UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
(Mark One)
|X| Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the quarterly period ended September 30, 2005
OR
|_| Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the transition period from _________ to _________
Commission File Number: 000-50243
GIANT MOTORSPORTS, INC.
================================================================================
(Exact Name of Registrant as Specified in Its Charter)
Nevada 33-1025552
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
13134 State Route 62, Salem, Ohio 44460
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(Address of Principal Executive Offices)
(Zip Code)
(440) 332-8534
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(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes |X| No |_|
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in rule 12b-2 of the Exchange Act)
Yes |_| No |X|
Indicate the number of shares outstanding of each of the Registrant's classes of
common stock, as of the latest practicable date.
As of February 21, 2006 the registrant had 10,445,000 shares of common stock,
$.001 par value, issued and outstanding.
GIANT MOTORSPORTS, INC.
INDEX TO FORM 10-Q/A
Page No.
--------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of September 30,
2005 (Unaudited) and December 31, 2004 (Audited) 3
Condensed Consolidated Statements of Operations for the
Nine Months and Three Months Ended September 30, 2005
and 2004 (Unaudited) 5
Condensed Consolidated Statements of Cash Flow for the
Nine Months and Three Months Ended September 30, 2005
and 2004 (Unaudited) 6
Notes to Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Conditions and Results of Operations 18
Item 3. Quantitative and Qualitative Disclosures about Market Risk 28
Item 4. Controls and Procedures 29
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 30
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 30
Item 3. Defaults upon Senior Securities 30
Item 4. Submission of Matters to a Vote of Security Holders 30
Item 5. Other Information 30
Item 6. Exhibits 30
SIGNATURES 31
2
GIANT MOTORSPORTS, INC.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
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.
3
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.
4
GIANT MOTORSPORTS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
For the nine and three months ended September 30, 2005 and 2004
Nine Months Ended Three Months Ended
September 30, September 30, September 30, September 30,
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 2,870,000 -- 2,870,000 --
------------ ------------ ------------ ------------
NET INCOME (LOSS)
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.
5
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.
6
GIANT MOTORSPORTS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2005 and 2004
(UNAUDITED)
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation:
The condensed consolidated financial statements included herein have been
prepared pursuant to the rules and regulations of the Securities and Exchange
Commission. The condensed consolidated financial statements and notes are
presented as permitted on Form 10-Q and do not contain information included in
the Company's annual consolidated statements and notes. Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with accounting principles generally accepted in the United States of
America have been condensed or omitted pursuant to such rules and regulations,
although the Company believes that the disclosures are adequate to make the
information presented not misleading. It is suggested that these condensed
consolidated financial statements be read in conjunction with the December 31,
2004 audited financial statements and accompanying notes thereto. While
management believes the procedures followed in preparing these condensed
consolidated financial statements are reasonable, the accuracy of the amounts
are in some respects dependent upon the facts that will exist, and procedures
that will be accomplished by the Company later in the year.
These condensed consolidated financial statements reflect all adjustments,
including normal recurring adjustments which, in the opinion of management, are
necessary to present fairly the consolidated operations and cash flows for the
periods presented.
Organization:
Giant Motorsports, Inc., (the Company) through its wholly owned subsidiaries,
W.W. Cycles, Inc. doing business as Andrews Cycles and Chicago Cycles, Inc.
doing business as Chicago Cycle Center, operates two retail dealerships of
motorcycles, all terrain vehicles, scooters and personal watercraft in
northeastern Ohio and northern Illinois. On December 30, 2003, the stockholders
of W.W. Cycles, Inc. entered into a Stock Purchase and Reorganization Agreement
in which effective January 16, 2004 W.W. Cycles, Inc. was issued an aggregate of
7,850,000 restricted shares of common stock, $.001 par value, of American Busing
Corporation in exchange for all of the outstanding shares of the common stock of
the Company, resulting in W.W. Cycles, Inc. becoming a wholly-owned subsidiary
of American Busing Corporation. The acquisition was accounted for as a reverse
merger whereby, for accounting purposes, WW Cycles, Inc. is considered the
accounting acquirer and the historical financial statements of WW Cycles, Inc.
became the historical financial statements of Giant Motorsports, Inc. Effective
April 5, 2004 American Busing Corporation changed its name to Giant Motorsports,
Inc. On April 30, 2004, Giant Motorsports, Inc. acquired substantially all of
the assets and certain liabilities of Chicago Cycle Center pursuant to an Asset
Purchase Agreement and entered into a Non-Competition Agreement with one of the
former owners and entered into an Employment Agreement with the other former
owner.
7
GIANT MOTORSPORTS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 2005 and 2004
(UNAUDITED)
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Principles of Consolidation:
The condensed consolidated financial statements include the accounts of the
Company and all of its wholly owned subsidiaries. All significant inter-company
accounts and transactions have been eliminated in consolidation.
Cash and Cash Equivalents:
Cash and cash equivalents include amounts held in demand deposit accounts and
overnight investment accounts. The Company considers all highly liquid
investments with original maturities of three months or less to be cash
equivalents.
Contracts in Transit:
Contracts in transit represent customer finance contracts evidencing loan
agreements or lease agreements between the Company, as creditor, and the
customer, as borrower, to acquire or lease a vehicle whereby a third-party
finance source has given the Company initial, non-binding approval to assume the
Company's position as creditor. Funding and approval from the finance source is
provided upon the finance source's review of the loan or lease agreement and
related documentation executed by the customer at the dealership. These finance
contracts are typically funded within ten days of the initial approval of the
finance transaction by the third-party finance source. The finance source is not
contractually obligated to make the loan or lease to the customer until it gives
its final approval and funds the transaction. Until such final approval is
given, contracts in transit represent amounts due from the customer to the
Company. See Note B for additional information.
Allowance for Doubtful Accounts:
Accounts are written off when management determines that an account is
uncollectible. Recoveries of accounts previously written off are recorded when
received. An estimated allowance for doubtful accounts is determined to reduce
the Company's receivables to their carrying value, which approximates fair
value. The allowance is estimated based on historical collection experience,
specific review of individual customer accounts, and current economic and
business conditions. Historically, the Company has not incurred any significant
credit related losses. Management has determined that an allowance of $25,000 is
necessary at September 30, 2005.
Revenue Recognition:
Vehicle Sales:
The Company records revenue when vehicles are delivered and title has passed to
the customer, when vehicle service or repair work is performed and when parts
are delivered. Sales promotions that are offered to customers are accounted for
as a reduction to the sales price at the time of sale. Incentives, rebates and
holdbacks offered by manufacturers directly to the Company are recognized at the
time of sale if they are vehicle specific, or as earned in accordance with the
manufacturer program rules and are recorded as a reduction of cost of
merchandise sold.
8
GIANT MOTORSPORTS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 2005 and 2004
(UNAUDITED)
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Revenue Recognition (continued):
Finance, Insurance and Extended Service Revenues:
The Company arranges financing for customers through various financial
institutions and receives a commission from the lender equal to the difference
between the interest rates charged to customers and the interest rates set by
the financing institution. The Company also receives commissions from the sale
of various third party insurance products to customers and extended service
contracts. These commissions are recorded as revenue at the time the customer
enters into the contract. The Company is not the obligor under any of these
contracts. In the case of finance contracts, a customer may prepay or fail to
pay their contract, thereby terminating the contract. Customers may also
terminate extended service contracts, which are fully paid at purchase, and
become eligible for refunds of unused premiums. In these circumstances, a
portion of the commissions the Company receives may be charged back based on the
relevant terms of the contracts. The revenue the Company records relating to
commissions is net of an estimate of the ultimate amount of chargebacks the
Company will be required to pay. Such estimates of chargeback experience is
based on our historical chargeback expense arising from similar contracts. The
Company also acts as the warrantor on certain extended service contracts and
defers the revenue and recognized it over the life of the contract on a
straight-line basis.
Fair Value of Financial Instruments:
Financial instruments consist of cash and cash equivalents, accounts receivable,
accounts payable and debt, including floor plan notes payable. The carrying
amount of all significant financial instruments approximates fair value due
either to length or maturity or variable interest rates that approximate
prevailing market rates.
Inventories:
Parts and accessories inventories are stated at the lower of cost or market
using the first-in, first-out method. Vehicle inventories are stated at the
lower of cost or market using the specific identification method.
Concentration of Credit Risk:
Financial instruments that potentially subject the Company to credit risk
consist of cash equivalents and accounts receivable.
The Company's policy is to review the amount of credit exposure to any one
financial institution and place investments with financial institutions
evaluated as being creditworthy. In the ordinary course of business, the Company
has bank deposits and overnight repurchase agreements that may exceed federally
insured limits. At September 30, 2005, the Company had $1,762,088 in excess of
the federally insured limit.
9
GIANT MOTORSPORTS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 2005 and 2004
(UNAUDITED)
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Concentration of Credit Risk(continued):
Concentration of credit risk, with respect to accounts receivable-customers, is
limited through the Company's credit evaluation process. The Company reviews the
credit history before extending credit. Generally, the Company does not require
collateral from its customers
Property and Equipment:
Property, equipment, and leasehold improvements are stated at cost. Maintenance
and repairs that do not add materially to the value of the asset nor appreciably
prolong its useful life are charged to expense as incurred. Gains or losses on
the disposal of property and equipment are included in the determination of
income.
Depreciation of property and equipment and amortization of leasehold
improvements are provided using the straight-line method over the following
estimated useful lives:
Fixtures, and equipment.................................. 3-7 years
Vehicles ................................................ 5 years
Leasehold Improvements................................... 10 years
Goodwill and Other Intangible Assets:
In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement
No. 142 "Goodwill and Other Intangible Assets". This statement addresses
financial accounting and reporting for acquired goodwill and other intangible
assets and supersedes APB opinion No. 17, "Intangible Assets". It addresses how
intangible assets that are acquired individually or with a group of other assets
(but not those acquired in a business combination) should be accounted for in
the financial statements upon their acquisition. This Statement also addresses
how goodwill and other intangible assets should be accounted for after they have
been initially recognized in the financial statements. The Company, in its
acquisitions, recognized $1,588,950 of goodwill. The Company performs its annual
impairment test for goodwill at year-end. In addition, the Company acquired a
Non-Compete Agreement in the amount of $500,000. 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-
10
GIANT MOTORSPORTS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 2005 and 2004
(UNAUDITED)
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
11
GIANT MOTORSPORTS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 2005 and 2004
(UNAUDITED)
NOTE B - ACCOUNTS RECEIVABLE, NET
Accounts receivable consisted of receivables due from customers and dealers,
manufacturers, 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 collateralized by substantially all
of the Company's assets.
12
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 - NOTE 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 all 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.
13
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 noncancellable terms in excess of one year
as of September 30, 2005:
YEAR ENDING AMOUNT
----------- ----------
2005 $ 156,367
2006 875,093
2007 947,209
2008 986,159
2009 1,009,810
2010 1,032,905
----------
$5,007,542
==========
NOTE L - INCOME TAXES
Income taxes (credit) consisted of the following:
2005
---------
Federal:
Current $ 411,000
Deferred (31,500)
---------
379,500
State:
Current 41,000
Deferred (7,500)
---------
33,500
---------
TOTAL $ 413,000
=========
Income taxes paid amounted to $151,000 for the nine months ended September 30,
2005.
14
GIANT MOTORSPORTS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 2005 and 2004
(UNAUDITED)
NOTE 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:
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.
15
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.
16
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
GIANT MOTORSPORTS, INC.
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 has 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).
17
Item 2. Management's Discussion and Analysis of Financial Conditions and Results
of Operations
Special Note of Caution Regarding Forward-Looking Statements
Certain statements in this report, including statements in the following
discussion, may constitute forward-looking statements made pursuant to the Safe
Harbor provisions of the Private Securities Litigation Reform Act of 1995. The
Company would like to caution readers regarding certain forward-looking
statements in this document and in all of its communications to shareholders and
others, press releases, securities filings, and all other communications.
Statements that are based on management's projections, estimates and assumptions
are forward-looking statements. The words "believe," "expect," "anticipate,"
"intend," "will," and similar expressions generally identify forward-looking
statements. While the Company believes in the veracity of all statements made
herein, forward-looking statements are necessarily based upon a number of
estimates and assumptions that, while considered reasonable by the Company, are
inherently subject to significant business, economic and competitive
uncertainties and contingencies and known and unknown risks. Many of the
uncertainties and contingencies can affect events and the Company's actual
results and could cause its actual results to differ materially from those
expressed in any forward-looking statements made by, or on behalf of, the
Company.
General
Our goal is to become one of the largest dealers of power sports vehicles
in the United States through acquisitions and internal growth.
The motorsports industry is highly fragmented with an estimated 4,000
retail stores throughout the United States. We are attempting to capitalize upon
the consolidation opportunities available and increase our revenues and income
by acquiring additional dealers and improving our performance and profitability.
We plan to maximize the operating and financial performance of our
dealerships by achieving certain efficiencies that will enhance internal growth
and profitability. By consolidating our corporate and administrative functions,
we believe we can reduce overall expenses, simplify dealership management and
create economies of scale.
We will specifically target dealers in markets with strong buyer
demographics that, due to under-management or under-capitalization, are unable
to realize their market share potential and can benefit substantially from our
systems and operating strategy.
Together with our two wholly-owned subsidiaries, we own and operate two
retail power sports superstores. Our core brands include Suzuki, Yamaha, Honda,
Ducati and Kawasaki. Our superstores operate under the names "Andrews Cycles"
and "Chicago Cycles." Andrews Cycles is located in Salem, Ohio, 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.
18
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.
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 September 30, 2005,
approximately $4.3 million of Chicago Cycles' approximately $32.1 million in
revenues (13%) 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
margins, 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 the first nine months of 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. 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.
19
Loan Transactions.
On April 30, 2004, we paid $1,675,000 of the purchase price for Chicago
Cycles by issuing to Kings Motorsports a 6% $1,675,000 aggregate principal
amount note (the "Note"), which Note initially provided for payment as follows:
(i) $500,000 on July 29, 2004, (ii) $250,000 on October 27, 2004, and
(iii) the remaining $925,000, plus accrued but unpaid interest on April 30,
2005. We repaid all outstanding principal and interest on the Note, remaining
due and payable, on October 13, 2005.
To fund the amount payable at closing for Chicago Cycles, we borrowed
$1,250,000 from The Fifth Third Bancorp Bank (the "Bank"), pursuant to a term
loan. This loan, which initially matured on May 31, 2004, was refinanced with
the Bank through a term loan amortized over a 72 month period, but is payable in
full on May 31, 2007, bearing interest at prime plus one percent (7.75% at
September 30, 2005). Our payment obligations under this term loan also are
personally guaranteed by Russell Haehn and Gregory Haehn. This loan is also
secured by a first priority lien on all of our assets (including, without
limitation, the Chicago Cycles assets). As of September 30, 2005, the
outstanding amount of this term loan, including accrued interest thereon, was
$1,041,680.
On April 20, 2004, pursuant to a $500,000 aggregate principal amount
promissory note bearing interest at the rate of fourteen (14%) percent per annum
(the "Bridge Note"), we received, from a third party, a bridge loan (the "Bridge
Loan"). All outstanding principal on the Bridge Note was due on October 15,
2004. To secure the repayment of principal and interest on the Bridge Note, each
of Russell Haehn and Gregory Haehn (i) pledged to the lender 150,000 shares
(300,000 shares in the aggregate) of common stock owned by each of them, and
(ii) guaranteed all of our payment obligations to the lender. As partial
consideration for the Bridge Loan, we issued to the lender a five-year warrant
to purchase 100,000 shares of common stock, at an exercise price of $2.25 per
share. We also granted the lender certain piggyback registration rights with
respect to the shares of common stock underlying the warrant. We used the
$500,000 Bridge Loan proceeds for working and operating capital. On October 15,
2004, we repaid $250,000 of the principal amount outstanding under the Bridge
Loan. Pursuant to a letter agreement entered into with the lender on October 6,
2004, payment of the remaining $250,000 of principal and all accrued interest
thereon was extended until January 15, 2005. We paid the lender $2,500 in
consideration for the extension. 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
20
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:
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.
21
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.
Results of Operations.
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.
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.
22
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.
23
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.
24
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.
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
25
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.
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 customer 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
26
the carrying value of assets and liabilities that are not readily apparent from
other sources. Actual results may differ from these estimates under different
assumptions or conditions. Set forth below are the policies that we have
identified as critical to our business operations and the understanding of our
results of operations or that involve significant estimates. For detailed
discussion of other significant accounting policies see Note A, Summary of
Significant Accounting Policies, of Notes to Consolidated Financial Statements,
contained elsewhere in this report.
Intangibles and Long-lived Assets - Goodwill is tested for impairment on an
annual basis, or more frequently if events or circumstances indicate that
impairment may have occurred. The Company is subject to financial statement risk
to the extent that intangible assets become impaired due to decreases in the
fair market value of the related underlying business.
We estimate the depreciable lives of our property and equipment, including any
leasehold improvements, and review them on an on-going basis. The Company
believes that the long-lived assets are appropriately valued. However, the
assumptions and estimates used may change, and the Company may be required to
record impairment to reduce the carrying value of these assets.
Revenue Recognition: Vehicle Sales - The Company records revenue when vehicles
are delivered and title has passed to the customer, when vehicle service or
repair work is performed and when parts are delivered. Sales promotions that are
offered to customers are accounted for as a reduction to the sales price at the
time of sale. Incentives, rebates and holdbacks offered by manufacturers
directly to the Company are recognized at the time of sale if they are vehicle
specific, or as earned in accordance with the manufacturer program rules and are
recorded as a reduction of cost of merchandise sold.
Revenue Recognition: Finance, Insurance and Extended Service Revenues - The
Company arranges financing for customers through various financial institutions
and receives a commission from the lender equal to the difference between the
interest rates charged to customers and the interest rates set by the financing
institution. The Company also receives commissions from the sale of various
third party insurance products to customers and extended service contracts.
These commissions are recorded as revenue at the time the customer enters into
the contract. The Company is not the obligor under any of these contracts. In
the case of finance contracts, a customer may prepay or fail to pay their
contract, thereby terminating the contract. Customers may also terminate
extended service contracts, which are fully paid at purchase, and become
eligible for refunds of unused premiums. In these circumstances, a portion of
the commissions the Company receives may be charged back based on the relevant
terms of the contracts. The revenue the Company records relating to commissions
is net of an estimate of the ultimate amount of chargebacks the Company will be
required to pay. Such estimates of chargeback experience are based on our
historical chargeback expense arising from similar contracts. The Company also
acts as the warrantor on certain extended service contracts and defers the
revenue and recognizes it over the life of the contract on a straight-line
basis.
Off-Balance Sheet Arrangements.
We have no off-balance sheet arrangements.
27
Contractual Obligations
We have entered into various contractual obligations, which may be
summarized as follows:
Contractual Obligations Payments due by period
----------------------------------------------------------------------------
Less than 1 More than 5
Total year 1-3 years 3-5 years years
------------ ------------ ------------ ------------ ------------
Long-Term Debt Obligations $ 1,730,223 $ 892,623 $ 837,600 -- --
Capital (Finance) Lease Obligations -- -- -- -- --
Operating Lease Obligations $ 7,508,584 $ 156,367 $ 1,987,669 $ 2,042,715 $ 3,321,833
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
Item 3 Quantitative and Qualitative Disclosure about Market Risk
The Company is exposed to market risk in the ordinary course of its
business. These risks are primarily related to changes in short-term interest
rates. The potential impact of the Company's exposure to these risks is
presented below:
Interest Rates
Floor Plan Financing
We purchase new and used vehicle inventory by utilizing floor plan
financing provided by lending institutions, as well as manufacturers of certain
of the products we sell, including Kawasaki Motor Finance Company and America
Honda Finance. We had outstanding indebtedness under floor plan notes of
$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%.
Line of Credit
We also have an existing revolving credit line with Fifth Third Bancorp,
the interest rate of which also fluctuates with the prime rate, at prime plus
one percent. Since the aggregate outstanding indebtedness of this line of credit
was $249,863 and $250,000 at September 30, 2005 and December 31, 2004,
respectively, we do not believe that fluctuations in the prime rate under our
credit line will have more than a slight negative impact on our income from
operations.
28
Hedging Activities
We normally invest any available cash in short-term investments and do not
currently have any investment strategies to hedge against increases in interest
rates. Additionally, although we do not currently intend to commence any such
hedging investments in the future, in the event that we determine that there is
a substantial risk that increases in interest rates would have a material
negative impact on our business, we may consider such hedging strategies at that
time.
Foreign Exchange Rates
We are not currently, and have not in the past, been subject to
fluctuations in exchange rates of foreign currencies against the U.S. Dollar,
since virtually all of the vehicles, accessories and parts that we purchase in
connection with our business are purchased from the U.S. subsidiaries of
Japanese manufacturers in U.S. Dollars. Additionally, all of our product sales
are made in the United States in U.S. Dollars. In the event that our business
model changes in the future, and we either purchase products in foreign
currencies such as Japanese Yen, or sell products outside of the United States,
for which we accept payment in foreign currencies, we could become subject to
exchange rate fluctuations at that time.
Item 4. Controls and Procedures
Our management evaluated, with the participation of our principal
executive officer and principal financial officer, the effectiveness of our
disclosure controls and procedures as of the end of the period covered by this
report (September 30, 2005). Based on this evaluation, our principal executive
officer and our principal financial officer have concluded that, as of the end
of the period covered by this report, our disclosure controls and procedures
were effective. Disclosure controls and procedures mean our controls and other
procedures that are designed to ensure that information required to be disclosed
by us in our reports that we file or submit under the Securities Exchange Act of
1934 is recorded, processed, summarized and reported within the time periods
specified in the SEC's rules and forms. Disclosure controls and procedures
include, without limitation, controls and procedures designed to ensure that
information required to be disclosed by us in our reports that we file or submit
under the Securities Exchange Act of 1934 is accumulated and communicated to our
management, including our principal executive officer and principal financial
officer, as appropriate to allow timely decisions regarding required disclosure.
There have been no changes in our internal control over financial reporting that
occurred during the quarter ended September 30, 2005 that has materially
affected, or is reasonably likely to materially affect, our internal control
over financial reporting.
29
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
Not applicable.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Information is provided in our Current Report on Form 8-K filed with
the Securities and Exchange Commission on September 22, 2005.
Item 3. Defaults Upon Senior Securities.
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
Item 5. Other Information
None
Item 6. Exhibits
(a) Exhibits (filed herewith)
31.1 Certification of the Chief Executive Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002 (Rule 13a-14(a)).
31.2 Certification of the Principal Financial Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002 (Rule 13a-14(a)).
32.1 Certification of the Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 (Rule 13a-14(b)).
32.2 Certification of the Principal Financial Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 (Rule 13a-14(b)).
30
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
GIANT MOTORSPORTS, INC.
Date: February 21, 2006 By: /s/ Russell A. Haehn
--------------------------------------------
Name: Russell A. Haehn
Title: Chairman of the Board of Directors,
Chief Executive Officer and Secretary
(Principal Executive Officer)
Date: February 21, 2006 By: /s/ Gregory A. Haehn
--------------------------------------------
Name Gregory A. Haehn
Title: President, Chief Operating Officer,
Treasurer and a Director
(Principal Financial and Accounting
Officer)
31