions
Given our experience in financing the purchase of the Chicago Cycles
Assets, we believe that the terms of future acquisitions, to the extent that
they involve significant amounts of debt financing, will require substantially
longer periods of time for repayment, which we anticipate to be at least 48
months, in order for these acquisitions to be financially viable for us. We
intend to give careful consideration to these terms when deciding whether to
acquire debt financing in connection with future acquisitions.
22
Results of Operations.
Six Months Ended June 30, 2005 Compared to Six Months Ended June 30, 2004
June 30, 2005 June 30, 2004
(Six Months) (Six Months) Increase (Decrease) % Change
------------- ------------- ------------------- --------
Revenues $56,535,378 $33,952,425 $22,582,953 66%
Cost of Sales $49,940,805 $29,896,872 $20,043,933 67%
Operating Expenses $5,482,982 $3,117,875 $2,365,107 76%
Operating Income $1,111,591 $937,678 $173,913 19%
Income b/f Taxes $724,981 $638,978 $86,003 13%
Net Income $551,981 $393,378 $58,603 15%
Revenues:
Revenues for the six months ended June 30, 2005 were $56,535,378
representing an increase of $22,582,953 (66%) from the $33,952,425 reported for
the six months ended June 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
six months ended June 30, 2005 in the approximate amount of $18,933,690. 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 six months ended June 30, 2005 increased by
$20,043,933 (67%) to $49,940,805, during the six months ended June 30, 2005, as
compared to $29,896,872 for the same period in 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 cost of Chicago Cycles' sales
beginning in April 30, 2004, which represented approximately $16,639,907 of our
cost of sales for the six months ended June 30, 2005.
Operating Expenses:
Selling, general and administrative expenses for the six months ended June
30, 2005 were $5,482,982, an increase of $2,365,107 (76%) over $3,117,875 for
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 $942,000 in compensation payable to our salespersons and $353,000
in advertising expenses, during the six months ended June 30, 2005 and (ii) an
approximate $126,000 increase in legal, accounting, auditing and other
professional fees, during the six months ended June 30, 2005, which additional
fees were primarily associated with the ongoing compliance and maintenance
requirements of being a public company. Net interest expense increased
approximately $114,677 to $420,750 in the six months ended June 30, 2005 as
compared to $306,073 during 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, which represented approximately $119,436 of
net interest expense for the six months ended June 30, 2005.
23
Operating Income:
We had income from operations before other income (expense) of $1,111,591
for the six month period ended June 30, 2005, as compared to income from
operations of $937,678 for the same period in 2004. This increase in income from
operations during the six months ended June 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 $210,000
for the six months ended June 30, 2005, as compared to $60,000 for the same
period in 2004.
Income before Taxes:
We had income before provision for taxes, for the six months ended June
30, 2005 of $724,981, as compared with income before provision for taxes of
$638,978 for the same period in 2004. This increase in income before taxes
during the six months ended June 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 $173,000 for the six months ended June 30, 2005, as
compared to taxes of $245,600 for the six months ended June 30, 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 a net income of $551,981 for the six months ended June 30, 2005, as
compared to net income of $393,378 for the same period in 2004. This increase in
net income during the six months ended June 30, 2005 as compared to the same
period in 2004, is a result of our greater sales volume, an increase in gross
margin on sales, and the reduced income taxes for the current period.
Three Months Ended June 30, 2005 Compared to Three Months Ended June 30, 2004
June 30, 2005 June 30, 2004
(Three Months) (Three Months) Increase (Decrease) % Change
-------------- -------------- ------------------- --------
Revenues $35,817,371 $22,752,262 $13,065,109 57%
Cost of Sales $31,213,014 $20,186,009 $11,027,005 54%
Operating Expenses $3,100,827 $2,013,650 $1,087,177 54%
Operating Income $1,503,530 $552,603 $950,927 172%
Income b/f Taxes $1,263,191 $341,719 $921,472 269%
Net Income $1,090,191 $206,119 $884,072 429%
Revenues:
Revenues for the three months ended June 30, 2005 were $35,817,371
representing an increase of $13,065,109 (57%) from the $22,752,262 reported for
the three months ended June 30, 2004. Our results 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.
Cost of Sales:
Cost of sales for the three months ended June 30, 2005 increased by
$11,027,005 (54%) to $31,213,014, during the three months ended June 30, 2005,
as compared to $20,186,009 for the same period in 2004. This increase reflects
the additional cost of units needed to realize the increase in sales, and is
also significantly impacted by the additional units purchased as a result of our
move to the larger facility in Chicago.
24
Operating Expenses:
Selling, general and administrative expenses for the three months ended
June 30, 2005 were $3,100,827, an increase of $1,087,177 (54%) over $2,013,650
for 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 $557,000 in compensation payable to our salespersons
and $103,000 in advertising expenses, during the three months ended June 30,
2005 and (ii) an approximate $26,000 increase in legal, accounting, auditing and
other professional fees, during the three months ended June 30, 2005, which
additional fees were primarily associated with the ongoing compliance and
maintenance requirements of being a public company. Net interest expense
increased approximately $29,550 to $246,909 in the three months ended June 30,
2005 as compared to $217,359 during 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, which represented approximately
$81,000 of net interest expense for the three months ended June 30, 2005.
Operating Income:
We had income from operations before other income (expense) of $1,503,530
for the three month period ended June 30, 2005, as compared to income from
operations of $552,603 for the same period in 2004. This increase in income from
operations during the three months ended June 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 $91,500 for
the three months ended June 30, 2005, as compared to $39,500 for the same period
in 2004.
Income before Taxes:
We had income before provision for taxes, for the three months ended June
30, 2005 of $1,263,191, as compared with income before provision for taxes of
$341,719 for the same period in 2004. This increase in income before taxes
during the three months ended June 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 $173,000 for the three months ended June 30, 2005, as
compared to taxes of $135,600 for the three months ended June 30, 2004. This
increase in taxes reflects greater income during the three months ended June 30,
2005. 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 a net income of $1,090,191 for the three months ended June 30,
2005, as compared to net income of $206,119 for the same period in 2004. This
increase in net income during the three months ended June 30, 2005 as compared
to the same period in 2004, is a result of our greater sales volume, an increase
in gross margin on sales, and the reduced income taxes for the current period.
25
Liquidity and Capital Resources.
Our primary source of liquidity has been cash generated by operations and
borrowings under various credit facilities. At June 30, 2005, we had $469,588 in
cash and cash equivalents, compared to $1,862,187 at December 31, 2004. Until
required for operations, our policy is to invest excess cash in bank deposits
and money market funds. Net working capital at June 30, 2005 was ($669,204)
compared to ($399,303) at December 31, 2004. The Company's negative net working
capital at June 30, 2005, was mostly attributable to its financing of the
Chicago Cycles acquisition through short-term debt, as well as an increase in
floor plan financing, as a result of the additional inventory acquired in the
Chicago Cycles acquisition.
The Company receives floor plan financing from five 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.
Inventory Management.
We believe that successful inventory management is the most important
factor in determining our profitability. In the power sports business, and
particularly as it relates to the sale of motorcycles, there is normally a
limited timeframe for the sale of current year models. For example, if we are
unable to sell a significant portion of our 2005 models before the 2006 models
are released, it could be very difficult for us to sell our remaining inventory
of 2005 models. Therefore, our goal is to limit sales of carryover products
(i.e. products that remain in inventory after the release of new models) to no
more than 10% of our total sales each year. This is accomplished by making all
of our purchasing decisions based on sales information for the prior year and
then utilizing aggressive sales and marketing techniques during the early part
of a model year in order to assure the timely sale of our products.
Additionally, by limiting our carryover to 10% of total sales, we also are
able to benefit from cash incentives provided by manufacturers with respect to
most of these products. These cash incentives minimize our need to reduce prices
for these models, as our customers are provided with cash reimbursement directly
from the manufacturers. Similarly, we are able to use the cash incentives
provided on our carryover products to promote new models, as the incentives
generate greater showroom traffic.
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.
26
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 of Financial Condition and
Results of Operations 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 consolidated financial statements requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the consolidated 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, fixed assets, inventory, accounts
receivable, 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. Set forth below are the policies that we have
identified as critical to our business operations and the understanding of our
results of operations or that involve significant estimates. For detailed
discussion of other significant accounting policies see Note A, Summary of
Significant Accounting Policies, of Notes to Consolidated Financial Statements,
contained elsewhere in this report.
Intangibles and Long-lived Assets - Goodwill is tested for impairment on an
annual basis, or more frequently if events or circumstances indicate that
impairment may have occurred. The Company is subject to financial statement risk
to the extent that intangible assets become impaired due to decreases in the
fair market value of the related underlying business.
We estimate the depreciable lives of our property and equipment, including any
leasehold improvements, and review them on an on-going basis. The Company
believes that the long-lived assets are appropriately valued. However, the
assumptions and estimates used may change, and the Company may be required to
record impairment to reduce the carrying value of these assets.
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.
Revenue Recognition: 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.
27
Off-Balance Sheet Arrangements.
We have no off-balance sheet arrangements.
Contractual Obligations
We have entered into various contractual obligations, which may be
summarized as follows:
-------------------------------------------------------------------------------------------------------------------------------
Contractual Obligations Payments due by period
----------------------------------------------------------------------------
Less than 1 More than 5
Total year 1-3 years 3-5 years years
-------------------------------------------------------------------------------------------------------------------------------
Long-Term Debt Obligations $ 1,106,076 $ 458,320 $ 647,756 -- --
-------------------------------------------------------------------------------------------------------------------------------
Capital (Finance) Lease Obligations $ 7,608,583 $ 156,367 $ 1,982,668 $ 2,047,716 $ 3,421,832
-------------------------------------------------------------------------------------------------------------------------------
Operating Lease Obligations -- -- -- -- --
-------------------------------------------------------------------------------------------------------------------------------
Purchase Obligations As Needed
-------------------------------------------------------------------------------------------------------------------------------
Other Long-Term Liabilities Reflected on the
Company's Balance Sheet under the GAAP of the
primary financial statements -- -- -- -- --
-------------------------------------------------------------------------------------------------------------------------------
Total $ 8,714,659 $ 614,687 $ 2,630,424 $ 2,047,716 $ 3,421,832
-------------------------------------------------------------------------------------------------------------------------------
Item 3. Quantitative and Qualitative Disclosure about Market Risk
The Company is exposed to market risk in the ordinary course of its
business. These risks are primarily related to changes in short-term interest
rates. The potential impact of the Company's exposure to these risks is
presented below:
Interest Rates
Floor Plan Financing
We purchase new and used vehicle inventory by utilizing floor plan
financing provided by lending institutions, as well as manufacturers of certain
of the products we sell, including Kawasaki Motor Finance Company and America
Honda Finance. We had outstanding indebtedness under floor plan notes of
$19,380,306 and $17,788,706, at June 30, 2005 and December 31, 2004,
respectively. Interest rates in connection with our floor plan financing
28
generally fluctuate based on the prime rate, the type of product being financed
and the length of time that such product remains on the floor plan. During the
first six months of 2005, interest rates on our floor plan financing ranged from
a low of 5.64% to a high of 10.9%. Since we are dependent to a significant
extent on our ability to finance the purchase of inventory, increases in the
prime rate of interest could have a significant negative impact on our income
from operations, as a result of the greater interest we will be required to pay
with respect to our floor plan financing. While increases in the prime rate did
not have a significant impact on our floor plan financing in 2004 and during the
first six months of 2005, continued increases would, in all likelihood, result
in a reduction in our income from operations during the remainder of 2005 and
thereafter. Although we cannot determine the precise impact of rate increases,
we believe that we would begin to experience a material negative impact on our
financial condition if the prime rate were to increase to 10% from its rate at
June 30, 2005 of 6.25%.
Line of Credit
We also have an existing revolving credit line with Fifth Third Bancorp,
the interest rate of which fluctuates with the prime rate, at prime plus one
percent. Since the aggregate outstanding indebtedness of this line of credit was
$249,863 and $250,000 at June 30, 2005 and December 31, 2004, respectively, we
do not believe that fluctuations in the prime rate under our credit line will
have more than a slight negative impact on our income from operations.
Hedging Activities
We normally invest any available cash in short-term investments and do not
currently have any investment strategies to hedge against increases in interest
rates. Additionally, although we do not currently intend to commence any such
hedging investments in the future, in the event that we determine that there is
a substantial risk that increases in interest rates would have a material
negative impact on our business, we may consider such hedging strategies at that
time.
Foreign Exchange Rates
We are not currently, and have not in the past, been subject to
fluctuations in exchange rates of foreign currencies against the U.S. Dollar,
since virtually all of the vehicles, accessories and parts that we purchase in
connection with our business are purchased from the U.S. subsidiaries of
Japanese manufacturers in U.S. Dollars. Additionally, all of our product sales
are made in the United States in U.S. Dollars. In the event that our business
model changes in the future, and we either purchase products in foreign
currencies such as Japanese Yen, or sell products outside of the United States,
for which we accept payment in foreign currencies, we could become subject to
exchange rate fluctuations at that time.
Item 4. Controls and Procedures
Our management evaluated, with the participation of our principal
executive officer and principal financial officer, the effectiveness of our
disclosure controls and procedures as of the end of the period covered by this
report (June 30, 2005). Based on this evaluation, our principal executive
officer and our principal financial officer have concluded that, as of the end
of the period covered by this report, our disclosure controls and procedures
were effective. Disclosure controls and procedures mean our controls and other
procedures that are designed to ensure that information required to be disclosed
by us in our reports that we file or submit under the Securities Exchange Act of
1934 is recorded, processed, summarized and reported within the time periods
specified in the SEC's rules and forms. Disclosure controls and procedures
include, without limitation, controls and procedures designed to ensure that
information required to be disclosed by us in our reports that we file or submit
under the Securities Exchange Act of 1934 is accumulated and communicated to our
management, including our principal executive officer and principal financial
officer, as appropriate to allow timely decisions regarding required disclosure.
29
There have been no changes in our internal control over financial
reporting that occurred during the quarter ended June 30, 2005 that has
materially affected, or is reasonably likely to materially affect, our internal
control over financial reporting.
30
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
Not applicable.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Not applicable.
Item 3. Defaults Upon Senior Securities.
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
Item 5. Other Information
None
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-14(a)).
31.2 Certification of the Principal Financial Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002 (Rule 13a-14(a)).
32.1 Certification of the Chief Executive Officer 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 of the Principal Financial Officer 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)).
31
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: January 23, 2006 By: /s/ Russell A. Haehn
--------------------------------------------
Name: Russell A. Haehn
Title: Chairman of the Board of Directors,
Chief Executive Officer and Secretary
(Principal Executive Officer)
Date: January 23, 2006 By: /s/ Gregory A. Haehn
-------------------------------------------
Name: Gregory A. Haehn
Title: President, Chief Operating Officer,
Treasurer and a Director
(Principal Financial and Accounting
Officer)
32