Filed pursuant to Rule 424(b)(3)
Registration Statement File No. 333-131001
PROSPECTUS SUPPLEMENT NO. 2 DATED NOVEMBER 21, 2006
TO
PROSPECTUS DATED FEBRUARY 13, 2006
GIANT MOTORSPORTS, INC.
This Prospectus Supplement supplements information contained in our Prospectus
dated February 13, 2006, as supplemented and amended, relating to the offer and
sale by the selling shareholders as listed in the Prospectus of up to 26,356,000
shares of common stock and warrants to purchase up to 6,314,000 shares of common
stock of Giant Motorsports, Inc., and should be read in conjunction with our
Prospectus dated February 13, 2006, as supplemented by Supplement No. 1 to the
Prospectus filed on November 21, 2006. We will not receive any proceeds from the
sale of the shares of common stock or the warrants by selling shareholders.
This Prospectus Supplement includes the attached Quarterly Report on Form 10-Q
of Giant Motorsports, Inc. for the quarterly period ended March 31, 2006, filed
with the Securities and Exchange Commission on May 22, 2006.
----------
BEFORE PURCHASING ANY OF THE SECURITIES COVERED BY THE PROSPECTUS, CAREFULLY
READ AND CONSIDER THE RISK FACTORS INCLUDED IN THE SECTION ENTITLED "RISK
FACTORS" BEGINNING ON PAGE 5 OF THE PROSPECTUS. 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 THE PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The date of this Prospectus Supplement is November 21, 2006
Remainder of Page Intentionally Left Blank
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the quarterly period ended March 31, 2006
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
------------------------------ ---------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
13134 State Route 62, Salem, Ohio 44460
(Address of Principal Executive Offices)
(Zip Code)
(440) 332-8534
(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 May 19, 2006 the registrant had 10,759,138 shares of common stock, $.001
par value, issued and outstanding.
GIANT MOTORSPORTS, INC.
INDEX TO FORM 10-Q
Page No.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements 3
Condensed Consolidated Balance Sheets as of March 31, 2006
(Unaudited) and December 31, 2005 (Audited) 3-4
Condensed Consolidated Statements of Operations for the Three
Months Ended March 31, 2006 and 2005 (Unaudited) 5
Condensed Consolidated Statements of Cash Flows for the
Three Months Ended March 31, 2006 and 2005 (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 27
Item 4. Controls and Procedures 28
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 29
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 29
Item 3. Defaults upon Senior Securities 29
Item 4. Submission of Matters to a Vote of Security Holders 29
Item 5. Other Information 29
Item 6. Exhibits 29
SIGNATURES 30
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
GIANT MOTORSPORTS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
March 31, 2006 December 31, 2005
Unaudited Audited
----------- -----------
CURRENT ASSETS
Cash and cash equivalents $ 651,137 $ 227,301
Accounts receivable, net 3,465,043 4,850,408
Accounts receivable, affiliates -- 261,667
Accounts receivable, employees 11,013 --
Inventories 22,982,502 16,775,069
Federal income tax receivable 119,500 119,500
Prepaid expenses 175,625 74,255
----------- -----------
TOTAL CURRENT ASSETS 27,404,820 22,308,200
----------- -----------
FIXED ASSETS, NET 2,240,395 1,893,967
----------- -----------
OTHER ASSETS
Goodwill 1,588,950 1,588,950
Deposits 41,000 41,000
----------- -----------
TOTAL OTHER ASSETS 1,629,950 1,629,950
----------- -----------
$31,275,165 $25,832,117
=========== ===========
The accompanying notes are an integral part of the
condensed consolidated financial statements.
3
GIANT MOTORSPORTS, INC.
CONDENSED CONSOLIDATED BALANCE SHEET (CONTINUED)
LIABILITIES AND STOCKHOLDERS' EQUITY
March 31, 2006 December 31, 2005
Unaudited Audited
------------ ------------
CURRENT LIABILITIES
Current portion of long-term debt 689,623 714,623
Notes payable, floor plans 22,454,261 17,159,719
Note payable, officer 77,645 193,135
Accounts payable, trade 2,982,724 2,370,369
Accrued expenses 692,525 654,417
Customer deposits 720,426 87,051
------------ ------------
TOTAL CURRENT LIABILITIES 27,617,204 21,179,314
DEFERRED FEDERAL INCOME TAXES 52,100 52,100
LONG-TERM DEBT, NET 730,166 783,856
------------ ------------
TOTAL LIABILITIES 28,399,470 22,015,270
------------ ------------
COMMITMENTS
STOCKHOLDERS' EQUITY
Preferred stock, $.001 par value, authorized
5,000,000 shares 5,000 shares designated Series A
Convertible, $1,000 stated value 2,820 and
2,870 shares issued and outstanding at March 31, 2006
and December 31, 2005, respectively 2,820,000 2,870,000
Common stock, $.001 par value, authorized
75,000,000 shares 10,759,138 and 10,445,000 shares
issued and outstanding at March 31, 2006 and
December 31, 2005, respectively 10,759 10,445
Additional paid-in capital 881,392 641,277
Additional paid-in capital - Options 107,535 109,442
Additional paid-in capital - Warrants 1,985,280 2,020,480
Additional paid-in capital - Beneficial conversions 1,500,240 1,526,840
Issuance cost on preferred series A convertible (786,762) (786,762)
Accumulated deficit (3,642,749) (2,574,875)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 2,875,695 3,816,847
------------ ------------
$ 31,275,165 $ 25,832,117
============ ============
The accompanying notes are an integral part of the
condensed consolidated financial statements.
4
GIANT MOTORSPORTS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For the three months ended March 31, 2006 and 2005
2006 2005
------------ ------------
(Unaudited) (Unaudited)
OPERATING INCOME
Sales $ 17,783,777 $ 20,426,807
Finance, insurance and extended service revenues 605,860 291,200
------------ ------------
TOTAL OPERATING INCOME 18,389,637 20,718,007
COST OF MERCHANDISE SOLD 15,842,217 18,727,791
------------ ------------
GROSS PROFIT 2,547,420 1,990,216
------------ ------------
OPERATING EXPENSES
Selling expenses 2,045,931 1,466,384
General and administrative expenses 1,171,179 915,771
------------ ------------
3,217,110 2,382,155
------------ ------------
LOSS FROM OPERATIONS (669,690) (391,939)
------------ ------------
OTHER INCOME AND (EXPENSE)
Other income, net 4,096 27,570
Interest expense, net (275,558) (173,841)
------------ ------------
(271,462) (146,271)
------------ ------------
LOSS BEFORE INCOME TAXES (941,152) (538,210)
INCOME TAXES -- --
------------ ------------
LOSS BEFORE PREFERRED DIVIDENDS (941,152) (538,210)
PREFERRED DIVIDENDS 126,722 --
------------ ------------
NET LOSS ATTRIBUTABLE TO
COMMON SHAREHOLDERS $ (1,067,874) $ (538,210)
============ ============
BASIC LOSS PER SHARE $ (0.10) $ (0.05)
DILUTED LOSS PER SHARE $ (0.10) $ (0.05)
WEIGHTED AVERAGE SHARES OUTSTANDING 10,532,973 10,425,000
============ ============
BASIC 10,532,973 10,425,000
============ ============
DILUTED 10,532,973 10,425,000
============ ============
The accompanying notes are an integral part of the
condensed consolidated financial statements.
5
GIANT MOTORSPORTS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the three months ended March 31, 2006 and 2005
2006 2005
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net (loss) $ (941,152) $ (538,210)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation 108,506 56,786
Amortization -- 62,500
(Increase) decrease in accounts receivable, net 1,385,365 (971,931)
(Increase) in accounts receivable, employees (11,013) --
(Increase) in inventories (6,207,433) (6,365,014)
Increase in floor plan liability 5,294,542 6,011,259
Decrease in prepaid expenses (101,370) 41,652
Increase in customer deposits 633,375 280,436
Increase in accounts payable trade 612,355 487,259
Increase in accrued expenses 38,108 50,095
(Decrease) in accrued warranty -- (22,500)
----------- -----------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 811,283 (907,668)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of fixed assets (193,267) (359,336)
Decrease in notes receivable from officers -- 92,239
(Increase) in deposits -- (17,202)
----------- -----------
NET CASH (USED IN) INVESTING ACTIVITIES (193,267) (284,299)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Payments on long-term debt (78,690) (51,234)
Payments on note payable to officer (115,490) --
----------- -----------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (194,180) (51,234)
----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 423,836 (1,243,201)
CASH AND CASH EQUIVALENTS, beginning of Period 227,301 1,862,187
----------- -----------
CASH AND CASH EQUIVALENTS, end of Period $ 651,137 $ 618,986
=========== ===========
OTHER SUPPLEMENTARY CASH FLOW INFORMATION
Income taxes paid $ 158,550 $ --
=========== ===========
Interest paid $ 277,412 $ 176,990
=========== ===========
Covenant not to compete incurred commitment $ -- $ 50,000
=========== ===========
The accompanying notes are an integral part of the
condensed consolidated financial statements.
6
GIANT MOTORSPORTS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2006 and 2005
(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,
2005 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, an inactive public company. The acquisition was
accounted for as a reverse merger whereby, for accounting purposes, WW Cycles,
Inc. is considered the accounting acquirer and the historical financial
statements of WW Cycles, Inc. became the historical financial statements of
Giant Motorsports, Inc. Effective April 5, 2004 American Busing Corporation
changed its name to Giant Motorsports, Inc. On April 30, 2004, Giant
Motorsports, Inc. acquired substantially all of the assets and certain
liabilities of Chicago Cycle Center pursuant to an Asset Purchase Agreement and
entered into a Noncompetition Agreement with one of the former owners and
entered into an Employment Agreement with the other former owner.
7
GIANT MOTORSPORTS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
March 31, 2006 and 2005
(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.
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 March 31, 2006.
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)
March 31, 2006 and 2005
(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 March 31, 2006, the Company had $988,485 in excess of the
federally insured limit.
9
GIANT MOTORSPORTS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
March 31, 2006 and 2005
(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.
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 March 31, 2006, income taxes are provided for amounts currently due and
deferred amounts arising from temporary differences between income for financial
reporting and income tax purposes.
10
GIANT MOTORSPORTS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
March 31, 2006 and 2005
(UNAUDITED)
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Advertising Costs:
Advertising costs are expensed when incurred. Charges to operations amounted to
$733,474 and $435,395 for the three months ended March 31, 2006 and 2005
respectively.
Earnings (loss) Per Share of Common Stock:
Historical net income (loss) 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:
Three Months Ended
March 31 March 31
2006 2005
------------ ------------
Net loss attributed to common shares $ (1,067,874) $ (538,210)
============ ============
Weighted-average common shares outstanding (Basic) 10,532,973 10,425,000
Weighted-average common stock equivalents:
Warrants 0 0
------------ ------------
Weighted-average common
shares outstanding (Diluted) 10,532,973 10,425,000
============ ============
There are 7,191,503 and -0- common stock equivalents available at March 31, 2006
and 2005, respectively.
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)
March 31, 2006 and 2005
(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 March 31, 2006.
NOTE C - INVENTORIES
Inventories consisted of vehicles and parts and accessories.
NOTE D - FIXED ASSETS
Fixed assets consisted of the following:
March 31
2006
----------
Fixtures and equipment $2,149,130
Vehicles 395,626
Leasehold improvements 292,887
----------
3,101,971
Less accumulated depreciation 861,576
----------
NET FIXED ASSETS $2,240,395
==========
Depreciation expense charged to operations amounted to $108,506 and $56,786 for
the three months ended March 31, 2006 and 2005, respectively.
NOTE E - NOTES PAYABLE - FLOOR PLANS
The Company has various floor plan financing agreements aggregating $22,454,261
at March 31, 2006. 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 4.8% to 16.5% at March 31, 2006).
Principle payments are due upon the sale of the specific unit financed. The
floor plans are collateralized by substantially all corporate assets.
NOTE F - 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
loan will be repaid by December 31, 2006.
12
GIANT MOTORSPORTS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
March 31, 2006 and 2005
(UNAUDITED)
NOTE G - DEBT
Long-term debt consisted of various notes aggregating $944,926 at March 31,
2006. This amount matures at various times ranging from 2005 to 2009, bearing
interest at various rates ranging from 7.25% to 8.25% per year. The notes are
collateralized by substantially all of the Company's assets.
The Company has a $250,000 revolving line of credit with a bank with an
outstanding balance of $249,863 at March 31, 2006. The revolving line of credit
has no stipulated repayment terms. This loan bears interest at prime plus one
percent (8.25% at March 31, 2006) and is collateralized by substantially all of
the Company's assets.
The Company has a $250,000 note payable with HSK Funding with an outstanding
balance of $225,000 at March 31, 2006. The note is due in full on June 20, 2006.
The note bears interest at 15%.
NOTE H - 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 were to
commence 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 increasing 3% annually for the remaining term of the lease. The Company is
also 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.
The following is a summary of future minimum lease payments under operating
leases that have initial or remaining non cancellable terms in excess of one
year as of March 31, 2006:
Year Ending Amount
----------- ------------
2007 $ 694,666
2008 758,000
2009 784,670
2010 802,004
2011 819,224
--------------
$ 3,858,564
13
GIANT MOTORSPORTS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
March 31, 2006 and 2005
(UNAUDITED)
NOTE I - LEASES (Continued)
The Company also leased an apartment in Chicago under a month-to-month
agreement. The amount charged to rent amounted to $3,800 and $3,000 for the
three months ended March 31, 2006 and 2005, respectively.
NOTE J - INCOME TAXES
Income taxes (credit) consisted of the following:
2006
---------
Current $(119,500)
Deferred 80,600
---------
TOTAL (38,900)
---------
Income taxes paid amounted to $158,550 for the three months ended March 31,
2006.
Deferred tax assets (liabilities) consisted of the following:
2006
---------
Deferred tax liabilities - long-term:
Depreciation $ (52,100)
Deferred tax assets - current and long-term:
Allowance for doubtful accounts 0
---------
TOTAL $ (52,100)
=========
NOTE K - RELATED PARTY TRANSACTIONS
Note payable officers amounted to $77,645 at March 31, 2006 (See Note F).
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 $1,870,000 at March
31, 2006.
Charges to operations amounted to $57,000 for the three months ended March 31,
2006 and 2005.
14
GIANT MOTORSPORTS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
March 31, 2006 and 2005
(UNAUDITED)
NOTE L - COMMON STOCK
The Company has 75,000,000 shares of $.001 par common stock authorized, with
10,759,138 issued and outstanding at March 31, 2006.
NOTE M - 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 2,820 shares are issued
and outstanding at March 31, 2006. 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.
During the three months ended March 31, 2006, a Series A Preferred shareholder
exercised 50 shares of the conversion feature of the stock, and subject to the
provisions of the conversion, received 125,000 shares of common stock.
The Company issued 189,138 shares of its common stock as a dividend to all
Series A Preferred shareholders, in accordance with the placement offering
provisions.
15
GIANT MOTORSPORTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
March 31, 2006 and 2005
(UNAUDITED)
NOTE N - 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:
(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:
(i) $500,000 on July 29, 2004
(ii) $250,000 on October 29, 2004, and
(iii) the remaining $925,000, plus accrued but unpaid interest on April
30, 2005.
The Note was 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).
16
GIANT MOTORSPORTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
March 31, 2006 and 2005
(UNAUDITED)
NOTE N - ACQUISITION OF KINGS MOTORSPORTS, INC. (continued)
In connection with the Acquisition and pursuant to the Asset Purchase Agreement,
the Company entered into a Non-Competition Agreement ("Non-Competition
Agreement"), dated April 30, 2004 with Mr. Haubner (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, 2005. In consideration for
the Non-Competition Agreement, the Company agreed to pay Mr. Haubner a monthly
fee of $20,833. Effective June 15, 2005, Mr. Haubner violated the Agreement. The
Company has negotiated a total amount to be assigned to the Non-Competition
Agreement of $130,000, which was paid in full in 2005.
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 55
employees and operates from an approximately 75,000 square foot facility.
Chicago Cycles is located in the Chicago metropolitan area, has approximately 99
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
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. During the three-month period ended
March 31, 2006, approximately $7.44 million of the approximately $16.182 million
of our power sports sales (46%) were financed. 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. During the three-month period ended March 31, 2006
approximately $865,638 of Chicago Cycles' approximately $8,004,700 in revenues
(10.8%) were generated from sales of used motorcycles. During the same period,
approximately $238,244 of Andrews Cycles' approximately $9,760,794 in revenues
(2.4%) were also generated from sales of used motorcycles. Although used
motorcycles sales at our Andrews Cycles dealership only commenced in the second
half of 2005, we intend to substantially increase such sales throughout the
remainder of 2006 and beyond. We also intend to increase sales of used
motorcycles at Chicago Cycles throughout the remainder of 2006 and beyond.
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
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.
19
Overall impact on our Future Earnings
Based on our operations during the first three months 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 engagement, 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:
o $500,000 on July 29, 2004;
o $250,000 on October 27, 2004; and
o 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 (8.25% at March 31,
2006). 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 March 31, 2006, the outstanding amount of this
term loan, including accrued interest thereon, was $937,520.
20
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.
On December 20, 2005, the third party that provided us with the Bridge Loan
provided us with a new bridge loan in the principal amount of $250,000 (the
"2005 Bridge Loan"). In connection with the 2005 Bridge Loan we issued to the
lender a $250,000 principal amount promissory note bearing interest at the rate
of fifteen (15%) per annum (the "2005 Bridge Note"). Interest on the 2005 Bridge
Note is payable monthly, and all outstanding principal and accrued but unpaid
interest was due and payable on March 20, 2006. In March we repaid $25,000 of
the outstanding principal amount and at March 31, 2006, the outstanding
principal amount was $225,000. We obtained a ninety (90) day extension for the
payment of the remaining $225,000. In consideration for this extension we paid
the lender $2,500.
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 (8.25% at March 31, 2006), and has no stipulated repayment terms. At
March 31, 2006, 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. 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 used these net proceeds for debt repayment,
legal fees, and general working capital purposes. At March 31, 2006, 50 Series A
Shares had been converted into 125,000 shares of our common stock.
Anticipated Funding of Operations
The amount required to fund the growth of our ongoing operations, as well as the
means by which we obtain this funding, will be wholly dependent on the magnitude
and timeframes we set for any growth in our business. Based on our current
expected growth in the next 12 to 24 months, we expect to fund our ongoing
operations as follows:
21
Cash Flow from Operations
We intend to significantly increase our cash flow from operations by growing
sales within our current business structure and through the acquisition of other
power sports dealers. Based on our current business plan, we believe that we
will begin to generate sufficient cash flows from operations to fund the growth
of our business during the third quarter of 2007. To the extent that the growth
of our business involves the acquisition of other dealers, our ability to do so
will depend on the availability of the types of financing discussed below.
Bank Financing
We 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 March 31, 2006. 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.
22
Results of Operations.
March 31, 2006 March 31, 2005 Increase
(Three Months) (Three Months) (Decrease) % Change
Revenues $ 18,389,637 $ 20,718,007 $ (2,328,370) (11.2%)
Cost of Sales $ 15,842,217 $ 18,727,791 $ (2,885,574) (15.4%)
Operating Expenses $ 3,217,110 $ 2,382,155 $ 834,955 35.1%
Operating Income (Loss) $ (669,690) $ (391,939) $ (277,751) (70.9%)
Income (Loss) b/f Taxes
$ (941,152) $ (538,210) $ (402,942) (74.9%)
Net Income (Loss) $ (941,152) $ (538,210) $ (402,942) (74.9%)
Revenues:
Revenues for the three months ended March 31, 2006 were $18,389,637 representing
a reduction of $2,328,370 (11.2%) from the $20,718,007 reported for the three
months ended March 31, 2005. Despite an increase in revenues from retail sales
of our products, during the first quarter of 2006, as compared to the same
period in 2005, we experienced a significant reduction in revenues from
wholesale sales of our products to other dealers and distributors, in the first
three months of 2006, which was primarily responsible for this reduction.
Reducing wholesale sales during the three months ended March 31, 2006, was part
of our plan to stabilize our inventory which we believe should increase our
profit margins for the remainder of 2006. In the first quarter of 2005 we
disposed of older and slow moving inventory at or below cost. We did not engage
in these types of sales during the first quarter of 2006, which resulted in an
actual increase in margins from approximately 9.6% for the first three months of
2005 to 14% for the first three months of 2006. Therefore, we already have begun
to see the positive effects on profit margins this year, and believe that this
will translate into more positive revenues and income for the remaining three
quarters of 2006, although we cannot provide you with any such assurance.
Cost of Sales:
Cost of sales for the three months ended March 31, 2006 was $15,842,217 a
decrease of $2,885,574 (15.4%) from $18,727,791 for the three months ended March
31, 2005. This reduction in cost of sales was primarily attributable to our
reduction in sales during the first quarter of 2006 as described above.
Operating Expenses:
Operating expenses for the three month period ended March 31, 2006 were
$3,317,110, reflecting an increase of $834,955 (35.1%) from operating expenses
of $2,382,155 for the three month period ended March 31, 2005. This increase in
operating expenses was attributable to the following increases in expenses:
(i) Since we moved into our new location in Chicago, in April 2005, we
experienced an increase in rent for our Chicago Cycles dealership from
approximately $72,000 for the three months ended March 31, 2005 to approximately
$180,000 for the three months ended March 31, 2006.
(ii) Advertising expenses increased approximately $298,000 between the
comparable periods to a total of $733,474 for the first three months of 2006.
This increase in advertising expenses was primarily attributable to our
increased advertising at the international motorcycle shows in Ohio and Chicago.
(iii) Commissions payable to our sales people increased approximately
$188,000 between the comparable periods to a total of $884,884 for the first
three months of 2006, and payroll taxes payable by us similarly increased
approximately $39,000 to $116,000 for the first three months of 2006.
23
Operating Income (Loss):
Operating loss increased from $391,939 for the three months ended March 31, 2005
to $669,690 for the three months ended March 31, 2006, representing an increase
of $277,751 (70.9%). This increase in operating loss between these periods was
primarily attributable to the same increase in expenses described under
operating expenses. Depreciation was approximately $89,449 for the three months
ended March 31, 2006, as compared to $45,290 for the same period in 2005.
Income (Loss) before Taxes:
Loss before taxes was $941,152 for the three month period ended March 31, 2006,
which reflects an increase of $402,942 (74.9%) from net loss of $538,210 for the
same period in 2005. This increase in loss between these two periods was
attributable to the same factors described in operating loss above and, in
addition, includes an increase of interest paid by us on floor plan financing,
which was approximately $125,000 more during the three months ended March 31,
2005 compared to the same period in 2005. This significant increase in interest
payable on floor plan financing was primarily attributable to increases in the
rate of interest payable under our floor plan financing arrangements.
Net Income (Loss):
Net loss was $941,152 for the three month period ended March 31, 2006, which
reflects an increase of $402,942 (74.9%) from net loss of $538,210 for the same
period in 2005. The reasons for this increase in Net loss are the same as those
described in loss before taxes. In addition, although not reflected in our
overall net loss, we paid dividends on our Series A Preferred Stock, in March
2006, in shares of our common stock, which has been ascribed a value of
$126,722. This increased the net loss attributable to our common shareholders to
$1,067,874 for the three months ended March 31, 2006.
Liquidity and Capital Resources.
Our primary source of liquidity has been cash generated by operations and
borrowings under various credit facilities. At March 31, 2006, we had $651,137
in cash and cash equivalents, compared to $227,301 at December 31, 2005. Until
required for operations, our policy is to invest excess cash in bank deposits
and money market funds. Net working capital at March 31, 2006 was $(212,384)
compared to $1,128,856 at December 31, 2005. The Company's negative net working
capital at March 31, 2006, was mostly attributable to its financing of the
acquisition of Chicago Cycles acquisition through short-term debt, as well as an
increase in floor plan financing, as a result of the additional inventory
acquired in the Chicago Cycles acquisition.
The Company receives floor plan financing from 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.
24
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 2006 models before the 2007 models are released, it
could be very difficult for us to sell our remaining inventory of 2006 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 report.
25
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.
26
Contractual Obligations
We have entered into various contractual obligations, which may be summarized as
follows:
Contractual Obligations Payments due by period
Less than 1 1-3 3-5 More than
Total year years years 5 years
--------------------------------------------------------------
Long-Term Debt Obligations $1,419,789 $ 689,623 $ 730,166 -- --
Capital (Finance) Lease Obligations $5,377,674 $ 466,666 $1,660,674 $1,827,410 $1,422,924
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 $6,797,463 $1,156,289 $2,390,840 $1,827,410 $1,422,924
--------------------------------------------------------------
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 $22,454,261
and $17,159,719, at March 31, 2006 and December 31, 2005, 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 first three months of 2006,
interest rates on our floor plan financing have ranged from a low of 4.8% to a
high of 16.5%. 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 2005 and during the first three months of 2006,
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 8.0%.
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 at March 31, 2006 and December 31, 2005, 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.
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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
(March 31, 2006). 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 March 31, 2006 that has materially affected,
or is reasonably likely to materially affect, our internal control over
financial reporting.
28
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
Not applicable.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Not applicable.
Item 3. Defaults Upon Senior Securities.
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
Item 5. Other Information
As a result of certain territorial restrictions in the Kawasaki Motors
Corp. dealer agreements, and protests by two dealers in the Chicago
area, we were unable to sell Kawasaki products through our Chicago
Cycles dealership until we entered into an agreement with Kawasaki and
the applicable dealers in February 2006. Under this agreement, we are
required to pay these dealers $100,000 over a period of ten months,
pursuant to which we now have the right to sell Kawasaki products at
our Chicago Cycles dealership.
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)).
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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: May 22, 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: May 22, 2006 By: /s/ Gregory A. Haehn
----------------------------------
Name: Gregory A. Haehn
Title: President, Chief Operating
Officer, Treasurer and a Director
(Principal Financial and
Accounting Officer)
30