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 June 30, 2004
OR
[ ] Transition report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 for the transition period
from ___________ to ____________
Commission File Number: 000-50243
GIANT MOTORSPORTS, INC.
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(Exact Name of Registrant as Specified in Its Charter)
Nevada 33-1025552
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
13134 State Route 62, Salem, Ohio 44460
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(Address of Principal Executive Offices) (Zip Code)
(330) 332-8534
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(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the Registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the past 12 months (or for such shorter
period that the Registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
As of August 12, 2004 the registrant had 10,425,000 shares of common
stock, $.001 par value, issued and outstanding.
GIANT MOTORSPORTS, INC.
INDEX TO FORM 10-Q
PAGE
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of June 30, 2004
(Unaudited) and December 31, 2003 (Audited)....................... 3
Condensed Consolidated Unaudited Statements of Income
for the Six Months Ended June 30, 2004 and 2003 and
for the Three Months Ended June 30, 2004 and 2003................. 4
Condensed Consolidated Unaudited Statements of Cash Flows for
the Six Months Ended June 30, 2004 and 2003....................... 5
Notes to Condensed Consolidated Unaudited Financial Statements.... 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations........... 14
Item 3. Quantitative and Qualitative Disclosures about
Market Risk............................................. 19
Item 4. Controls and Procedures................................. 20
PART II. OTHER INFORMATION
Item 1. Legal Proceedings....................................... 20
Item 2. Changes in Securities, Use of Proceeds and
Issuer Purchases of Equity Securities................... 20
Item 3. Defaults Upon Senior Securities......................... 20
Item 4. Submission of Matters to a Vote of Security
Holders................................................. 20
Item 5. Other Information....................................... 20
Item 6. Exhibits and Reports on Form 8-K........................ 21
SIGNATURES........................................................ 22
2
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements
GIANT MOTORSPORTS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
June 30, 2004 and December 31, 2003
2004 2003
----------- -----------
(Unaudited) (Audited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 425,867 $ 587,917
Accounts receivable, net 4,495,024 1,285,106
Accounts receivable, affiliates 8,563 315,343
Inventories 16,615,482 10,986,080
Deferred federal income taxes 97,700 -
Note receivable, officer 776,944 679,405
Prepaid expenses 86,678 8,000
----------- -----------
TOTAL CURRENT ASSETS 22,506,258 13,861,851
----------- -----------
PROPERTY AND EQUIPMENT, NET 1,117,778 425,177
----------- -----------
OTHER ASSETS
Intangibles, net 1,588,950 -
Deferred federal income taxes 24,300 -
Deposits 16,000 16,000
----------- -----------
TOTAL OTHER ASSETS 1,629,250 16,000
----------- -----------
$25,253,286 $14,303,028
=========== ===========
The accompanying notes are an integral part of the condensed
consolidated financial statements.
3
GIANT MOTORSPORTS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (CONTINUED)
June 30, 2004 and December 31, 2003
2004 2003
----------- -----------
(Unaudited) (Audited)
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Lines of credit $ 450,000 $ 450,000
Notes payable, floor plans 16,605,685 11,575,660
Notes payable 2,175,000 -
Accounts payable, trade 1,452,370 675,042
Accounts payable, affiliate 25,070 -
Accrued expenses 401,499 178,412
Accrued income taxes 367,600 -
Deferred service contract income 174,592 80,000
Customer deposits 912,986 215,632
Current portion of long-term debt 245,888 97,073
----------- -----------
TOTAL CURRENT LIABILITIES 22,810,690 13,271,819
DEFERRED SERVICE CONTRACT INCOME 308,494 -
LONG-TERM DEBT, NET 1,061,432 -
----------- -----------
TOTAL LIABILITIES 24,180,616 13,271,819
----------- -----------
COMMITMENTS - NOTE I
STOCKHOLDERS' EQUITY
Common stock, $.001 par value at June 30, 2004;
Authorized 75,000,000 shares at June 30, 2004;
Issued and outstanding 10,425,000 shares at
June 30, 2004 and 8,000,000 shares at
December 31, 2003 10,425 8,000
Paid-in capital 668,867 1,023,209
Retained earnings 393,378 -
----------- -----------
TOTAL STOCKHOLDERS' EQUITY 1,072,670 1,031,209
----------- -----------
$25,253,286 $14,303,028
=========== ===========
The accompanying notes are an integral part of the condensed
consolidated financial statements.
4
GIANT MOTORSPORTS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
For the six and three months ended June 30, 2004 and 2003
Six Months Ended Three Months Ended
June 30, June 30, June 30, June 30,
2004 2003 2004 2003
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
------------ ------------ ------------ ------------
OPERATING INCOME
Sales $ 33,163,590 $ 24,086,697 $ 22,167,499 $ 14,677,867
Finance, insurance and extended
service revenues 788,835 450,683 584,763 268,869
------------ ------------ ------------ ------------
TOTAL OPERATING INCOME 33,952,425 24,537,380 22,752,262 14,946,736
COST OF MERCHANDISE SOLD 29,896,872 22,202,819 20,186,009 13,772,827
------------ ------------ ------------ ------------
GROSS PROFIT 4,055,553 2,334,561 2,566,253 1,173,909
------------ ------------ ------------ ------------
OPERATING EXPENSES
Selling expenses 1,942,826 1,318,213 1,346,762 725,361
General and administrative
expenses 1,175,049 664,598 666,888 343,614
------------ ------------ ------------ ------------
3,117,875 1,982,811 2,013,650 1,068,975
------------ ------------ ------------ ------------
INCOME FROM OPERATIONS 937,678 351,750 552,603 104,934
------------ ------------ ------------ ------------
OTHER INCOME AND (EXPENSES)
Other income, net 7,373 6,468 6,475 3,978
Interest expense, net (306,073) (157,562) (217,359) (94,396)
Loss on sale of assets - (1,300) - (1,300)
------------ ------------ ------------ ------------
(298,700) (152,394) (210,884) (91,718)
------------ ------------ ------------ ------------
INCOME BEFORE INCOME TAXES 638,978 199,356 341,719 13,216
INCOME TAXES 245,600 - 135,600 -
------------ ------------ ------------ ------------
NET INCOME ATTRIBUTABLE TO
COMMON SHAREHOLDERS $ 393,378 $ 199,356 $ 206,119 $ 13,216
============ ============ ============ ============
BASIC EARNINGS PER SHARE $ 0.04 $ 0.02 $ 0.02 $ -
DILUTED EARNINGS PER SHARE $ 0.03 $ 0.02 $ 0.02 $ -
WEIGHTED AVERAGE SHARES
OUTSTANDING
BASIC 10,425,000 8,000,000 10,425,000 8,000,000
============ ============ ============ ============
DILUTED 10,975,000 8,000,000 11,525,000 8,000,000
============ ============ ============ ============
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 six months ended June 30, 2004 and 2003
2004 2003
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 393,378 $ 199,356
Adjustments to reconcile net income to
net cash used in operating activities:
Depreciation 59,870 40,748
Deferred federal income taxes (122,000) -
(Increase) in accounts receivable, net (3,209,918) (694,201)
(Increase) in inventories (5,629,402) (2,587,621)
Increase in floor plan liability 5,030,025 3,352,812
(Increase) in prepaid expenses (78,678) (66,788)
Increase (decrease) in customer deposits 697,354 (3,886)
Increase in deferred service contract income 403,086 -
Increase (decrease) in accounts payable trade 777,328 (294,324)
Increase in accounts payable affiliate 25,070 -
Increase in accrued income taxes 367,600 -
Increase in accrued expenses 223,087 2,561
----------- -----------
NET CASH USED IN OPERATING ACTIVITIES (1,063,200) (51,343)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment (666,421) (71,317)
Decrease (increase) in accounts
receivable affiliates 306,780 (121,658)
(Increase) in notes receivable from officers (97,539) (431,133)
----------- -----------
NET CASH USED IN INVESTING ACTIVITIES (457,180) (624,108)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Short-term borrowings on note 500,000 -
Long-term borrowings on note 1,250,000 -
Loans from affiliate - 104,899
Payments on long-term debt (39,753) (65,056)
Distributions (345,667) -
Issue 1,000,000 stock warrants 15,000 -
Repurchase 8,000,000 shares of common stock (21,250) -
----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 1,358,330 39,843
----------- -----------
NET DECREASE IN CASH AND CASH EQUIVALENTS (162,050) (635,608)
CASH AND CASH EQUIVALENTS, beginning of Year 587,917 780,372
----------- -----------
CASH AND CASH EQUIVALENTS, end of quarter $ 425,867 $ 144,764
=========== ===========
OTHER SUPPLEMENTARY CASH FLOW INFORMATION
Short-term borrowings incurred for the
acquisition of assets $ 1,675,000 $ -
=========== ===========
Interest paid for the six months $ 132,453 $ 158,428
=========== ===========
The accompanying notes are an integral part of the
condensed consolidated financial statements.
6
GIANT MOTORSPORTS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2004 and 2003
(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, 2003 audited financial
statements and accompanying notes thereto. While management believes
the procedures followed in preparing these condensed consolidated
financial statements are reasonable, the accuracy of the amounts are
in some respects dependent upon the facts that will exist, and
procedures that will be accomplished by the Company later in the year.
These condensed consolidated financial statements reflect all
adjustments, including normal recurring adjustments which, in the
opinion of management, are necessary to present fairly the
consolidated operations and cash flows for the periods presented.
Organization:
------------
Giant Motorsports, Inc. (the "Company"), through its wholly-owned
subsidiaries, W.W. Cycles, Inc., doing business as Andrews Cycles, and
Chicago Cycles, Inc., doing business as Chicago Cycle Center, operates
two retail dealerships of motorcycles, all terrain vehicles, scooters
and personal watercraft in northeastern Ohio and northern Illinois.
On December 30, 2003, the stockholders of W.W. Cycles, Inc. entered
into a Stock Purchase and Reorganization Agreement in which effective
January 16, 2004 W.W. Cycles, Inc. was issued an aggregate of
8,000,000 restricted shares of common stock, $.001 par value, of
American Busing Corporation in exchange for all of the outstanding
shares of the common stock of the Company, resulting in W.W. Cycles,
Inc. becoming a wholly-owned subsidiary of American Busing
Corporation, an inactive public company. The acquisition was
accounted for as a reverse merger whereby, for accounting purposes, WW
Cycles, Inc. is considered the accounting acquirer and the historical
financial statements of WW Cycles, Inc. became the historical
financial statements of Giant Motorsports, Inc. Effective April 5,
2004 American Busing Corporation changed its name to Giant
Motorsports, Inc. On April 30, 2004, Giant Motorsports, Inc. acquired
substantially all of the assets and certain liabilities of Chicago
Cycle Center pursuant to an Asset Purchase Agreement and entered into
7
a Noncompetition Agreement with one of the former owners and entered
into an Employment Agreement with the other former owner.
Principles of Consolidation:
---------------------------
The condensed consolidated financial statements include the accounts
of the Company and all of its wholly owned subsidiaries. All
significant intercompany accounts and transactions have been
eliminated in consolidation.
Cash and Cash Equivalents:
-------------------------
Cash and cash equivalents include amounts held in demand deposit
accounts and overnight investment accounts. The Company considers all
highly liquid investments with original maturities of three months or
less to be cash equivalents.
Contracts in Transit:
--------------------
Contracts in transit represent customer finance contracts evidencing
loan agreements or lease agreements between the Company, as creditor,
and the customer, as borrower, to acquire or lease a vehicle whereby a
third-party finance source has given the Company initial, non-binding
approval to assume the Company's position as creditor. Funding and
approval from the finance source is provided upon the finance source's
review of the loan or lease agreement and related documentation
executed by the customer at the dealership. These finance contracts
are typically funded within ten days of the initial approval of the
finance transaction by the third-party finance source. The finance
source is not contractually obligated to make the loan or lease to the
customer until it gives its final approval and funds the transaction.
Until such final approval is given, contracts in transit represent
amounts due from the customer to the Company. See Note B for
additional information.
Allowance for Doubtful Accounts:
-------------------------------
Accounts are written off when management determines that an account is
uncollectible. Recoveries of accounts previously written off are
recorded when received. An estimated allowance for doubtful accounts
is determined to reduce the Company's receivables to their carrying
value, which approximates fair value. The allowance is estimated
based on historical collection experience, specific review of
individual customer accounts, and current economic and business
conditions. Historically, the Company has not incurred any
significant credit related losses. Management has determined that an
allowance of $25,000 is necessary at June 30, 2004 and December 31,
2003.
Revenue Recognition:
-------------------
Vehicle Sales:
The Company records revenue when vehicles are delivered and title has
passed to the customer, when vehicle service or repair work is
performed and when parts are delivered. Sales promotions that are
offered to customers are accounted for as a reduction to the sales
price at the time of sale. Incentives, rebates and holdbacks offered
by manufacturers directly to the Company are recognized at the time of
sale if they are vehicle specific, or as earned in accordance with the
manufacturer program rules and are recorded as a reduction of cost of
merchandise sold.
8
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.
Concentration of credit risk, with respect to accounts receivable-
customers, is limited through the Company's credit evaluation process.
The Company reviews the credit history before extending credit.
Generally, the Company does not require collateral from its customers.
Property and Equipment:
----------------------
Property and equipment are stated at cost. Maintenance and repairs
that do not add materially to the value of the asset nor appreciably
prolong its useful life are charged to expense as incurred. Gains or
losses on the disposal of property and equipment are included in the
determination of income.
9
Depreciation of property and equipment and amortization of leasehold
improvements are provided using the straight-line method over the
following estimated useful lives:
Fixtures, and equipment................ 3-7 years
Vehicles............................... 5 years
Leasehold Improvements................. 15 years
Impairment of Long-Lived Assets:
-------------------------------
Long-lived assets are reviewed for impairment whenever events such as
product discontinuances, product dispositions or other changes in
circumstances indicate that the carrying amount may not be
recoverable. An impairment loss is recognized when the carrying
amount of a long-lived asset exceeds the sum of non-discounted cash
flows expected to result from the asset's use and eventual
disposition. An impairment loss is measured as the amount by which
the carrying amount exceeds its fair value, which is typically
calculated using discounted expected future cash flows. The discount
rate to these cash flows is based on the Company's weighted average
cost of capital, which represents the blended after-tax costs of debt
and equity. There were no indications of impairments at June 30, 2004
Income Taxes:
------------
Income taxes are calculated using the liability method specified by
Statement of Financial Accounting Standards No. 109, "Accounting for
Income Taxes."
At June 30, 2004, income taxes are provided for amounts currently due
and deferred amounts arising from temporary differences between income
for financial reporting and income tax purposes.
Advertising Costs:
-----------------
Advertising costs are expensed when incurred. Charges to operations
amounted to $482,411 and $454,999 for the six months ended June 30,
2004 and 2003 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.
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 June 30, 2004 and December 31, 2003. Also included in accounts
receivable at June 30, 2004 is approximately $900,000 due from Kings
Motorsports, Inc., the former owner of Chicago Cycle Center, for
contract fundings that were deposited in its cash account during the
transition period. These monies are expected to be reimbursed to the
Company by December 31, 2004.
10
NOTE C - INVENTORIES
Inventories consisted of vehicles and parts and accessories.
NOTE D - PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
June 30 December 31
2004 2003
----------- ------------
Fixtures and equipment $ 902,164 $ 178,737
Vehicles 252,522 234,558
Leasehold improvements 275,408 264,328
----------- -----------
1,430,094 667,623
Less accumulated depreciation 312,316 252,446
----------- -----------
NET PROPERTY AND EQUIPMENT $ 1,117,778 $ 425,177
=========== ===========
Depreciation expense charged to operations amounted to $59,870 and
$40,748 for the six months ended June 30, 2004 and 2003 respectively.
NOTE E - NOTES RECEIVABLE OFFICERS
Notes receivable officers consisted of advances to officers and
advances to companies that the officers own bearing interest at 6%
with no stipulated repayment terms. Interest income on these notes
amounted to $20,403 for the six months ended June 30, 2004. The notes
are expected to be repaid by December 31, 2004.
NOTE F - LINES OF CREDIT
The Company's has a $250,000 line of credit with one of its suppliers
and a $300,000 revolving line of credit with a bank which aggregate
$450,000 at June 30, 2004 and December 31, 2003. The line of credit
with the supplier is payable in full by December 2004 but then the
Company can re-borrow on the line one month subsequent to payoff. The
revolving line of credit has no stipulated repayment terms. These
loans bear interest at 7.5% and prime plus one percent (5% at June 30,
2004), respectively, and are collateralized by substantially all of
the Company's assets.
NOTE G - NOTES PAYABLE - FLOOR PLANS
The Company has various floor plan financing agreements aggregating
$16,605,685 at June 30, 2004 and $11,575,660 at December 31, 2003.
Interest is payable monthly and fluctuates with prime and varies based
on the type of unit financed and the length of time the unit remains
on the floor plan (ranging from 3% to 18% at June 30, 2004).
Principal payments are due upon the sale of the specific unit
financed. The floor plans are collateralized by substantially all
corporate assets.
11
NOTE H - NOTES PAYABLE
Notes payable consisted of a $1,675,000 loan payable to Kings
Motorsports, Inc. at June 30, 2004 for the purchase of the assets of
Chicago Cycles, Inc. bearing interest at 6%, payable in installments
of $500,000 on July 29, 2004, $250,000 on October 24, 2004 and
$925,000 plus accrued interest on October 24, 2004. Also included
in notes payable is a $500,000 demand loan, bearing interest at 14%,
due on October 15, 2004.
NOTE I - LONG-TERM DEBT
Long-term debt consisted of various notes aggregating $1,307,320 at
June 30, 2004 and $97,073 at December 31, 2003. These amounts mature
at various times ranging from 2004 to 2006, bearing interest at
various rates ranging from 5.75% to 6.85% per year. The notes are
collateralized by substantially all of the Company's assets.
NOTE J - INCOME TAXES
Income taxes (credit) consisted of the following:
June 30 December 31
2004 2003
----------- ------------
Federal:
Current $ 322,600 $ -
Deferred (122,000) -
----------- ------------
200,600 -
----------- ------------
State:
Current 45,000 -
Deferred - -
----------- ------------
45,000 -
----------- ------------
TOTALS $ 245,600 $ -
=========== ============
No income taxes were paid for the six months ended June 30, 2004 and
2003.
Deferred tax assets (liabilities) consisted of the following:
June 30 December 31
2004 2003
----------- ------------
Deferred tax liabilities-long-term:
Depreciation $ (21,300) $ -
Amortization (6,000) -
----------- ------------
Gross deferred tax liabilities (27,300) -
----------- ------------
12
Deferred tax assets -
current and long-term:
Allowance for doubtful accounts 8,500 -
Deferred revenue 140,800 -
----------- ------------
Gross deferred tax assets 149,300 -
----------- ------------
TOTALS $ 122,000 $ -
=========== ============
NOTE K - RELATED PARTY TRANSACTIONS
Related Party Transactions:
Accounts receivable, affiliates consisted of the following:
June 30 December 31
2004 2003
----------- ------------
Noninterest bearing advances to and
transfer of product at cost to
Andrews North, Inc., a corporation
in Cleveland, Ohio affiliated
through common ownership interest
to be repaid within one year $ - $ 220,000
Non-interest bearing advances of
$-0- at June 30, 2004 and
$90,000 at December 31, 2003 and
sale of product of $8,563 at
June 30, 2004 and $5,343 at
December 31, 2003 to individuals
related to the shareholders of
the corporation to be repaid
within one year 8,563 95,343
----------- ------------
TOTALS $ 8,563 $ 315,343
=========== ============
Notes receivable officers amounted to $776,944 at June 30, 2004
and $679,405 at December 31, 2003 (See Note E).
The Company leases its 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
$346,000 at June 30, 2004.
Charges to operations amounted to $90,000 for the six months
ended June 30, 2004 and 2003.
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 June 30, 2004:
YEAR ENDING AMOUNT
----------- -----------
2004 $ 90,000
2005 180,000
2006 180,000
2007 180,000
2008 180,000
-----------
$ 810,000
===========
13
Item 2. Management's Discussion and Analysis of Financial Conditions
and Results of Operations
This document includes statements that 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
The Company's goal is to become one of the largest dealers of
powersports 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. The Company is
attempting to capitalize upon the consolidation opportunities
available and increase its revenues and income by acquiring additional
dealers and improving its performance and profitability.
Management plans to maximize the operating and financial
performance of its dealerships by achieving certain efficiencies that
will enhance internal growth and profitability. By consolidating
functions within the Company, management believes it can reduce
overall expenses, simplify dealership management and create economies
of scale.
The Company 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 the Company's systems and operating
strategy.
The Company, together with its two (2) wholly-owned subsidiaries,
owns and operates two (2) retail powersports superstores. The
Company's core brands include Suzuki, Yamaha, Honda, Ducati and Kawasaki.
The Company superstores operate under the names "Andrews Cycles" and
"Chicago Cycles." Andrews Cycles is located in Salem, Ohio, has
approximately fifty (50) employees as of June 30, 2004 and operates
from an approximately thirty-five thousand (35,000) square foot facility.
Chicago Cycles is located in Chicago, Illinois, has approximately sixty
(60) employees and operates from an approximately thirty thousand
(30,000) square foot facility. The Company believes Andrews Cycles and
14
Chicago Cycles are two of the largest volume dealers of powersports in
the Midwest.
On April 30, 2004, pursuant to an Asset Purchase Agreement (the
"Asset Agreement"), dated as of 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"). 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 27, 2004, and (iii) the remaining
$925,000, plus accrued but unpaid interest on April 30, 2005. The Note
is secured by a second lien on the Chicago Assets pursuant to a
Commercial Security Agreement dated as of April 30, 2004, by and among
the Company and Chicago Cycle, and guaranteed pursuant to a Guaranty
dated April 30, 2004 by and among Chicago Cycle, the Company, Russell
Haehn and Gregory Haehn, the current executive officers, directors 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 Guaranty 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 of the assets of the
Company (including, but not limited to, the Chicago Assets).
Pursuant to a Management Agreement dated April 30, 2004, by and
among the Company and Chicago Cycle, in the event the Company does not
receive dealership franchise approvals and floor plan financing by
approximately August 30, 2004, the Company has the right to require
Chicago Cycle to repurchase the Chicago Assets for $1,675,000. As of
August 12, 2004, the Company had not yet received all such franchise
approvals. In the event that all of such approvals and floor plan
financing have not been obtained by August 30th, the Company intends to
extend the term of the Management Agreement for up to an additional
two (2) months for the purpose of obtaining such necessary approvals
and financing.
In connection with the Acquisition and pursuant to the Asset
Purchase Agreement, the Company entered into a Noncompetition
Agreement ("Noncompetition 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 Noncompetition Agreement, the
Company agreed to (i) pay to Mr. Haubner a monthly fee of $20,833
15
from January 20, 2005 through December 31, 2006, and (ii) provide Mr.
Haubner with certain health insurance coverage.
Pursuant to an Employment Agreement ("Employment Agreement"),
dated April 30, 2004 between the Company and Jerry Fokas (the
"Employee"), the Company agreed to employ Mr. Fokas as a sales manager
for a two (2) year period. In consideration for such employment, the
Company agreed to, among other things, pay to the Employee (i) a
salary of $2,500 per week from May 1, 2004 to April 30, 2005, and
$3,000 per week from May 1, 2005 to April 30, 2006, and (ii) a
quarterly bonus equal to five percent (5%) of Chicago Cycle's
quarterly earnings before interest, taxes, depreciation and
amortization (as determined by the certified public accounting firm
that regularly provides accounting services to Chicago Cycle and/or
the Company).
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"), the Company received from a
third party lender (the "Lender") a $500,000 aggregate principal
amount bridge loan (the "Bridge Loan"). All outstanding principal on
the Bridge Note is due on October 19, 2004. To secure the repayment
of principal and interest on the Bridge Note, each Executive (i)
pledged to the Lender 150,000 shares (300,000 shares in the aggregate)
of the common stock, par value $0.001 per share, of the Company (the
"Common Stock") owned by each such Executive, and (ii) guaranteed the
payment of all of the Company's payment obligations to the Lender
under the Bridge Note. As partial consideration for the Bridge Loan,
the Company issued to the Lender a five (5) year warrant to purchase
100,000 shares of Common Stock (the "Warrant Shares"), at an exercise
price of $2.25. The Company also granted to the Lender certain
piggyback registration rights with respect to the Warrant Shares. The
Company used the $500,000 Bridge Loan proceeds for working and
operating capital.
On April 5, 2004, the Company changed its name from American
Busing Corporation to Giant Motorsports, Inc.
On January 16, 2004, pursuant to a Stock Purchase and
Reorganization Agreement dated as of December 30, 2003 (the
"Agreement"), between, among others, the Company, W.W. Cycles, Inc.
("Cycles") and the Executives, the Company issued to the Executives
and one (1) other Cycles' employee, an aggregate of 7,850,000 shares
of Common Stock in exchange for all of the issued and outstanding
shares of the capital stock of Cycles, resulting in Cycles becoming a
wholly-owned subsidiary of the Company (the "Initial Acquisition").
On such date, the Executives also purchased an additional 150,000
shares of Common Stock from a then shareholder of the Company for an
aggregate purchase price of $178,750. Simultaneously with the Closing
of the Initial Acquisition, the then sole director and officer of the
Company resigned as a director and officer of the Company and was
replaced by the Executives. Russell A. Haehn became the Chairman,
Chief Executive Officer, Secretary and a Director of the Company and
Gregory A. Haehn became the President, Chief Operating Officer,
Treasurer and a Director of the Company.
Immediately following the Initial Acquisition and the
consummation of certain other related transactions, the Company had
10,425,000 issued and outstanding shares of Common Stock, of which the
Executives owned in the aggregate, 7,600,000 shares of Common Stock,
16
representing approximately 72.9% of the issued and outstanding shares
of Common Stock. Of such amount, Russell A. Haehn owns 4,785,000
shares of Common Stock and Gregory A. Haehn owns the remaining 2,815,000
shares of Common Stock. A third prior shareholder of Cycles owns an
additional 400,000 shares of Common Stock. The Company also issued to
a financial advisor six-year warrants to purchase up to 1,000,000
shares of the Common Stock in consideration for financial advisory
services provided to Cycles in connection with the Initial Acquisition
and to the Company following the Initial Acquisition.
RESULTS OF OPERATIONS
Revenues
--------
Revenues during the second quarter of 2004 were $22,752,262
representing an increase of $7,805,526 (52.2%) from the $14,946,736
reported for the quarter ending June 30, 2003. Revenues for the first
six months of 2004 were $33,952,425 representing an increase of
$9,415,045 (38.4%) from the $24,537,380 reported for the six months
ending June 30, 2003. Our results, specifically those for the second
quarter of 2004, were impacted significantly, in a positive manner, by
the acquisition of Chicago Cycle on April 30, 2004, and the inclusion
of the additional revenues generated by Chicago Cycle from that date
through June 30, 2004. Additionally, our sales increase can also be
attributed to our aggressive marketing and advertising campaigns.
Cost of Sales
-------------
Cost of sales for the second quarter of 2004 increased by
$6,413,182 (46.6%) from the same period in 2003. Cost of sales for
the first six months of 2004 increased by $7,694,053 (34.7%) from the
same period in 2003. This increase reflects the additional cost of
units needed to realize the increase in sales, and is also
significantly impacted by the inclusion of the costs of Chicago
Cycle's sales from April 30, 2004.
Operating Expenses
------------------
Selling, general and administrative expenses for the second
quarter of 2004 were $2,013,650, an increase of $944,675 (88.4%) over
the same period in 2003. Selling, general and administrative expenses
for the first six months of 2004 were $3,117,875, an increase of
$1,135,064 (57.2%) over the same period in 2003. The aggregate
increase in such costs were principally related to (i) additional
selling, general and administrative expenses relating to Chicago
Cycle, commencing April 30, 2004, and (ii) approximately $220,263 of
legal, accounting and auditing fees, incurred during the first six
months of 2004 compared to $7,145 during the same period in 2003,
which additional fees were associated with the requirements of
becoming a public entity and the ongoing compliance and maintenance
requirements ("Public Company Expenses"). Interest expense increased
approximately $122,963 to $217,359 in the second quarter of 2004 as
compared to the second quarter of 2003, and $148,511 to $306,073 for
the first six months of 2004 compared to the same period in 2003.
This increase is primarily due to (i) interest payable by the Company
relating to the Initial Loan, the Term Loan and the Bridge Note, and
(ii) an increase in interest bearing floor plan inventory, and most
17
significantly the addition of the floor plan inventory of Chicago
Cycle. We anticipate floor plan interest expense to decline over the
remaining quarters of 2004 as the principal balance of our floor
planned inventory is reduced.
Operating Income
----------------
Income from Operations for the three months ended June 30, 2004
increased by $447,669 to $552,603, as compared to $104,934 over the
same period in 2003. Income from Operations for the first six months
of 2004 increased by $585,928 to $937,678, as compared to $351,750
over the same period in 2003. Income from Operations in 2004 was also
substantially affected by the addition of Chicago Cycle's operations
on April 30, 2004 and approximately $220,263 of Public Company
Expenses. This generally is a result of an increase of sales.
Income before Taxes, Depreciation and Amortization
--------------------------------------------------
Income before provision for taxes, depreciation and amortization,
for the three months ended June 30, 2004 was $371,654, which is
$338,064 greater than the comparable period last year. Income before
provision for taxes, depreciation and amortization, for the first six
months of 2004 was $698,848, which is $458,744 greater than the
comparable period last year. The income tax increase of $245,600 for
the first six months of 2004, as compared to the same period in 2003,
is a result of the Company's tax filing status that changed from an S-
Corp in 2003 to a C-Corp effective on January 1, 2004. Depreciation
and amortization was approximately $59,870 for the first six months of
2004 as compared to $40,748 for the comparable period in 2003.
Net Income
----------
Net income for the three months ended June 30, 2004 was $206,119
as compared to $13,216 for the comparable period in 2003. Net income
for the first six months of 2004 was $393,378 as compared to $199,356
for the comparable period in 2003. As discussed above, net income in
2004 was substantially affected by the addition of the Chicago Cycle
operations and approximately $220,263 of Public Company Expenses.
LIQUIDITY AND CAPITAL RESOURCES
Our primary source of liquidity has been cash generated by
operations and borrowings under various credit facilities. At June
30, 2004, we had $425,867 in cash and cash equivalents, compared to
$587,917 at December 31, 2003. Until required for operations, our
policy is to invest excess cash in bank deposits and money market
funds. Net working capital at June 30, 2004 was ($304,432) compared
to $590,032 at December 31, 2003.
The Company receives floor plan financing from five different
motorcycle manufacturers for whom the Company sells the manufacturers'
products. The Company uses such floor plan financing to assist it in
financing and carrying the Company's inventory necessary to achieve
the Company's sales goals. Such manufacturer's collateral includes
all unit inventory plus a general lien on all assets of Cycles and
Chicago Cycle.
18
On April 20, 2004, the Company borrowed from a third party lender
(the "Lender") the $500,000 Bridge Loan, evidenced by the Bridge Note.
All outstanding principal on the Bridge Note is due on October 19,
2004. To secure the repayment of principal and interest on the Bridge
Note, each Executive (i) pledged to the Lender 150,000 shares (300,000
shares in the aggregate) of Common Stock owned by each such Executive,
and (ii) guaranteed the payment of all of the Company's payment
obligations to the Lender under the Bridge Note. As partial
consideration for the Bridge Loan, the Company issued to the Lender
the Bridge Warrant to purchase 100,000 Warrant Shares at an exercise
price of $2.25 per share. The Company also granted to the Lender
certain piggyback registration rights with respect to the Warrant
Shares. The Company used $500,000 Bridge Loan proceeds for working
and operating capital.
On March 12, 2004, the Company received the $1,250,000 Initial
Loan from the Bank, which it used for the Initial Payment for its
Acquisition of Chicago Cycle. The Initial Loan matured on May 31,
2004 and was refinanced and replaced with the Term Loan, which matures
on May 31, 2010, and is guaranteed by each of the Executives.
Although the Company believes that its current borrowing
facilities together with its cash generated from operations, will be
adequate to meet the Company's working capital requirements for its
current operating levels, the Company may in the future attempt to
raise additional financing through the sale of its debt and/or equity
securities.
SEASONALITY
The Company's 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, the Company has
experienced increased salaries and higher prices for supplies, goods
and services. The Company continuously seeks methods of reducing
costs and streamlining operations while maximizing efficiency through
improved internal operating procedures and controls. While the
Company is subject to inflation as described above, the Company's
management believes that inflation currently does not have a material
effect on its operating results. However, there can be no assurance
that this will continue to be so in the future.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
The Company does not have any material risk with respect to
changes in foreign currency exchange rates, commodities prices or
interest rates. The Company does not believe that it has any other
relevant market risk with respect to the categories intended to be
discussed in this item of this Report.
19
Item 4. Controls And Procedures
The Company's Chief Executive Officer and Chief Financial
Officer, after evaluating the effectiveness of the Company's
disclosure controls and procedures (as defined in Rules 13a-14(c)
and 15d-14(c) under the Securities Exchange Act of 1934, as amended)
as of June 30, 2004, (the "Evaluation Date"), have concluded that,
as of the Evaluation Date, the Company's disclosure controls and
procedures were effective to ensure the timely collection, evaluation,
and disclosure of information relating to the Company that would
potentially be subject to disclosure under the Securities Exchange Act
of 1934, as amended, and the rules and regulations promulgated under
the Act. There were no significant changes in the Company's internal
controls or in other factors that could significantly affect the
internal controls subsequent to the Evaluation Date.
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities, Use of Proceeds and Issuer
Purchases of Equity Securities
As partial consideration for the Bridge Loan, the Company
issued to the Lender a five (5) year warrant to purchase 100,000
shares of Common Stock (the "Warrant Shares"), at an exercise price of
$2.25. The Company also granted to the Lender certain piggyback
registration rights with respect to the Warrant Shares. The Warrant
shares are exercisable by the Lender at any time or from time to time
during the period from April 19, 2004 until April 18, 2009. The
warrant also contains anti-dilution provisions covering certain
recapitalization events such as (i) the declaration of dividends in
Common Stock of the Company; or (ii) stock splits or reverse stock
splits of the Company's shares of Common Stock.
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
20
Item 6. Exhibits And Reports On Form 8-K
(a) Exhibits (Filed herewith)
--------
31.1 Certification of the Chief Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002 (Rule 13a-4(a))
31.2 Certification of the Chief Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002 (Rule 13a-4(a))
32.1 Certification pursuant to 18 U.S.C. Section 1350 as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(Rule 13a-14(b)).
32.2 Certification pursuant to 18 U.S.C. Section 1350 as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(Rule 13a-14(b)).
(b) Reports on Form 8-K
-------------------
(i) Current Report on Form 8-K/A filed with the SEC on July 16,
2004 (filing audited financial statements for King's
Motorsports, Inc. d/b/a Chicago Cycles for years ended
December 31, 2003 and 2002 and required pro-forma financial
statements).
(ii) Current Report on Form 8-K filed with the SEC on June 8,
2004 (reporting change of accountants).
(iii) Current Report on Form 8-K filed with the SEC on May 11,
2004 (disclosing acquisition of King's Motorsports, Inc.
d/b/a Chicago Cycles).
(iv) Current Report on Form 8-K filed with the SEC on April 21,
2004 (disclosing $500,000 bridge loan)
(v) Current Report on Form 8-K filed with the SEC on April 5,
2004 (disclosing name change to Giant Motorsports, Inc.)
21
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: August 16, 2004 /s/ Russell A. Haehn
-------------------------------------
Name: Russell A. Haehn
Title: Chairman of the Board
of Directors, Chief Executive
Officer and a Director
(Principal Executive Officer)
Date: August 16, 2004 /s/ Gregory A. Haehn
-------------------------------------
Name: Gregory A. Haehn
Title: President, Chief Operating
Officer, Treasurer, Secretary
and a Director
(Principal Financial and
Accounting Officer)
22