As filed with the Securities and Exchange Commission on February 13, 2006
Registration No. 333-131001
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
--------------------------------------
Giant Motorsports, Inc.
(Exact name of Registrant as Specified in its Charter)
Nevada 5900 33-1025552
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation or Classification Code Number) Identification No.)
organization)
13134 State Route 62
Salem, Ohio 44460
(330) 332-8534
(Address, including zip code, and Telephone Number,
including area code, of Registrant's Principal Executive Offices)
Gregory A. Haehn, President and COO
13134 State Route 62
Salem, Ohio 44460
(330) 332-8534
(Name, Address, including zip code, and Telephone Number,
including area code of Agent for Service)
With a copy to:
Lawrence G. Nusbaum, Esq.
Scott M. Miller, Esq.
Gusrae, Kaplan, Bruno & Nusbaum, PLLC
120 Wall Street, 11th Floor
New York, NY 10005
(212) 269-1400
----------------------------------
Approximate Date of Proposed Sale to the Public: From time to time after
the effective date of the registration statement.
If any of the securities being registered on this Form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities Act,
check the following box. |X|:
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. |_|
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. |_|
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. |_|
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. |_|
CALCULATION OF REGISTRATION FEE (1)
====================================================================================================================================
Proposed Maximum
Title of Each Class of Amount to be Proposed Maximum Offering Aggregate Offering Amount of
Securities to be Registered Registered (2) Price Per Unit (3) Price (3) Registration Fee
Shares of common stock 6,314,000 $ .725 $4,577,650 $ 489.81
underlying Series A
redeemable convertible
preferred stock(4)
Shares of common stock 6,314,000 $ .725(6) $4,577,650 $ 489.81
underlying Series A Warrants(5)
Series A Warrants(7) 6,314,000 (8) (8) (8)
Shares of common stock 1,000,000 $ 1.00(6) $1,000,000 $ 107.00
underlying certain other
warrants offered hereby(9)
Shares of common stock 100,000 $ 2.25(6) $ 225,000 $ 24.08
underlying a certain other
warrant offered hereby(10)
Additional shares of common 12,628,000 $ .725 $9,155,300 $ 979.62
stock issuable with respect
to the Series A redeemable
convertible preferred stock;
the Series A Warrants and the
other warrants(11)
================================================================================
Total Amount of Registration Fee: $2,090.30
================================================================================
(1) The Company filed a Registration Statement on Form SB-2 (File No.
333-129216) with the SEC on October 24, 2005 (the "SB-2 Registration
Statement"). In lieu of filing an amendment to the SB-2 Registration
Statement, the Company filed a new Registration Statement on Form S-1
(File No. 333-131001) with the SEC on January 12, 2006 and concurrently
withdrew the SB-2 Registration Statement. The prospectus contained in this
Registration Statement includes selling shareholder information relating
to the same securities offered for resale in the prospectus contained in
the SB-2 Registration Statement, along with additional securities that
were erroneously omitted from the SB-2 Registration Statement. The
prospectus included in this Registration Statement also includes
additional disclosure that is required in a Registration Statement on Form
S-1. The Company previously paid a registration fee of $2,828.86 with the
filing of the SB-2 Registration Statement, which was credited to the
registration fees due upon the initial filing of this Registration
Statement.
(2) Pursuant to Rule 416, there are also being registered such indeterminable
additional securities as may be issued as a result of anti-dilution
provisions.
(3) Estimated pursuant to Rule 457(c) under the Securities Act, solely for the
purpose of calculating the registration fee, based on, except as otherwise
provided, the average of the high and low prices for the Company's common
stock as reported on the OTC Bulletin Board on January 10, 2006.
(4) Includes a total of (i) 5,740,000 shares of common stock into which
investors in the Company's September 2005 private placement may convert
their shares of Series A convertible preferred stock ("Series A Shares")
and (ii) an additional 574,000 shares of common stock into which the
placement agent in the September 2005 private placement may convert Series
A Shares available to it under an option granted to said placement agent.
This includes 374,000 shares of common stock available to the placement
agent that were erroneously omitted from the SB-2 Registration Statement.
(5) Includes a total of (i) 5,740,000 shares of common stock underlying the
warrants issued to the investors in the September 2005 private placement
and (ii) 574,000 shares of common stock underlying the warrants available
to the placement agent upon its exercise of the placement agent's option.
This includes 374,000 shares of common stock available to the placement
agent that were erroneously omitted from the SB-2 Registration Statement.
(6) Based on the greater of (i) the exercise price of the applicable warrants
and (ii) the average of the high and low prices for the Company's common
stock as reported on the OTC Bulletin Board on January 10, 2006.
(7) Includes (i) a total of 5,740,000 warrants, issued to investors in the
September 2005 private placement, to purchase shares of common stock and
(ii) an additional 574,000 warrants to purchase shares of common stock
issuable to the placement agent upon the exercise of the placement agent's
option. This includes 374,000 warrants available to the placement agent
that were erroneously omitted from the SB-2 Registration Statement.
(8) Pursuant to Rule 457(g), no separate registration fee is required with
respect to the warrants as they are being registered in the same
registration statement as the common stock issuable upon the exercise of
such warrants.
(9) Includes 1,000,000 shares of common stock underlying a warrant originally
issued on January 20, 2004, in consideration for financial advisory
services provided to the Company, in connection with the acquisition of
W.W. Cycles, Inc., currently a wholly-owned subsidiary of the Company.
(10) Includes 100,000 shares of common stock underlying a warrant issued on
April 20, 2004, in connection with a bridge loan provided to the Company
in the principal amount of $500,000.
(11) An estimated number of additional shares of common stock which may be
issued as a result of (i) full exercise price anti-dilution with respect
to the Series A Shares and the Series A Warrants and (ii) dividends
payable on the Series A Shares in shares of common stock. Includes an
estimated additional 748,000 shares of common stock which may be issued to
the placement agent, as described in this footnote, with respect to
securities erroneously omitted from the SB-2 Registration Statement.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. THE
SECURITIES MAY NOT BE SOLD UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
-------------------------------
Subject to Completion, February 13, 2006
------------------------------
PROSPECTUS
26,356,000 SHARES OF COMMON STOCK
AND
WARRANTS TO PURCHASE 6,314,000 SHARES OF COMMON STOCK
OF
GIANT MOTORSPORTS, INC.
The persons listed in this prospectus under "Selling Shareholders" may
offer and sell from time to time up to an aggregate of 13,728,000 shares of our
common stock issuable upon (i) the conversion of our Series A convertible
preferred stock ("Series A Shares"); (ii) the exercise of warrants granted by us
in connection with the purchase of the Series A Shares (the "Series A
Warrants"); and (iii) the exercise of certain other warrants issued by us (the
"Other Warrants"). Certain of these Selling Shareholders also may offer and
sell, from time to time, up to an aggregate of an additional 12,628,000 shares
of common stock which may be issued to them (i) as dividends on the Series A
Shares in lieu of cash dividends and (ii) pursuant to certain price
anti-dilution adjustments applicable to the Series A Shares and the Series A
Warrants. This prospectus also includes the offer and sale of the Series A
Warrants. Information on the Selling Shareholders, and the times and manner in
which they may offer and sell shares of our common stock and/or the Series A
Warrants, is provided under "Selling Shareholders" and "Plan of Distribution" in
this prospectus.
We will not receive any proceeds from the sale of the common stock or the
Series A Warrants by the Selling Shareholders, although we may receive proceeds
from the purchase of the shares of common stock underlying the Series A Warrants
and the Other Warrants. We will bear the costs and expenses of registering the
common stock and Series A Warrants offered by the Selling Shareholders. Selling
commissions, brokerage fees, and applicable transfer taxes are payable by the
Selling Shareholders.
Our common stock is listed on the Over-The-Counter Bulletin Board
("OTCBB") under the symbol "GMOS." On February 10, 2006, the closing price for
our common stock on the OTCBB was $0.72 per share. No trading market currently
exists for the Series A Warrants.
BEFORE PURCHASING ANY OF THE SECURITIES COVERED BY THIS PROSPECTUS, CAREFULLY
READ AND CONSIDER THE RISK FACTORS INCLUDED IN THE SECTION ENTITLED "RISK
FACTORS" BEGINNING ON PAGE 5. YOU SHOULD BE PREPARED TO ACCEPT ANY AND ALL OF
THE RISKS ASSOCIATED WITH PURCHASING THE SECURITIES, INCLUDING A LOSS OF ALL OF
YOUR INVESTMENT.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The date of this Prospectus is _________ __, 2006
TABLE OF CONTENTS
Page
----
PROSPECTUS SUMMARY........................................................... 1
RISK FACTORS................................................................. 5
A NOTE ABOUT FORWARD-LOOKING STATEMENTS...................................... 13
USE OF PROCEEDS.............................................................. 14
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS..................... 14
SELECTED CONSOLIDATED FINANCIAL DATA......................................... 16
SUPPLEMENTARY FINANCIAL INFORMATION - SELECTED QUARTERLY
CONSOLIDATED FINANCIAL DATA............................................... 18
SELLING SHAREHOLDERS......................................................... 19
PLAN OF DISTRIBUTION......................................................... 25
BUSINESS..................................................................... 28
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS................... 36
MANAGEMENT................................................................... 51
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS............................... 55
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT............... 57
DESCRIPTION OF SECURITIES.................................................... 59
LEGAL MATTERS................................................................ 66
EXPERTS...................................................................... 66
WHERE YOU CAN FIND MORE INFORMATION.......................................... 67
INDEX TO FINANCIAL STATEMENTS............................................... F-1
You should rely only on the information contained in this prospectus. We have
not authorized any other person to provide you with information different from
that contained in this prospectus. The information contained in this prospectus
is complete and accurate only as of the date on the front cover page of this
prospectus, regardless of the time of delivery of this prospectus or the sale of
any common stock or warrants. The prospectus is not an offer to sell, nor is it
an offer to buy, our common stock or Series A Warrants in any jurisdiction in
which the offer or sale is not permitted.
We have not taken any action to permit a public offering of our shares of
common stock or Series A Warrants outside of the United States or to permit the
possession or distribution of this prospectus outside of the United States.
Persons outside of the United States who came into possession of this prospectus
must inform themselves about and observe any restrictions relating to the
offering of the shares of common stock or warrants and the distribution of this
prospectus outside of the United States.
--------------------------------------------------------------------------------
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements and related notes thereto appearing
elsewhere in this prospectus.
The Company
Background
We were incorporated as American Busing Corporation under the laws of the
State of Nevada on August 5, 2003. On January 16, 2004, we acquired all of the
issued and outstanding shares of W.W. Cycles, Inc., the corporate entity that
conducts business under the name "Andrews Cycles" ("W.W. Cycles"), from Gregory
A. Haehn and Russell A. Haehn, our current officers and directors, and one other
employee of W.W. Cycles, in exchange for our issuance of an aggregate of
7,850,000 shares of our common stock, which resulted in W.W. Cycles' becoming
our wholly-owned subsidiary. On that same date, our two current officers and
directors also purchased an additional 150,000 shares of our common stock from a
then shareholder of the Company for an aggregate purchase price of $178,750.
Simultaneously with the closing of this acquisition, the then sole director and
officer of the Company resigned as a director and officer and was replaced by
our current officers and directors. Russell A. Haehn became the Chairman, Chief
Executive Officer, Secretary and a Director of the Company and Gregory A. Haehn
became the President, Chief Operating Officer, Treasurer and a Director of the
Company, which are the same positions in which they currently serve. We changed
our name from American Busing Corporation to Giant Motorsports, Inc., effective
as of April 5, 2004. We currently conduct all of our "Andrews Cycles" business
through our W.W. Cycles subsidiary. On April 30, 2004, we acquired substantially
all of the assets of King's Motorsports, Inc. (the "Chicago Cycles Assets"), the
corporate entity that conducted business under the name Chicago Cycle Center
("King's Motorsports"). We agreed to pay Kings Motorsports a total of $2,925,000
for the Chicago Cycle Assets as follows:
o $1,250,000 on the date of closing, which we borrowed from The Fifth
Third Bancorp; and
o $1,675,000 through the issuance to King's Motorsports of a 6% $1,675,000
aggregate principal amount note (the "King's Note"), which note was payable: (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, which
was repaid in full, with all accrued interest, on October 13, 2005.
Our Business
Giant Motorsports, Inc. ("us," "our," "we," the "Company" or "Giant")
through our two wholly-owned subsidiaries, owns and operates two retail power
sport superstores in the Midwestern United States. Our core brands include
Suzuki, Yamaha, Honda, Ducati, Kawasaki and Polaris. Our superstores operate in
Salem, Ohio and Chicago, Illinois under the names "Andrews Cycles" and "Chicago
Cycles," respectively. It is our plan to maximize the operating and financial
performance of our dealerships by achieving certain efficiencies both at the
store and corporate levels. We believe this will enhance internal growth and
profitability. We have begun, and plan to continue to centralize certain of our
administrative functions including accounting, finance, insurance, employee
benefits, strategic planning, marketing, purchasing and management information
systems (MIS). We believe that by acquiring additional dealerships that
complement our existing business, we can consolidate these functions, and we
will be able to reduce overall expenses, simplify dealership management, create
economies of scale with leveraged buying power and provide a level of expertise
that would otherwise be unavailable to each dealership individually.
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1
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Our executive offices are located at 13134 State Route 62, Salem, Ohio
44460 and our telephone number is (330) 332-8534.
The Offering
Up to 13,728,000 shares of our common stock which may be issued upon (1)
the conversion of our shares of Series A convertible preferred stock ("Series A
Shares") and exercise of warrants, all of which were issued in our September
2005 private placement, and such warrants ("Series A Warrants"); (2) (i) the
exercise of warrants for an aggregate of 1,000,000 shares of our common stock,
originally issued to Moneta Capital, LLC on January 20, 2004, in consideration
for corporate finance and financial advisory services provided to the Company
relating to the acquisition of our subsidiary, W.W. Cycles, and our continuing
business immediately after the acquisition and (ii) the exercise of a warrant
for 100,000 shares of our common stock issued on April 20, 2004, in connection
with a bridge loan in the principal amount of $500,000 provided by HSK Funding,
Inc. to the Company, the net proceeds of which were used for working and
operating capital (collectively, the "Other Warrants"), are being offered and
sold by the Selling Shareholders. We will not receive any of the proceeds from
the sale of these shares or the Series A Warrants, although we will, however,
receive the net proceeds from the exercise of the Series A Warrants and the
Other Warrants. Such shares of common stock include (1) 5,740,000 shares of our
common stock issuable upon the conversion of our Series A Shares and 5,740,000
shares of our common stock which may be purchased upon the exercise of Series A
Warrants, at an initial exercise price of $.50 per share, all of which shares of
preferred stock and warrants were sold in a private placement to accredited
investors in September 2005 (the "September 2005 Private Placement") and (2)
574,000 shares of our common stock issuable upon the conversion of our Series A
Shares and 574,000 shares of our common stock which may be purchased upon the
exercise of Series A Warrants, at an initial exercise price of $.50 per share,
which are issuable to the placement agent in the September 2005 Private
Placement upon its exercise of an option. Additionally, these shares of common
stock also include the shares issuable upon the exercise of the Other Warrants.
This prospectus also covers the offer and sale of the Series A Warrants and the
Series A Warrants issuable to the placement agent upon exercise of its option.
Up to an additional 12,628,000 shares of our common stock also may be
issued to the holders of Series A Shares as dividends, in lieu of the payment of
cash dividends, and pursuant to certain price anti-dilution provisions
applicable to the Series A Shares and Series A Warrants, all of which, to the
extent issued, also are being offered under this prospectus.
The 26,356,000 shares of common stock being registered on behalf of the
Selling Shareholders named in this prospectus is equal to approximately 252% of
the 10,445,000 shares of common stock currently outstanding. As of the date of
this prospectus, the Selling Shareholders would be able to sell an aggregate of
13,728,000 shares of common stock, assuming (i) the conversion of all of the
Series A Shares, (ii) the exercise of all of the Series A Warrants and Other
Warrants and (iii) the full exercise of the purchase option by the placement
agent in the September 2005 Private Placement.
The conversion rate applicable to the conversion of the Series A Shares
and the exercise price of the Series A Warrants (until the Series A Warrants are
listed on the OTC Bulletin Board) are subject to full price anti-dilution, in
the event we, subject to certain exceptions, issue additional shares of common
stock or securities convertible into shares of common stock, at an effective
price less than the then current conversion rate or warrant exercise price
($0.50 on the date of this prospectus). The following table sets forth examples
of this anti-dilution upon the issuance of additional shares of common stock at
an effective price of (i) $0.375 per share (25% less than the current conversion
and exercise prices); (ii) $0.25 per share (50% less than the current conversion
rate and warrant exercise price); and $0.125 per share (75% less than the
current conversion rate and warrant exercise price).
Total Number of Total Total
Common Shares into Total Number of Number of Shares Number of Shares
which initially Shares upon issuance upon issuance of upon issuance of
Convertible or of Additional Stock Additional Stock at Additional Stock at
Exercisable at $0.375 per share $0.25 per share $0.175 per share
----------------------------------------------------------------------------------------------------------------------
Series A Shares 6,314,000 8,400,000 12,628,000 21,000,000
----------------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------------
Series A Warrants 6,314,000 8,400,000 12,628,000 21,000,000
----------------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------------
Total 12,628,000 16,800,000 25,256,000 42,000,000
----------------------------------------------------------------------------------------------------------------------
Plan of Distribution
Sales of common stock and/or the Series A Warrants may be made by or for
the account of the Selling Shareholders in the over-the-counter market or on any
exchange on which our common stock and the Series A Warrants, respectively, may
be listed at the time of sale. Shares of common stock and Series A warrants may
also be sold in block transactions or private transactions or otherwise, through
brokers or dealers. Brokers or dealers may be paid commissions or receive sales
discounts in connection with such sales. The Selling Shareholders must pay their
own commissions and absorb the discounts. Brokers or dealers used by the Selling
Shareholders will be underwriters under the Securities Act of 1933. In addition,
any Selling Shareholders affiliated with a broker/dealer will be underwriters
under the Securities Act with respect to the common stock and/or the Series A
Warrants offered hereby. In lieu of making sales through the use of this
prospectus, the Selling Shareholders may also make sales of the shares of common
stock and/or the Series A Warrants covered by this prospectus pursuant to Rule
144 under the Securities Act.
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2
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Risk Factors
Investing in the common stock involves certain risks. You should review
these "Risk Factors" beginning on page 5.
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3
Summary Financial Information
Nine Months Ended September 30, Year ended December 31,
2005 2004 2004 2003 2002
(Restated) (Restated) (Restated)
---------- ---------- ---------- ---------- ----------
Condensed Consolidated
Statements of Income
Sales 83,784,883 60,277,512 77,615,237 45,217,270 38,461,692
Operating Expenses 8,935,361 5,622,099 7,756,715 3,973,368 3,902,158
Net Income attributable to
Common Shareholders (2,207,843) 682,514 958,061 558,502 1,014,408
Basic Earnings
per share (0.21) 0.07 0.09 0.07 0.13
Diluted earnings
per share (0.21) 0.06 0.08 0.07 0.13
Weighted Average Number
of shares outstanding
- Basic 10,432,839 10,425,000 10,425,000 7,850,000 7,850,000
- Diluted 11,748,223 11,351,740 12,001,503 7,850,000 7,850,000
As of September 30, As of December 31,
2005 2004 2004 2003
(Restated)
---------- ---------- ---------- ----------
Balance Sheet Data
Cash and Cash Equivalents 703,605 1,204,726 1,862,187 587,917
Accounts Receivable, net 3,375,001 4,078,762 2,465,369 1,285,106
Accounts Receivable, affiliates 249,966 -- 65,823 315,343
Inventories 17,316,251 14,243,801 16,538,087 10,986,080
Accounts Receivable, employees 24,138 -- -- --
Notes Receviable, Officers 147,216 802,247 254,059 679,405
Deferred federal income taxes 8,500 159,000 8,500 --
Prepaid expenses 35,369 99,339 61,875 8,000
Fixed assets, net 1,845,008 1,083,050 1,105,667 425,177
Total other assets 1,671,050 1,766,950 1,656,190 16,000
Total Assets 25,376,104 23,437,875 24,017,727 14,303,028
Total liabilities 20,888,297 22,096,402 22,688,840 13,271,819
Stockholders' Equity 4,487,807 1,341,473 1,328,887 1,031,209
4
RISK FACTORS
You should carefully review and consider the following risks as well as
all other information contained in this prospectus, including our consolidated
financial statements and the notes to those statements, before you decide to
purchase any of our securities. The following risks and uncertainties are not
the only ones facing us. Additional risks and uncertainties of which we are
currently unaware or which we believe are not material also could materially
adversely affect our business, financial condition, results of operations, or
cash flows. In any case, the value of our common stock and/or Series A Warrants
could decline, and you could lose all or a portion of your investment. To the
extent any of the information contained in this prospectus constitutes
forward-looking information, the risk factors set forth below are cautionary
statements identifying important factors that could cause our actual results for
various financial reporting periods to differ materially from those expressed in
any forward-looking statements made by or on behalf of Giant Motorsports, Inc.
and could materially adversely affect our financial condition, results of
operations or cash flows.
RISKS RELATED TO OUR BUSINESS
Our business is subject to the influence of the manufacturers of motorcycles and
the other power sports equipment we sell.
Each of our retail motorcycle and power sports dealerships operates
pursuant to dealership agreements between each applicable motorcycle, all
terrain vehicle, scooter and personal watercraft manufacturer (or authorized
distributor thereof) and the subsidiaries of the Company that operate such
dealerships, and we are dependent to a significant extent on our relationship
with such manufacturers. Manufacturers exercise a great degree of control over
dealerships, and the dealership agreements provide for termination or
non-renewal for a variety of causes. Actions taken by manufacturers to exploit
their superior bargaining position could have a material adverse effect on our
business. Furthermore, many of our dealership agreements require prior
manufacturer approval with respect to acquisitions of other motorcycle and/or
power sports dealerships, and a manufacturer may deny our application to make an
acquisition or seek to impose further restrictions on us as a condition to
granting approval of an acquisition.
We are dependent on the Manufacturers of the products we sell.
The success of each of our dealerships is, in large part, dependent upon
the overall success of the applicable manufacturers of our motorcycles and other
power sports products. Accordingly, our success is linked to the financial
condition, management, marketing, production and distribution capabilities of
these manufacturers. Events, such as labor strikes, that may adversely affect a
manufacturer, may also adversely affect our business. Similarly, the delivery of
motorcycles or other power sports products from manufacturers later than
scheduled, which may occur particularly during periods of new product
introductions, can lead to reduced sales during such periods. Furthermore, any
event that causes adverse publicity involving these manufacturers may have an
adverse effect on our business regardless of whether such event directly
involves any of our dealerships.
Risks associated with our ability to manage expansion as a result of
acquisitions.
The growth of our business depends in large part on our ability to manage
expansion, control costs in our operations and consolidate dealership
acquisitions into existing operations. This strategy will entail reviewing and
potentially reorganizing acquired dealership operations, corporate
infrastructure and systems and financial controls. Unforeseen expenses,
difficulties, complications and delays frequently encountered in connection with
the rapid expansion of operations could inhibit our growth and adversely affect
our financial condition, results of operations or cash flow.
5
Risks associated with our inability to identify suitable acquisition candidates.
There can be no assurance that we will be able to identify acquisition
candidates that would result in the most successful combinations or that we will
be able to consummate acquisitions on acceptable terms. The magnitude, timing
and nature of future acquisitions will depend upon various factors, including
the availability of suitable acquisition candidates, the negotiation of
acceptable terms, our financial capabilities, the availability of skilled
employees to manage the acquired companies and general economic and business
conditions. In particular, the increasing competition among potential acquirers
has resulted in higher prices being paid for attractive targets. If we are
unable to acquire other motorcycle and power sports dealerships on acceptable
terms we would be unable to realize our business plan which could adversely
affect our future business prospects.
We may not be able to obtain required approvals from manufacturers for
prospective acquisitions.
The growth of our business through the acquisition of other motorcycle and
power sports dealerships will depend on our ability to obtain the requisite
manufacturer approvals. There can be no assurance that manufacturers will grant
such approvals. While we are not aware of any manufacturers that limit the
number of dealerships that may be held by any one company, or the number of
dealerships that may be held in any geographic market, we believe that it is
currently the policy of some manufacturers to restrict any company from holding
contiguous dealerships (i.e. ownership of two dealerships without the existence
of an unaffiliated dealership located geographically in between such two
dealerships). We believe that our Andrews Cycles and Chicago Cycles
distributorships currently are two of the largest volume dealers of power sports
products in the Midwestern United States. If we continue to increase our market
share for the sales of such products, manufacturers may become more likely to
enforce these contiguous ownership restrictions against us. If we are unable to
obtain any such required approvals from manufacturers, it could be difficult for
us to realize our business plan which could adversely affect our future business
prospects.
Manufacturers may impose additional restrictions on our business as a condition
of granting approvals for any of our proposed acquisitions.
In connection with any future acquisitions, one or more manufacturers may
seek to impose further restrictions on us relating to their approval of an
acquisition. For example, manufacturers may condition such approvals upon our
agreement to implement certain measures at our existing dealerships, to provide
certain additional training to employees and to achieve higher customer
satisfaction ratings. If such goals are not attained, we may be precluded from
acquiring, whether directly from such manufacturers or through acquisitions,
additional dealerships, and it may lead such manufacturers to conclude that they
have a basis pursuant to which they may seek to terminate or refuse to renew our
existing dealerships with those manufacturers. Furthermore, factors outside our
control may cause a manufacturer to reject our application to make acquisitions.
Any of these actions by manufacturers could adversely affect our financial
condition, results of operations or cash flows.
We may be unable to obtain financing for the acquisitions that are available to
us.
Although we do not currently have any plans to raise additional financing
through the sale of any of our securities, we may, in the future, attempt to
obtain financing for acquisition opportunities through a combination of loans
and equity investments from commercial sources, seller debt financing, issuance
of our equity securities as part of the purchase price, and other sources.
Commercial sources will tend to come from investment funds, private equity
funds, and other non-traditional sources, usually at a very high borrowing cost.
Use of our equity securities could result in material dilution to our existing
shareholders. There can be no assurance that we will be able to obtain adequate
financing for any acquisition, or that, if available, such financing will be on
favorable terms.
6
Dependence on Floor Plan Financing.
We are dependent to a significant extent on our ability to finance the
purchase of inventory, which in the motorcycle and power sports retail
industries involves significant sums of money in the form of floor plan
financing. As of September 30, 2005, we had $15,474,363 of floor plan notes
payable. Substantially all the assets of our dealerships are pledged to secure
such indebtedness, which may impede our ability to borrow from other sources. We
currently have floor plan facilities with a variety of lenders, including
primarily GE Commercial Distribution Finance Corporation, Fifth Third Bank,
Kawasaki Motors Finance Company, and American Honda Finance. Several of such
lenders are associated with manufacturers with whom we have dealership
agreements. Consequently, deterioration of our relationship with a manufacturer
could adversely affect our relationship with the affiliated floor plan lender
and vice versa.
We have substantial outstanding indebtedness.
As of September 30, 2005, based upon our financial statements, our
outstanding indebtedness to third parties, including the $15,474,363 of floor
plan notes payable under our floor plan financing arrangements was approximately
$17,223,142. As of September 30, 2005 approximately $425,000 of our outstanding
indebtedness to third parties was represented by debt incurred by us, in
connection with the acquisition of Chicago Cycles, which reflected (1) the
remaining outstanding amount of the $1,250,000 we borrowed from the Fifth Third
Bank, pursuant to a Term Note dated March 12, 2004, to fund the initial
$1,250,000 payment for such acquisition and (2) the remaining outstanding amount
of the $1,675,000 portion of the purchase price of such acquisition that we
financed through King Motorsports, Inc., pursuant to a promissory note accruing
interest at 6% per annum. The original loan from Fifth Third Bank matured on May
31, 2004, and we converted the entire $1,250,000 principal amount of this loan
to a six (6) year term loan, which bears interest at the rate of prime plus one
percent (7.75% at September 30, 2005) and is secured by a first priority lien on
all of our assets, including the assets acquired from Chicago Cycles.
The motorcycle and power sports industries are subject to cyclical movements in
the economy.
Sales of motorcycles/power sports products, historically have been
cyclical, fluctuating with general economic cycles. During economic downturns,
this industry tends to experience similar periods of decline and recession as
the general economy. We believe that the industry is influenced by general
economic conditions and particularly by consumer confidence, the level of
personal discretionary spending, interest rates and credit availability. There
can be no assurance that the industry will not experience sustained periods of
decline in sales in the future, and that such decline would not have a material
adverse effect on our operations.
Our business experiences seasonal trends.
Our business is seasonal, with a disproportionate amount of our sales
occurring in the second and third fiscal quarters. This is particularly the
case, as our existing dealerships are in Chicago and Ohio, both of which
experience extremely cold winter seasons. In the event that we acquire future
dealerships in regions with more temperate climates all year round (e.g.
Southern Florida or Southern California), those dealerships may experience less
seasonality in sales, although there can be no assurances given that such
dealerships would not experience similar seasonal fluctuations.
7
We are dependent on foreign manufacturers, particularly from Japan, for our
products.
A significant portion of the motorcycle and other power sports products
sold by us, as well as the components and accessories for these products are of
foreign origin - primarily from Japan. Accordingly, we are subject to the import
and export restrictions of various jurisdictions and are dependent to some
extent upon general economic conditions in and political relations with these
foreign countries, particularly Japan. In the event of a severe downturn in the
Japanese economy or problems in political or economic relations between the U.S.
and Japan, such as, for example, disputes relating to import duties, subsidies,
etc., our business could be materially adversely affected.
The retail motorcycle/power sports business is highly competitive.
The motorcycle/power sports retailing industry is highly competitive with
respect to price, service, location and selection. There are an estimated 4,000
retail stores throughout the United States. We compete with numerous dealerships
in each of our market segments, many of which are large and have significant
financial and marketing resources. We also compete with private market buyers
and sellers of used motorcycles and other power sports products, dealers that
sell used motorcycles and other power sports products, service center chains and
independent shops for service and repair business. Some of these businesses are
capable of operating on smaller gross margins than those on which we are capable
of operating because they have lower overhead and sales costs. Our inability to
compete with these other businesses could have a material adverse effect on our
operations.
Our business is subject to environmental regulations.
Our business is subject to federal, state and local laws, ordinances and
regulations which establish various health and environmental quality standards,
and liability related thereto, and provide penalties for violations of those
standards. Under certain laws and regulations, a current or previous owner or
operator of real property may be liable for the costs of removal and remediation
of hazardous or toxic substances or wastes on, under, in or emanating from such
property. Such laws typically impose liability whether or not the owner or
operator knew of, or was responsible for, the presence of such hazardous or
toxic substances or wastes. Certain laws, ordinances and regulations may impose
liability on an owner or operator of real property where on-site contamination
discharges into waters of the state, including groundwater. Under certain other
laws, generators of hazardous or toxic substances or wastes that send such
substances or wastes to disposal, recycling or treatment facilities may be
liable for remediation of contamination at such facilities. Other laws,
ordinances and regulations govern the generation, handling, storage,
transportation and disposal of hazardous and toxic substances or wastes, the
operation and removal of underground storage tanks, the discharge of pollutants
into surface waters and sewers, emissions of certain potentially harmful
substances into the air and employee health and safety.
Business operations subject to such laws, ordinances and regulations
include the use, handling and contracting for recycling or disposal of hazardous
or toxic substances or wastes, including environmentally sensitive materials
such as motor oil, waste motor oil and filters, transmission fluid, antifreeze,
refrigerants, waste paint and lacquer thinner, batteries, solvents, lubricants,
degreasing agents, gasoline and diesel fuels. Our business is also subject to
other laws, ordinances and regulations as the result of the past or present
existence of underground storage tanks at our properties. Certain laws and
regulations, including those governing air emissions and underground storage
tanks, have been amended so as to require compliance with new or more stringent
standards as of future dates. We cannot predict what other environmental
legislation or regulations will be enacted in the future, how existing or future
laws or regulations will be administered or interpreted or what environmental
conditions may be found to exist in the future. Compliance with new or more
stringent laws or regulations, stricter interpretation of existing laws or the
future discovery of environmental conditions may require additional expenditures
on our part, some of which may be material.
8
We are heavily dependent on our management.
Our success depends to a large degree upon the skills of our senior
management team and current key employees at our subsidiaries. The Company
depends particularly upon the following key executives: Gregory A. Haehn, who is
our President, Chief Operating Officer and a director, and Russell A. Haehn, who
is our Chief Executive Officer and Chairman of the board of directors. In
addition, we rely on the management skills of Philip A. Andrews, the general
manager of our Andrews Cycles business conducted by our W.W. Cycles subsidiary
in Salem, Ohio, and we also rely on Jerry Fokas, the general manager of our
Chicago Cycle business conducted by our Chicago Cycles, Inc. subsidiary in
Chicago, Illinois.
We do not have employment contracts with either of our officers or Mr.
Andrews. We entered into an Employment Agreement with Mr. Fokas, employing him
as a general manager of Chicago Cycles for a two (2) year period. In
consideration for such employment, we agreed to, among other things, pay to Mr.
Fokas (1) a salary of $2,500 per week from May 1, 2004 to April 30, 2005, and
$3,000 per week from May 1, 2005 to April 30, 2006, and (2) a quarterly bonus
equal to five percent (5%) of Chicago Cycles' quarterly earnings before
interest, taxes, depreciation and amortization (as determined by the certified
public accounting firm that regularly provides accounting services to Chicago
Cycles and/or us).
We maintain Keyman life insurance on the life of Russell A. Haehn in an
amount of $2,000,000, with the beneficiary being our W.W. Cycles subsidiary. In
addition, we maintain Keyman life insurance on the life of Gregory A. Haehn in
an amount of $1,000,000, with the beneficiary being the Company.
In connection with the acquisition of Chicago Cycles, we entered into a
Noncompetition Agreement with Jason Haubner, one of the shareholders of Chicago
Cycles, pursuant to which Mr. Haubner agreed to limit his business activities,
after said acquisition, to those not competing with Chicago Cycles until
December 31, 2006. The loss of any of our key officers and employees or the
failure to attract, integrate, motivate, and retain additional key employees
could have a material adverse effect on our business.
In the event that we ever begin to provide financing to customers, our business
could be negatively impacted by customers' defaults on loans provided.
In the event we choose to provide financing to any of our customers, in
the future, to purchase our motorcycles and other power sports equipment, we may
assign a substantial portion of these loans to third-party financial
institutions in order to reduce our exposure to customer defaults, and will
receive a fee from these financial institutions for these assigned loan
contracts. With respect to loans that we choose not assign to third parties, or
are unable to do so, we will be subject to all of the ordinary risks relating to
customer defaults on such loans. In the event that the aggregate amount of these
defaults result in losses in excess of the amounts we have made allowances for,
this could have an adverse effect on our business, profitability and financial
condition. Additionally, if any customer to whom we provide financing is
adjudicated a bankrupt person, we may have no means of recourse to collect any
of the principal or interest outstanding on such loan. In the event that
financing operations ever become a material portion of our business, we intend
to establish an evaluation process designed to determine the adequacy of the
allowances we establish for loan defaults. While this evaluation process will
most likely use historical and other objective information, there would be no
assurance that we would not substantially underestimate potential defaults,
given that current management of the Company has little experience in the
equipment financing business. In such event we could not assure you that our
loan reserves would be sufficient to absorb future loan losses or prevent a
material adverse effect on our business, profitability or financial condition.
9
RISKS RELATED TO OUR SECURITIES
We do not expect to pay dividends.
Except for dividends that we are required to pay on our Series A Shares
(which dividends may be paid in cash or shares of our common stock, in our sole
discretion), we do not currently anticipate paying any cash dividends on any of
our capital stock in the foreseeable future. Furthermore, for the foreseeable
future, we intend to retain profits, if any, to fund our planned growth and
expansion. In the event that we desire to pay dividends on any shares of our
capital stock, in the future (other than on the Series A Shares), we are
required to obtain the separate approval of the holders of the Series A Shares
in order to declare and pay any such dividends. See "Risk Factors - Holders of
our Series A Shares have special approval rights on certain matters requiring
approval of our board of directors and/or shareholders."
Control by Management.
Subject to the requirement for us to obtain the separate approval of the
holders of our Series A Shares, with respect to certain matters, our officers
and directors may be able to influence matters requiring shareholders approval
because they own a majority of our outstanding shares of voting stock. Our
executive officers and directors beneficially own in the aggregate 9,020,000
shares of common stock (including options to purchase 1,500,000 shares of common
stock at an exercise price of $1.25 per share), or approximately 75.5% of our
outstanding shares of common stock. Because our Series A Shares are entitled to
vote along with our common stock on all matters presented to our shareholders
for approval, our executive officers and directors actually own approximately
51% of our outstanding shares of voting stock (giving effect to the voting
rights of the 2,870 Series A Shares outstanding at a rate of 2,000 votes for
each such preferred share outstanding, and assuming exercise of all options held
by such executive officers and directors). This concentration of ownership
provides such persons with the ability, except with respect to those matters
upon which the holders of the Series A Shares have a separate right of approval,
to control and influence all corporate decisions and policies of shareholder
voting matters, including, without limitation, the removal of directors.
Additionally, except with respect to those matters upon which the holders of the
Series A Shares have a separate right of approval, these persons would be able
to approve any proposed amendment to our charter, a merger proposal, a proposed
sale of assets or other major corporate transaction or a non-negotiated takeover
attempt. This concentration of ownership may discourage a potential acquiror
from making an offer to buy us, which, in turn, could adversely affect the
market price of our common stock and warrants.
Holders of our Series A Shares have special approval rights on certain
matters requiring approval of our board of directors and/or shareholders.
Under the provisions of our certificate of designation designating the
rights, preferences and privileges of our Series A Shares, the vote or consent
of the holders of at least a majority of our outstanding Series A Shares, voting
separately as a class, is required for the approval of certain matters including
(i) any alteration or repeal of our articles of incorporation or certificate of
designation that adversely affects the rights, preferences or privileges of the
Series A Shares, including to create, authorize or issue any series or shares of
senior stock or parity stock or to increase the amount of authorized capital
stock of any such class; (ii) the creation, authorization or issuance of any
series or shares of capital stock convertible into common stock which is on
parity with or senior to the Series A Shares in terms of liquidation, dividends
or otherwise; (iii) any merger, consolidation or entering into a business
combination or similar transaction, other than if (1) we are the surviving
entity and (2) our shareholders prior to such transaction continue to hold a
majority of our capital stock following the transaction; (iv) the incurrence or
permission to exist any inventory or equipment indebtedness or liens relating
thereto, except that we are permitted to borrow in connection with institutional
financing of inventory and equipment and mortgage financing in connection with
acquisitions of real estate; (v) (1) the declaration or payment of any dividends
on any of our capital stock (other than the Series A Shares), (2) the purchase,
redemption or retirement for value, of any of our capital stock (other than the
Series A Shares) or (3) the distribution of our assets, capital stock, warrants,
rights, options, indebtedness or obligations to our shareholders; (vi) the sale,
transfer or disposal of a material portion of our assets, unless the sale is not
of all or substantially all of our assets and is approved by a majority or our
independent and disinterested directors; and (vii) entering into any
transactions, or agreement or amending or modifying any existing agreement, with
any officers, directors or our principal shareholders, or any of their
affiliates, which transaction, agreement amendment or modification is not
approved by a majority of our independent and disinterested directors.
10
As a result of the foregoing rights granted to the holders of the Series A
Shares, as long as we have any Series A Shares outstanding, we will not be able
to (i) effect certain financing through the issuance of securities on parity
with or senior to the Series A Shares or (ii) enter into certain merger
transactions with other businesses or conduct certain other transactions,
without the approval of the holders of a majority of the outstanding Series A
Shares. In the event that the interests of the holders of the Series A Shares
are not aligned with the interests of our other shareholders, it is likely that
the holders of the Series A Shares will act in their own best interests, which
could be to the detriment of our other shareholders with respect to any matters
for which their approval is required. In addition, these special approval rights
may discourage a potential acquiror from making an offer to buy us, which, in
turn, could adversely affect the market price of our common stock and warrants.
Trading in our common stock is limited and the price of our common stock may be
subject to substantial volatility.
Our common stock is traded on the Over the Counter Bulletin Board, and
therefore the trading volume is more limited and sporadic than if our common
stock were traded on NASDAQ or a national stock exchange such as Amex.
Additionally, the price of our common stock may be volatile as a result of a
number of factors, including, but not limited to, the following:
o quarterly variations in our operating results;
o large purchases or sales of common stock;
o actual or anticipated announcements of new products or services by
us or competitors;
o acquisitions of new dealerships;
o investor perception of our business prospects or the
motorcycle/power sports industry in general;
o general conditions in the markets in which we compete; and
o economic and financial conditions.
11
If outstanding Series A Shares, options and warrants are exercised or converted,
the value of those shares of common stock outstanding just prior to the
conversion will be diluted.
As of February 7, 2006, there are outstanding Series A Shares convertible
into a total of 5,740,000 shares of our common stock and options and warrants to
purchase 8,340,000 shares of common stock, with exercise prices ranging from
$0.50 to $2.25 per share. If the holders exercise a significant number of these
securities at any one time, the market price of the common stock could fall. In
the event that the anti-dilution provisions contained in the Series A Shares and
the Series A Warrants are triggered and we also issue additional shares of our
common stock as dividends on the Series A Shares so that all or a significant
portion of the 26,356,000 shares of common stock become available for resale
pursuant to this prospectus, this could cause an even greater reduction in the
market price of our common stock. The value of the common stock held by other
shareholders will be diluted. The holders of the options and warrants have the
opportunity to profit if the market price for the common stock exceeds the
exercise price of their respective securities, without assuming the risk of
ownership. If the market price of the common stock does not rise above the
exercise price of these securities, then they will expire without exercise. The
holders of these options and warrants may also exercise their securities if we
are able to raise capital privately or from the public on terms more favorable
than those provided in these securities. We cannot predict exactly if, or when,
such a financing will be needed or obtained. Furthermore, we cannot predict
whether any such financing will be available on acceptable terms, or at all.
"Penny stock" regulations may impose certain restrictions on the marketability
of our securities.
The Securities and Exchange Commission has adopted regulations which
generally define a "penny stock" to be any equity security that has a price of
less than $5.00 per share or an exercise price of less than $5.00 per share,
subject to certain exceptions (including the issuer of the securities having net
tangible assets (i.e. total assets less intangible assets and liabilities) in
excess of $2,000,000 or average revenue of at least $6,000,000 for the last
three years). As a result, our common stock could be subject to these rules that
impose additional sales practice requirements on broker-dealers who sell our
securities to persons other than established customers and accredited investors
(generally persons with a net worth in excess of $1,000,000 or annual income
exceeding $200,000, or $300,000 together with their spouse). For transactions
covered by these rules, the broker-dealer must make a special suitability
determination for the purchase of such securities and have received the
purchaser's written consent to the transaction prior to the purchase.
Additionally, for any transaction involving a "penny stock," unless exempt, the
rules require the delivery, prior to the transaction, of a risk disclosure
document mandated by the Securities and Exchange Commission relating to the
"penny stock" market. The broker-dealer must also disclose the commissions
payable to both the broker-dealer and the registered representative, current
quotations for the securities and, if the broker-dealer is the sole market
maker, the broker-dealer must disclose this fact and the broker-dealer's
presumed control over the market. Finally, monthly statements must be sent
disclosing recent price information for the "penny stock" held in the account
and information on the limited market in "penny stocks." Consequently, although
the "penny stock" rules do not currently apply to our securities, if these rules
do become applicable in the future, this may restrict the ability of
broker-dealers to sell our securities.
12
A NOTE ABOUT FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements such as statements relating
to our financial condition, results of operations, plans, objectives, future
performance and business operations. These statements relate to expectations
concerning matters that are not historical fact. Accordingly, statements that
are based on management's projections, estimates, assumptions, and judgments are
forward-looking statements. These forward-looking statements are typically
identified by words or phrases such as "believes," "expects," "anticipates,"
"plans," "estimates," "approximately," "intend," and other similar words and
phrases, or future or conditional verbs such as "should," "would," "could," and
"may." These forward-looking statements are based largely on our current
expectations, assumptions, estimates, judgments, and projections about our
business and our industry, and they involve inherent risks and uncertainties.
Although we believe our expectations are based on reasonable assumptions,
judgments, and estimates, forward-looking statements involve known and unknown
risks, uncertainties, contingencies, and other factors that could cause our or
our industry's actual results, level of activity, performance or achievement to
differ materially from those discussed in or implied by any forward-looking
statements made by or on behalf of Giant Motorsports, Inc. and could cause our
financial condition, results of operations, or cash flows to be materially
adversely affected. In evaluating these statements, some of the factors that you
should consider include those described under "Risk Factors" and elsewhere in
this prospectus or incorporated herein by reference.
13
USE OF PROCEEDS
We will not receive any of the proceeds from the sale of the common stock
or Series A Warrants offered by this prospectus. The Selling Shareholders will
receive all of the proceeds.
We, however, will receive funds upon any exercise of the Series A Warrants
and Other Warrants held by the Selling Shareholders. If any of such warrants are
exercised, we will receive the exercise price for the warrants. If the Series A
Warrants are exercised, in full, we would realize proceeds, before expenses
(including a 5% warrant solicitation fee payable to HCFP/Brenner Securities LLC
for all warrant exercises solicited by it) in the amount of $3,157,000. If the
Other Warrants are exercised, in full, we would realize proceeds, before
expenses, in the amount of $1,225,000. Any funds received upon exercise of the
Series A Warrants and/or the Other Warrants would, in all likelihood, first be
applied to the repayment of any outstanding debt then due and payable and then
for operating capital for our business. At this time our management has not
determined any specific allocations for proceeds allocable to our operations,
but we will use the proceeds, on an as needed basis, as such proceeds become
available. In the event that at such time we have sufficient funds from cash
flow from our operations to satisfy all of our working capital requirements, we
may also consider prepaying a portion of our outstanding indebtedness to the
extent that management determines such prepayments to be in our best interests.
There can be no assurance that any of the Series A Warrants or the Other
Warrants will be exercised.
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Market Information
Our common stock is traded in the over-the-counter market on the Nasdaq
OTC Bulletin Board under the symbol "GMOS." The following table shows the price
range of the Company's common stock since it was initially quoted on November
19, 2003 until December 31, 2005. Prior to April 5, 2004, our common stock
traded in the over-the-counter market on the Nasdaq OTC Bulletin Board under the
symbol ASBC.
BID ASK
Quarter Ended High Low High Low
------------- ---- --- ---- ---
12/31/03 .250 .250 .250 .250
3/31/04 2.20 2.10 2.20 2.10
6/30/04 1.90 1.90 1.90 1.90
9/30/04 .85 .68 .85 .68
12/31/04 1.90 1.80 1.90 1.80
3/31/05 1.30 1.26 1.30 1.26
6/30/05 .61 .60 .61 .60
9/30/05 1.03 .95 1.03 .95
12/31/05 1.01 .58 1.06 .60
14
Holders
Our common stock is issued in registered form. Olde Monmouth Stock
Transfer Co., Inc., 200 Memorial Parkway, Atlantic Highlands, New Jersey 07716
(Telephone: 732-872-2727; Facsimile: 732-872-2728) is the registrar and transfer
agent for our common stock. On February 7, 2006, the shareholders' list of our
common stock showed 19 registered shareholders (which includes shares held in
street or nominee names) and 10,445,000 shares outstanding. We believe that on
February 7, 2006, there were approximately 85 beneficial owners of our common
stock.
On February 7, 2006, there were 14 registered holders of Series A Warrants
exercisable for an aggregate of up to 5,740,000 shares of common stock. We do
not currently have a warrant agent for the Series A Warrants, but are required
to engage a warrant agent for our Series A Warrants when the they are first
listed. We have agreed to also engage Olde Monmouth Stock Transfer Co., Inc. as
our warrant agent when the Series A Warrants are listed.
Dividends
We have never paid any dividends, and, except for dividends we are
required to pay on our Series A Shares, which dividends are payable in cash or
shares of our common stock, as determined in our sole discretion, we do not
anticipate any stock or cash dividends on any of our securities in the
foreseeable future.
15
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data presented below should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and our consolidated financial statements and the
notes thereto included elsewhere in this prospectus. Our statement of operations
data for the years ended December 31, 2004, 2003 (restated), and 2002 (restated)
and our balance sheet data as of December 31, 2004, 2003 (restated) and 2002
have been derived from our audited consolidated financial statements, all of
which except our balance sheet data at December 31, 2002, are included elsewhere
in this prospectus. Our statement of operations data for the years ended
December 31, 2001 and 2000 and our balance sheet data as of December 31, 2001
and 2000 have been derived from our unaudited consolidated financial statements,
which are not presented in this prospectus. The selected consolidated statements
of operations data for the nine months ended September 30, 2004 and 2005 and the
selected consolidated balance sheet data as of September 30, 2005 have been
derived from unaudited consolidated financial statements included elsewhere in
this prospectus. The unaudited consolidated financial statements include, in the
opinion of management, all adjustments that management considers necessary for
the fair presentation of the financial information set forth in those
statements. Historical results are not necessarily indicative of the results to
be expected in the future, and the results for the nine months ended September
30, 2005 should not be considered indicative of results expected for the full
year.
2000 2001 2002 2003 2004
---------- ---------- ---------- ---------- ----------
Net sales 18,680,494 29,161,043 38,461,692 45,217,270 77,615,237
========== ========== ========== ========== ==========
Income from Continuing operations 563,302 1,090,557 1,242,854 852,831 2,168,256
========== ========== ========== ========== ==========
Income from Continuing operation per share 0.07 0.14 0.16 0.11 0.21
========== ========== ========== ========== ==========
Total Assets 5,724,096 7,504,373 10,084,106 14,303,028 24,017,727
========== ========== ========== ========== ==========
Long Term debt obligations 176,384 478,471 366,044 547,073 2,636,027
========== ========== ========== ========== ==========
Redeemable preferred stock -- -- -- -- --
========== ========== ========== ========== ==========
Cash dividends declared per common -- -- -- -- --
========== ========== ========== ========== ==========
16
September 30 September 30
2005 2004
---------- ----------
Net sales 81,480,719 58,937,527
Income from Continuing operations 1,577,530 1,659,270
Income from Continuing operation per share 0.15 0.16
Total Assets 25,376,104 23,437,875
Long Term debt obligations 1,727,223 1,041,680
Redeemable preferred stock 2,870,000 --
Cash dividends declared per common -- --
17
SUPPLEMENTARY FINANCIAL INFORMATION
SELECTED QUARTERLY CONSOLIDATED FINANCIAL DATA
The following tables set forth unaudited quarterly operating results for
fiscal 2003, 2004 and the first three quarters of 2005 in dollars and as a
percentage of net revenue. This information has been prepared on a basis
consistent with the audited consolidated financial statements included elsewhere
herein and, in the opinion of management, contains all adjustments consisting
only of normal recurring adjustments, necessary for a fair presentation thereof.
These unaudited quarterly results should be read in conjunction with the
consolidated financial statements and notes thereto appearing elsewhere in this
prospectus. The operating results for any quarter are not necessarily indicative
of results for any future period. The sum of the quarterly earnings per share
may not total annual amounts reported in the consolidated financial statements
as a result of the fluctuation in the amount of weighted average common shares
used in the calculation of basic and diluted loss per share.
Earnings
Net Gross Net Income (Loss)
Quarter ending: Sales Profit (Loss) per share
--------------- --------- --------- ------- ---------
3/31/2003 9,590,644 1,160,652 186,140 0.02
6/30/2003 14,946,736 1,173,909 13,216 --
9/30/2003 12,722,447 1,229,541 199,204 0.03
12/31/2003 8,796,016 1,262,097 159,942 0.02
3/31/2004 11,200,162 1,489,299 187,259 0.02
6/30/2004 22,752,262 4,604,357 206,119 0.02
9/30/2004 26,325,087 3,225,816 289,136 0.03
12/31/2004 27,478,870 4,035,947 468,450 0.04
3/31/2005 20,718,007 1,990,216 (538,210) (0.05)
6/30/2005 35,817,371 4,604,357 949,083 0.09
9/30/2005 27,249,505 3,918,318 251,284 0.02
18
SELLING SHAREHOLDERS
The following table sets forth information as of February 7, 2006, with
respect to the securities of the Selling Shareholders that are being registered
for sale. These include shares of common stock which were acquired or may be
acquired by the Selling Shareholders pursuant to their exercise of their Series
A Shares purchased by them in our September 2005 Private Placement, and the
Series A Warrants issued under that placement. These shares also include shares
of our common stock beneficially owned by HCFP Brenner Securities LLC, a
registered broker/dealer, which were acquired or may be acquired by it through
the exercise of an option granted to it, as part of its compensation for
services rendered in connection with the September 2005 Private Placement, and
its subsequent conversion of the Series A Shares and exercise of the Series A
Warrants underlying its option. All of the Series A Warrants held by the Selling
Shareholders, including those held by the placement agent, expire in September
2010. These shares also include an additional 1,100,000 shares of common stock
which may be issued upon exercise of the Other Warrants. Other Warrants for an
aggregate of 1,000,000 shares of common stock will expire in January 2010 and
for 100,000 shares will expire in April 2009. Additionally, we also agreed to
register the Series A Warrants issued to the Selling Shareholders, and those
issuable to the placement agent upon its exercise of its option, which may be
exercised for a total of 6,314,000 shares of our common stock. The shares of
common stock beneficially owned by each of the Selling Shareholders and the
Series A Warrants are being registered to permit public secondary trading of
these shares and Series A Warrants, and the Selling Shareholders may offer these
shares and Series A Warrants for resale from time to time. See "Plan of
Distribution."
The shares being offered by the Selling Shareholders as set forth in the
table below include, for those holding Series A Shares and Series A Warrants,
their pro rata portion of an aggregate maximum of 12,628,000 shares that have
been reserved for issuance in the event (i) any exercise-price anti-dilution
adjustments (which are applicable to the (1) Series A Shares and (2) the Series
A Warrants prior to the listing of such Warrants, if ever, on the OTC Bulletin
Board) are required to be made and/or (ii) payment of dividends on the Series A
Shares are made in shares of common stock. These additional shares are referred
to below as "reserve shares."
The following table sets forth the names of the Selling Shareholders, the
number of shares of common stock, Series A Warrants owned beneficially by each
Selling Shareholder as of February 7, 2006 and the number of shares of common
stock and Series A Warrants that may be offered pursuant to this prospectus.
Except as may be identified in the footnotes to the table, none of the Selling
Shareholders has, or within the past three years has had, any position, office
or material relationship with us or any of our predecessors or affiliates. The
table has been prepared based upon information furnished to us by or on behalf
of the Selling Shareholders.
The Selling Shareholders may decide to sell all, some, or none of the
shares of common stock and/or Series A Warrants listed below. We cannot provide
you with any estimate of the number of shares of common stock or Series A
Warrants that any of the Selling Shareholders will hold in the future.
For purposes of this table, beneficial ownership is determined in
accordance with the rules of the SEC, and includes voting power and investment
power with respect to such shares. All percentages are approximate.
As explained below under "Plan of Distribution," we have agreed to bear
certain expenses (other than broker discounts and commissions, if any) in
connection with the registration statement, which includes this prospectus.
19
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Number of
Number of Shares
Warrants Offered by
Offered by this
Shares Beneficially Owned this Prospectus Shares Beneficially owned
Selling Shareholders Prior to Offering (1)(2) Prospectus (4) After the Offering (5)
------------------------------------------------------------------------------------------------------------------------------------
Number Percent(3) Number Percent
------------------------------------------------------------------------------------------------------------------------------------
Shirley Stone Koffman 540,000(6) 4.9% 100,000 400,000 -- --
------------------------------------------------------------------------------------------------------------------------------------
Meadowbrook Opportunity Fund LLC 549,000(7) 4.99% 300,000 1,200,000(7) -- --
------------------------------------------------------------------------------------------------------------------------------------
Vestal Venture Capital 540,000(8) 4.9% 1,740,000 6,960,000(8) -- --
------------------------------------------------------------------------------------------------------------------------------------
Richard Molinsky 200,000 1.9% 100,000 400,000(9) -- --
------------------------------------------------------------------------------------------------------------------------------------
Robert A. Melnick 200,000 1.9% 100,000 400,000(10) -- --
------------------------------------------------------------------------------------------------------------------------------------
Milton Koffman 540,000(11) 4.9% 400,000 1,600,000(11) -- --
------------------------------------------------------------------------------------------------------------------------------------
Israel Feit 200,000 1.9% 100,000 400,000(12) -- --
------------------------------------------------------------------------------------------------------------------------------------
Edward J. Gutman 400,000 3.7% 200,000 800,000(13) -- --
------------------------------------------------------------------------------------------------------------------------------------
Burton I. Koffman and 540,000(14) 4.9% 1,000,000 4,000,000(14) -- --
Ruthanne Koffman, as
joint tenants with a
right of survivorship
------------------------------------------------------------------------------------------------------------------------------------
Durban Investment Group, LLC 400,000 3.7% 200,000 800,000(15) -- --
------------------------------------------------------------------------------------------------------------------------------------
Tech-Aerofoam Products, Inc. 540,000(16) 4.9% 1,000,000 4,000,000(16)
------------------------------------------------------------------------------------------------------------------------------------
James Scibelli 400,000 3.7% 200,000 800,000(17) -- --
------------------------------------------------------------------------------------------------------------------------------------
Dov Schwartz 200,000 1.9% 100,000 400,000(18) -- --
------------------------------------------------------------------------------------------------------------------------------------
20
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Number of
Number of Shares
Warrants Offered by
Offered by this
Shares Beneficially Owned this Prospectus Shares Beneficially owned
Selling Shareholders Prior to Offering (1)(2) Prospectus (4) After the Offering (5)
------------------------------------------------------------------------------------------------------------------------------------
Number Percent(3) Number Percent
------------------------------------------------------------------------------------------------------------------------------------
Albert Nocciolino 400,000 3.7% 200,000 800,000(19) -- --
------------------------------------------------------------------------------------------------------------------------------------
HCFP/Brenner Securities LLC 540,000(20) 4.9% 574,000 2,296,000(20) -- --
------------------------------------------------------------------------------------------------------------------------------------
Thomas A. Gallo 460,000(21) 4.3% -- 250,000(21) -- --
------------------------------------------------------------------------------------------------------------------------------------
John S. Arnone 498,300(22) 2.3% -- 250,000(22) -- --
------------------------------------------------------------------------------------------------------------------------------------
Brendan C. Rempel 470,000(23) 4.3% -- 250,000(23) -- --
------------------------------------------------------------------------------------------------------------------------------------
Moneta Capital Advisors, Inc. 220,000 2.1% -- 220,000(24) -- --
------------------------------------------------------------------------------------------------------------------------------------
HSK Funding, Inc. 100,000 * -- 100,000(25) -- --
------------------------------------------------------------------------------------------------------------------------------------
Moira Stodden 10,000 * -- 10,000(26) -- --
------------------------------------------------------------------------------------------------------------------------------------
Douglas Gass 10,000 * -- 10,000(27) -- --
------------------------------------------------------------------------------------------------------------------------------------
Albert A. Auer 10,000 * -- 10,000(28) -- --
------------------------------------------------------------------------------------------------------------------------------------
-----------------------
* Less than 1%
(1) Includes all shares issued or to be issued pursuant to the conversion of
Series A Shares, Series A Warrants and/or Other Warrants held by the
Selling Shareholders, which may be converted or exercised within 60 days
after February 7, 2006.
21
(2) The actual number of shares of common stock issuable upon conversion of
the Series A Shares, the exercise of the Series A Warrants and the
exercise of the Other Warrants is subject to certain anti-dilution and
other adjustments.
(3) Percentage is based upon 10,445,000 shares of common stock outstanding on
February 7, 2006, plus, with respect to that Selling Shareholder only, all
shares of common stock that are issuable to it within 60 days after that
date, upon conversion of its Series A Shares, exercise of its Series A
Warrants and/or exercise of its Other Warrants.
(4) The Selling Shareholders are also offering hereunder such indeterminate
number of additional shares of common stock as may be issued to them
because of any future stock distributions, stock splits, similar capital
readjustments or other anti-dilution adjustments, relating to the Series A
Shares, the Series A Warrants and the Other Warrants.
(5) Assumes the sale of all shares of common stock and Series A Warrants that
may be sold in the offering.
(6) Represents Mrs. Koffman's beneficial ownership of 4.9% of the Company's
issued and outstanding shares of common stock. Mrs. Koffman and her
husband, Milton Koffman, have agreed to restrict their rights to convert
the Series A Shares and exercise Series A Warrants so that their combined
beneficial ownership of the Company's common stock is less than five
percent. Notwithstanding any restrictions on her beneficial ownership, the
number of shares offered by Mrs. Koffman by this prospectus includes an
aggregate of (i) 100,000 shares issuable upon the conversion of Series A
Shares; (ii) 100,000 shares issuable upon the exercise of Series A
Warrants; and (iii) 200,000 potential reserve shares.
(7) Represents Meadowbrook Opportunity Fund LLC's beneficial ownership of
4.99% of the Company's issued and outstanding shares of common stock.
Meadowbrook Opportunity Fund has agreed to restrict its right to convert
the Series A Shares and exercise Series A Warrants so that its beneficial
ownership of the Company's common stock is less than five percent.
Notwithstanding any restrictions on its beneficial ownership, the number
of shares offered by Meadowbrook Opportunity Fund by this prospectus
includes an aggregate of (i) 300,000 shares issuable upon the conversion
of Series A Shares; (ii) 300,000 shares issuable upon the exercise of
Series A Warrants; and (iii) 600,000 potential reserve shares. Michael
Ragins is a managing member of MYR Partners LLC, the manager of
Meadowbrook Opportunity Fund, and has sole voting power with respect to
the securities being offered for resale by Meadowbrook Opportunity Fund in
this prospectus.
(8) Represents Vestal Venture Capital's beneficial ownership of 4.9% of the
Company's issued and outstanding shares of common stock. Vestal Venture
Capital has agreed to restrict its right to convert the Series A Shares
and exercise Series A Warrants so that its beneficial ownership of the
Company's common stock is less than five percent. Notwithstanding any
restrictions on its beneficial ownership, the number of shares offered by
Vestal Venture Capital by this prospectus includes an aggregate of (i)
1,740,000 shares issuable upon the conversion of Series A Shares; (ii)
1,740,000 shares issuable upon the exercise of Series A Warrants; and
(iii) 3,480,000 potential reserve shares. Allan R. Lyons is the sole owner
and managing member of 21st Century Strategic Investment Planning, LC, the
general partner of Vestal Venture Capital, and has sole voting power with
respect to the securities offered for resale by Vestal Venture Capital in
this prospectus.
(9) Represents an aggregate of (i) 100,000 shares issuable upon the conversion
of Series A Shares; (ii) 100,000 shares issuable upon the exercise of
Series A Warrants; and 200,000 potential reserve shares.
(10) Represents an aggregate of (i) 100,000 shares issuable upon the conversion
of Series A Shares; (ii) 100,000 shares issuable upon the exercise of
Series A Warrants; and 200,000 potential reserve shares.
(11) Represents Mr. Koffman's beneficial ownership of 4.9% of the Company's
issued and outstanding shares of Common Stock. Mr. Koffman and his wife,
Shirley Stone Koffman, have agreed to restrict their rights to convert the
Series A Shares and exercise Series A Warrants so that their combined
beneficial ownership of the Company's Common Stock is less than five
percent. Notwithstanding any restrictions on his beneficial ownership, the
number of shares offered by Mr. Koffman by this prospectus includes (i)
400,000 shares issuable upon the conversion of Series A Shares; (ii)
400,000 shares issuable upon the exercise of Series A Warrants; and (iii)
800,000 potential reserve shares.
22
(12) Represents an aggregate of (i) 100,000 shares issuable upon the conversion
of Series A Shares; (ii) 100,000 shares issuable upon the exercise of
Series A Warrants; and (iii) 200,000 potential reserve shares.
(13) Represents an aggregate of (i) 200,000 shares issuable upon the conversion
of Series A Shares; (ii) 200,000 shares issuable upon the exercise of
Series A Warrants; and (iii) 400,000 potential reserve shares.
(14) Represents Mr. Koffman's beneficial ownership of 4.9% of the Company's
issued and outstanding shares of common stock. Mr. Koffman and
Tech-Aerofoam Products, Inc., a corporation with which he is affiliated,
have agreed to restrict their rights to convert the Series A Shares and
exercise Series A Warrants so that their combined beneficial ownership of
the Company's common stock is less than five percent. Notwithstanding any
restrictions on his beneficial ownership, the number of shares offered by
Mr. and Mrs. Koffman by this prospectus includes an aggregate of (i)
1,000,000 shares issuable upon conversion of Series A Shares; (ii)
1,000,000 shares issuable upon the exercise of Series A Warrants; and
(iii) 2,000,000 potential reserve shares. Mr. Koffman is also deemed to be
the beneficial owner of 100,000 shares issuable upon the exercise of Other
Warrants by HSK Funding, Inc., which may be exercised until January 2010
at an exercise price of $1.00 per share.
(15) Represents an aggregate of (i) 200,000 shares issuable upon the conversion
of Series A Shares; (ii) 200,000 shares issuable upon the exercise of
Series A Warrants; and (iii) 400,000 potential reserve shares. J. Leon
Ellman, Neil Ellman, Lance Ellman and Kevin Sirop, are each managers of
JLE Investment Managers, LLC, the manager of Durban Investment Group, LLC,
and each has sole voting power over the securities being offered for
resale by Durban Investment Group in this prospectus.
(16) Represents Tech-Aerofoam Products' beneficial ownership of 4.9% of the
Company's issued and outstanding shares of common stock. Tech-Aerofoam
Products and Burton Koffman, who is an affiliate of Tech-Aerofoam
Products, have agreed to restrict their rights to convert Series A Shares
and exercise Series A Warrants so that their combined beneficial ownership
of the Company's common stock is less than five percent. Notwithstanding
any restrictions on its beneficial ownership, the number of shares offered
by Tech-Aerofoam Products by this prospectus includes an aggregate of (i)
1,000,000 shares issuable upon conversion of Series A Shares; (ii)
1,000,000 shares issuable upon the exercise of Series A Warrants; and
(iii) 2,000,000 potential reserve shares. Burton I. Koffman, President,
David L. Koffman, Vice President, and Jeffrey Koffman, Vice President,
each has sole voting power over the securities being offered for resale by
Tech Aerofoam Products in this prospectus.
(17) Represents an aggregate of (i) 100,000 shares issuable upon the conversion
of Series A Shares; (ii) 100,000 shares issuable upon the exercise of
Series A Warrants; (iii) 100,000 shares issuable upon the conversion of
Series A Shares under Mr. Scibelli's IRA; (iv) 100,000 shares issuable
upon the exercise of Series A Warrants under Mr. Scibelli's IRA; and
400,000 potential reserve shares. Mr. Scibelli is a registered
representative with RG Securities, LLC, a registered broker-dealer.
Additionally, Mr. Scibelli has represented to us that he purchased his
Series A Shares and Series A Warrants as an investment for his own account
without a view to resell. Mr. Scibelli has further represented that he
does not have any agreements or understandings, directly or indirectly,
with any person to distribute the securities purchased by him.
(18) Represents an aggregate of (i) 100,000 shares issuable upon the conversion
of Series A Shares; (ii) 100,000 shares issuable upon the exercise of
Series A Warrants; and (iii) 200,000 potential reserve shares.
(19) Represents an aggregate of (i) 200,000 shares issuable upon the conversion
of Series A Shares; (ii) 200,000 shares issuable upon the exercise of
Series A Warrants; and (iii) 400,000 potential reserve shares.
(20) Represents HCFP/Brenner Securities' beneficial ownership of 4.9% of the
Company's issued and outstanding shares of common stock. HCFP/Brenner
Securities has agreed to restrict its right to convert the Series A Shares
and exercise Series A Warrants so that its beneficial ownership of the
Company's common stock is less than five percent. Notwithstanding any
restrictions on its beneficial ownership, the number of shares offered by
HCFP/Brenner Securities by this prospectus includes an aggregate of (i)
(1) 574,000 shares issuable upon the conversion of Series A Shares and (2)
574,000 shares issuable upon the exercise of Series A Warrants, all of
which are issuable pursuant to the placement agent's purchase option; and
(ii) 1,148,000 potential reserve shares. Steven D. Shaffer, a member of
HCFP/Brenner Securities' Board, has sole voting power with respect to the
securities offered for resale by HCFP/Brenner Securities in this
prospectus. HCFP/Brenner Securities, the placement agent for the September
2005 Private Placement, is a registered broker-dealer.
23
(21) Represents beneficial ownership of (i) 250,000 shares issuable upon the
exercise of Other Warrants which may be exercised until January 2010 at an
exercise price of $1.00 per share; and (ii) 100,000 shares of common stock
owned by Mr. Gallo directly or by his children. Additionally, Mr. Gallo is
a principal of Moneta Capital Advisors, Inc. ("Moneta") and may therefore
be deemed to have beneficial ownership of the 220,000 shares underlying
Other Warrants, held by Moneta, although Mr. Gallo disclaims beneficial
ownership of 110,000 of such shares.
(22) Represents beneficial ownership of (i) 250,000 shares issuable upon the
exercise of Other Warrants which may be exercised until January 2010 at an
exercise price of $1.00 per share and (ii) 248,300 shares of common stock
owned by Mr. Arnone directly or by his children.
(23) Represents beneficial ownership of (i) 250,000 shares issuable upon the
exercise of Other Warrants which may be exercised until January 2010 at an
exercise price of $1.00 per share and (ii) 110,000 shares of common stock
owned by Mr. Rempel. Additionally, Mr. Rempel is a principal of Moneta and
may therefore be deemed to have beneficial ownership of the 220,000 shares
underlying Other Warrants held by Moneta, although Mr. Rempel disclaims
beneficial ownership of 110,000 of such shares.
(24) Represents (i) 120,000 shares issuable upon the exercise of Other Warrants
which may be exercised until January 2010 at an exercise price of $1.00
per share and (ii)100,000 shares issuable upon the exercise of Other
Warrants which may be exercised until April 2009 at an exercise price of
$2.25 per share. Thomas A. Gallo and Brenda C. Rempel are the officers,
directors and shareholders of Moneta Capital Advisors, Inc. and have
shared voting power with respect to the securities of Moneta Capital
Advisors being offered for resale in this prospectus.
(25) Represents 100,000 shares issuable upon the exercise of Other Warrants
which may be exercised until January 2010 at an exercise price of $1.00
per share. Burton I. Koffman, David L. Koffman and Jeffrey Koffman are the
officers of HSK Funding, and each has sole voting power over the
securities being offered for resale by HSK Funding in this prospectus.
(26) Represents 10,000 shares issuable upon the exercise of Other Warrants
which may be exercised until January 2010 at an exercise price of $1.00
per share.
(27) Represents 10,000 shares issuable upon the exercise of Other Warrants
which may be exercised until January 2010 at an exercise price of $1.00
per share.
(28) Represents 10,000 shares issuable upon the exercise of Other Warrants
which may be exercised until January 2010 at an exercise price of $1.00
per share.
24
PLAN OF DISTRIBUTION
The Selling Shareholders and any of their pledgees, assignees, and
successors-in-interest (including distributees) may, from time to time, sell any
or all of their shares of common stock of Giant Motorsports and/or the Series A
Warrants offered hereby on any stock exchange, market or trading facility on
which such shares and/or Series A Warrants are traded or in private
transactions. These sales may be at fixed or negotiated prices. No short sales
of the shares of common stock being offered for resale under this prospectus are
permitted prior to the date that the registration statement, of which this
prospectus forms a part, has been declared effective by the Securities and
Exchange Commission. The Selling Shareholders may use any one or more of, or a
combination of, the following methods when selling shares of common stock and/or
Series A Warrants:
o ordinary brokerage transactions and transactions in which a
broker/dealer solicits purchasers;
o block trades in which a broker/dealer will attempt to sell the
shares and/or Series A Warrants as agent but may position and resell
a portion of the block as principal to facilitate the transaction;
o purchases by a broker/dealer as principal and resale by the
broker/dealer for its account;
o an exchange distribution in accordance with the rules of any
applicable exchange;
o privately negotiated transactions;
o settlement of short sales;
o broker/dealers may agree with the Selling Shareholders to sell a
specified number of such shares of common stock and/or Series A
Warrants at a stipulated price per share or per warrant, as
applicable;
o a combination of any such methods of sale; and
o any other method permitted pursuant to applicable law.
The Selling Shareholders also may sell shares of common stock and/or
Series A Warrants under Rule 144 under the Securities Act, if available, rather
than under this prospectus.
Broker/dealers engaged by the Selling Shareholders may arrange for other
broker/dealers to participate in sales. Broker/dealers may receive commissions
or discounts from the Selling Shareholders (or, if any broker/dealer acts as
agent for the purchaser of shares or warrants, from the purchaser) in amounts to
be negotiated. The Selling Shareholders do not expect these commissions and
discounts to exceed what is customary in the types of transactions involved.
25
The Selling Shareholders may from time to time pledge or grant a security
interest in some or all of the shares or warrants or shares of common stock
issuable upon exercise of warrants owned by them and, if they default in the
performance of their secured obligations, the pledgees or secured parties may
offer and sell the shares of common stock and Series A Warrants from time to
time under this prospectus, or under an amendment to this prospectus under the
applicable provision of the Securities Act amending the list of Selling
Shareholders to include the pledgee, transferee or other successors in interest
as Selling Shareholders under this prospectus.
The Selling Shareholders and any broker/dealers or agents that are
involved in selling the shares of common stock or Series A Warrants may be
deemed to be "underwriters" within the meaning of the Securities Act in
connection with such sales. In such event, any commissions received by such
broker/dealers or agents and any profit on the resale of the shares of common
stock or Series A Warrants purchased by them may be deemed to be underwriting
commissions or discounts under the Securities Act. The Selling Shareholders have
informed the Company that they do not have any agreement or understanding,
directly or indirectly, with any persons to distribute the common stock or the
Series A Warrants.
In order to comply with the securities laws of some states, if applicable,
the common stock and/or Series A Warrants may be sold in these jurisdictions
only through registered or licensed brokers or dealers. In addition, in some
states the common stock and/or Series A Warrants may not be sold unless
registered or qualified for sale or an exemption from registration or
qualification requirements is available and is complied with.
We have advised the Selling Shareholders that the anti-manipulation rules
of Regulation M under the Exchange Act may apply to sales of shares of common
stock and Series A Warrants in the market and to the activities of the Selling
Stockholders and their affiliates. In addition, we will make copies of this
prospectus (as it may be supplemented or amended from time to time) available to
the Selling Shareholders for the purpose of satisfying the prospectus delivery
requirements of the Securities Act. The Selling Shareholders may indemnify any
broker-dealer that participates in transactions involving the sale of the shares
of common stock or Series A Warrants against certain liabilities, including
liabilities arising under the Securities Act.
Although our shares of common stock are currently traded on the OTC
Bulletin Board, there does not currently exist a market for the trading of the
Series A Warrants included for registration in this prospectus. We have agreed,
upon the request of any holder of the Series A Warrants (following such holder
obtaining the written consent of the placement agent in our September 2005
Private Placement) or upon the request of said placement agent, to use our best
efforts (subject to the willingness of market makers to file Form 211 as
required) to cause the Series A Warrants to be listed on the OTC Bulletin Board
and thereafter concurrently listed and/or quoted on any other trading market or
exchange on which our common stock is quoted or listed. We advise you that it is
the applicable market makers who will be responsible for initiating the listing
of the Series A Warrants on the OTC Bulletin Board and we have very little
control over the trading of the Series A Warrants on the OTC Bulletin Board.
We are required to pay all fees and expenses incident to the registration
of the shares of common stock and Series A Warrants. We have agreed to indemnify
the Selling Shareholders against certain losses, claims, damages and
liabilities, including liabilities under the Securities Act.
26
UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED (THE "EXCHANGE
ACT"), ANY PERSON ENGAGED IN THE DISTRIBUTION OF THE SHARES OF COMMON STOCK OR
SERIES A WARRANTS MAY NOT SIMULTANEOUSLY ENGAGE IN MARKET-MAKING ACTIVITIES WITH
RESPECT TO THE COMMON STOCK OR SERIES A WARRANTS FOR SPECIFIED PERIODS OF TIME
PRIOR TO THE START OF THE DISTRIBUTION. IN ADDITION, EACH SELLING SHAREHOLDER
AND ANY OTHER PERSON PARTICIPATING IN A DISTRIBUTION WILL BE SUBJECT TO THE
EXCHANGE ACT, WHICH MAY LIMIT THE TIMING OF PURCHASES AND SALES OF COMMON STOCK
AND SERIES A WARRANTS BY THE SELLING SHAREHOLDER OR ANY SUCH OTHER PERSON.
27
BUSINESS
General
Giant Motorsports, Inc. ("us," "our," "we," the "Company" or "Giant")
through our two wholly-owned subsidiaries, owns and operates two retail power
sport superstores in the Midwestern United States. Our core brands include
Suzuki, Yamaha, Honda, Ducati, Kawasaki and Polaris. Our superstores operate in
Salem, Ohio and Chicago, Illinois under the names "Andrews Cycles" and "Chicago
Cycles," respectively.
We are a Nevada corporation with our principal offices located at 13134
State Route 62, Salem Ohio 44460, Tel. (330) 332-8534. Our web sites are:
www.andrewscycles.com, www.chicagocycle.com and www.giantcorporate.com.
Information on our websites do not constitute part of this prospectus.
Development of Our Business
We commenced our motorcycle and powers sports business with the
acquisition of our W.W. Cycles subsidiary in January 2004, and shortly
thereafter, in April 2004, expanded our business with the acquisition of our
Chicago Cycles business.
W.W. Cycles Subsidiary
Our W.W. Cycles subsidiary, which does business under the name Andrews
Cycles, commenced business in 1984 as a Honda products dealership. In 1985
Andrews Cycles acquired an existing motorsports dealership and added Yamaha
products to its line of motorsports products. Through the acquisition of two
additional motorsports dealerships in 1986 and 1987, Andrews Cycles added the
Suzuki and Kawasaki brands to its line of motorsports products. From 1987
through January 2004, Andrews Cycles expanded its power sports business by
adding Polaris motorcycles to its product line.
On January 16, 2004, we acquired all of the issued and outstanding shares
of W.W. Cycles, Inc. ("W.W. Cycles"), from Gregory A. Haehn and Russell A.
Haehn, our current officers and directors, and one other employee of W.W.
Cycles, in exchange for our issuance of an aggregate of 7,850,000 shares of our
common stock, which resulted in W.W. Cycles' becoming our wholly-owned
subsidiary. On that same date, our two current officers and directors also
purchased an additional 150,000 shares of our common stock from a then
shareholder of the Company for an aggregate purchase price of $178,750.
Simultaneously with the closing of this acquisition, the then sole director and
officer of the Company resigned as a director and officer and was replaced by
our current officers and directors. Russell A. Haehn became the Chairman, Chief
Executive Officer, Secretary and a Director of the Company and Gregory A. Haehn
became the President, Chief Operating Officer, Treasurer and a Director of the
Company, which are the same positions in which they currently serve. The
Company, which was then called American Busing Corporation, changed its name to
Giant Motorsports, Inc., effective as of April 5, 2004. We currently conduct all
of our "Andrews Cycles" business through our W.W. Cycles subsidiary.
Chicago Cycles Subsidiary
On April 30, 2004, we acquired substantially all of the assets of King's
Motorsports, Inc. (the "Chicago Cycles Assets"), the corporate entity that
conducted business under the name Chicago Cycle Center ("King's Motorsports").
We agreed to pay Kings Motorsports a total of $2,925,000 for the Chicago Cycle
Assets, as follows:
28
o $1,250,000 on the date of closing; and
o $1,675,000 through the issuance to Kings Motorsports of a 6% $1,675,000
aggregate principal amount note (the "King's Note"), which Note was
payable: (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.
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 the rate of 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.
The entire outstanding principal amount of the King's Note and all
interest accrued thereon was repaid on October 13, 2005.
Our Chicago Cycles subsidiary commenced business in 1988, under the name
Chicago Cycle Center, with its purchase of Ace Honda World. Within its first few
months after commencing business Chicago Cycle Center began selling Yamaha
motorcycles with its purchase of Yamaha North, a nearby competitor. Shortly
thereafter, Can't Beat the Bears, a local Suzuki dealer was acquired. Then in
1990 Chicago Cycle Center added the Ducati brand to its list of products. In
November 2000, Chicago Cycle Center was sold to King's Motorsports, the business
whose assets we acquired in April 2004.
Products.
Our products consist primarily of the sale of new and used motorcycles,
all-terrain vehicles ("ATV's"), and scooters. In addition, we sell parts and
accessories, extended service contracts, and aftermarket motorcycle products.
Our core brands include Honda, Yamaha, Suzuki, Kawasaki, Polaris and Ducati.
We are a retail dealer of power sports products, and sell our products in
superstores that operate under the names "Andrews Cycles" and "Chicago Cycles."
Our Andrews Cycles subsidiary is located in Salem, Ohio, had approximately 50
employees, as of February 7, 2006, and sells power sports products to customers
residing within an approximate 200 square mile area of its facilities. Our
Chicago Cycles operations are located in Skokie, Illinois, has approximately 81
employees as of February 7, 2006, and sells power sports products to customers
residing within an approximate 200 square mile area of its facilities. Both
Andrews Cycles and Chicago Cycles also sell power sports products and parts
through our websites specifically dedicated to those businesses.
During our fiscal years ended December 31, 2004, 2003 and 2002, sales of
motorcycles, ATV's and other power sports products, including accessories,
accounted for approximately 97%, 98% and 97%, respectively, of our total
revenues generated during such periods. Revenues from the sales of these
products also accounted for approximately 97% and 98%, respectively, of our
total revenues for the nine month periods ended September 30, 2005 and 2004.
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Servicing and Repairs.
In addition to product sales, we also provide servicing and repair
services for the products we sell as a courtesy to our customers. These
services, which are provided by mechanics, include crash repairs (body work) and
normal wear and tear installation and repairs such as brake replacement, repair
of exhaust systems, shock absorber replacement, battery replacement, oil changes
and tune-ups. During our fiscal years ended December 31, 2004, 2003 and 2002,
servicing and repairs accounted for approximately 3%, 2% and 3%, respectively,
of our total revenues generated during such periods. Revenues from servicing and
repairs also accounted for approximately 3% and 2%, respectively, of our total
revenues for the nine month periods ended September 30, 2005 and 2004. Servicing
and repairs have always been an insignificant portion of our business. We do not
have any plans to increase this part of our business, in the future, as we do
not believe that servicing and repairs offers any opportunity for producing
significant income for our business.
Competition.
The motorcycle/power sports retailing industry is highly competitive with
respect to price, service, location and selection. There are an estimated 4,000
retail stores throughout the United States. We compete with numerous dealerships
in each of our market segments, many of which are large and have significant
financial and marketing resources. We also compete with private market buyers
and sellers of used motorcycles and other power sports products dealers that
sell used motorcycles and other power sports products, service center chains and
independent shops for service and repair business. Some of these businesses are
capable of operating on smaller gross margins than those on which we are capable
of operating because they have lower overhead and sales costs.
In many states, dealerships have an exclusive 5 to 10-mile franchised
territory, similar to automobile dealerships. While franchised territories can
sometimes restrict market entry and subsequently market penetration; franchise
restrictions can likewise provide protection from over-saturation.
While we believe that our two current locations are among the larger
retail dealerships in the states of Ohio and Illinois, our business represents
only a small portion of the retail motorcycle, ATV and other power sports
products sales throughout the United States. By implementing our superstore
concept through further acquisitions of retail power sports dealerships
throughout the United States, we believe that we can provide consumers in
acquired markets with wide product diversification. Such diversification, as
well as a comprehensive product offering, could result in an increase in our
portion of total power sports retail business throughout the United States, and
consequently reduce the impact of local competition on our business. There is no
assurance that we will ever be able to implement this strategy in such a manner.
Principal Suppliers of our Products.
We purchase substantially all of our products from the following
manufacturers:
o American Honda Motor Company, Inc.
o Yamaha Motor Corporation
o American Suzuki Motor Corporation
o Kawasaki Motors Corp. U.S.A., Inc.
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o Ducati North America
o Polaris Industries, Inc.
Our Andrews Cycles and Chicago Cycles power sports dealerships operate
pursuant to dealership agreements with all or most of the manufacturers listed
above (or authorized distributors of such manufacturers' products), and we are
dependent to a significant extent on our relationship with such manufacturers.
Manufacturers exercise a great degree of control over our dealerships, and the
dealership agreements provide for termination or non-renewal for a variety of
causes. Many of our dealership agreements require prior approval with respect to
acquisitions of other motorcycle and/or power sports dealerships, and a
manufacturer may deny our application to make an acquisition or seek to impose
further restrictions on us as a condition to granting approval of an
acquisition. While these restrictions could adversely affect our business
strategy of expanding our operations through the acquisition of other retail
dealerships, we believe that we will be able to work with these manufacturers to
obtain the approvals required for future acquisitions, although there can be no
assurance of our success in doing so.
Market for our Products and Services.
According the Bureau of Transportation Statistics ("BTS"), the motorcycle
market is expected to record its 13th consecutive year of growth in 2005. The
BTS states that a key factor responsible for this growth is product
segmentation. BTS also reports that during 2004, industry sales of motorcycles,
parts and accessories generated revenues of approximately $12.7 billion,
representing an increase of approximately 15.5% over revenues of approximately
$11 billion in 2003. During that same period, W.W. Cycles revenues generated
from sales of all power sports products, including parts and accessories,
increased by nearly 21% from $44.1 million to $53.2 million. BTS also estimates
an increase in motorcycle sales in 2005 to $14.6 billion. Based on sales of
motorcycles, parts and accessories during the first nine months of 2005, we
estimate revenues for 2005 of approximately $100 million, which represents an
increase in sales from $77.6 million in 2004. The industry is highly fragmented
with over 9,000 franchises being operated within approximately 4,000 motorcycle
dealerships, the majority of which we believe are individually owned. We also
believe that many dealership owners are motorcycle enthusiasts with minimal
business training and limited capital.
Business Plan.
It is our plan to maximize the operating and financial performance of our
dealerships by achieving certain efficiencies both at the store and corporate
levels. We believe this will enhance internal growth and profitability. We have
begun, and plan to continue to centralize certain of our administrative
functions including:
o accounting;
o finance;
o insurance;
o employee benefits;
o strategic planning;
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o marketing;
o purchasing; and
o management information systems (MIS).
We believe that by consolidating these functions we will be able to reduce
overall expenses, simplify dealership management, create economies of scale with
leveraged buying power and provide a level of expertise that would otherwise be
unavailable to each dealership individually. We have identified, without
limitation, the following strategic components as potentially integral to our
overall success and profitability:
o Super Store Concept. The "Super Store" has proven to be an effective
strategy in the successful consolidation of many other retail industries.
Super Stores are the choice of consumers nationwide. These large stores
represent and imply the widest offerings, the lowest prices, and, we
believe, will contribute to the development of a more mainstream
motorsports marketplace.
o Sales and Service Effectiveness. Consumers have become more
sophisticated in evaluating and purchasing products, as a result of the
wide-spread availability of the internet and greater access to
information, and, as a result, require a more comprehensive offering, as
well as intelligent and informative presentations. Our superstore selling
space provides a larger display of products, with a greater choice of
brands and styles. We believe that a greater choice of products, under one
roof, will lead to a more satisfying shopping experience for customers
and, in turn, increased product sales.
o Competitive Workforce Development. A significant portion of the
compensation we pay to our sales staff is commission based. We believe
that commission-based compensation provides incentive for our salespersons
to expend their greatest efforts to sell our products and services. Since
their compensation is directly related to sales, our ability to hire
successful salespersons is conditioned upon their belief that our
dealerships will generate significant traffic and provide the inventory
levels necessary to maximize sales opportunities. Our goal to build a
"market leader" presence, proper inventory levels and an overall
aggressive yet tactful approach, we believe, will attract the successful
salespersons we need to sell our products and services.
o Inventory Utilization. We believe that by housing our inventory in one
large central facility, and distributing products from that facility to
each of our dealerships, on an as-needed basis, we will be able to deliver
products to our customers faster than other dealerships which are required
to wait, for delivery of out-of-stock products.
o Marketing Efficiencies. With a regional presence, and the use of single
creative themes, tested for effectiveness, we believe that we will be able
to take advantage of semi-national and possibly national marketing
opportunities which typically offer reduced advertising rates based on the
utilization of economies of scale. We also plan to maximize our use of
cooperative advertising.
o E-Commerce and Mail Order Opportunities. We intend to develop e-commerce
and mail order strategies for the sale of parts and accessories that will
expand our customer base outside of our dealership territories. We believe
that the expansion of our business, over the internet and through mail
order business, will assist us in the development of a national presence
and create customer interest to visit one of our "Super Stores," although
no assurance can be given that it will have such effect. We believe that
increased efforts on internet and mail-order sales, will increase revenues
and also create additional opportunities for strategic business
relationships with dealerships outside of the territories where our
dealerships are located, although no assurance can be given.
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o Captive Financing Opportunities. It is our plan to create and implement
our own in-house consumer financing facility, by acquiring an outside
finance company, entering into a joint-venture relationship with a finance
company, or by internally developing our own financing business, in order
to provide financing to our customers for the purchase of our products.
Such "captive" financing opportunities could represent significant
additional revenues, which are currently received by third party
manufacturers, banks, or outside financing organizations. We would be then
have the ability to sell these loans to third parties in order to minimize
our consumer financing risk. In February 2005 we formed Giant Motorsports
Acceptance Group Inc., a wholly-owned subsidiary, as a potential vehicle
to provide this type of in-house consumer financing. To date, we have not
provided any financing through this company. As of the date of this
prospectus we do not have plans in the foreseeable future to commence any
type of financing operations, but we may provide financing through Giant
Motorsports Acceptance Group Inc., in the future, in the event that we
determine this to be consistent with our business plan. In the event that
we ever commence providing financing for vehicle purchases, this part of
our business will become subject to certain additional risks relating to
this type of financing business. See Risk Factors, elsewhere in this
prospectus, for a discussion of these risks.
Sales and Marketing.
We currently market our products through television, radio, print and
outdoor advertising. Advertising costs are funded primarily through cooperative
advertising programs established by the manufacturers of the products. Under
these programs, most dealers have access to approximately $100 per unit sold
during the previous year. In addition, many of the larger and better performing
dealership groups are able to access additional advertising funds for special
circumstances from the manufacturers. It is our normal strategy to acquire and
use the maximum amount of advertising funds available to us.
Floor Plan Financing.
We are dependent to a significant extent on our ability to finance the
purchase of inventory, which in the motorcycle and power sports retail
industries involves significant sums of money in the form of floor plan
financing. As of September 30, 2005, the Company had $15,474,363 of floor plan
notes payable. Substantially all the assets of our dealerships are pledged to
secure such indebtedness, which may impede our ability to borrow from other
sources. We currently have floor plan facilities with a variety of lenders,
including primarily GE Commercial Distribution Finance Corporation, Fifth Third
Bank, Kawasaki Motors Finance Company, and American Honda Finance. Several of
such lenders are associated with manufacturers with whom we have dealership
agreements. Consequently, deterioration of our relationship with a manufacturer
could adversely affect our relationship with the affiliated floor plan lender
and vice versa.
Government Regulation.
Our business is subject to federal, state and local laws, ordinances and
regulations which establish various health and environmental quality standards,
and liability related thereto, and provide penalties for violations of those
standards. Under certain laws and regulations, a current or previous owner or
operator of real property may be liable for the costs of removal and remediation
of hazardous or toxic substances or wastes on, under, in or emanating from such
property. Such laws typically impose liability whether or not the owner or
operator knew of, or was responsible for, the presence of such hazardous or
toxic substances or wastes. Certain laws, ordinances and regulations may impose
liability on an owner or operator of real property where on-site contamination
discharges into waters of the state, including groundwater. Under certain other
laws, generators of hazardous or toxic substances or wastes that send such
substances or wastes to disposal, recycling or treatment facilities may be
liable for remediation of contamination at such facilities. Other laws,
ordinances and regulations govern the generation, handling, storage,
transportation and disposal of hazardous and toxic substances or wastes, the
operation and removal of underground storage tanks, the discharge of pollutants
into surface waters and sewers, emissions of certain potentially harmful
substances into the air and employee health and safety.
33
Business operations subject to such laws, ordinances and regulations
include the use, handling and contracting for recycling or disposal of hazardous
or toxic substances or wastes, including environmentally sensitive materials
such as motor oil, waste motor oil and filters, transmission fluid, antifreeze,
refrigerants, waste paint and lacquer thinner, batteries, solvents, lubricants,
degreasing agents, gasoline and diesel fuels. Our business is also subject to
other laws, ordinances and regulations as the result of the past or present
existence of underground storage tanks at our properties. Certain laws and
regulations, including those governing air emissions and underground storage
tanks, have been amended so as to require compliance with new or more stringent
standards as of future dates. We cannot predict what other environmental
legislation or regulations will be enacted in the future, how existing or future
laws or regulations will be administered or interpreted or what environmental
conditions may be found to exist in the future. Compliance with new or more
stringent laws or regulations, stricter interpretation of existing laws or the
future discovery of environmental conditions may require additional expenditures
on our part, some of which may be material.
Employees.
As of February 7, 2006, we had approximately 131 employees (excluding our
two executive officers) , 50 of whom are employed at our Andrews Cycles
dealership and the other 81 of whom are employed at our Chicago Cycles
dealership. All of our employees were employed on a full-time basis including 2
executives, 40 salespersons, 40 administrative persons, 27 service technicians
and 24 clerical persons. We are not a party to a collective bargaining agreement
with our employees and we believe that our relationship with our employees is
satisfactory.
Legal Proceedings.
We are not currently subject to any legal proceedings, and to the best of
our knowledge, none are threatened, the results of which would have a material
adverse effect on our properties, results of operations or financial condition.
Additionally, to our knowledge, neither of our officers and directors are
involved in any legal proceedings in which we are an adverse party.
Properties.
Our principal executive offices are located at our recently expanded
75,000 square foot facility at 13134 State Route 62, Salem Ohio 44460, which is
also the offices and showroom for our Andrews Cycles dealership. We lease this
facility from an affiliated entity controlled by Russell A. Haehn, our Chairman,
Chief Executive Officer and a controlling shareholder. We lease this facility
under a ten-year lease at a rental rate of $15,000 per month. The current term
expires on October 31, 2009, but may be extended on the same terms for an
additional period of two years until October 31, 2011.
34
We also lease a 95,000 square foot retail facility in Skokie, Illinois,
which is used for offices, a showroom and service facility for our Chicago
Cycles dealership. We lease this facility from an unaffiliated third party under
a ten-year lease with a ten year renewal option. The payments on the lease
commenced in August 2005 at a monthly rent of $33,333 through May 2006 then
increase 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 increase 3% annually for the remaining term of the lease. We are also
liable for a proportionate share of expenses and taxes over a specified amount.
35
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion of our results of operations and financial
condition should be read together with the consolidated financial statements and
the notes to those statements included elsewhere in this prospectus. This
discussion may contain forward-looking statements that involve risks and
uncertainties. Our actual results could differ materially from the results
anticipated in any forward-looking statements as a result of a variety of
factors, including those discussed in "Risk Factors" and elsewhere in this
prospectus.
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.
Overview of Economic Trends.
Effects of Increasing Interest Rates
Notwithstanding our increase in sales for the nine month period ended
September 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 September
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.
36
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 November 30, 2005,
approximately $4.8 million of Chicago Cycles' approximately $32.1 million in
revenues (15%) 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 have commenced sales of used motorcycles at Andrews
Cycles in the second half of 2005 and intend to substantially increase sales in
2006. We also intend to increase sales of used motorcycles at Chicago Cycles in
2006. Although there can be no assurance, we believe that our greater focus on
sales of lower-priced used motorcycles, which generally provide larger sales
margin, will help make up for any reduction in sales of new motorcycles.
Effects of Increasing Fuel Costs
Although we have not yet computed the increase in sales of motorcycles and
scooters attributable to the spike in gasoline prices during the fourth quarter
of 2005, we have noticed an increase in sales of these products during this
three month period, which is historically the slowest period for sales. We
believe that it is reasonable to assume that a continued rise in gasoline prices
will result in many consumers considering the use of motorcycles and scooters as
alternative forms of transportation to automobiles, since motorcycles and
scooters provide significantly better gas mileage than automobiles resulting in
substantially lower fuel costs. Although there is no absolute certainty as to
the direction that gasoline prices will move in 2006 and beyond, recent trends
appear to suggest a greater likelihood of increases than reductions, which could
have a positive impact on our sales for the next 12 to 24 months.
Reduction in Units by Manufacturers
We believe that certain 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.
Overall impact on our Future Earnings
Management believes that our earnings for 2005 were negatively affected by
the substantial non-recurring expense incurred by the Company in connection with
Chicago Cycles' move to its larger facilities, during the first half of the
year. This move also had a negative impact on sales for approximately three
months, until customers made the transition to our new facilities. Based on our
operations during the first month of 2006, we believe that under our current
business structure earnings from our Andrews Cycles and Chicago Cycles
subsidiaries will increase at a measured pace during the next 12 to 18 months.
We intend to continue to evaluate and analyze our business decisions through
effective inventory management, as described in greater detail under the heading
Inventory Management, included elsewhere in this MD&A. We also foresee promising
opportunities to increase our sales of motorcycles and scooters as consumers
face substantial increases in gas prices, and give greater consideration to the
purchase of motorcycles and scooters which provide significantly greater gas
mileage than automobiles. We have even recently commenced an advertising
campaign that emphasizes the miles per gallon advantage of riding a motorcycle.
At the same time, we face challenges caused by the Federal Reserve's continued
increase in interest rates over the past year, which directly increases the cost
of financing purchases of our motorcycles and other power sports products.
Although we cannot control increases in interest rates, we have recently begun
to address this by increasing our focus on the sales of used motorcycles and
other equipment, which provide customers with lower price alternatives, and we
believe can help to make up for a significant portion of new vehicle sales lost
because of higher interest rates. Additionally, in the event that we are able to
successfully integrate additional dealerships and/or new brands into our
existing business, we believe that this will result in greater sales margins and
an even greater increase in earnings. These greater sales margins would be
created by the consolidation of expenses through the implementation of our
superstore business plan, resulting in greater earnings per unit sold. While it
is management's intent to pursue the goals described herein, we cannot assure
you that these goals will be achieved at any level.
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.
37
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 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 a revolving line of credit with the Bank, in the
maximum amount of $250,000. This line of credit bears interest at the rate of
prime plus one percent (7.75% at September 30, 2005), and has no stipulated
repayment terms. At September 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.
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
Shares and warrants to purchase up to of 5,740,000 shares common stock (the
"Series A Warrants"), resulting in the receipt by the Company of $2,870,000 of
gross proceeds including the repayment of $50,000 of indebtedness outstanding
under the Bridge Loan from HSK Funding, Inc., by the conversion of that amount
into Series A Shares and Series A Warrants. These securities are convertible
into the shares of common stock being offered for resale in this prospectus.
After deduction of all offering expenses for the September 2005 Private
Placement, including the placement agent's commissions and nonaccountable
expense allowance, the Company received net proceeds of $2,485,163. The Company
has used these net proceeds for debt repayment legal fees, and general working
capital purposes.
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:
38
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 currently have a revolving credit line with Fifth Third Bancorp in a
total available amount of $250,000 of which $249,863 was funded at September 30,
2005. We are currently 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 current 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
Although it is not our intention to raise additional funds through the
sale of our equity securities to directly fund our working capital needs, to the
extent that the growth of our business involves either the acquisition of other
power sports dealers or the acquisition of significant assets out of the
ordinary course of our business, such as acquiring a new brand of motorcycles,
we will 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.
39
Results of Operations.
Year ended December 31, 2004 Compared to Year ended December 31, 2003
Increase
2004 2003 (Decrease) % Change
----------- ----------- ----------- -----------
Revenues $79,950,855 $46,055,843 $33,895,012 74%
Cost of Sales $70,025,884 $41,229,644 $28,796,240 70%
Operating Expenses $ 7,756,715 $ 3,973,368 $ 3,783,347 95%
Operating Income $ 2,168,256 $ 852,831 $ 1,315,425 154%
Income b/f Taxes $ 1,580,261 $ 558,502 $ 1,021,759 183%
Net Income $ 958,061 $ 558,502 $ 399,559 71%
Revenues:
Revenues for the year ended December 31, 2004 were $79,950,855
representing an increase of $33,895,012 (74%) from the $46,055,843 reported for
the year ended December 31, 2003. 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 of $24,560,732
from that date through December 31, 2004. Our sales increase, during 2004, also
can be attributed to our aggressive marketing and advertising campaigns.
Cost of Sales:
Cost of sales for the year ended December 31, 2004 increased by
$28,796,240 (70%) to $70,025,884 from $41,229,644 in 2003. This increase
reflects the additional cost of our motorcycle and other power sports equipment
inventory, in a total amount of approximately $26,780,000, needed to realize the
increase in sales, and is also significantly impacted by the inclusion of the
costs of Chicago Cycles' sales from April 30, 2004, in the amount of $24,560,732
accounting for approximately $21,223,542 (30%) of this increase in cost of
sales.
Operating Expenses:
Selling, general and administrative expenses for the year ended December
31, 2004 were $7,756,715, an increase of $3,783,347 (95%) over $3,973,368 in
2003. 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, which accounted for $3,383,803 of this
increase, or approximately 89% of this increase and (ii) approximately $359,596
of legal, accounting and auditing fees, incurred during 2004, which was
significantly more than comparable expenses during the same period in 2003,
which additional fees were associated with the requirements of becoming a public
entity and the ongoing compliance and maintenance requirements ("Public Company
Expenses"). Net interest expense increased approximately $325,560 from $300,937
in 2003 to $626,587 in 2004, which reflects an increase of approximately 108%
from 2003. This increase is primarily due to (i) interest payable by the Company
of approximately $11,712 relating to the loans we acquired to pay for Chicago
Cycles, (ii) interest payable of approximately $6,555 relating to the Bridge
Loan, and (iii) an increase in interest bearing floor plan inventory, in a total
amount of $5,537,896, a significant portion of which is attributable to the
floor plan inventory of Chicago Cycles, which accounted for additional net
interest expense of approximately $179,173 in 2004.
40
Operating Income:
Income from operations for the year ended December 31, 2004 increased by
$1,315,425 to $2,168,256, as compared to $852,831 in 2003, which reflects an
increase of approximately 154%. Income from operations in 2004 was also
substantially affected by the addition of Chicago Cycles' operations on April
30, 2004, which accounted for $366,034 of this increase in income, or
approximately 17% of this increase. This generally is a result of the
$33,895,012 increase in sales described above, $24,560,732 of which is
attributable to the addition of the sales of Chicago Cycles from April 30, 2004.
Income before Taxes:
We had income before provision for taxes for the year ended December 31,
2004 of $1,580,261, as compared with income before provision for taxes of
$558,502 for 2003. This increase of $1,021,759 (183%) in income before taxes for
the year ended December 31, 2004 as compared to 2003, is primarily a result of
our greater sales of $79,950,855 in 2004, as compared to $46,055,843 in 2003,
and, to a somewhat lesser extent, an increase in gross margin on our sales from
10% to 12% between these two periods. As described above, $24,560,732 of this
increase in sales is attributable to the addition of the sales of Chicago Cycles
from April 30, 2004. The income tax increase to $622,200 in 2004, as compared to
no income tax payable in 2003, is a result of the Company's tax filing status
that changed from an S-Corp in 2003 to a C-Corp effective on January 1, 2004.
Net Income:
We had net income for the year ended December 31, 2004 of $958,061 as
compared to $558,502 for 2003. This reflects an increase of $399,559 (71%) from
2003 to 2004. As discussed above, net income in 2004 was substantially affected
by the addition of the Chicago Cycles operations, which contributed an
additional $24,560,732 to our sales in 2004. The increase in net income for
these comparable periods would have been even greater, except for the additional
$622,200 provision for income taxes for the year ended December 31, 2004, as
described above.
Nine Months ended September 30, 2005 Compared to Nine Months ended September 30,
2004
September 30, September 30,
2005 2004 Increase
(Nine Months) (Nine Months) (Decrease) % Change
----------- ----------- ----------- -----------
Revenues $83,784,883 $60,277,512 $23,507,371 39%
Cost of Sales $73,271,992 $52,996,143 $20,275,849 38%
Operating Expenses $ 8,935,361 $ 5,622,099 $ 3,313,262 59%
Operating Income $ 1,577,530 $ 1,659,270 $ (81,740) (5%)
Income b/f Taxes $ 1,075,157 $ 1,168,214 $ (93,057) (8%)
Net Income $ 662,157 $ 682,514 $ (20,357) (3%)
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 of $32,245,079 during the nine months ended September 30, 2005 as
compared to only $18,257,223 during the shorter period from May 1, 2004 to
September 30, 2004, in the prior year, which reflects a 76.6% increase in
Chicago Cycles' sales. 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. Our increase in sales, during the nine months ended September 30, 2005,
also can be attributed to our aggressive marketing and advertising campaigns.
41
Cost of Sales:
Cost of sales for the nine months ended September 30, 2005 increased by
$20,275,849 (38%) to $73,271,992, during the nine months ended September 30,
2005, compared to $52,996,143 for the same period in 2004. This increase
reflects the additional cost of units, in a total amount of $16,438,873, 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, accounting for approximately
$15,805,379 (78%) of this increase in cost of sales.
Operating Expenses:
Selling, general and administrative expenses for the nine months ended
September 30, 2005 were $8,935,361, an increase of $3,313,262 (59%) over
$5,622,099 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, which accounted
for $2,957,317 of this increase, and includes 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. Additionally, as a result of our move to the larger Chicago
facility in April 2005, we recognized a significant increase in rent expense
from April through September, whereby such rent expense was increased to
approximately $282,000 for that period. Net interest expense increased
approximately $93,564 to $601,933 in the nine months ended September 30, 2005 as
compared to $508,369 for the same period in 2004. This increase is primarily due
to (i) interest payable by the Company of approximately $63,000 relating to the
loans we acquired to pay for Chicago Cycles, (ii) interest payable of
approximately $29,000 relating to the Bridge Loan, and (iii) an increase in
interest bearing floor plan inventory, in a total amount of $5,546,397, a
significant portion of which is attributable to the addition of the floor plan
inventory of Chicago Cycles, which accounted for additional net interest expense
of approximately $179,000 in the nine months ended September 30, 2005, as
compared to the same period in 2004.
Operating Income:
We had income from operations before other income (expense) for the nine
months ended September 30, 2005 of $1,577,530, as compared to income from
operations of $1,659,270 for the same period in 2004, which reflects a decrease
of $81,740 (5%). This decrease in income from operations during the nine months
ended September 30, 2005 as compared to the same period in 2004, is a result of
the significant increase in operating expenses, as described above, and in
particular, the increase in rent expense relating to our move to the new
facility in Chicago, which expenses were offset, in part, by (i) the increase in
sales to $83,784,883 for the nine months ended September 30, 2005, from
$60,277,512 for the same period in 2004, and (ii) an increase in gross margin on
our sales from 12% to 13%, during the nine months ended September 30, 2005 as
compared to the same period in 2004. 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 $1,075,577, as compared with income before provision for
taxes of $1,168,214 for the same period in 2004. This decrease of $93,057 (8%)
in income before taxes during the nine months ended September 30, 2005 as
compared to the same period in 2004, is primarily attributable to the increase
in operating expenses, as described above, which was offset, in part, by our
greater sales of $83,784,883, during the nine months ended September 30, 2005,
as compared to $60,277,512 for the same period in 2004, and, to a lesser extent,
an increase in gross margin on our sales between these two periods. 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.
42
Net Income:
We had net income of $662,157 for the nine months ended September 30,
2005, as compared to net income of $682,514 for the same period in 2004. This
reflects a decrease of $20,357 (3%) between these comparable periods. This
decrease in net income during the nine months ended September 30, 2005 as
compared to the same period in 2004, is attributable to the increase in our
operating expenses, as described above, which was offset, in part, by our
$23,507,371 increase in sales for the nine months ended September 30, 2005, an
increase in gross margin on our sales from 12% to 13%, and the reduced income
taxes for the nine months ended September 30, 2005, as compared to the same
period in 2004.
Three Months ended September 30, 2005 Compared to Three Months ended September
30, 2004
September 30, 2005 September 30, 2004 Increase
(Three Months) (Three Months) (Decrease) % Change
----------- ----------- ----------- -----------
Revenues $27,249,505 $26,325,087 $ 924,418 4%
Cost of Sales $23,331,187 $23,099,271 $ 231,916 1%
Operating Expenses $ 3,311,271 $ 2,504,224 $ 807,047 32%
Operating Income $ 607,047 $ 721,592 $ (114,545) (16%)
Income b/f Taxes $ 491,284 $ 529,236 $ (37,952) (7%)
Net Income $ 251,284 $ 289,136 $ (37,852) (13%)
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. Our increase in sales, during the three months ended
September 30, 2005, also can be attributed to our aggressive marketing and
advertising campaigns.
Cost of Sales:
Cost of sales for the three months ended September 30, 2005 increased by
$231,916 (1%) to $23,331,187, during the three months ended September 30, 2005,
as compared to $23,099,271 for the same period in 2004. This increase reflects
the additional cost of units, in a total amount of $185,533, 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 $3,311,271, an increase of $807,047 (32%) over
$2,504,224 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, which accounted
for $493,867 of this increase, and includes 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. Additionally, as a result of our move to the larger Chicago
facility in April 2005, we recognized a significant increase in rent expense
during the three months ended September 30, 2005 compared to the same period in
2004, whereby rent expense was increased to approximately $141,000 for that
period. Net interest expense decreased approximately $21,113 to $181,183 in the
three months ended September 30, 2005 as compared to $202,296 for the same
period in 2004. This decrease is primarily due to a significant reduction in the
outstanding principal amount of the King's Note from $1,199,000 at September 30,
2004 to $425,000 at September 30, 2005.
43
Operating Income:
We had income from operations before other income (expense) for the three
months ended September 30, 2005 of $607,047, as compared to income from
operations of $721,592 for the same period in 2004, which reflects a decrease of
$114,545 (16%). 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 decrease in the gross margin on our sales
from 14% to 12%, 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 from $2,504,224 to $3,311,271, for those
comparable periods, including the increase in rent expense at our new Chicago
facility. 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 $491,284, as compared with income before provision for
taxes of $529,236 for the same period in 2004. This decrease of $37,952 (7%) in
income before taxes during the three months ended September 30, 2005 as compared
to the same period in 2004, is almost entirely attributable to the significant
increase in our selling, general and administrative expenses, including the
increase in rent expense at our new Chicago facility, which was offset, in part,
by 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 $251,284 for the three months ended September 30,
2005, as compared to net income of $289,136 for the same period in 2004. This
reflects a decrease of $37,852 (13%) between these comparable periods. This
decrease 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 decrease in net income before taxes for those
comparable periods.
Year ended December 31, 2003 Compared to Year ended December 31, 2002
Increase
2003 2002 (Decrease) % Change
----------- ----------- ----------- -----------
Revenues $46,055,843 $39,502,920 $ 6,552,923 16%
Cost of Sales $41,229,644 $34,357,908 $ 6,871,736 20%
Operating Expenses $ 3,973,368 $ 3,902,158 $ 71,210 2%
Operating Income $ 852,831 $ 1,242,854 ($ 390,023) (31%)
Income b/f Taxes $ 558,502 $ 1,014,408 ($ 455,906) (45%)
Net Income $ 558,502 $ 1,014,408 ($ 455,906) (45%)
44
Revenues:
Revenues for the year ended December 31, 2003 were $46,055,843
representing an increase of $6,552,923 (16%) from the $39,502,920 reported for
the year ended December 31, 2002. This increase in revenues resulted almost
entirely from the sale of more motorcycles and other power sports equipment in
2003. Our results were impacted in a positive manner as a result of the
aggressive marketing programs put in place in 2003 by manufacturers of the
products we sell, including no-money-down financing programs. Notwithstanding
significantly higher unit sales in 2003 as compared to 2002, revenues per unit
sold in 2003 were lower than in 2002, as a result of our having much greater
inventory on hand, during the second half of 2003, than anticipated, and our
need to sell 2003 models at considerable discounts. This excess inventory was
caused by our inaccurate forecast of strong 2003 year-end sales, which resulted
in our aggressive purchasing of power sports equipment during the second quarter
of 2003. We had to sell this excess inventory at these reduced prices in order
to clear our showroom for 2004 models.
Cost of Sales:
Cost of sales for the year ended December 31, 2003 increased by $6,871,736
(20%) to $41,229,644 from $34,357,908 in 2002. This increase reflects the
increase in the number of motorcycles and other power sports equipment we
purchased in 2003 compared to 2004, and to a lesser extent, the increase in
price we paid per unit.
Operating Expenses:
Selling, general and administrative expenses for the year ended December
31, 2003 were $3,973,368, a net increase of $71,210 (2%) over $3,902,158 in
2002. The principal reason for the increase in 2003 operating expenses was
attributable to professional fees which increased by $46,522 (99%) to $93,427
from $46,905 in 2002. This increase was due to the fees we paid our independent
public accountants to audit the financial statements of our subsidiary, W.W.
Cycles, in connection with the acquisition of said subsidiary and legal fees we
paid in connection with the acquisition of our W.W. Cycles subsidiary, which was
completed in January 2004. Additionally, the premiums we paid for insurance on
our inventory for the year ended December 31, 2003 increased by $34,390 (57%)
from $60,468 in 2002 to $94,858 in 2003, which was primarily attributable to
insuring an additional $3.6 million in unit inventory, as well as an increase in
the premium rates in 2003. Although our compensation payable to non-executive
employees increased from $261,633 for the year ended December 31, 2002 to
$311,122 for the same period in 2003, an increase of $49,756, this increase was
almost completely eliminated by a reduction in compensation payable to executive
employees of $45,503 for the same period.
Operating Income:
We had income from operations before other income (expense) for the year
ended December 31, 2003 of $852,831, as compared to income from operations of
$1,242,854 for the same period in 2002, which reflects a decrease of $390,023
(31%). This decrease in income from operations in 2003 as compared to 2002, was
primarily the result of a significant reduction in gross margin on our sales in
2003 as compared to 2002, which was caused by substantially discounted sales of
our motorcycles and other power sports equipment at the end of 2003, for the
reasons described above in the paragraph titled Revenues. As a result of these
discounts, even though our revenues increased by 16% in 2003 from 2002, our cost
of sales increased by 4% more in percentage terms (20%). Additionally, the
reduction in our operating income was due, to a much less extent to a small
increase in our selling, general and administrative expenses from $3,902,158 to
$3,973,368 ($71,210 or 2%), for the comparable periods. Depreciation and
amortization was approximately $74,564 for the year ended December 31, 2003, as
compared to $64,900 for the same period in 2002.
45
Income before Taxes:
We had income before provision for taxes, for the year ended December 31,
2003 of $558,502, as compared with income before provision for taxes of
$1,014,408 for the same period in 2002. This decrease of $455,906 (45%) in
income before taxes during the year ended December 31, 2003 as compared to the
same period in 2002, is almost entirely attributable to the same factors
described above in the paragraph titled Operating Income. Additionally, income
before provision for taxes, for the year ended December 31, 2003, was also
negatively impacted by an increase of $56,504 in net interest expense compared
to 2002. This increase in net interest expense was due to an increase in floor
plan financing in 2003 due to an increase in inventory between those two years.
We did not have income taxes payable in either 2003 or 2002, as we had elected
to be taxed as a subchapter S corporation during both of those years.
Net Income:
We had net income of $455,906 for the year ended December 31, 2003, as compared
to net income of $1,014,408 for the same period in 2002. This reflects an
decrease of $455,906 (45%) between these comparable periods. This decrease in
net income during the year ended December 31, 2003 as compared to the same
period in 2002, is attributable to the same factors that attributed to the
decrease in net income before taxes for those comparable periods.
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 $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 September 30, 2005 was
$1,809,349 compared to $(399,303) at December 31, 2004. The Company's increase
in net working capital at September 30, 2005, was mostly attributable to the
$2,870,000 of gross proceeds raised by it in the September 2005 Private
Placement.
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. As a result of the September 2005 Private Placement, the
Company also raised additional cash from financing activities of approximately
$2,485,000 for use in connection with its operations. Although the Company
believes that the proceeds raised in its private placement, along with 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.
46
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.
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 prospectus.
47
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 charge backs 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.
Quantitative and Qualitative Disclosures about Market Risk.
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
$15,474,363 and $17,788,706, at September 30, 2005 and December 31, 2004,
respectively. Interest rates in connection with our floor plan financing
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
period the first nine months of 2005, interest rates on our floor plan financing
have ranged from a low of 5.6452% to a high of 12.17%. 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 nine months of 2005, continued increases would, in all
likelihood, result in a reduction in our income from operations in 2006 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 current
rate of 7.25%.
48
Lines of Credit
We also have two existing revolving credit lines with Fifth Third Bancorp,
the interest rates of which also fluctuate with the prime rate, at prime plus
one percent. Since the aggregate outstanding indebtedness of these lines of
credit was $249,863 and $250,000 at September 30, 2005 and December 31, 2004,
respectively, we do not believe that fluctuations in the prime rate 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.
Off-Balance Sheet Arrangements.
We have no off-balance sheet arrangements.
49
Contractual Obligations
We have entered into various contractual obligations, which may be
summarized as follows:
------------------------------------------------------------------------------------------------------------------------------------
Contractual Obligations Payments due by period
------------------------------------------------------------------------------------------------------------------------------------
More
Less than 1-3 3-5 than
Total 1 year years years 5 years
------------------------------------------------------------------------------------------------------------------------------------
Long-Term Debt Obligations $1,730,223 $ 892,623 $ 837,600 -- --
------------------------------------------------------------------------------------------------------------------------------------
Capital (Finance) Lease Obligations $7,508,584 $ 156,367 $1,987,669 $2,042,715 $3,321,833
------------------------------------------------------------------------------------------------------------------------------------
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 $9,238,807 $1,048,990 $2,825,269 $2,042,715 $3,321,833
------------------------------------------------------------------------------------------------------------------------------------
50
MANAGEMENT
Set forth below are the names, ages, and positions of each of our
executive officers and directors, together with such person's business
experience during the past five years. Their business experience is based on
information provided by each of them to us. Directors are to be elected annually
at our annual meeting of shareholders and served in that capacity until the
earlier of their resignation, removal or the election and qualification of their
successor. Executive officers are elected annually by our Board of Directors to
hold office until the earlier of their death, resignation, or removal.
NAME AGE POSITIONS HELD AND TENURE
---- --- -------------------------
Russell A. Haehn 58 Chairman, Chief Executive Officer and
Director since January 2004
Gregory A. Haehn 59 President, Chief Operating Officer
and Director since January 2004
Officers and Directors:
Russell A. Haehn has been the Chairman, Chief Executive Officer and
Secretary of the Company since the acquisition of W.W. Cycles, in January 2004,
and holds the same positions with W.W. Cycles since such time. Prior to such
acquisition, Mr. Haehn had been the Vice President and a director of W.W. Cycles
since its inception in 1984. From 1990 to 2000, Mr. Haehn also was the founder,
President, a director and the sole shareholder of Andrew Cycles Incorporated,
which was an importer and exporter of motorcycles.
Gregory A. Haehn has been the President, Chief Operating Officer,
Treasurer and a director of the Company since the acquisition of W.W. Cycles, in
January 2004, and holds the same positions with W.W. Cycles since such time. Mr.
Haehn, since its inception in 1998, also has been the President, director and
sole shareholder of Yukon International Inc., a manufacturer, distributor and
retailer of fitness equipment. From May 2000 to December 2000, Mr. Haehn was
President of Interactive Marketing Technologies, Inc., a publicly-traded company
in the direct marketing business. From 1988 to 1997, Mr. Haehn was the founder,
President and sole shareholder of Midwest Motorsports Inc., a power sports
dealership in Akron, Ohio which sold motorcycles. Additionally, from 1976 to
1997, Mr. Haehn was the President of Worldwide Auto Parts Inc., a leading
regional auto parts supply business in Northeastern Ohio.
Russell Haehn and Gregory Haehn are brothers. The present term of office
of each director will expire at the next annual meeting of shareholders.
Our executive officers are elected annually at the first meeting of our
board of directors held after each annual meeting of shareholders. Each
executive officer holds office until his successor is duly elected and
qualified, until his resignation, or until removed in the manner provided by our
bylaws.
Agreement to Appoint Additional Director
For a period of five years from the effective date of the of the
Registration Statement of which this prospectus forms a part, we have agreed to
appoint a designee of HCFP/Brenner Securities LLC, the placement agent in the
September 2005 Private Placement, to serve on our board of directors. In the
event that the placement agent does not exercise its right to appoint a designee
to our board, it shall have the right to send a representative (who need not be
the same individual from meeting to meeting) to observe each meeting of the
board of directors.
51
Director Compensation
We have not paid any cash compensation to our directors for their service
on the board of directors, and do not have any plans to do so, in the near
future. We do not currently maintain liability insurance coverage for the acts
of our officers and directors, but we have agreed to obtain liability insurance
in an amount not less than $1,500,000, on or around the date that the placement
agent's designee commences services on our board, if this shall occur, and will
include the placement agent's designee as an insured under such policy.
There are no arrangements between any director or director nominee of the
Company and any other person pursuant to which he was, or will be, selected as a
director.
Significant Employees:
Phillip A. Andrews has been the general manager of our W.W. Cycles
subsidiary since 1984.
Jerry Fokas has been the general manager of our Chicago Cycles subsidiary
since May 2004. Commencing in 2001 and until our acquisition of the Chicago
Cycles assets in April 2004, Mr. Fokas was a principal, founder and general
manager of King's Motorsports. From 1999 to 2000 Mr. Fokas was the general
manager of Schaumburg Honda Suzuki. From 1990 through 1998 Mr. Fokas served as
general manager and principal of Northern Illinois Honda (which was later
renamed Banzai Motorsports).
Governance
The Company has not formally appointed an audit committee, and the entire
board of directors (two persons) currently serves the function of an audit
committee. The Company has not made a determination as to whether any of its
directors would qualify as an audit committee financial expert. The Company has
not yet adopted a code of ethics applicable to its chief executive officer and
chief accounting officer, or persons performing those functions, because of the
small number of persons involved in management of the Company.
Compliance with Section 16(a) of the Exchange Act
Section 16(a) of the Securities Exchange Act of 1934, as amended,
generally requires our directors and executive officers and persons who own more
than 10% of a registered class of our equity securities ("10% owners") to file
with the SEC initial reports of ownership and reports of changes in ownership of
common stock and other equity securities of the Company. Directors and executive
officers and 10% owners are required by SEC regulation to furnish us with copies
of all Section 16(a) reports they file. To our knowledge, based solely on review
of copies of the reports furnished to us and verbal representations that no
other reports were required to be filed during the fiscal year ended December
31, 2004, all Section 16(a) filing requirements applicable to our directors,
executive officers and 10% owners were met.
52
Executive Compensation
The following table sets forth the annual and long-term compensation paid
for the fiscal years ended December 31, 2004, 2003 and 2002 to our Chairman and
Chief Executive Officer; and President and Chief Operating Officer
(collectively, the "Named Executive Officers"). No other officer received
compensation in excess of $100,000 in any of those years.
Summary Compensation Table
Annual Compensation
-----------------------------------------------------------------------------------------------------------------------------------
Long-Term
Compensation
Awards
Securities
Fiscal Underlying All Other
Name and Positions Year Salary Bonus Options (#) Compensation
-----------------------------------------------------------------------------------------------------------------------------------
Russell A. Haehn, Chairman and Chief 2002(1) $107,805 -0- -0- $ 41,000(2)
Executive Officer 2003(1) $ 88,000 -0- -0- $ 70,000(2)
2004(1) $ 94,500 -0- 1,000,000 $ 137,000(2)
2005 $ 91,000 -0- -0- $ 274,935
-----------------------------------------------------------------------------------------------------------------------------------
Gregory A. Haehn, President and Chief 2004(3) $ 26,000 -0- 500,000 $ 12,000(4)
Operating Officer 2005 $ 70,700 -0- -0- $ 49,000(4)
-----------------------------------------------------------------------------------------------------------------------------------
----------
(1) Russell Haehn was employed by W.W. Cycles, the wholly-owned subsidiary of
the Company that was acquired in January 2004. Compensation paid to him
for fiscal years 2002, 2003 and until January 15, 2004, reflect amounts
paid by W.W. Cycles to him.
(2) Other compensation payable to Russell Haehn includes amounts payable to
Mr. Haehn directly from manufacturers of certain of the products we sell,
as an incentive to sell these products. The total amounts paid to Mr.
Haehn during the years set forth in the above table were $29,000 in 2002,
$58,000 in 2003, $125,000 in 2004 and $262,935 in 2005. Mr. Haehn also
received an automobile allowance of $12,000 per year in each of those
years.
(3) Gregory Haehn became an employee of the Company in January 2004.
(4) Other compensation payable to Gregory Haehn reflects an automobile
allowance of $12,000 in each of 2004 and 2005 and an aggregate of $37,000
paid to Mr. Haehn in 2005 directly from manufacturers of certain of the
products we sell, as an incentive to sell these products.
53
Stock Options
Option/SAR Grants in Last Fiscal Year
(Individual Grants)
------------------------------------------------------------------------------------------------------------------------
Potential Realizable
Value at Assumed
Number of Percent of Annual Rates of
Securities total Stock Price
Underlying options/SARs Exercise Appreciation
Options/SARs granted to or base for Option
granted employees in price Expiration Term (2)
Name and Position (#) (1) fiscal year ($/Sh) Date 5% ($) 10% ($)
------------------------------------------------------------------------------------------------------------------------
Russell A. Haehn, 1,000,000(1) 67% $1.25 August 15, 2009 $10,000 $340,000
Chairman and Chief
Executive Officer
------------------------------------------------------------------------------------------------------------------------
Gregory A. Haehn, 500,000(1) 33% $1.25 August 15, 2009 $ 5,000 $170,000
President and Chief
Operating Officer
------------------------------------------------------------------------------------------------------------------------
----------
(1) Reflects options granted to the two Named Executive Officers in August
2004 to purchase shares of our common stock. The closing price of our
common stock on the OTC Bulletin Board on August 16, 2004, the date that
the options were granted, was $.99 per share.
(2) The potential realizable value shown is calculated based on the term of
the options at the time of grant (5 years). Stock price appreciation of 5%
and 10% is assumed pursuant to the rules and regulations of the SEC and
does not represent our prediction of stock price performance. The
potential realizable values at 5% and 10% appreciation are calculated by
assuming that the market price on the date of grant appreciates at the
indicated rate for the entire term of the option and that the options are
exercised at the exercise price and sold on the last day of its term
appreciated price.
54
Aggregate Option Exercises and Option Values
The following table sets forth information concerning exercisable and
unexercisable stock options held by the Named Executive Officers as of September
30, 2005. No options were exercised by the Named Executive Officers as of
September 30, 2005. The amount described in the column captioned "Value of
Unexercised In-the-Money Options at September 30, 2005" represents the positive
spread between the exercise price of stock options and the fair market value of
the options, which is based upon $1.02 per share, the per share price of our
common stock as of September 30, 2005, minus the actual exercise price per
share.
----------------------------------------------------------------------------------------------------
Number of Securities
underlying Value of Unexercised
Unexercised Options In-the-Money Options
Name at September 30, 2005 at September 30, 2005
----------------------------------------------------------------------------------------------------
Exercisable Unexercisable Exercisable Unexercisable
----------------------------------------------------------------------------------------------------
Russell A. Haehn 1,000,000 -- -- --
----------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------
Gregory A. Haehn 500,000 -- -- --
----------------------------------------------------------------------------------------------------
Employment Agreements
We do not have a written employment agreement with either of our Named
Executive Officers.
Compensation Committee Interlocks and Insider Participation
We do not have a separate compensation committee, and our board of
directors performs all equivalent functions. During the year ended December 31,
2004, the board of directors consisted of Russell A. Haehn and Gregory A. Haehn,
both of whom also serve as executive officers of Giant Motorsports. The board of
directors made all compensation decisions with respect to our executive officers
during 2004.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
We lease our 30,000 square foot facility in Salem, Ohio from an affiliated
entity controlled by Russell A. Haehn, our Chairman, Chief Executive Officer and
a controlling shareholder. We lease this facility under a 10-year lease at a
rental rate of $15,000 per month. The current term expires on October 31, 2009,
but may be extended on the same terms for an additional period of two years
until October 31, 2011. We believe that the terms of this arrangement are no
less favorable to us than those that would be available for a similar facility
leased from a third party in a bona fide arms length transaction.
We have provided loans to Gregory A. Haehn, and to Russell A. Haehn, our
directors and executive officers,, the aggregate outstanding principal amount of
which was $94,145.64 as of September 30, 2005.
The loans to Gregory A. Haehn reflect advances made in August 2003 and
November 2003, to provide him with the necessary funds to purchase his portion
of the 150,000 shares of common stock of the Company purchased by he and Russell
Haehn from an existing shareholder, in connection with the acquisition of W.W.
Cycles by the Company. These loans were repaid, in full, by Mr. Haehn in
December 2005.
In 2002, we provided a loan to Andrews North, Inc., a corporation owned by
Russell A. Haehn, in the aggregate amount of $104,899, for use for general
working capital purposes. This loan has been repaid in full and there are no
loans currently outstanding to Andrews North, Inc. In 2002 and 2003, we also
made advances to Mr. Haehn in an aggregate amount of approximately $350,000 to
pay income taxes payable by him with respect to income allocated to him from
W.W. Cycles, which was then a Subchapter S corporation. We also made loans in
September and November of 2004, in an aggregate amount of approximately $66,000,
to Marck's Real Estate, Inc, a corporation owned by Russell A. Haehn and the
owner of our Salem, Ohio facilities. These loans were used by Marck's Real
Estate to pay construction costs relating to the expansion of our Ohio
facilities. We made additional loans to Marck's Real Estate in 2005, and at
September 30, 2005 the aggregate outstanding amount of such loans was
approximately $250,000. All loans to Russell Haehn have been repaid, but the
loans to Marck's Real Estate remain outstanding.
55
We lease an apartment in Chicago, Illinois, from one of our employees, for
use by our officers when their services are required at our Chicago Cycles
facility. We do not have a written lease and therefore this rental is on a month
to month basis. We make rental payments of $1,000 per month for this apartment.
We believe that the monthly rental amount reflects the market value of this
rental and is not more than we would be required to pay to a third party to rent
a similar apartment. Additionally, we believe that the expense incurred for this
apartment is equal to or less than the expenses that we would incur to pay for
hotel accommodations for our officers.
56
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Beneficial Ownership
As of February 7, 2006, we had a total of 10,445,000 shares of common
stock issued and outstanding.
The following table sets forth information, as of February 7, 2006, with
respect to the beneficial ownership of our common stock by: (i) all directors;
(ii) the Named Executive Officers; (iii) all current executive officers and
directors as a group; and (iv) each shareholder known by us to be the beneficial
owner of more than 5% of our common stock.
--------------------------------------------------------------------------------
Number of Approximate
Shares Owned Percent of Class
Name Beneficially (1) Owned (1)(2)(3)
---- ---------------- ---------------
--------------------------------------------------------------------------------
Russell A. Haehn (4)(6) 5,785,000 50.5%
--------------------------------------------------------------------------------
Gregory A. Haehn (5)(6) 3,235,000 29.6%
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
All Executive Officers and Directors, 9,020,000 75.5%
as a Group (two persons)
--------------------------------------------------------------------------------
----------
(1) Beneficial ownership information is based on information provided to the
Company. Except as indicated, and subject to community property laws when
applicable, the persons named in the table above have sole voting and
investment power with respect to all shares of common stock shown as
beneficially owned by them. Except as otherwise indicated, the address of
such persons is the Company's offices at 13134 State Route 62, Salem, Ohio
44460.
(2) The percentages shown are calculated based upon 10,445,000 shares of
common stock outstanding on February 7, 2006. The numbers and percentages
shown include the shares of common stock actually owned as of February 7,
2006 and the shares of common stock that the person or group had the right
to acquire within 60 days of February 7, 2006. In calculating the
percentage of ownership, all shares of common stock that the identified
person or group had the right to acquire within 60 days of February 7,
2006 upon the exercise of options and warrants are deemed to be
outstanding for the purpose of computing the percentage of the shares of
common stock owned by such person or group, but are not deemed to be
outstanding for the purpose of computing the percentage of the shares of
common stock owned by any other person.
(3) Notwithstanding each person or group's beneficial ownership of the
Company's common stock, since the Series A Shares are entitled to vote
together with the common stock on all matters submitted to shareholders
for their approval, each person's or group's percentage voting interest
(assuming exercise of all options) is: Russell A. Haehn - 33.7%; Gregory
A. Haehn - 19.4%; and all executive officers and directors as a group -
51.0%.
57
(4) Includes a five-year non-qualified stock option, granted to Mr. Russell
Haehn on August 16, 2004, to purchase up to 1,000,000 shares of Common
Stock at an exercise price of $1.25 per share.
(5) Includes (i) 2,655,000 shares of common stock owned directly by Mr. Haehn
and (ii) 80,000 shares of common stock owned by Mr. Haehn's minor
children. Does not include an additional 80,000 shares of common stock
owned by two other of Mr. Haehn's children for which he disclaims any
beneficial ownership. Also includes a five-year non-qualified stock
option, granted to Mr. Gregory Haehn on August 16, 2004, to purchase up to
500,000 shares of Common Stock at an exercise price of $1.25 per share.
(6) Russell Haehn and Gregory Haehn are brothers.
The Company is not aware of any arrangement which might result in a change in
control in the future.
Equity Compensation Plans
We do not have any general equity compensation plans which have been
approved by our shareholders or otherwise. In August 2004, we granted options to
Russell A. Haehn and Gregory A. Haehn, our only officers and directors, to
purchase up to an aggregate of 1,500,000 shares of our common stock at an
exercise price of $1.25 per share. These options were granted without
shareholder approval. The material provisions of these options, which are the
same, except for the number of shares granted, are as follows:
o Five year term and expires on August 15, 2009.
o Anti-dilution provisions for reorganization and recapitalization
events.
o Company has agreed to use best efforts to register underlying shares
in a Form S-8 Registration Statement within twelve months after date
granted.
----------------------------------------------------------------------------------------------------------------------
Plan category Number of securities Weighted average Number of securities
to be issued upon exercise price of remaining available for
exercise of outstanding options, future issuance
outstanding options, warrants and rights
warrants and rights
----------------------------------------------------------------------------------------------------------------------
Equity compensation plans approved by -- -- --
security holders
----------------------------------------------------------------------------------------------------------------------
Equity compensation plans not approved 1,500,000 $1.25 --
by security holders
----------------------------------------------------------------------------------------------------------------------
Total 1,500,000 $1.25 --
----------------------------------------------------------------------------------------------------------------------
58
DESCRIPTION OF SECURITIES
The following summary is qualified in its entirety by reference to the
Company's Restated Articles of Incorporation ("Articles") and its bylaws. The
Company's authorized capital stock consists of 75,000,000 shares of common
stock, $.001 par value per share, and 5,000,000 shares of preferred stock, $.001
par value per share.
Common Stock
As of February 7, 2006, we have 10,445,000 shares of common stock issued
and outstanding. Each share of common stock is entitled to one vote at all
meetings of shareholders. All shares of common stock are equal to each other
with respect to liquidation rights and dividend rights. There are no preemptive
rights to purchase any additional shares of common stock. Our Articles do not
provide for cumulative voting in the election of directors. Because holders of
common stock do not have cumulative voting rights, subject to the rights of the
preferred stock to vote with the holders of common stock, holders or a single
holder of more than 50% of the outstanding shares of common stock present and
voting at an annual meeting at which a quorum is present can elect all of the
Company's directors. In the event of liquidation, dissolution or winding up of
the Company, holders of shares of common stock will be entitled to receive on a
pro rata basis all assets of the Company remaining after satisfaction of all
liabilities and all liquidation preferences, if any, granted to holders of our
preferred stock.
All of our issued and outstanding common stock is, and, when distributed
according to the terms of the offering will be, fully paid and non-assessable
and are not subject to any future call.
The holders of outstanding shares of common stock are entitled to receive
dividends out of assets legally available therefore at such times and in such
amounts as our board of directors may from time to time determine, subject to
any approval required by holders of any class of preferred stock. Holders of
common stock will share equally on a per share basis in any dividend declared by
the board of directors. We have not paid any dividends on our common stock, to
date, and do not anticipate paying any cash dividends our common stock in the
foreseeable future.
Preferred Stock
General
The board of directors of the Company has the authority to divide the
authorized preferred stock into series, the shares of each series to have such
relative rights and preferences as shall be fixed and determined by the board of
directors. The provisions of a particular series of authorized preferred stock,
as designated by the board of directors, may include restrictions on the payment
of dividends on common stock. Such provisions may also include restrictions on
the ability of the Company to purchase shares of common stock or to purchase or
redeem shares of a particular series of authorized preferred stock. Depending
upon the voting rights granted to any series of authorized preferred stock,
issuance thereof could result in a reduction in the voting power of the holders
of common stock. In the event of any dissolution, liquidation or winding up of
the Company, whether voluntary or involuntary, the holders of the preferred
stock will receive, in priority over the holders of common stock, a liquidation
preference established by the board of directors, together with accumulated and
unpaid dividends. Depending upon the consideration paid for authorized preferred
stock, the liquidation preference of authorized preferred stock and other
matters, the issuance of authorized preferred stock could result in a reduction
in the assets available for distribution to the holders of common stock in the
event of the liquidation of the Company.
59
Series A Shares
As of February 7, 2006, we have 2,870 shares of preferred stock issued and
outstanding, all of which has been designated as Series A convertible preferred
stock (the "Series A Shares"). Additionally, HCFP/Brenner Securities LLC, the
placement agent in our September 2005 Private Placement has an option to
purchase 287 Series A Shares at a purchase price of $1,000 per share.
Rank. The Series A Shares rank senior to (1) the common stock and (2) each
other class or series of preferred stock now or hereafter established by the
board of directors, the terms of which do not expressly provide that it ranks
senior to, or on a parity with, the Series A Shares as to dividend rights and
rights on liquidation, winding-up and dissolution of the Company (collectively
referred to as "Junior Stock").
Dividends. The holders of shares of Series A Shares will receive dividends
at the rate of $100.00 per Series A Share per annum, payable, at the option of
the Company, in cash or shares of Common Stock, provided that, the dividend rate
will be reduced to $70.00 per Series A Share per annum at such time as and for
as long as our shares of common stock issuable upon conversion of the Series A
Shares are covered by an effective registration statement. In the event of
certain defaults by the Company, the dividend rate will be increased to $200.00
per Series A Share until the default has been cured. Dividends will accrue and
be payable semi-annually, in arrears, on the first day of March and September in
each year, beginning March 2006. Dividends payable on the Series A Shares are
cumulative and any accrued and unpaid dividends are included in the payment of a
liquidation preference to the holders of Series A Shares, as described below.
Liquidation Preference. In the event of a liquidation, dissolution or
winding up of the Company, whether voluntary or involuntary, the holders of the
Series A Shares are entitled to receive, after all payments to holders of any
securities that rank senior to the Series A Shares, $1,000.00 per Series A
Share, together with an amount equal to the dividends accrued and unpaid thereon
(whether or not declared) to the date of final distribution to the holders of
Series A Shares, without interest, before any payment shall be made or any
assets distributed to the holders of any of the Company's securities that rank
junior to the Series A Shares, including the common stock. After the full
payment of the liquidation preference to the holders of Series A Shares, they
are not entitled to any further participation in any distribution of the
Company's assets. At the option of any holder of Series A Shares, a
consolidation or merger of the Company with another corporation in which the
Company is not the surviving entity, or a sale or transfer of all or part of the
Company's assets for cash, securities or other property will be considered a
liquidation, dissolution or winding up of the Company.
Conversion.
Election to Convert. Each Series A Share may be converted at any time, at
the election of the holder, into 2,000 shares of our common stock, subject to
certain adjustments.
Mandatory Conversion. We have the right, in our sole discretion, to
require that all of the outstanding Series A Shares be converted into shares of
our common stock at the same conversion rate applicable to a conversion
election. We have this right to require conversion at any time: (1) the last
trade price of our common stock reported on the OTC Bulletin Board for each of
the ten consecutive trading days ending two business days prior to the date of
our conversion election exceeds $1.50 per share (subject to certain adjustments,
including adjustments for anti-dilution) and (2) the common stock issuable upon
conversion of the Series A Shares is covered by an effective registration
statement during the entire ten-day period and through the date of the
conversion.
60
Anti-Dilution Adjustments. Subject to certain exceptions, if we issue
securities, in the future, at an effective price of less than $.50 per share of
common stock (or the then current price as reduced by prior anti-dilution
events), then the rate of conversion of the Series A Shares into our common
stock will be reduced to the effective price of our common stock as issued. In
addition, the rate of conversion may also be reduced as a result of certain
recapitalization events, including (1) a split or reverse split of our shares of
common stock and (2) the payment of a dividend in shares of our common stock
(other than dividends payable on the Series A Shares in common Stock).
Reduction in Conversion Rate due to Default. Upon the occurrence of
certain types of defaults, such as a default: (i) under our certificate of
designation of the Series A Shares; (ii) under our subscription agreements with
the investors in the September 2005 Private Placement; (iii) subject to certain
exceptions, of any obligation of indebtedness or financing in excess of
$250,000; or (iv) under any material contract, the then applicable conversion
rate will be adjusted to an amount equal to 80% of the Conversion Price then in
effect.
Voting Rights. Holders of the Series A Shares vote together with the
holders of common stock as a single class on all matters submitted to
shareholders for a vote and shall have a number of votes equal to 2,000 votes
for each Series A Share, subject to certain adjustments. Additionally, the
approval of the holders of a majority of the Series A Shares is required for the
approval of the following matters:
(1) Any amendment, alteration or repeal of the Articles or the
certificate of designation relating to the Series A Shares, if such
amendment, alteration or repeal adversely affects the rights, preferences
or privileges of the Series A Shares, including the right to create,
authorize or issue any series or shares of stock senior to or on parity
with the Series A Shares, or to increase the amount of authorized capital
stock of any such class;
(2) The creation, authorization or issuance of any series or shares
of capital stock convertible into common stock which is on parity with or
senior to the Series A Shares in terms of liquidation, dividends or
otherwise;
(3) The merger, consolidation or entering into a business
combination or similar transaction, other than if (i) the Company is the
surviving entity and (ii) the shareholders of the Company prior to such
transaction continue to hold a majority of the capital stock of the
Company following the transaction;
(4) The incurrence or permission to exist of any inventory or
equipment indebtedness or liens relating thereto, except that the Company
may borrow in connection with institutional financing of inventory and
equipment and mortgage financing in connection with acquisitions of real
estate;
(5) The declaration or payment of any dividends on, purchase,
redemption or retirement for value, of any capital stock (other than the
Series A Shares), or make any distribution of assets, capital stock,
warrants, rights, options, indebtedness or obligations to the Company's
shareholders;
(6) The sale or other transfer of a material portion of the
Company's assets; provided, however, that such a sale or other transfer
will be permitted if (i) it is not of all or substantially all of the
Company's assets and (b) is approved by a majority of the independent and
disinterested members of the board of directors; and
(7) The entering into any transaction or agreement, or the amendment
or modification of any existing agreement, with any officers, directors or
principal shareholders of the Company, or any of their affiliates, which
transaction, agreement amendment or modification is not approved by a
majority of the independent and disinterested members of the board of
directors.
61
Warrants
Series A Warrants
We issued warrants in our September 2005 Private Placement (the "Series A
Warrants") to the investors who purchased Series A Shares, providing those
shareholders the right to purchase up to an aggregate of 5,740,000 shares of our
common stock, at an exercise price of $.50 per share, subject to certain
adjustments. Additionally, the placement agent in our September 2005 Private
Placement has an option to acquire Series A Warrants to purchase 574,000 shares
of our common stock. The Series A Warrants, which are also being offered for
resale by the Selling Shareholders under this prospectus, may be exercised at
any time until September 16, 2010. Other material terms of the Series A Warrants
are as follows:
(1) Listing. Upon the request of any holder of the Series A Warrants
(following the holder's obtaining the written consent of HCFP/Brenner
Securities LLC) or of said placement agent, we have agreed to use our best
efforts to list the Series A Warrants on the OTC Bulletin Board and to
provide for quotation on any other trading market or exchange on which our
common stock becomes quoted or listed in the future.
2) Anti-Dilution Adjustments. At any time prior to the listing of
the Series A Warrants on the OTC Bulletin Board, the exercise price will
be subject to similar adjustments as provided with respect to reductions
in the conversion price, in the event of the issuance of additional
securities at an effective price per share of common stock less than $.50
(or the then current exercise price as reduced by prior anti-dilution
events). The exercise price is also subject to adjustment as a result of
certain recapitalization events.
(3) Appointment of Warrant Agent. We are required, commencing on the
first date that the Series A Warrants are listed on OTC Bulletin Board, to
appoint a warrant agent for the purpose of maintaining the warrant
register, in connection with the issuance of the common stock issuable
upon the exercise of the Series A Warrants, exchanging the Series A
Warrants, replacing the Series A Warrants or any or all of the foregoing.
Upon said appointment, any registration, issuance, exchange, or
replacement of the Series A Warrants, as the case may be, will be made at
the office of the warrant agent.
(4) Redemption. Provided (i) that the shares of common stock
underlying the Series A Warrants are registered for resale under an
effective registration statement filed by the Company with the SEC and
(ii) that the registration statement shall be effective thirty (30) days
prior to the date of a notice of redemption, and remains effective until
that date, and provided that the Company obtains the prior written consent
of HCFP/Brenner Securities LLC to redeem the Series A Warrants, then upon
not less than 14 business days' prior written notice to the each holder,
the Series A Warrants may be redeemed by the Company at any time
commencing six months after the date of effectiveness of the registration
statement and prior to expiration of the Series A Warrants, in whole but
not in part, at the Company's sole option, at the redemption price of
$0.01 per share for every share of common stock purchasable upon exercise
the Series A Warrants at the time of redemption, if the last sale price of
a share of our common stock is at least $1.50 per share as adjusted for
stock splits, dividends and the like, for all ten of the consecutive
trading days ending within three business days prior to the date of the
redemption notice. The sending of a redemption notice will not affect a
holder's ability to exercise his or her Series A Warrants at any time
prior to the date of redemption.
62
Registration Rights
In connection with the issuance of its securities in the September 2005
Private Placement, we entered into a registration rights agreement with the
purchasers and the placement agent requiring us to file a registration statement
to register (1) the shares of common stock into which the Series A Shares
convert Warrants (including those Series A Shares that may be purchased pursuant
to the placement agent's option); (2) the shares of common stock that may be
paid as dividends on the Series A Shares; (3) the Series A Warrants (including
those Series A Warrants that may be issued pursuant to the placement agent's
option), and (4) the shares of common stock underlying the Series A Warrants
(including those underlying the Series A Warrants issuable to the placement
agent pursuant to its option), on a Form SB-2 Registration Statement (or
comparable form) by on or about October 31, 2005 and ensure that such
registration statement is effective no later than on or about January 16, 2006.
If any of the above time periods are not met, or the registration statement is
declared effective by the SEC, but the registered securities cannot be sold by a
Selling Shareholder for any reason other than its own fault, then the Company
will pay investors an amount in cash, as partial liquidated damages and not as a
penalty, equal to 2% per month of the issue price until such deficiency is
cured. In the event that the Registration Statement is not declared effective on
or around January 16, 2006, we will be required to pay investors in the
September 2005 Private Placement, unless these investors agree otherwise, an
aggregate of $57,400 on such date, and an additional $57,400 each month
thereafter until the Registration Statement has been declared effective. The
Company has not, as of the date of this prospectus, paid any of the $57,400 of
liquidated damages owed to the investors under the specific terms of the
registration rights agreement. The Company has been notified by HCFP/Brenner
Securities that such continued failure to pay such amount could result in a
default by the Company resulting in (i) an increase in the dividend payable on
the Series A Shares from $100.00 to $200.00 per share, until such liquidated
damages have been paid and (ii) each Series A Share would become convertible
into 2,500 shares of common stock instead of 2,000 shares. We are currently
trying to negotiate a waiver or a reduction in the amount payable to the
investors.
Certain Rights of Holders of Common Stock
The Company is a Nevada corporation organized under Chapter 78 of the
Nevada Revised Statutes ("NRS"). Accordingly, the rights of the holders of
common stock are governed by Nevada law. Although it is impracticable to set
forth all of the material provisions of the NRS, the following is a summary of
certain significant provisions of the NRS that affect the rights of securities
holders.
Control Share Statute
Sections 78.378 - 78.3793 of the NRS constitute Nevada's control share
statute, which set forth restrictions on the acquisition of a controlling
interest in a Nevada corporation which does business in Nevada (directly or
through an affiliated corporation) and which has 200 or more shareholders, at
least 100 of whom are shareholders of record and residents of Nevada. A
controlling interest is defined as ownership of common stock sufficient to
enable a person directly or indirectly and individually or in association with
others to exercise voting power over at least 20% but less than 33.3% of the
common stock, or at least 33.3% but less than a majority of the common stock, or
a majority or more of the common stock. Generally, any person acquiring a
controlling interest must request a special meeting of shareholders to vote on
whether the shares constituting the controlling interest will be afforded full
voting rights, or something less. The affirmative vote of the holders of a
majority of the common stock, exclusive of the control shares, is binding. If
full voting rights are not granted, the control shares may be redeemed by the
corporation under certain circumstances. The Company does not believe the
foregoing provisions of the Nevada statutes are presently applicable to it
because it does not presently have the requisite number of shareholders and does
not conduct business in Nevada; however, if in the future it does satisfy these
requirements, then such provisions may apply.
63
Business Combination Statute
Sections 78.411 - 78.444 of the NRS set forth restrictions and
prohibitions relating to certain business combinations and prohibitions relating
to certain business combinations with interested shareholders. These sections
generally prohibit any business combination involving a corporation and a person
that beneficially owns 10% or more of the common stock of that corporation (an
"Interested Shareholder") (A) within five years after the date (the "Acquisition
Date") the Interested Shareholder became an Interested Shareholder, unless,
prior to the Acquisition Date, the corporation's board of directors had approved
the combination or the purchase of shares resulting in the Interested
Shareholder becoming an Interested Shareholder; or (B) unless five years have
elapsed since the Acquisition Date and the combination has been approved by the
holders of a majority of the common stock not owned by the Interested
Shareholder and its affiliates and associates; or (C) unless the holders of
common stock will receive in such combination, cash and/or property having a
fair market value equal to the higher of (a) the market value per share of
common stock on the date of announcement of the combination or the Acquisition
Date, whichever is higher, plus interest compounded annually through the date of
consummation of the combination less the aggregate amount of any cash dividends
and the market value of other dividends, or (b) the highest price per share paid
by the Interested Shareholder for shares of common stock acquired at a time when
he owned 5% or more of the outstanding shares of common stock and which
acquisition occurred at any time within five years before the date of
announcement of the combination or the Acquisition Date, whichever results in
the higher price, plus interest compounded annually from the earliest date on
which such highest price per share was paid less the aggregate amount of any
cash dividends and the market value of other dividends. For purposes of these
provisions, a "business combination" is generally defined to include (A) any
merger or consolidation of a corporation or a subsidiary with or into an
Interested Shareholder or an affiliate or associate; (B) the sale, lease or
other disposition by a corporation to an Interested Shareholder or an affiliate
or associate of assets of that corporation representing 5% or more of the value
of its assets on a consolidated basis or 10% or more of its earning power or net
income; (C) the issuance by a corporation of any of its securities to an
Interested Shareholder or an affiliate or associate having an aggregate market
value equal to 5% or more of the aggregate market value of all outstanding
shares of that corporation; (D) the adoption of any plan to liquidate or
dissolve a corporation proposed by or under an agreement with the Interested
Shareholder or an affiliate or associate; (E) any receipt by the Interested
Shareholder or an affiliate, except proportionately as a Shareholder, of any
loan, advance, guarantee, pledge or other financial assistance or tax credit or
other tax advantage; and (F) any recapitalization or reclassification of
securities or other transaction that would increase the proportionate shares of
outstanding securities owned by the Interested Shareholder or an affiliate.
Sections 78.411-78.444 of the NRS are presently applicable to the Company.
Mergers, Consolidations and Sales of Assets
Nevada law provides that an agreement of merger or consolidation, or the sale or
other disposition of all or substantially all of a corporation's assets, must be
approved by the affirmative vote of the holders of a majority of the voting
power of a corporation (except that no vote of the shareholders of the surviving
corporation is required to approve a merger if certain conditions are met,
unless the articles of incorporation of that corporation states otherwise, and
except that no vote of shareholders is required for certain mergers between a
corporation and a subsidiary), but does not require the separate vote of each
class of stock unless the corporation's articles of incorporation provides
otherwise (except that class voting is required in a merger if shares of the
class are being exchanged or if certain other rights of the class are affected).
The Company's certificate of designation of its Series A Shares alters these
provisions of Nevada law by providing for the requirement of the approval of the
holders of a majority of the Series A Shares, voting separately as a class for:
(1) the merger, consolidation or entering into a business combination or similar
transaction, other than if (a) the Company is the surviving entity and (b) the
shareholders of the Company prior to such transaction continue to hold a
majority of the capital stock of the Company following the transaction; and (2)
the sale, transfer or disposal of a material portion of the Company's assets;
provided, however, that such a sale, transfer or other disposition will be
permitted if (a) it is not of all or substantially all of the Company's assets
and (b) is approved by a majority of the independent and disinterested members
of the Company's board of directors.
64
Directors; Removal of Directors
Under Nevada law, the number of directors may be fixed by, or determined
in the manner provided in the articles of incorporation or bylaws of a
corporation, and the board of directors may be divided into classes as long as
at least 25% in number of the directors are elected annually. Nevada law further
requires that a corporation have at least one director. Directors may be removed
under Nevada law with or without cause by the holders of not less than a
majority of the voting power of the corporation, unless a greater percentage is
set forth in the articles of incorporation.
Amendments to Bylaws
The Company's bylaws may be amended by the board of directors or by the
shareholders, with respect to any bylaw adopted by the shareholders.
Appraisal Rights
The Nevada statutes provide dissenting or objecting security holders with
the right to receive the fair value of their securities in connection with
certain extraordinary corporate transactions. These appraisal rights are
available with respect to certain mergers and share exchanges and in connection
with the granting of full voting rights to control shares acquired by an
interested shareholder. However, unless the transaction is subject to the
control share provisions of the Nevada statutes, a shareholder of a Nevada
corporation may not assert dissenters' rights, in most cases, if the stock is
listed on a national securities exchange or held by at least 2,000 shareholders
of record (unless the articles of incorporation of the corporation expressly
provide otherwise or the security holders are required to exchange their shares
for anything other than shares of the surviving corporation or another publicly
held corporation that is listed on a national securities exchange or held of
record by more than 2,000 shareholders). The Company's certificate of
designation of its Series A Shares alters these provisions of Nevada law by
providing each holder of Series A Shares, at its option, the right to elect to
treat a consolidation or merger of the Company with another corporation in which
the Company is not the surviving entity, or a sale or transfer of all or part of
the Company's assets for cash, securities or other property as a liquidation
event, which would entitle such shareholder to payment for its Series A Shares
based on the liquidation preference amount of the Series A Shares.
Distributions
Cumulative Voting
Under the Nevada statutes, the articles of incorporation of a corporation
may provide for cumulative voting, which means that the shareholders are
entitled to multiply the number of votes they are entitled to cast by the number
of directors for whom they are entitled to vote and then cast the product for a
single candidate or distribute the product among two or more candidates.
Cumulative voting is not available to shareholders of a Nevada corporation,
unless its articles of incorporation expressly provide for that voting right.
The Company's Articles do not contain a provision permitting shareholders to
cumulate their votes when electing directors.
Indemnification of Directors, Officers and Controlling Persons
Section 78.7502 of the Nevada Revised Statutes requires a corporation to
indemnify a director or officer who has been successful on the merits or
otherwise in defense of any proceeding to which he or she is made a party by
reason of his or her service as a director or officer. Nevada law permits a
corporation to indemnify its present and former directors and officers, among
others, against judgments, fines, settlements and reasonable expenses (including
attorneys' fees) actually incurred by them in connection with any proceeding to
which they may be made a party by reason of their service as directors or
officers (including a proceeding brought by or in the right of the corporation),
but only if: (i) their liability is not the result of a breach of fiduciary
duties involving intentional misconduct, fraud or a knowing violation of law or
(ii) they acted in good faith and in a manner which they reasonably believed to
be in, or not opposed to, the best interests of the corporation, and, with
respect to any criminal action or proceeding, had no reasonable cause to believe
their conduct was unlawful. A Nevada corporation may not indemnify directors or
officers for final, non-appealable, adverse judgments in a suit by or in the
right of the corporation unless a court orders determines that indemnification
would be fair and reasonable, but then only for expenses.
65
In addition, Section 78.751 of the Nevada Revised Statutes permits a
corporation, if provided in its Articles of Incorporation or By-laws, to advance
reasonable expenses to a director or officer before a final disposition of a
proceeding, but only upon the corporation's receipt of a written undertaking by
or on behalf of the director or officer to repay the amount paid or reimbursed
by the corporation if it is ultimately determined that he or she was not
entitled to indemnification.
Our Articles provide for the indemnification of any person entitled to
indemnification pursuant to the Nevada Revised Statutes, to the fullest extent
permitted thereunder.
Each Selling Shareholder has agreed to indemnify the Company against
certain liabilities incurred in connection with this offering as the result of
claims made under the Securities Act of 1933, the Securities Exchange Act of
1934 or state law.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers, or persons controlling the
registrant pursuant to the foregoing provisions, the registrant has been
informed that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act and
is therefore unenforceable.
LEGAL MATTERS
The validity of the issuance of the shares of common stock offered by this
Prospectus has been passed upon for the Company by Gusrae, Kaplan, Bruno &
Nusbaum, PLLC, New York, New York.
EXPERTS
The consolidated financial statements of Giant Motorsports, Inc. as of
December 31, 2004, 2003 and 2002, and for the years then ended, as listed below,
included in this prospectus and the Registration Statement have been included
herein in reliance upon the report of Bagell Josephs, Levine & Company, LLC,
independent certified public accountants, given on the authority of said firm as
an expert in auditing and accounting.
Changes In and Disagreements with Accountants on Accounting and Financial
Disclosure
Change of Accountants from Miller and McCollom to BDO Seidman
Effective March 3, 2004, the Company, notified Miller and McCollom
("M&M"), the independent accounting firm previously engaged as the principal
accountant to audit the financial statements of American Busing Corporation, the
Company's predecessor business ("ABC"), of its dismissal. M&M's report on ABC's
financial statements for the fiscal years ended August 31, 2003 and 2002,
contained qualifications by M&M raising substantial doubt of ABC's ability to
continue as a going concern. This qualification in M&M's report for the fiscal
year 2002 financial statements was based on ABC's minimal working capital and
nominal business operations. M&M's qualification in its report for the fiscal
year 2003 financial statements was based on ABC's accumulated deficit, minimal
working capital and nominal business operations. M&M's reports did not contain
any other adverse opinion or disclaimer of opinion and were not otherwise
qualified or modified as to uncertainty, audit scope or accounting principles.
66
The decision to change accountants was approved by the Company's board of
directors. During the 2002 and 2003 fiscal years, and any subsequent interim
period preceding M&M's dismissal, there were no disagreements with M&M on any
matter of accounting principles or practices, financial statement disclosure, or
auditing scope or procedure, which disagreements, if not resolved to the
satisfaction of M&M, would have caused it to make reference to the subject
matter of the disagreements in connection with its report.
Effective March 4, 2004, the Company engaged BDO Seidman, LLP ("BDO"), as
the principal accountant to audit the Company's financial statements. During the
2002 and 2003 fiscal years, and any subsequent interim period prior to engaging
BDO, neither the Company nor anyone on its behalf consulted BDO regarding
either: (1) the application of accounting principles to a specified transaction
regarding the Company, either completed or proposed; or the type of audit
opinion that might be rendered on the Company's financial statements; or (2) any
matter regarding the Company that was either the subject of a disagreement or a
reportable event.
Change of Accountants from BDO Seidman to Bagell Josephs & Company
Effective June 3, 2004, the Company notified BDO of its dismissal. BDO had
provided a report on the financial statements of the Company's wholly-owned
subsidiary, W.W. Cycles, Inc. ("Cycles"), for the fiscal years ended December
31, 2003 and 2002. This report was filed along with the Company's Form 8-K/A
dated March 31, 2004. BDO's report did not contain any adverse opinion or
disclaimer of opinion and was not otherwise qualified or modified as to
uncertainty, audit scope or accounting principles.
The decision to change accountants was approved by the board of directors
of the Company and Cycles. During the period preceding such dismissal there were
no disagreements with BDO on any matter of accounting principles or practices,
financial statement disclosure, or auditing scope or procedure, which
disagreements, if not resolved to the satisfaction of BDO, would have caused it
to make reference to the subject matter of the disagreements in connection with
its report.
Effective June 2, 2004, the Company engaged Bagell Josephs & Company, LLC
("BJC") as the principal accountant to audit the Company's financial statements.
During the Company's then two most recent fiscal years, and any subsequent
interim period prior to engaging BJC, neither the Company nor anyone on its
behalf consulted BJC regarding either: (1) the application of accounting
principles to a specified transaction regarding the Company, either completed or
proposed or the type of audit opinion that might be rendered on the Company's
financial statements; or (2) any matter regarding the Company that was either
the subject of a disagreement or a reportable event.
WHERE YOU CAN FIND MORE INFORMATION
The Company has filed under the Securities Act with the Securities and
Exchange Commission a Registration Statement on Form S-1 with respect to its
shares of common stock and Series A Warrants offered hereby. This prospectus was
filed as a part of the Registration Statement. As permitted by the rules and
regulations of the Commission, this prospectus omits certain information
contained in the Registration Statement, and reference is hereby made to the
Registration Statement for further information with respect to the Company and
its common stock and the Series A Warrants.
67
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended, and, in accordance therewith, files reports,
proxy and information statements, and other information with the Commission.
Reports, proxy statements and other information filed by the Company with the
Commission pursuant to the informational requirements of the Exchange Act may be
inspected and copied at the public reference facilities maintained by the
Commission at 100 F Street, N.E., Washington, D.C. 20549. Copies of such
material may also be obtained upon written request addressed to the Commission,
Public Reference Section, 100 F Street, N.E., Washington, D.C. 20549, at
prescribed rates. The Commission also maintains a Web site that contains
reports, proxy and information statements and other information regarding
registrants that are filed electronically with the Commission at
http://www.sec.gov. The Company maintains websites at www.andrewscycles.com,
www.chicagocycle.com and www.giantcorporate.com.
No person has been authorized to give any information or to make any
representation other than as contained or incorporated by reference in this
prospectus and, if given or made, such information or representation must not be
relied upon as having been authorized by the Company. Neither the delivery of
this prospectus nor any sale of common stock made hereunder shall, under any
circumstances, create any implication that the information contained herein is
correct as of any date subsequent to the date hereof. This prospectus does not
constitute an offer to sell or a solicitation of an offer to buy the securities
offered by this prospectus to any person or by anyone in any jurisdiction in
which it is unlawful to make such an offer or solicitation.
68
INDEX TO FINANCIAL STATEMENTS
Audited Consolidated Financial Statements:
Report of Independent Registered Public Accounting Firm F-2
Consolidated Balance Sheets as of December 31, 2004 and 2003
(Restated) F-3
Consolidated Statements of Income for the years ended
December 31, 2004, 2003 and 2002 (Restated) F-5
Consolidated Statements of Stockholders' Equity -
Restated for the years ended
December 31, 2004, 2003 and 2002 F-6
Consolidated Statements of Cash Flow for the years ended
December 31, 2004, 2003 and 2002 F-7
Notes to Consolidated Financial Statements F-8
Unaudited Condensed Consolidated Financial Statements:
Condensed Consolidated Balance Sheet as of September 30, 2005
(Unaudited)(Restated) and December 31, 2004 (Audited) F-24
Condensed Consolidated Statements of Income for the Nine and
Three Months ended September 30, 2005 (Restated) (Unaudited)
and 2004 (Unaudited) F-26
Condensed Consolidated Statements of Cash Flow for the
Nine Months ended June 30, 2005 (Unaudited) and 2004
(Unaudited) F-27
Notes to Condensed Consolidated Unaudited Financial Statements F-28
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
Giant Motorsports, Inc.
Salem, Ohio
We have audited the accompanying consolidated balance sheets of Giant
Motorsports, Inc., as of December 31, 2004 and 2003 and the related consolidated
statements of income, changes in stockholders' equity, and cash flows for each
of the three years in the period ended December 31, 2004. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall consolidated financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Giant Motorsports,
Inc., as of December 31, 2004 and 2003 and the results of its consolidated
operations, changes in stockholders' equity, and cash flows for each of the
three years in the period ended December 31, 2004, in conformity with accounting
principles generally accepted in the United States of America.
As noted in Note O, the Company has restated it previously issued consolidated
financial statements for the year ended December 31, 2003 to properly reflect
the activity for the reverse merger between American Busing Corporation and W.W.
Cycles, Inc. The effect of this restatement was to re-class various components
within the stockholders' equity section of the balance sheet and to recalculate
the weighted average common shares outstanding. This change had no effect on net
income for the year ended December 31, 2003 or the financial position of the
Company as of December 31, 2003. The Company corrected the amount of shares
issued in the reverse merger in 2003, as the shares were issued in 2004, but
inadvertently booked in 2003.
/s/ Bagell Josephs & Company, LLC
Bagell Josephs & Company, LLC
Gibbsboro, New Jersey
March 28, 2005, except for
Notes N and O, dated
December 13, 2005
F-2
GIANT MOTORSPORTS, INC.
CONSOLIDATED BALANCE SHEETS
December 31, 2004 and 2003
(Restated)
2004 2003
----------- -----------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 1,862,187 $ 587,917
Accounts receivable, net 2,465,369 1,285,106
Accounts receivable, affiliates 65,823 315,343
Inventories 16,538,087 10,986,080
Deferred federal income taxes 8,500 --
Note receivable, officer 254,029 679,405
Prepaid expenses 61,875 8,000
----------- -----------
TOTAL CURRENT ASSETS 21,255,870 13,861,851
----------- -----------
PROPERTY AND EQUIPMENT, NET 1,105,667 425,177
----------- -----------
OTHER ASSETS
Goodwill 1,588,950 --
Deposits 67,240 16,000
----------- -----------
TOTAL OTHER ASSETS 1,656,190 16,000
----------- -----------
$24,017,727 $14,303,028
=========== ===========
The accompanying notes are an integral part of these consolidated
financial statements.
F-3
GIANT MOTORSPORTS, INC.
CONSOLIDATED BALANCE SHEETS (CONTINUED)
December 31, 2004 and 2003
(Restated)
2004 2003
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable 1,425,000 450,000
Notes payable, floor plans 17,788,706 11,575,660
Accounts payable, trade 1,226,986 675,042
Accrued expenses 172,281 178,412
Accrued income taxes 393,300 --
Deferred service contract income 90,000 80,000
Customer deposits 344,140 215,632
Current portion of long-term debt 214,760 97,073
----------- -----------
TOTAL CURRENT LIABILITIES 21,655,173 13,271,819
DEFERRED FEDERAL INCOME TAXES 37,400 --
LONG-TERM DEBT, NET 996,267 --
----------- -----------
TOTAL LIABILITIES 22,688,840 13,271,819
----------- -----------
COMMITMENTS
STOCKHOLDERS' EQUITY
Common stock, $.001 par value at December
31, 2004 and no par value at 2003;
Authorized 75,000,000 shares
at December 31, 2004 and 2003;
Issued and and outstanding 10,425,000
and 7,850,000 shares at December 31,
2004 and 2003 10,425 7,850
Paid-in capital 1,014,534 37,150
Retained earnings 303,928 986,209
----------- -----------
TOTAL STOCKHOLDERS' EQUITY 1,328,887 1,031,209
----------- -----------
$24,017,727 $14,303,028
=========== ===========
The accompanying notes are an integral part of these consolidated
financial statements.
F-4
GIANT MOTORSPORTS, INC.
CONSOLIDATED STATEMENTS OF INCOME
For the years ended December 31, 2004, 2003 and 2002
(Restated) (Restated)
2004 2003 2002
------------ ------------ ------------
OPERATING INCOME
Sales $ 77,615,237 $ 45,217,270 $ 38,461,692
Finance, insurance and extended service revenues 2,335,618 838,573 1,041,228
------------ ------------ ------------
TOTAL OPERATING INCOME 79,950,855 46,055,843 39,502,920
COST OF MERCHANDISE SOLD 70,025,884 41,229,644 34,357,908
------------ ------------ ------------
GROSS PROFIT 9,924,971 4,826,199 5,145,012
------------ ------------ ------------
OPERATING EXPENSES
Selling expenses 5,003,299 2,513,276 2,564,627
General and administrative expenses 2,753,416 1,460,092 1,337,531
------------ ------------ ------------
7,756,715 3,973,368 3,902,158
------------ ------------ ------------
INCOME FROM OPERATIONS 2,168,256 852,831 1,242,854
------------ ------------ ------------
OTHER INCOME AND (EXPENSES)
Other income, net 38,592 6,608 15,987
Interest expense, net (626,587) (300,937) (244,433)
------------ ------------ ------------
(587,995) (294,329) (228,446)
------------ ------------ ------------
INCOME BEFORE INCOME TAXES 1,580,261 558,502 1,014,408
INCOME TAXES (622,200) -- --
------------ ------------ ------------
NET INCOME ATTRIBUTABLE TO
COMMON STOCKHOLDERS' $ 958,061 $ 558,502 $ 1,014,408
============ ============ ============
BASIC EARNINGS PER SHARE $ 0.09 $ 0.07 $ 0.13
============ ============ ============
DILUTED EARNINGS PER SHARE $ 0.08 $ 0.07 $ 0.13
============ ============ ============
WEIGHTED AVERAGE SHARES OUTSTANDING
BASIC 10,425,000 7,850,000 7,850,000
============ ============ ============
DILUTED 12,001,503 7,850,000 7,850,000
============ ============ ============
The accompanying notes are an integral part of these consolidated
financial statements.
F-5
GIANT MOTORSPORTS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY - RESTATED
For the years ended December 31, 2004, 2003 and 2002
Common Stock
-------------------- Retained
Shares Amount Paid-In Capital Earnings Total
------ ------ --------------- -------- -----
Balance, January 1, 2002, retroactively restated 7,850,000 $ 7,850 37,150 $ 618,697 $ 663,697
Distributions - - - (416,955) (416,955)
Net income for the year ended December 31, 2002 - - - 1,014,408 1,014,408
---------- ------- --------- ---------- ----------
Balance, December 31, 2002, as restated 7,850,000 7,850 37,150 1,216,150 1,261,150
Net income for the year ended December 31, 2003 - - - 558,502 558,502
Distributions - - - (788,443) (788,443)
---------- ------- --------- ---------- ----------
Balance, December 31, 2003, as restated 7,850,000 7,850 37,150 986,209 1,031,209
Effects of reverse merger 2,575,000 2,575 (2,575) - -
Reallocation of S-Corporation earnings - - 986,209 (986,209) -
Retirment of loan - - (21,250) - (21,250)
Stock warrants issued as compensation - - 15,000 - 15,000
Distributions - - - (654,133) (654,133)
Net income for the year ended December 31, 2004 - - - 958,061 958,061
---------- ------- --------- ---------- ----------
Balance, December 31, 2004 10,425,000 10,425 1,014,534 303,928 1,328,887
========== ======= ========= ========== =========
The accompanying notes are an integral part of these consolidated
financial statements.
F-6
GIANT MOTORSPORTS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOW
For the years ended December 31, 2004, 2003 and 2002
2004 2003 2002
----------- ----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 958,061 $ 558,502 $ 1,014,408
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 165,043 74,564 64,912
Deferred federal income taxes 28,900 -- --
Provision for doubtful accounts -- 6,295 3,542
Loss on sale of property and equipment -- 1,609 --
(Increase) in accounts receivable, net (1,180,263) (374,187) (537,403)
(Increase) in inventories (5,552,007) (3,666,594) (1,371,749)
Increase in floor plan liability 6,213,046 3,913,483 2,325,256
(Increase) decrease in prepaid expenses (53,875) 23,712 (25,000)
Increase in customer deposits 128,508 153,881 (29,657)
Increase in accrued warranty 10,000 -- --
Increase (decrease) in accounts payable trade 551,944 (7,084) (136,876)
Increase in accrued income taxes 393,300 -- --
Increase (decrease) in accrued expenses (6,131) 29,035 11,566
----------- ----------- -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 1,656,526 713,216 1,318,999
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment (741,519) (89,420) (183,725)
Proceeds from sale of property and equipment -- 50,240 --
Decrease (increase) in accounts receivable affiliates 249,520 (95,343) --
(Increase) decrease in notes receivable from officers 425,376 (163,734) 16,558
(Increase) in deposits (51,240) -- (14,300)
----------- ----------- -----------
NET CASH (USED IN) INVESTING ACTIVITIES (117,863) (298,257) (181,467)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Short-term borrowings on note 750,000 300,000 --
Long-term borrowings on note 1,250,000 -- --
Payments on short-term debt (1,450,000) -- --
Payments on long-term debt (154,010) (118,971) (112,427)
Distributions (654,133) (788,443) (416,955)
Issue 1,000,000 stock warrants 15,000 -- --
Repurchase 8,000,000 shares of common stock (21,250) -- --
----------- ----------- -----------
NET CASH (USED IN) FINANCING ACTIVITIES (264,393) (607,414) (529,382)
----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1,274,270 (192,455) 608,150
CASH AND CASH EQUIVALENTS, beginning of Year 587,917 780,372 172,222
----------- ----------- -----------
CASH AND CASH EQUIVALENTS, end of Year $ 1,862,187 $ 587,917 $ 780,372
=========== =========== ===========
OTHER SUPPLEMENTARY CASH FLOW INFORMATION
Short-term borrowings incurred for the acquisition of assets $ 1,675,000 $ -- $ --
=========== =========== ===========
Interest paid during the year $ 642,859 $ 261,657 $ 259,913
=========== =========== ===========
Income taxes paid $ 200,000 $ -- $ --
=========== =========== ===========
The accompanying notes are an integral part of these consolidated
financial statements.
F-7
GIANT MOTORSPORTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004, 2003 and 2002
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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.
Principles of Consolidation:
The 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.
F-8
GIANT MOTORSPORTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 2004, 2003 and 2002
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 December 31, 2004 and December 31, 2003.
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 recognized it over the life of the contract on a
straight-line basis.
F-9
GIANT MOTORSPORTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 2004, 2003 and 2002
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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. As of December 31, 2004 and 2003 the Company had $1,919,786 and
$941,754 in excess of the $100,000 insured limit.
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 and equipment 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................................... 15 years
F-10
GIANT MOTORSPORTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 2004, 2003 and 2002
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 supercedes 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.
Gross Carrying Accumulated
Amount Amortization
------ ------------
Goodwill $1,588,950 $ -0-
Income Taxes:
Income taxes are calculated using the liability method specified by Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes."
At December 31, 2004, income taxes are provided for amounts currently due and
deferred amounts arising from temporary differences between income for financial
reporting and income tax purposes.
For 2003 and 2002, the Company, with the consent of its shareholders, has
elected to have its income taxed as an "S" corporation under Section 1362 of the
Internal Revenue Code. As such, the Company does not pay corporate income taxes
and is not allowed net operating tax loss carrybacks or carryovers as
deductions. Instead, the shareholders include their proportionate share of the
Company's taxable income or loss in their individual income tax returns.
Advertising Costs:
Advertising costs are expensed when incurred. Charges to operations amounted to
$1,265,407, $752,371 and $645,080 for the years ended December 31, 2004, 2003
and 2002 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.
F-11
GIANT MOTORSPORTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 2004, 2003 and 2002
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Earnings Per Share of Common Stock (Continued):
The following is a reconciliation of the computation for basic and diluted EPS:
Years Ended December
2004 2003 2002
----------- ----------- -----------
Net income $ 958,061 $ 558,502 $ 1,014,408
=========== =========== ===========
Weighted-average common shares outstanding (Basic) 10,425,000 7,850,000 7,850,000
Weighted-average common stock equivalents:
Warrants 1,010,929 0 0
Options 565,574 0 0
----------- ----------- -----------
Weighted-average common shares
outstanding (diluted) 12,001,503 7,850,000 7,850,000
=========== =========== ===========
The Company uses the intrinsic value method to account for warrants granted to
executive officer, directors, key employees and advisors for the purchase of
common stock. No compensation expense is recognized on the grant date, since at
that date, the warrant price equals or is higher than the market price of the
underlying common stock. The Company discloses the pro forma effect of
accounting for stock warrants under the fair value method. The Company uses the
fair value method to account for warrants granted to advisors for the purchase
of common stock.
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.
Recent Accounting Pronouncements:
In June 2001, the 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 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.
F-12
GIANT MOTORSPORTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 2004, 2003 and 2002
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Recent Accounting Pronouncements (Continued):
On October 3, 2001, the FASB issued Statement of Financial Accounting Standards
No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS
144"), that is applicable to financial statements issued for fiscal years
beginning after December 15, 2001. The FASB's new rules on asset impairment
supersede SFAS 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of," and portions of Accounting Principles
Board Opinion 30, "Reporting the Results of Operations." This Standard provides
a single accounting model for long-lived assets to be disposed of and
significantly changes the criteria that would have to be met to classify an
asset as held-for-sale is an important distinction since such assets are not
depreciated and are stated at the lower of fair value or carrying amount.
This Standard also requires expected future operating losses from discontinued
operations to be displayed in the period(s) in which the losses are incurred,
rather than as of the measurement date as presently required. The adoption of
SFAS No. 144 did not have an impact on the Company's results of operations or
financial position.
Reclassifications:
Certain amounts from 2003 have been reclassified to conform to the 2004
presentation.
NOTE B - ACCOUNTS RECEIVABLE, NET
Accounts receivable, net consisted of the following:
2004 2003
---------- ----------
A/R-Customers and dealers $1,444,620 $ 651,932
A/R-Manufacturers 720,635 328,790
A/R-Employees 10,000 4,902
Contracts in transit 315,114 324,482
---------- ----------
2,490,369 1,310,106
Allowance for doubtful accounts 25,000 25,000
---------- ----------
$2,465,369 $1,285,106
========== ==========
F-13
GIANT MOTORSPORTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 2004, 2003 and 2002
NOTE C - INVENTORIES
Inventories consisted of the following:
2004 2003
----------- -----------
Parts and accessories $ 997,414 $ 736,308
Vehicles 15,540,673 10,249,772
----------- -----------
TOTALS $16,538,087 $10,986,080
=========== ===========
The Company does not provide for allowances on its vehicle and parts and
supplies inventory. With regards to vehicle inventory, all models are
specifically identified. Slow moving vehicles are reduced in price via a rebate
offered by the manufacturer. Historically, the Company has been successful in
selling its vehicle inventory. No allowance is made on the parts and supplies
inventory, as this amount is immaterial to the inventory taken as a whole.
NOTE D - PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
2004 2003
----------- -----------
Fixtures and equipment $ 927,017 $ 178,737
Vehicles 286,522 234,558
Leasehold improvements 309,617 264,328
----------- -----------
1,523,156 677,623
Less accumulated depreciation (417,489) (252,446)
----------- -----------
NET PROPERTY AND EQUIPMENT $ 1,105,667 $ 425,177
=========== ===========
Depreciation expense charged to operations amounted to $165,043 in 2004, $74,564
in 2003 and $64,912 in 2002.
NOTE E - NOTE RECEIVABLE OFFICER
Note receivable officer consisted of advances to an officer and advances to
companies that the officer owns bearing interest at 6% with no stipulated
repayment terms. Interest income on the note amounted to $42,567 in 2004,
$13,364 in 2003 and $15,980 in 2002. The note is expected to be repaid within a
year.
F-14
GIANT MOTORSPORTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 2004, 2003 and 2002
NOTE F - NOTES PAYABLE
The following is a summary of the Company's line of credit agreements:
2004 2003
---------- ----------
A $250,000 line of credit with one of its
suppliers bearing interest at 7.5%. The
loan is collateralized by substantially
all of the Company's assets. The
outstanding principal balance is
payable in full by December 2004. The
balance has been paid as of December
31, 2004 The Company can re-borrow on
the line one month subsequent to
payoff. $ 0 $ 150,000
A $300,000 revolving line of credit at a
bank bearing interest at a variable
rate of prime plus one percent (5% at
December 31, 2003). The loan is
collateralized by substantially all the
Company's assets and the building owned
personally by an officer. 0 300,000
A $250,000 revolving line of credit at a
bank bearing interest at a variable
rate of prime plus one percent (6.25%
at December 31, 2004). The loan is
collateralized by substantially all the
Company's assets and shareholder
guarantee. 250,000 0
A $250,000 revolving line of credit at a
bank bearing interest at a variable
rate of prime plus one percent (6.25%
at December 31, 2004). The loan is
collateralized by substantially all the
Company's assets and the building owned
personally by an officer. 250,000 0
Note payable to Kings Motorsports, Inc.
bearing interest at 6%, payable in full
on April 30, 2005 plus accrued interest
collateralized by assets. 925,000 0
---------- ----------
$1,425,000 $ 450,000
========== ==========
F-15
GIANT MOTORSPORTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 2004, 2003 and 2002
NOTE G - NOTES PAYABLE - FLOOR PLANS
The Company has floor plan financing agreements for the purchase of its new and
used vehicle inventory. The floor plans are collateralized by substantially all
corporate assets. The following is a summary of floor plan financing agreements:
2004 2003
---------- -----------
Kawasaki Motors Finance Company floor plan
agreement provides for borrowings up to
$1,900,000. 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 8.25% to
9.75% at December 31, 2004 and 2003).
Principal payments are due upon the
sale of the specific units financed. $1,208,808 $ 720,246
American Honda Finance floor plan
agreement provides for borrowings up to
$2,000,000. Manufacturers at their
discretion may increase the borrowings.
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 5.65% to 7.15%
at December 31, 2004 and 2003).
Principal payments are due upon the
sale of the specific units financed. 1,615,811 3,706,011
Deutsche Financial Service floor plan
agreement for Yamaha units provides for
borrowings up to $2,500,000. 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 3.3% to 5.83% at December
31, 2003). Principal payments are due
upon the sale of the specific units
financed. 0 1,247,034
Deutsche Financial Service floor plan
agreement for Suzuki units provides for
borrowings up to $1,000,000.
Manufacturers at their discretion may
increase the borrowings. 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 4.583% at December
31, 2003). Principal payments are due
upon the sale of the specific units
financed. 0 4,508,402
---------- -----------
CARRIED FORWARD $2,824,619 $10,181,693
========== ===========
F-16
GIANT MOTORSPORTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 2004, 2003 and 2002
NOTE G - NOTES PAYABLE - FLOOR PLANS (CONTINUED)
2004 2003
----------- -----------
BROUGHT FORWARD $ 2,824,619 $10,181,693
GE Commercial Distribution Finance floor
plan agreement for Yamaha units
provides for borrowings up to
$2,700,000. 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 4.17% to
6.6% at December 31, 2004). Principal
payments are due upon the sale of the
specific units financed. 1,590,270 0
GE Commercial Distribution finance floor
plan agreement for Suzuki units
provides for borrowings up to $150,000.
Manufacturers at their discretion may
increase the borrowings. 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 4.58% to 5.42% at
December 31, 2004). Principal payments
are due upon the sale of the specific
units financed. 5,872,823 0
Polaris Acceptance floor plan agreement
provides for borrowings up to $325,000.
Manufacturers at their discretion may
increase the borrowings. The agreement
is collateralized by specific units
financed (ranging from 4.75% to 9% at
December 31, 2004 and 2003). Principal
payments are due the earlier of date of
sale or one year after financing. 381,142 398,230
Fifth Third Bank floor plan agreement
provides for borrowings up to
$2,500,000. 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 (5.25% at December 31,
2004 and 2003). Principal payments are
due upon the sale of the specific units
financed. 1,581,926 995,737
GE Commercial Distribution Finance floor
plan agreement for Ducati units
provides for borrowings up to $300,000.
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 6.25% at
December 31, 2004). Principal payments
are due upon the sale of the specific
units financed. 185,956 0
----------- -----------
CARRIED FORWARD $12,436,736 $11,575,660
=========== ===========
F-17
GIANT MOTORSPORTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 2004, 2003 and 2002
NOTE G - NOTES PAYABLE - FLOOR PLANS (CONTINUED)
2004 2003
----------- -----------
BROUGHT FORWARD $12,436,736 $11,575,660
GE Commercial Distribution Finance floor
plan agreement for Yamaha units
provides for borrowings up to
$1,300,000. 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 4.17% to
6.6% at December 31, 2004). Principal
payments are due upon the sale of the
specific units financed. 1,417,292 0
GE Commercial Distribution Finance floor
plan agreement for Suzuki units
provides for borrowings up to $150,000.
Manufacturers at their discretion may
increase the borrowings. 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 4.58% to 5.42% at
December 31, 2004). Principal payments
are due upon the sale of the specific
units financed. 2,015,499 0
Fifth Third Bank floor plan agreement
provides for borrowing up to
$1,500,000. 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 (5.25% at December 31,
2004). Principal payments are due upon
the sale of the specific units
financed. 1,250,057 0
Fifth Third Bank floor plan agreement
provides for borrowing up to
$1,000,000. 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 (5.25% at December 31,
2004). Principal payments are due upon
the sale of the specific units
financed. 669,122 0
----------- -----------
TOTALS $17,788,706 $11,575,660
=========== ===========
F-18
GIANT MOTORSPORTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 2004, 2003 and 2002
NOTE H - LONG-TERM DEBT
The following is a summary of long-term debt:
2004 2003
----------- -----------
Note payable to bank bearing interest at
6.25% payable in monthly installments
of $17,360, through May 31, 2007,
collateralized by substantially all the
Company's assets and shareholder
guarantee. $ 1,197,920 $ 0
Note payable to bank bearing interest at
6.85%, payable in monthly installments
of $1,635, through July 2004,
collateralized by vehicle. 0 11,186
Noninterest bearing note payable to
finance company, payable in monthly
installments of $518, through November
2004, collateralized by vehicle. 0 5,177
Note payable to bank bearing interest at
5.75%, payable in monthly installments
of $7,576, through November 2004,
collateralized by second mortgage on
commercial real estate owned by a
shareholder. 0 80,710
Note payable to bank bearing interest at
8.6%, payable in monthly installments
of $546, through December 2005,
collateralized by vehicle. 13,107 0
----------- -----------
1,211,027 97,073
Less current maturities 214,760 97,073
----------- -----------
TOTALS $ 996,267 $ 0
=========== ===========
NOTE I - INCOME TAXES
Income taxes (credit) consisted of the following:
2004 2003 2002
-------- -------- --------
Federal:
Current $474,000 $ 0 $ 0
Deferred 28,900 0 0
-------- -------- --------
502,900 0 0
-------- -------- --------
State:
Current 119,300 0 0
Deferred 0 0 0
-------- -------- --------
119,300 0 0
TOTALS $622,200 $ 0 $ 0
======== ======== ========
Income taxes paid amounted to $200,000 for the year ended December 31, 2004 and
$-0- for the years ended December 31, 2003 and 2002, respectively.
F-19
GIANT MOTORSPORTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 2004, 2003 and 2002
NOTE I - INCOME TAXES (CONTINUED)
Deferred tax assets (liabilities) consisted of the following:
2004 2003 2002
-------- -------- --------
Deferred tax liabilities - long-term:
Depreciation $(37,400) $ 0 $ 0
-------- -------- --------
Deferred tax assets - current and long-term:
Allowance for doubtful accounts 8,500 0 0
-------- -------- --------
TOTALS $(28,900) $ 0 $ 0
======== ======== ========
No income tax expense was recognized in the years 2003 and 2002 due to the fact
the Company was classified as an "S" Corporation, and no liability would be
recognized at the entity level.
NOTE J - RELATED PARTY TRANSACTIONS
Related Party Transactions:
Accounts receivable, affiliates consisted of the following:
2004 2003
----------- -----------
Noninterest bearing advances to Marck's
Real Estate, LLC., a limited liability
company affiliated through common
ownership interest to be repaid within
one year $ 65,823 $ 0
Noninterest bearing advances to and
transfer of product at cost to Andrews
North, Inc., a corporation in
Cleveland, Ohio affiliated through
common ownership interest to be repaid
within one year $ 0 $ 220,000
Non-interest bearing advances of $90,000
at December 31, 2003 and sale of
product of $5,343 at December 31, 2003
to individuals related to the
shareholders of the corporation to be
repaid within one year 0 95,343
----------- -----------
TOTALS $ 65,823 $ 315,343
=========== ===========
Note receivable officers amounted to $254,029 at December 31, 2004 and $679,405
at December 31, 2003 (See Note E).
The Company leases its Ohio subsidiary retail facility from a shareholder under
a five-year agreement with two five-year renewal terms. The Company guarantees
the debt on the building, which amounted to approximately $1,104,924 at December
31, 2004.
F-20
GIANT MOTORSPORTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 2004, 2003 and 2002
NOTE J - RELATED PARTY TRANSACTIONS (CONTINUED)
Charges to operations amounted to $180,000 in 2004 and 2003.
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 December 31, 2004:
YEAR ENDING AMOUNT
----------- ----------
2005 $ 379,998
2006 619,998
2007 690,000
2008 730,002
2009 748,404
----------
$3,168,402
==========
NOTE K - EMPLOYEE BENEFIT PLANS
The Company sponsors a Simple Retirement Plan for all eligible employees. The
Company matches 100% of employee contributions up to 3% of compensation. Charges
to operations amounted to $28,198 in 2004, $20,870 in 2003 and $24,092 in 2002.
NOTE L - LEASES
The Company leases its Chicago subsidiary retail facility under a month-to-month
agreement. The amount charged to rent amounted to $144,000 in 2004. The Company
also leases an apartment in Chicago under a month-to-month agreement. The amount
charged to rent amounted to $8,000 in 2004.
NOTE M - ACQUISITION OF KINGS MOTORSPORTS, 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 is being sought primarily to provide the Company with a larger
market share in the industry. All the operations of the acquired entity are
included in the Company's income statement from the date of acquisition (April
30, 2004) through December 31, 2004. Through the acquisition, goodwill in the
amount of $1,588,950 was recognized, and is being amortized over 15 years for
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:
F-21
GIANT MOTORSPORTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 2004, 2003 and 2002
(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%, $1,625,000
aggregate principal amount promissory note (the "Note"). The
principal amount of the Note matures as follows:
(iv) $500,000 on July 29, 2004
(v) $250,000 on October 29, 2004, and
(vi) 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).
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 (effective January 1, 2005),
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 for 24 months for a total of $500,000.
The following unaudited pro forma information for the years ended December 31,
2004 and 2003 has been presented as if the acquisition occurred on December 31,
2002. The unaudited pro forma information does not necessarily represent the
actual results that would have been achieved had the companies been combined at
December 31, 2002, nor may they be indicative of future operations. In addition,
the following balance sheet indicates the amounts assigned for the various major
classes of assets acquired and liabilities assumed in the acquisition of Kings
Motorsports, Inc.
KINGS MOTORSPORTS, INC.
T/A CHICAGO CYCLE CENTER
BALANCE SHEET
ASSETS
ASSETS
Inventories $7,386,584
Property and equipment 682,700
Goodwill 1,588,950
----------
TOTAL ASSETS $9,658,234
==========
LIABILITIES
Notes payable, floor plans $6,658,234
Deferred service contract income 75,000
Due to Kings Motorsports 1,675,000
Note payable - Firstar 1,250,000
----------
TOTAL LIABILITIES $9,658,234
==========
F-22
GIANT MOTORSPORTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 2004, 2003 and 2002
FOR THE YEARS ENDED
DECEMBER 31,
2004 2003
--------------- ---------------
Revenues $ 85,760,237 $ 86,649,493
=============== ===============
Net Income $ 1,021,985 $ 702,427
=============== ===============
Net income per share
Basic $ 0.098 $ 0.067
=============== ===============
Diluted $ 0.085 $ 0.067
=============== ===============
Weighted average common
shares outstanding
10,425,000 10,425,000
=============== ===============
NOTE N - SUBSEQUENT EVENTS
The Company is moving its Chicago subsidiary to a 125,000 square foot building
in Skokie, Illinois in 2005. The Company entered into a ten-year lease with a
ten-year renewal option for the building on October 26, 2004 and is expected to
move into the building in April 2005. The payments on the lease will commence in
July 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.
NOTE O - RESTATEMENT
The Company has restated it previously issued consolidated financial statements
for the year ended December 31, 2003 to properly reflect the activity for the
reverse merger between American Busing Corporation and W.W. Cycles, Inc. The
effect of this restatement was to re-class various components within the
stockholders' equity section of the balance sheet and to recalculate the
weighted average common shares outstanding. This change had no effect on net
income for the year ended December 31, 2003 or the financial position of the
Company as of December 31, 2003. The Company corrected the amount of shares
issued in the reverse merger in 2003, as the shares were issued in 2004, but
inadvertently recorded in 2003.
F-23
GIANT MOTORSPORTS, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
Restated
Sept. 30, 2005 Dec. 31, 2004
Unaudited Audited
-------------- -------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 703,605 $ 1,862,187
Accounts receivable, net 3,375,001 2,465,369
Accounts receivable, affiliates 249,966 65,823
Inventories 17,316,251 16,538,087
Accounts receivable, employees 24,138 --
Notes receivable, officers 147,216 254,029
Deferred federal income taxes 8,500 8,500
Prepaid expenses 35,369 61,875
----------- -----------
TOTAL CURRENT ASSETS 21,860,046 21,255,870
----------- -----------
FIXED ASSETS, NET 1,845,008 1,105,667
----------- -----------
OTHER ASSETS
Goodwill 1,588,950 1,588,950
Intangibles, net 32,500 --
Deferred federal income taxes 1,600 --
Deposits 48,000 67,240
----------- -----------
TOTAL OTHER ASSETS 1,671,050 1,656,190
----------- -----------
$25,376,104 $24,017,727
=========== ===========
The accompanying notes are an integral part of the condensed
consolidated financial statements.
F-24
GIANT MOTORSPORTS, INC.
CONDENSED CONSOLIDATED BALANCE SHEET (CONTINUED)
Restated
Sept. 30, 2005 Dec. 31, 2004
Unaudited Audited
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable $ 674,863 $ 1,425,000
Notes payable, floor plans 15,474,363 17,788,706
Note payable, officer 236,316 --
Accounts payable, trade 1,851,247 1,226,986
Accrued expenses 530,206 172,281
Accrued warranty 22,500 90,000
Accrued income taxes 694,300 393,300
Customer deposits 352,142 344,140
Current portion of long-term debt 214,760 214,760
------------ ------------
TOTAL CURRENT LIABILITIES 20,050,697 21,655,173
DEFERRED FEDERAL INCOME TAXES -- 37,400
LONG-TERM DEBT, NET 837,600 996,267
------------ ------------
TOTAL LIABILITIES 20,888,297 22,688,840
------------ ------------
COMMITMENTS - NOTE J
STOCKHOLDERS' EQUITY
Preferred stock, $.001 par value, authorized 5,000,000 shares
5,000 shares designated Series A Convertible, $1,000 stated value
2,870 shares issued and outstanding at September 30, 2005, 0 shares
issued at December 31, 2004 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
and 10,425,000 shares issued and outstanding at December 31, 2004 10,445 10,425
Additional paid-in-capital 641,277 1,014,534
Additional paid-in-capital - Options 109,442 --
Additional paid-in capital - Warrants 2,020,480 --
Additional paid-in capital - Beneficial conversions 1,526,840 --
Issuance costs on preferred series A convertible (786,762) --
Retained earnings (Deficit) (1,903,915) 303,928
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 4,487,807 1,328,887
------------ ------------
$ 25,376,104 $ 24,017,727
============ ============
The accompanying notes are an integral part of the condensed
consolidated financial statements.
F-25
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,
Restated Restated
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 3,146,816 1,916,998 1,134,729 741,949
------------ ------------ ------------ ------------
8,935,361 5,622,099 3,311,271 2,504,224
------------ ------------ ------------ ------------
INCOME FROM OPERATIONS 1,577,530 1,659,270 607,047 721,592
------------ ------------ ------------ ------------
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 1,075,157 1,168,214 491,284 529,236
INCOME TAXES 413,000 485,700 240,000 240,100
------------ ------------ ------------ ------------
NET INCOME 662,157 682,514 251,284 289,136
ACCRETION OF PREFERRED STOCK DISCOUNT 2,870,000 -- 2,870,000 --
------------ ------------ ------------ ------------
NET INCOME ATTRIBUTABLE
TO COMMON SHAREHOLDERS $ (2,207,843) $ 682,514 $ (2,618,716) $ 289,136
============ ============ ============ ============
BASIC EARNINGS PER SHARE $ (0.21) $ 0.07 $ (0.25) $ 0.03
============ ============ ============ ============
DILUTED EARNINGS PER SHARE $ (0.21) $ 0.06 $ (0.25) $ 0.03
============ ============ ============ ============
WEIGHTED AVERAGE SHARES OUTSTANDING
BASIC 10,432,839 10,425,000 10,445,000 10,425,000
============ ============ ============ ============
DILUTED 10,432,839 11,351,740 10,445,000 11,425,000
============ ============ ============ ============
The accompanying notes are an integral part of the condensed
consolidated financial statements.
F-26
GIANT MOTORSPORTS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW (UNAUDITED)
For the nine months ended September 30, 2005 and 2004
Restated
2005 2004
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 662,157 $ 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 (decrease) in floor plan liability (2,314,343) 3,705,464
Increase in accounts payable affiliate -- 0
Increase in accrued income taxes 301,000 559,000
Increase in accrued expenses 357,925 66,094
Decrease in accrued warranty (67,500) --
----------- -----------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES (2,047,777) 585,974
----------- -----------
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
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 FINANCING ACTIVITIES 1,753,753 712,078
----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (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
Accretion of preferred stock discount $ 2,870,000 $ --
=========== ===========
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.
F-27
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
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.
F-28
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.
F-29
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.
F-30
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
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 supercedes 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. Originally the Agreement was to
be amortized over two (2) years, expiring on December 31, 2006. However, the
holder of the Non-Compete Agreement has violated the agreement. The carrying
value has been written down to $130,000 and will be amortized through the end of
2005.
Gross Carrying Accumulated
Amount Amortization
-------------- ------------
Non-Compete Agreements $ 130,000 $ 97,500
Goodwill $1,588,950 $ -0-
F-31
GIANT MOTORSPORTS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 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 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.
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 (loss) 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 (loss) $ (2,207,843) $ 682,514
============ ============
Weighted-average common shares outstanding (Basic) 10,432,839 10,425,000
Weighted-average common stock equivalents:
Warrants -0- 926,740
------------ ------------
Weighted-average common shares outstanding (Diluted) 10,432,839 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.
F-32
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 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. As of December 31, 2005
the loans have been repaid. The interest income was "netted" against interest
expense for financial statement purposes. See Note M for additional information
on notes receivable from related parties.
NOTE F - LINE OF CREDIT
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 collaterized by substantially all of
the Company's assets.
F-33
GIANT MOTORSPORTS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 2005 and 2004
(UNAUDITED)
NOTE G - 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 H - 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.
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. It is anticipated the
loans will be repaid by December 31, 2005.
NOTE J - 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.
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 September 30, 2005.
F-34
GIANT MOTORSPORTS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 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 Company was granted a four(4) month rent holiday. Rent
expense has been calculated using the straight-line basis over the lease term of
ten (10) years to reflect the inclusion of the rent-free period. An additional
$215,550 has been accrued to reflect the rent-free period.
The following is a summary of future minimum lease payments under operating
leases that have initial or remaining noncancelable 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.
F-35
GIANT MOTORSPORTS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 2005 and 2004
(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
--------
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 N - 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.
F-36
GIANT MOTORSPORTS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 2005 and 2004
(UNAUDITED)
NOTE O - PREFERRED STOCK
The Company has 5,000,000 shares of preferred stock authorized, with a par value
of $.001 per share. Included in these 5,000,000 shares are 5,000 authorized
shares of 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 Preferred stock with a stated value of
$1,000 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.
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.
In connection with the private placement warrants, the Company reported an
accretion of preferred stock discount in the amount of $2,870,000 as a
constructive dividend associated with the preferred stock. This amount reduced
the amount available for the common shareholders.
The net proceeds of the issuance of the preferred stock were allocated based on
the relative fair values of each equity instrument using the Black-Scholes
Pricing Model and current market values where applicable. The preferred stock
conversion price was less than the market value based on these valuations on the
date of issuance; accordingly a preferred stock discount resulted from the
allocation of the net proceeds to the other equity instruments issued, which was
immediately distributed, as both the stock and the warrants were convertible and
vested, respectively.
NOTE P - 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 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.
F-37
GIANT MOTORSPORTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 2005 and 2004
(UNAUDITED)
NOTE P - ACQUISITION OF KINGS MOTOTRSPORTS, INC (Continued)
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).
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 has 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 Q - 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.
In addition, the loans from the shareholders have been repaid in December 2005.
NOTE R - RESTATEMENT
The Company has reclassified elements of the Stockholders Equity section of the
balance sheet to reflect the beneficial conversion and other aspects associated
with the issuance of the preferred series A shares and warrants. Additionally,
the Statement of Operations has been amended to reflect the accretion of
preferred stock discounts recognized as a preferred stock dividend. This
accretion resulted in a reduction of $2,870,000 that would have been applicable
to common shareholders. This restatement had no effect on the total income,
loss, or total equity.
Moreover, the Company has restated its Statement of Operations to account for
additional rent expense not previously reported due to a rent-free holiday
received by the Company for its initial four(4) months of its new lease
agreement, commencing April 2005. The first required lease payment was made on
August 1, 2005. This transaction decreased net income and retained earnings for
the nine and three months ended September 30, 2005 by $215,550 and $74,442,
respectively.
The net effect of these changes resulted in earnings per share to common
shareholder decreasing from $.06 to $(0.21).
F-38
26,356,000 SHARES OF COMMON STOCK
AND
WARRANTS TO PURCHASE 6,314,000 SHARES OF COMMON STOCK
OF
GIANT MOTORSPORTS, INC.
DEALER PROSPECTUS DELIVERY OBLIGATIONS
Until _________, 2006, all dealers effecting transactions in the
registered securities, whether or not participating in this distribution, may be
required to deliver a prospectus. This is in addition to the obligation of
dealers to deliver a prospectus when acting as underwriters and with respect to
their unsold allotments or subscriptions.
PART II
INFORMATION NOT REQUIRED TO BE IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution
The estimated expenses of the registration, all of which will be paid by
the Company, are as follows:
SEC Filing fee $ 2,157.88
Accounting Fees and Expenses $ 25,000.00
Legal Fees and Expenses including $ 50,000.00
those of counsel to the Selling
Shareholders
Miscellaneous Expenses $ 5,000.00
-------------
TOTAL $ 82,157.88
Item 14 Indemnification of Directors and Officers.
Section 78.138(7) of the Nevada Revised Statutes states that, unless a
corporation's articles of incorporation provide differently, the directors and
officers of a Nevada corporation are not individually liable to the corporation,
its shareholders or its creditors for any damages resulting from the director's
or officer's act or failure to act, unless it is proven that: (i) the director's
or officer's act or failure to act constituted a breach of his or her fiduciary
duties; and (ii) his or her breach of those duties involved intentional
misconduct, fraud or a knowing violation of law. Our Articles contain a
provision eliminating our directors' and officers' liability to us and to our
shareholders (a) for acts or omissions that involve intentional misconduct,
fraud or a knowing violation of law or (b) for the payment of dividends or other
distributions in violation of the Nevada Revised Statutes.
Section 78.7502 of the Nevada Revised Statutes requires a corporation to
indemnify a director or officer who has been successful on the merits or
otherwise in defense of any proceeding to which he or she is made a party by
reason of his or her service as a director or officer. Nevada law permits a
corporation to indemnify its present and former directors and officers, among
others, against judgments, fines, settlements and reasonable expenses (including
attorneys' fees) actually incurred by them in connection with any proceeding to
which they may be made a party by reason of their service as directors or
officers (including a proceeding brought by or in the right of the corporation),
but only if: (i) their liability is not the result of a breach of fiduciary
duties involving intentional misconduct, fraud or a knowing violation of law or
(ii) they acted in good faith and in a manner which they reasonably believed to
be in, or not opposed to, the best interests of the corporation, and, with
respect to any criminal action or proceeding, had no reasonable cause to believe
their conduct was unlawful. A Nevada corporation may not indemnify directors or
officers for final, non-appealable, adverse judgments in a suit by or in the
right of the corporation unless a court orders determines that indemnification
would be fair and reasonable, but then only for expenses.
In addition, Section 78.751 of the Nevada Revised Statutes permits a
corporation, if provided in its Articles of Incorporation or By-laws, to advance
reasonable expenses to a director or officer before a final disposition of a
proceeding, but only upon the corporation's receipt of a written undertaking by
or on behalf of the director or officer to repay the amount paid or reimbursed
by the corporation if it is ultimately determined that he or she was not
entitled to indemnification.
Part II - Page 1
Our Articles provide for the indemnification of any person entitled to
indemnification pursuant to the Nevada Revised Statutes, to the fullest extent
permitted thereunder.
The Company does not currently maintain director and officer liability
insurance, as permitted by the Nevada Revised Statutes. The Company has agreed
with the placement agent in the September 2005 Private Placement to obtain and
maintain a liability insurance policy affording coverage for the acts of its
officers and directors in an amount not less than $1,500,000, on or around the
date that any designee of said placement agent commences serving on the board of
directors.
Each Selling Shareholder has agreed to indemnify the Company against
certain liabilities incurred in connection with this offering as the result of
claims made under the Securities Act of 1933, the Securities Exchange Act of
1934 or state law.
Item 15. Recent Sales of Unregistered Securities
In September 2005, the Company sold to accredited investors in a private
placement offering (the "September 2005 Private Placement"), 2,870 shares of its
newly-designated Series A Convertible Preferred Stock, stated value $1,000 per
share (the "Series A Shares"), and common stock purchase warrants (the "Series A
Warrants") to purchase up to of 5,740,000 shares of Company's common stock,
resulting in the receipt by the Company of $2,870,000 of gross proceeds. In
connection with HCFP/Brenner Securities LLC's acting as placement agent in the
September 2005 Private Placement, the Company paid it commissions of $229,600
and a nonaccountable expense allowance of $57,400. Additionally, the Company
issued the placement agent an option to purchase 287 Series A Shares and Series
A Warrants to purchase up to 574,000 shares of common stock. After deduction of
all offering expenses, including the placement agent's commissions and
nonaccountable expense allowance, the Company received net proceeds of
$2,485,163. The securities sold by the Company in the September 2005 Private
Placement were exempt from registration under the Securities Act of 1933, as
amended (the "Securities Act"), pursuant to the provisions of Section 4(2) of
the Securities Act and Regulation D promulgated thereunder. Sales of these
securities were made pursuant to the provisions of Rule 506 of Regulation D
which provides for an exemption from registration under the Securities Act of
1933, for sales of securities to no more than 35 "accredited investors" (as such
term is defined in Rule 501 of Regulation D). Based on the information provided
by the investors in the September 2005 Private Placement in their subscription
documents, the Company sold securities to 15 accredited investors in compliance
with the provisions of Regulation D and filed a Form D with the Securities and
Exchange Commission reporting this sale.
On April 20, 2004, as partial consideration for a bridge loan in the
principal amount of $500,000, the Company 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. This warrant was exempt from registration under the Securities
Act, pursuant to the provisions of Section 4(2) of the Securities Act.
As partial consideration for certain financial advisory services provided
in connection with the acquisition of W.W. Cycles, the Company issued to Moneta
Capital LLC, an unaffiliated entity, a five-year warrant to purchase 1,000,000
shares of common stock at an exercise price of $1.00 per share. This warrant was
exempt from registration under the Securities Act, pursuant to the provisions of
Section 4(2) of the Securities Act.
Part II - Page 2
On January 16, 2004, the Company acquired all of the issued and
outstanding shares of W.W. Cycles, Inc., the corporate entity that conducts
business under the name "Andrews Cycles" ("W.W. Cycles"), from Gregory A. Haehn
and Russell A. Haehn, our current officers and directors, and one other employee
of W.W. Cycles, in exchange for the Company's issuance of an aggregate of
7,850,000 shares of common stock, which resulted in W.W. Cycles' becoming a
wholly-owned subsidiary of the Company. These shares were exempt from
registration under the Securities Act, pursuant to the provisions of Section
4(2) of the Securities Act.
On June 13, 2003, American Busing Corporation ("ABC"), our predecessor
business, issued 25,000 shares of common stock to an attorney in consideration
for legal services provided. These shares were exempt from registration under
the Securities Act, pursuant to the provisions of Section 4(2) of the Securities
Act. The attorney to whom these shares were issued is not a Selling Shareholder
in the prospectus forming a part of this Registration Statement, nor are any of
such shares being registered hereunder.
On November 12, 2002, ABC issued 8,000,000 shares of common stock to Mr.
Edmond Forister the then sole director and majority shareholder of ABC, at an
offering price of $0.0000012 per share for gross offering proceeds of $10.00 and
other good and valuable consideration. These shares were exempt from
registration under the Securities Act , pursuant to the provisions of Section
4(2) of the Securities Act and Regulation D promulgated thereunder.
Item 16. Exhibits
2.1 Stock Purchase and Reorganization Agreement dated as of December 30, 2003
(1).
2.2 Repurchase Agreement dated December 30, 2003 (1).
2.3 Stock Purchase Agreement dated as of December 30, 2003 (1).
2.4 Share Purchase Agreement dated as of December 30, 2003 (1).
2.5 Asset Purchase Agreement dated April 2004 (Exhibit 2.1) (2).
3.1 Restated Articles of Incorporation of Giant Motorsports, Inc. (3).
3.2 Bylaws of Giant Motorsports, Inc. (4).
4.1 Form of Warrant for 1,000,000 shares of common stock dated January 20,
2004 (1).
4.2 Form of Warrant for 100,000 shares of common stock dated April 19, 2004
(5).
4.3 Stock Option Agreement with Russell A. Haehn (1,000,000 shares) (Exhibit
4.2) (6).
4.4 Stock Option Agreement with Gregory A. Haehn (500,000 shares) (Exhibit
4.3) (6).
4.5 Certificate of Designation of Series A Convertible Preferred Stock
(Exhibit 99.1) (7).
4.6 Form of Investor Warrant (September 2005 Private Placement) (Exhibit 99.2)
(7).
4.7 Form of Purchase Option (September 2005 Private Placement) (Exhibit 99.3)
(7).
4.8 Registration Rights Agreement (September 2005 Private Placement (Exhibit
99.4) (7).
4.9 Specimen stock certificate for shares of common stock.*
4.10 Specimen stock certificate for Series A Shares.*
5.1 Opinion of Gusrae, Kaplan, Bruno & Nusbaum, PLLC.*
10.1 Agency Agreement between Giant Motorsports, Inc. and HCPF/Brenner
Securities LLC dated September 9, 2005*
20.1 Secured Promissory Note dated April 2004 in the principal amount of
$1,675,000 (2)
20.2 Commercial Security Agreement dated April 2004 (2)
20.3 Management Agreement between King's Motorsports Inc. d/b/a Chicago Cycle
and Giant Motorsports, Inc. dated April 2004 (2)
21 Subsidiaries.*
23.1 Consent of Bagell, Josephs, Levine & Company, LLC.**
23.4 Consent of Gusrae, Kaplan, Bruno & Nusbaum, PLLC, included in the opinion
filed as Exhibit 5.1
Part II - Page 3
----------
* Previously filed
** Filed herewith
(1) Filed as an exhibit to the Form 8-K filed January 23, 2004 and
incorporated herein by reference.
(2) Filed as an exhibit to the Form 8-K filed May 11, 2004 and incorporated
herein by reference.
(3) Filed as an exhibit to the Definitive Schedule 14C filed March 15, 2004
and incorporated herein by reference.
(4) Filed as an exhibit to the Form 10-KSB filed April 15, 2005 and
incorporated herein by reference.
(5) Filed as an exhibit to the Form 8-K filed on April 21, 2004 and
incorporated herein by reference.
(6) Filed as an exhibit to the Form 8-K filed on August 18, 2004 and
incorporated herein by reference.
(7) Filed as an exhibit to the Form 8-K filed on September 22, 2005 and
incorporated herein by reference.
Item 17. Undertakings
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to the Registration Statement:
(i) to include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) to reflect in the prospectus any facts or events arising after
the effective date of the Registration Statement (or the most recent
post effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set
forth in the Registration Statement. Notwithstanding the foregoing,
any increase or decrease in volume of securities offered (if the
total dollar value of securities offered would not exceed that which
was registered) and any deviation from the low or high end of the
estimated maximum offering range may be reflected in the form of a
prospectus filed with the Commission pursuant to Rule 424(b) if, in
the aggregate, the changes in volume and price represent no more
than a 20% change in the maximum aggregate offering price set forth
in the "Calculation of Registration" table in the effective
registration statement; and
(iii) to include any material information with respect to the plan
of distribution not previously disclosed in the Registration
Statement or any material change to such information in the
Registration Statement;
Provided however, That:
(A) Paragraphs (a)(1)(i) and (a)(1)(ii) of this section do not
apply if the Registration Statement is on Form S-8 (ss.239.16b of
this chapter), and the information required to be included in a
post-effective amendment by those paragraphs is contained in reports
filed with or furnished to the Commission by the registrant pursuant
to section 13 or section 15(d) of the Securities Exchange Act of
1934 (15 U.S.C. 78m or 78o(d)) that are incorporated by reference in
the Registration Statement; and
(B) Paragraphs (a)(1)(i), (a)(1)(ii) and (a)(1)(iii) of this
section do not apply if the registration statement is on Form S-3
(ss.239.13 of this chapter) or Form F-3 (ss.239.33 of this chapter)
and the information required to be included in a post-effective
amendment by those paragraphs is contained in reports filed with or
furnished to the Commission by the registrant pursuant to section 13
or section 15(d) of the Securities Exchange Act of 1934 that are
incorporated by reference in the Registration Statement, or is
contained in a form of prospectus filed pursuant to Rule 424(b)
(ss.230.424(b) of this chapter) that is part of the Registration
Statement.
(C) Provided further, however, that paragraphs (a)(1)(i) and
(a)(1)(ii) do not apply if the Registration Statement is for an
offering of asset-backed securities on Form S-1 (ss.239.11 of this
chapter) on Form S-3 (ss.239.13 of this chapter), and the
information required to be included in a post-effective amendment is
provided pursuant to Item 1100(c) of Regulation AB (ss.229.1100(c)).
Part II - Page 4
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment
shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of post-effective
amendment any of the securities being registered which remain
unsold at the termination of the offering.
(4) If the registrant is a foreign private issuer, to file a
post-effective amendment to the registration statement to
include any financial statements required by Item 8.A. of Form
20-F at the start of any delayed offering or throughout a
continuous offering. Financial statements and information
otherwise required by Section 10(a)(3) of the Act need not be
furnished, provided that the registrant includes in the
prospectus, by means of a post-effective amendment, financial
statements required pursuant to this paragraph (a)(4) and
other information necessary to ensure that all other
information in the prospectus is at least as current as the
date of those financial statements. Notwithstanding the
foregoing, with respect to registration statements on Form
F-3, a post-effective amendment need not be filed to include
financial statements and information required by Section
10(a)(3) of the Act or Rule 3-19 of this chapter if such
financial statements and information are contained in periodic
reports filed with or furnished to the Commission by the
registrant pursuant to section 13 or section 15(d) of the
Securities Exchange Act of 1934 that are incorporated by
reference in the Form F-3.
(5) That, for the purpose of determining liability under the
Securities Act of 1933 to any purchaser:
(i) If the registrant is relying on Rule 430B (ss.230.430B of
this chapter):
(A) Each prospectus filed by the registrant pursuant to
Rule 424(b)(3)shall be deemed to be part of the
Registration Statement as of the date the filed
prospectus was deemed part of and included in the
Registration Statement; and
(B) Each prospectus required to be filed pursuant to
Rule 4243(b)(2), (b)(5), or (b)(7) as part of a
Registration Statement in reliance on Rule 430B relating
to an offering made pursuant to Rule 415(a)(1)(i),
(vii), or (x) for the purpose of providing the
information required by section 10(a) of the Securities
Act of 1933 shall be deemed to be part of and included
in the Registration Statement as of the earlier of the
date such form of prospectus is first used after
effectiveness or the date of the first contract of sale
of securities in the offering described in the
prospectus. As provided in Rule 430B, for liability
purposes of the issuer and any person that is at that
date an underwriter, such date shall be deemed to be a
new effective date of the registration statement
relating to the securities in the registration statement
to which that prospectus relates, and the offering of
such securities at that time shall be deemed to be the
initial bona fide offering thereof. Provided, however,
that no statement made in a registration statement or
prospectus that is part of the registration statement or
made in a document incorporated or deemed incorporated
by reference into the registration statement or
prospectus that is part of the registration statement
will, as to a purchaser with a time of contract of sale
prior to such effective date, supersede or modify any
statement that was made in the registration statement or
prospectus that was part of the registration statement
or made in any such document immediately prior to such
effective date; or
(ii) If the registrant is subject to Rule 430C (ss.230.430C of
this chapter), each prospectus filed pursuant to Rule 424(b)
as part of a registration statement relating to an offering,
other than Registration Statements relying on Rule 430B or
other than prospectuses filed in reliance on Rule 430A
(ss.230.430A of this chapter), shall be deemed to be part of
and included in the Registration Statement as of the date it
is first used after effectiveness. Provided, however, that no
statement made in a Registration Statement or prospectus that
is part of the Registration Statement or made in a document
incorporated or deemed incorporated by reference into the
Registration Statement or prospectus that is part of the
Registration Statement will, as to a purchaser with a time of
contract of sale prior to such first use, supersede or modify
any statement that was made in the Registration Statement or
prospectus that was part of the Registration Statement or made
in any such document immediately prior to such date of first
use.
(6) That, for the purpose of determining liability of the
registrant under the Securities Act of 1933 to any purchaser
in the initial distribution of the securities:
The undersigned registrant undertakes that in a primary
offering of securities of the undersigned registrant pursuant
to this Registration Statement, regardless of the underwriting
method used to sell the securities to the purchaser, if the
securities are offered or sold to such purchaser by means of
any of the following communications, the undersigned
registrant will be a seller to the purchaser and will be
considered to offer or sell such securities to such purchaser:
(i) Any preliminary prospectus or prospectus of the
undersigned registrant relating to the offering required
to be filed pursuant to Rule 424 (ss.230.424 of this
chapter);
(ii) Any free writing prospectus relating to the
offering prepared by or on behalf of the undersigned
registrant or used or referred to by the undersigned
registrant;
(iii) The portion of any other free writing prospectus
relating to the offering containing material information
about the undersigned registrant or its securities
provided by or on behalf of the undersigned registrant;
and
(iv) Any other communication that is an offer in the
offering made by the undersigned registrant to the
purchaser.
(b) Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling persons
of the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Commission such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than director, officer or controlling person in
the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
Part II - Page 5
SIGNATURES
Pursuant to the requirements of the Securities Act, the Company has duly
caused this Amendment No. 2 to Registration Statement to be signed on its behalf
by the undersigned, thereunto duly authorized, in the City of Salem, State of
Ohio, on February 12, 2006.
GIANT MOTORSPORTS, INC.
By: /s/ Russell A. Haehn
---------------------------------------
Russell A. Haehn, Chairman and
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated.
Name Office Date
---- ------ ----
/s/ Russell A. Haehn Chairman, Chief Executive February 12, 2006
------------------------ Officer and Director
Russell A. Haehn (Principal Executive Officer)
/s/ Gregory A. Haehn President, Chief February 12, 2006
------------------------ Operating Officer and Director
Gregory A. Haehn (Principal Financial and Accounting
Officer)
Part II - Page 6