U.S.
SECURITIES AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
x
Annual Report pursuant
to Section 13 or 15(d) of the Securities Exchange
Act
of
1934 for the fiscal year ended December 31, 2006
OR
o
Transition Report
pursuant to Section 13 or 15(d) of the Securities
Exchange
Act of 1934
GIANT
MOTORSPORTS, INC.
(Exact
name of Registrant as Specified in its Charter)
Nevada
|
|
33-1025552
|
(State
or other jurisdiction of incorporation
or organization)
|
|
(IRS
Employer Identification No.)
|
|
|
|
13134
Route 62
|
|
|
Salem,
Ohio
|
|
44460
|
(Address
of principal executive
offices)
|
|
(Zip
Code)
|
|
|
|
(440)
332-8534
(Registrant's
Telephone Number, Including Area Code)
Securities
registered pursuant to Section 12(g) of the Exchange Act:
Common
Stock, .001 par value per share
(Title
of Class)
Series
A Warrants to purchase shares of Common Stock, at an exercise price of $.50
per
share
(Title
of Class)
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined
in
Rule 405 of the Securities Act.
Yes
o
No
x
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.
Yes
o No x
Indicate
by check mark whether 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
o
Indicate
by check mark if disclosure of delinquent filers in response to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendments to
this Form 10-K.
Yes o
No
x
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of “accelerated
filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check
one)
Large
accelerated filer o Accelerated
filer o Non-accelerated filer x
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act)
Yes
o
No x
The
aggregate market value of the common equity of the registrant held by
non-affiliates as of April 12, 2007 was approximately $944,025 as computed
by
reference to the closing price of the common stock on the Over-the-Counter
Bulletin Board on such date ($0.20). As of April 12, 2007, the number of issued
and outstanding shares of common stock of the registrant was
12,213,126.
FORM
10-K
FISCAL
YEAR ENDED DECEMBER 31, 2006
Item
Number in
Form
10-K
|
Page
|
|
PART
I
|
|
1
|
Business
|
1
|
1A.
|
Risk
Factors
|
8
|
1B.
|
Unresolved
Staff Comments
|
15
|
2.
|
Properties
|
15
|
3.
|
Legal
Proceedings
|
15
|
4.
|
Submission
of Matters to a Vote of Security Holders
|
|
|
PART
II
|
|
5.
|
Market
for Registrant's Common Equity and Related Stockholder Matters
and Issuer
Purchases of Equity Securities
|
16
|
6.
|
Selected
Financial Data
|
19
|
7.
|
Management's
Discussion and Analysis of Financial Condition and Results of Operation
|
20
|
7A.
|
Quantitative
and Qualitative Disclosure About Market Risk
|
31
|
8.
|
Financial
Statements and Supplementary Data
|
32
|
9.
|
Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosure
|
32
|
9A.
|
Controls
and Procedures
|
32
|
9B.
|
Other
Information
|
33
|
|
PART
III
|
|
10.
|
Directors
and Executive Officers of the Registrant
|
34
|
11.
|
Executive
Compensation
|
36
|
12.
|
Security
Ownership of Certain Beneficial Owners and Management
|
37
|
13.
|
Certain
Relationships and Related Transactions
|
38
|
14.
|
Principal
Accountant Fees and Services
|
39
|
|
PART
IV
|
|
15.
|
Exhibits,
Financial Statement Schedules
|
40
|
THIS
ANNUAL REPORT ON FORM 10-K CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE
MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933, AS AMENDED AND SECTION
21E
OF THE SECURITIES EXCHANGE ACT OF 1934 AS AMENDED AND ARE SUBJECT TO RISKS,
UNCERTAINTIES, AND OTHER FACTORS WHICH COULD CAUSE ACTUAL RESULTS TO DIFFER
MATERIALLY FROM THOSE EXPRESSED OR IMPLIED BY SUCH FORWARD-LOOKING STATEMENTS.
SEE ITEM 1. "BUSINESS - A NOTE ABOUT FORWARD LOOKING STATEMENTS."
PART
I
ITEM
1. BUSINESS
General
Giant
Motorsports, Inc. (“us,” “our,” “we,” the “Company” or “Giant”) through our two
wholly-owned subsidiaries, owns and operates two retail power sport superstores
in the Midwestern United States. Our core brands include Suzuki, Yamaha, Honda,
Ducati, Kawasaki and Polaris. Our superstores operate in Salem,
Ohio and Chicago, Illinois under the names “Andrews Cycles” and “Chicago
Cycles,” respectively.
We
are a
Nevada corporation with our principal offices located at 13134 State Route
62,
Salem Ohio 44460, Tel. (330) 332-8534. Our web sites are: www.andrewscycles.com,
www.chicagocycle.com and www.giantcorporate.com.
Information on our websites do not constitute part of this report.
Development
of Our Business
We
commenced our motorcycle and powers sports business with the acquisition of
our
W.W. Cycles subsidiary in January 2004, and shortly thereafter, in April 2004,
expanded our business with the acquisition of our Chicago Cycles
business.
W.W.
Cycles Subsidiary
Our
W.W.
Cycles subsidiary, which does business under the name Andrews Cycles, commenced
business in 1984 as a Honda products dealership. In 1985 Andrews Cycles acquired
an existing motorsports dealership and added Yamaha products to its line of
motorsports products. Through the acquisition of two additional motorsports
dealerships in 1986 and 1987, Andrews Cycles added the Suzuki and Kawasaki
brands to its line of motorsports products. From 1987 through January 2004,
Andrews Cycles expanded its power sports business by adding Polaris motorcycles
to its product line.
On
January 16, 2004, we acquired all of the issued and outstanding shares of W.W.
Cycles, Inc. (“W.W. Cycles”), from Gregory A. Haehn and Russell A. Haehn, our
current officers and directors, and one other employee of W.W. Cycles, in
exchange for our issuance of an aggregate of 7,850,000 shares of our common
stock, which resulted in W.W. Cycles' becoming our wholly-owned subsidiary.
On
that same date, our two current officers and directors also purchased an
additional 150,000 shares of our common stock from a then shareholder of the
Company for an aggregate purchase price of $178,750. Simultaneously with the
closing of this acquisition, the then sole director and officer of the Company
resigned as a director and officer and was replaced by our current officers
and
directors. Russell A. Haehn became the Chairman, Chief Executive Officer,
Secretary and a Director of the Company and Gregory A. Haehn became the
President, Chief Operating Officer, Treasurer and a Director of the Company,
which are the same positions in which they currently serve. The Company, which
was then called American Busing Corporation, changed its name to Giant
Motorsports, Inc., effective as of April 5, 2004. We currently conduct all
of
our “Andrews Cycles” business through our W.W. Cycles subsidiary.
Chicago
Cycles Subsidiary
On
April
30, 2004, we acquired substantially all of the assets of King's Motorsports,
Inc. (the “Chicago Cycles Assets”), the corporate entity that conducted business
under the name Chicago Cycle Center ("King's Motorsports"). We agreed to pay
Kings Motorsports a total of $2,925,000 for the Chicago Cycle Assets,
as follows:
· |
$1,250,000
on the date of closing; and
|
· |
$1,675,000
through the issuance to Kings Motorsports of a 6% $1,675,000 aggregate
principal amount note (the "King's
Note").
|
To
fund
the amount payable at closing for Chicago Cycles, we borrowed $1,250,000 from
The Fifth Third Bancorp Bank (the "Bank"), pursuant to a term loan. This loan,
which initially matured on May 31, 2004, was refinanced with the Bank through
a
term loan amortized over a 72 month period, but is payable in full on May 31,
2007, bearing interest at the rate of prime plus one percent (8% at December
31,
2005). Our payment obligations under this term loan also are personally
guaranteed by Russell Haehn and Gregory Haehn. This loan is also secured by
a
first priority lien on all of our assets (including, without limitation, the
Chicago Cycles Assets). As of December 31, 2006, the outstanding amount of
this
term loan, including accrued interest thereon, was $781,280.
The
entire outstanding principal amount of the King's Note and all interest accrued
thereon was repaid on October 13, 2005.
Our
Chicago Cycles subsidiary commenced business in 1988, under the name Chicago
Cycle Center, with its purchase of Ace Honda World. Within its first few months
after commencing business Chicago Cycle Center began selling Yamaha motorcycles
with its purchase of Yamaha North, a nearby competitor. Shortly thereafter,
Can't Beat the Bears, a local Suzuki dealer was acquired. Then in 1990 Chicago
Cycle Center added the Ducati brand to its list of products. In November 2000,
Chicago Cycle Center was sold to King's Motorsports, the business whose assets
we acquired in April 2004.
Products
Our
products consist primarily of the sale of new and used motorcycles, all-terrain
vehicles ("ATV's"), and scooters. In addition, we sell parts and accessories,
extended service contracts, and aftermarket motorcycle products. Our core brands
include Honda, Yamaha, Suzuki, Kawasaki, Polaris and Ducati.
We
are a
retail dealer of power sports products, and sell our products in superstores
that operate under the names “Andrews Cycles” and “Chicago Cycles.” Our Andrews
Cycles subsidiary is located in Salem, Ohio, had approximately 55 employees,
as
of April 1, 2007, and sells power sports products to customers residing within
an approximate 200 square mile area of its facilities. Our Chicago Cycles
operations are located in Skokie, Illinois, has approximately 80 employees
as of
April 1, 2007, and sells power sports products to customers residing within
an
approximate 200 square mile area of its facilities. Both Andrews Cycles and
Chicago Cycles also sell power sports products and parts through our websites
specifically dedicated to those businesses.
During
our fiscal years ended December 31, 2006, 2005 and 2004, sales of motorcycles,
ATV's and other power sports products, including accessories, accounted for
approximately 97%, 97% and 97%, respectively, of our total revenues generated
during such periods.
Servicing
and Repairs
In
addition to product sales, we also provide servicing and repair services for
the
products we sell as a courtesy to our customers. These services, which are
provided by mechanics, include crash repairs (body work) and normal wear and
tear installation and repairs such as brake replacement, repair of exhaust
systems, shock absorber replacement, battery replacement, oil changes and
tune-ups. During our fiscal years ended December 31, 2006, 2005 and 2004,
servicing and repairs accounted for approximately 2.3%, 3% and 3%, respectively,
of our total revenues generated during such periods. Servicing and repairs
have
always been an insignificant portion of our business. We do not have any plans
to increase this part of our business, in the future, as we do not believe
that
servicing and repairs offers any opportunity for producing significant income
for our business.
Competition
The
motorcycle/power sports retailing industry is highly competitive with respect
to
price, service, location and selection. There are an estimated 4,000 retail
stores throughout the United States. We compete with numerous dealerships in
each of our market segments, many of which are large and have significant
financial and marketing resources. We also compete with private market buyers
and sellers of used motorcycles and other power sports products dealers that
sell used motorcycles and other power sports products, service center chains
and
independent shops for service and repair business. Some of these businesses
are
capable of operating on smaller gross margins than those on which we are capable
of operating because they have lower overhead and sales costs.
In
many
states, dealerships have an exclusive 5 to 10-mile franchised territory, similar
to automobile dealerships. While franchised territories can sometimes restrict
market entry and subsequently market penetration; franchise restrictions can
likewise provide protection from over-saturation.
While
we
believe that our two current locations are among the larger retail dealerships
in the states of Ohio and Illinois, our business represents only a small portion
of the retail motorcycle, ATV and other power sports products sales throughout
the United States. By implementing our superstore concept through further
acquisitions of retail power sports dealerships throughout the United States,
we
believe that we can provide consumers in acquired markets with wide product
diversification. Such diversification, as well as a comprehensive product
offering, could result in an increase in our portion of total power sports
retail business throughout the United States, and consequently reduce the impact
of local competition on our business. There is no assurance that we will ever
be
able to implement this strategy in such a manner.
Principal
Suppliers of our Products
We
purchase substantially all of our products from the following manufacturers:
· |
American
Honda Motor Company, Inc.
|
· |
Yamaha
Motor Corporation
|
· |
American
Suzuki Motor Corporation
|
· |
Kawasaki
Motors Corp. U.S.A.,
Inc.
|
· |
Polaris
Industries, Inc.
|
Our
Andrews Cycles and Chicago Cycles power sports dealerships operate pursuant
to
dealership agreements with all or most of the manufacturers listed above (or
authorized distributors of such manufacturers' products), and we are dependent
to a significant extent on our relationship with such
manufacturers.
Manufacturers
exercise a great degree of control over our dealerships, and the dealership
agreements provide for termination or non-renewal for a variety of causes.
Many
of our dealership agreements require prior approval with respect to acquisitions
of other motorcycle and/or power sports dealerships, and a manufacturer may
deny
our application to make an acquisition or seek to impose further restrictions
on
us as a condition to granting approval of an acquisition. While these
restrictions could adversely affect our business strategy of expanding our
operations through the acquisition of other retail dealerships, we believe
that
we will be able to work with these manufacturers to obtain the approvals
required for future acquisitions, although there can be no assurance of our
success in doing so.
Market
for our Products and Services
According
to the Motorcycle Industry Council, an organization that provides sales
information for the motorcycle industry, sales of motorcycles in the United
States in 2006 modestly increased to 1,022,332 units (including scooters, street
bikes, off-road bikes and dual sport vehicles (vehicles used both on and off
streets). This was slightly higher than the 1,009,588 units sold in the United
States in 2005, representing a 1.3% increase. These statistics generally cover
sales of the major U.S. and Japanese brands. Although there was a modest
increase in sales in 2006, most of this was attributable to a 19.0% increase
in
dual sport vehicles. Sales of on-road motorcycles increased only 5.4% and sales
of off-road motorcycles decreased 9.0% in 2006 compared to 2005. In addition,
sales of ATV’s in 2006 decreased 4.2% in 2006 compared to 2005. This
1.3%
increase in industry sales for 2006 reflects a significant downturn in the
market compared to a prior report by the Bureau of Transportation Statistics
that stated that during 2004 industry sales of motorcycles, parts and
accessories generated revenues of approximately $12.7 billion, representing
an
increase of approximately 15.5% over revenues of approximately $11 billion
in
2003.
We
believe that our 4.6% reduction in sales during 2006 as compared to 2005 was
attributable, in part, to the reduction in ATV sales in 2006, as sales of ATV's
represented approximately 50% of overall unit sales at our Andrew Cycles
location and approximately 20% of unit sales at Chicago Cycles.
The
industry is highly fragmented with over 9,000 franchises being operated within
approximately 4,000 motorcycle dealerships, the majority of which we believe
are
individually owned. We also believe that many dealership owners are motorcycle
enthusiasts with minimal business training and limited capital.
Business
Plan
It
is our
plan to maximize the operating and financial performance of our dealerships
by
achieving certain efficiencies both at the store and corporate levels. We
believe this will enhance internal growth and profitability. We have begun,
and
plan to continue to centralize certain of our administrative functions
including:
· |
Management
information systems
(MIS).
|
We
believe that by consolidating these functions we will be able to reduce overall
expenses, simplify dealership management, create economies of scale with
leveraged buying power and provide a level of expertise that would otherwise
be
unavailable to each dealership individually. We have identified, without
limitation, the following strategic components as potentially integral to our
overall success and profitability:
|
· |
Super
Store Concept.
The "Super Store" has proven to be an effective strategy in the successful
consolidation of many other retail industries. Super Stores are the
choice
of consumers nationwide. These large stores represent and imply the
widest
offerings, the lowest prices, and, we believe, will contribute to
the
development of a more mainstream motorsports
marketplace.
|
|
· |
Sales
and Service Effectiveness.
Consumers have become more sophisticated in evaluating and purchasing
products, as a result of the wide-spread availability of the internet
and
greater access to information, and, as a result, require a more
comprehensive offering, as well as intelligent and informative
presentations. Our superstore selling space provides a larger display
of
products, with a greater choice of brands and styles. We believe
that a
greater choice of products, under one roof, will lead to a more satisfying
shopping experience for customers and, in turn, increased product
sales.
|
|
· |
Competitive
Workforce Development.
A
significant portion of the compensation we pay to our sales staff
is
commission based. We believe that commission-based compensation provides
incentive for our salespersons to expend their greatest efforts to
sell
our products and services. Since their compensation is directly related
to
sales, our ability to hire successful salespersons is conditioned
upon
their belief that our dealerships will generate significant traffic
and
provide the inventory levels necessary to maximize sales opportunities.
Our goal to build a “market leader” presence, proper inventory levels and
an overall aggressive yet tactful approach, we believe, will attract
the
successful salespersons we need to sell our products and
services.
|
|
· |
Inventory
Utilization.
We believe that by housing our inventory in one large central facility,
and distributing products from that facility to each of our dealerships,
on an as-needed basis, we will be able to deliver products to our
customers faster than other dealerships which are required to wait,
for
delivery of out-of-stock products.
|
|
· |
Marketing
Efficiencies.
With a regional presence, and the use of single creative themes,
tested
for effectiveness, we believe that we will be able to take advantage
of
semi-national and possibly national marketing opportunities which
typically offer reduced advertising rates based on the utilization
of
economies of scale. We also plan to maximize our use of cooperative
advertising.
|
|
· |
E-Commerce
and Mail Order Opportunities. We intend to develop e-commerce and
mail
order strategies for the sale of parts and accessories that will
expand
our customer base outside of our dealership territories. We believe
that
the expansion of our business, over the internet and through mail
order
business, will assist us in the development of a national presence
and
create customer interest to visit one of our “Super Stores,” although no
assurance can be given that it will have such effect. We believe
that
increased efforts on internet and mail-order sales, will increase
revenues
and also create additional opportunities for strategic business
relationships with dealerships outside of the territories where our
dealerships are located, although no assurance can be
given.
|
Sales
and Marketing
We
currently market our products through television, radio, print and outdoor
advertising. Advertising costs are funded primarily through cooperative
advertising programs established by the manufacturers of the products. Under
these programs, most dealers have access to approximately $100 per unit sold
during the previous year. In addition, many of the larger and better performing
dealership groups are able to access additional advertising funds for special
circumstances from the manufacturers. It is our normal strategy to acquire
and
use the maximum amount of advertising funds available to us.
Floor
Plan Financing
We
are
dependent to a significant extent on our ability to finance the purchase of
inventory, which in the motorcycle and power sports retail industries involves
significant sums of money in the form of floor plan financing.
As of December 31, 2006, the Company had $20,885,887 of floor plan notes
payable. Substantially all the assets of our dealerships are pledged to secure
such indebtedness, which may impede our ability to borrow from other sources.
We
currently have floor plan facilities with a variety of lenders, including
primarily GE Commercial Distribution Finance Corporation, Fifth Third Bank,
Kawasaki Motors Finance Company, and American Honda Finance. Several of such
lenders are associated with manufacturers with whom we have dealership
agreements. Consequently, deterioration of our relationship with a manufacturer
could adversely affect our relationship with the affiliated floor plan lender
and vice versa.
Government
Regulation
Our
business is subject to federal, state and local laws, ordinances and regulations
which establish various health and environmental quality standards, and
liability related thereto, and provide penalties for violations of those
standards. Under certain laws and regulations, a current or previous owner
or
operator of real property may be liable for the costs of removal and remediation
of hazardous or toxic substances or wastes on, under, in or emanating from
such
property. Such laws typically impose liability whether or not the owner or
operator knew of, or was responsible for, the presence of such hazardous or
toxic substances or wastes. Certain laws, ordinances and regulations may impose
liability on an owner or operator of real property where on-site contamination
discharges into waters of the state, including groundwater. Under certain other
laws, generators of hazardous or toxic substances or wastes that send such
substances or wastes to disposal, recycling or treatment facilities may be
liable for remediation of contamination at such facilities. Other laws,
ordinances and regulations govern the generation, handling, storage,
transportation and disposal of hazardous and toxic substances or wastes, the
operation and removal of underground storage tanks, the discharge of pollutants
into surface waters and sewers, emissions of certain potentially harmful
substances into the air and employee health and safety.
Business
operations subject to such laws, ordinances and regulations include the use,
handling and contracting for recycling or disposal of hazardous or toxic
substances or wastes, including environmentally sensitive materials such as
motor oil, waste motor oil and filters, transmission fluid, antifreeze,
refrigerants, waste paint and lacquer thinner, batteries, solvents, lubricants,
degreasing agents, gasoline and diesel fuels. Our business is also subject
to
other laws, ordinances and regulations as the result of the past or present
existence of underground storage tanks at our properties. Certain laws and
regulations, including those governing air emissions and underground storage
tanks, have been amended so as to require compliance with new or more stringent
standards as of future dates. We cannot predict what other environmental
legislation or regulations will be enacted in the future, how existing or future
laws or regulations will be administered or interpreted or what environmental
conditions may be found to exist in the future. Compliance with new or more
stringent laws or regulations, stricter interpretation of existing laws or
the
future discovery of environmental conditions may require additional expenditures
on our part, some of which may be material.
Employees
As
of
April 1, 2007, we had approximately 134 employees (excluding our two executive
officers), 54 of whom are employed at our Andrews Cycles dealership and the
other 80 of whom are employed at our Chicago Cycles dealership. All of our
employees were employed on a full-time basis including 2 executives, 82
salespersons, six administrative persons, 26 service technicians and 20 clerical
persons. We are not a party to a collective bargaining agreement with our
employees and we believe that our relationship with our employees is
satisfactory.
Properties
Our
principal executive offices are located at our recently expanded 75,000 square
foot facility at 13134 State Route 62, Salem Ohio 44460, which is also the
offices and showroom for our Andrews Cycles dealership. We lease this facility
from an affiliated entity controlled by Russell A. Haehn, our Chairman,
Chief
Executive Officer and a controlling shareholder. On October 1, 2006 we entered
into a new lease for this facility, effective as of January 1, 2007 and
continuing through December 2016, at a rental rate of $24,000 per month. The
lease provides for two consecutive five-year renewal terms at a rental rate
to
be negotiated.
We
also
lease a 95,000 square foot retail facility in Skokie, Illinois, which is used
for offices, a showroom and service facility for our Chicago Cycles dealership.
We lease this facility from an unaffiliated third party under a ten-year lease
with a ten year renewal option. The payments on the lease commenced in August
2005 at a monthly rent of $33,333 through May 2006 then increase to $40,000
per
month from June 2006 through May 2007, $45,000 per month from June 2007 through
May 2008, $46,667 from June 2008 through May 2009 and then increase 3% annually
for the remaining term of the lease. We are also liable for a proportionate
share of expenses and taxes over a specified amount.
A
NOTE ABOUT FORWARD-LOOKING STATEMENTS
This
Annual Report on Form 10-K (including the Exhibits hereto) contains certain
“forward-looking statements” within the meaning of the of Section 27A of the
Securities Act of 1933, Section 21E of the Securities Exchange Act of 1934,
and
the Private Securities Litigation Reform Act of 1995, such as statements
relating to our financial condition, results of operations, plans, objectives,
future performance and business operations. Such statements relate to
expectations concerning matters that are not historical fact. Accordingly,
statements that are based on management's projections, estimates, assumptions
and judgments are forward-looking statements. These forward-looking statements
are typically identified by words or phrases such as “believe,” “expect,”
“anticipate,” “plan,” “estimate,” “approximately,” “intend,” and other similar
words and expressions, or future or conditional verbs such as “should,” “would,”
“could,” and “may.” In addition, we may from time to time make such written or
oral “forward-looking statements” in future filings with the Securities and
Exchange Commission (the “Commission” or “SEC”) (including exhibits thereto), in
our reports to shareholders, and in other communications made by or with our
approval. These forward-looking statements are based largely on our current
expectations, assumptions, plans, estimates, judgments and projections about
our
business and our industry, and they involve inherent risks and uncertainties.
Although we believe that these forward-looking statements are based upon
reasonable estimates and assumptions, we can give no assurance that our
expectations will in fact occur or that our estimates or assumptions will be
correct, and we caution that actual results may differ materially and adversely
from those in the forward-looking statements. Forward-looking statements involve
known and unknown risks, uncertainties, contingencies and other factors that
could cause our or our industry's actual results, level of activity, performance
or achievement to differ materially from those discussed in or implied by any
forward-looking statements made by or on behalf of us and could cause our
financial condition, results of operations or cash flows to be materially
adversely effected. Accordingly, investors and all others are cautioned not
to
place undue reliance on such forward-looking statements. In evaluating these
statements, some of the factors that you should consider include those described
below under "Risk Factors" and elsewhere in this annual report.
You
should carefully review and consider the following risks as well as all other
information contained in this Annual Report on Form 10-K, including our
consolidated financial statements and the notes to those statements. The
following risks and uncertainties are not the only ones facing us. Additional
risks and uncertainties of which we are currently unaware or which we believe
are not material also could materially adversely affect our business, financial
condition, results of operations, or cash flows. In any case, the value of
our
common stock could decline. To the extent any of the information contained
in
this annual report constitutes forward-looking information, the risk factors
set
forth below are cautionary statements identifying important factors that could
cause our actual results for various financial reporting periods to differ
materially from those expressed in any forward-looking statements made by or
on
our behalf and could materially adversely effect our financial condition,
results of operations or cash flows. See also, “A Note About Forward-Looking
Statements.”
RISKS
RELATED TO OUR BUSINESS
Our
business is subject to the influence of the manufacturers of motorcycles and
the
other power sports equipment we sell.
Each
of
our retail motorcycle and power sports dealerships operates pursuant to
dealership agreements between each applicable motorcycle, all terrain vehicle,
scooter and personal watercraft manufacturer (or authorized distributor thereof)
and the subsidiaries of the Company that operate such dealerships, and we are
dependent to a significant extent on our relationship with such manufacturers.
Manufacturers exercise a great degree of control over dealerships, and the
dealership agreements provide for termination or non-renewal for a variety
of
causes. Actions taken by manufacturers to exploit their superior bargaining
position could have a material adverse effect on our business. Furthermore,
many
of our dealership agreements require prior manufacturer approval with respect
to
acquisitions of other motorcycle and/or power sports dealerships, and a
manufacturer may deny our application to make an acquisition or seek to impose
further restrictions on us as a condition to granting approval of an
acquisition.
We
are dependent on the Manufacturers of the products we
sell.
The
success of each of our dealerships is, in large part, dependent upon the overall
success of the applicable manufacturers of our motorcycles and other power
sports products. Accordingly, our success is linked to the financial condition,
management, marketing, production and distribution capabilities of these
manufacturers. Events, such as labor strikes, that may adversely affect a
manufacturer, may also adversely affect our business. Similarly, the delivery
of
motorcycles or other power sports products from manufacturers later than
scheduled, which may occur particularly during periods of new product
introductions, can lead to reduced sales during such periods. Furthermore,
any
event that causes adverse publicity involving these manufacturers may have
an
adverse effect on our business regardless of whether such event directly
involves any of our dealerships.
Risks
associated with our ability to manage expansion as a result of
acquisitions.
The
growth of our business depends in large part on our ability to manage expansion,
control costs in our operations and consolidate dealership acquisitions into
existing operations. This strategy will entail reviewing and potentially
reorganizing acquired dealership operations, corporate infrastructure and
systems and financial controls. Unforeseen expenses, difficulties, complications
and delays frequently encountered in connection with the rapid expansion of
operations could inhibit our growth and adversely affect our financial
condition, results of operations or cash flow.
Risks
associated with our inability to identify suitable acquisition
candidates.
There
can
be no assurance that we will be able to identify acquisition candidates that
would result in the most successful combinations or that we will be able to
consummate acquisitions on acceptable terms. The magnitude, timing and nature
of
future acquisitions will depend upon various factors, including the availability
of suitable acquisition candidates, the negotiation of acceptable terms, our
financial capabilities, the availability of skilled employees to manage the
acquired companies and general economic and business conditions. In particular,
the increasing competition among potential acquirers has resulted in higher
prices being paid for attractive targets. If we are unable to acquire other
motorcycle and power sports dealerships on acceptable terms we would be unable
to realize our business plan which could adversely affect our future business
prospects.
We
may not be able to obtain required approvals from manufacturers for prospective
acquisitions.
The
growth of our business through the acquisition of other motorcycle and power
sports dealerships will depend on our ability to obtain the requisite
manufacturer approvals. There can be no assurance that manufacturers will grant
such approvals. While we are not aware of any manufacturers that limit the
number of dealerships that may be held by any one company, or the number of
dealerships that may be held in any geographic market, we believe that it is
currently the policy of some manufacturers to restrict any company from holding
contiguous dealerships (i.e. ownership of two dealerships without the existence
of an unaffiliated dealership located geographically in between such two
dealerships). We believe that our Andrews Cycles and Chicago Cycles
distributorships currently are two of the largest volume dealers of power sports
products in the Midwestern United States. If we continue to increase our market
share for the sales of such products, manufacturers may become more likely
to
enforce these contiguous ownership restrictions against us. If we are unable
to
obtain any such required approvals from manufacturers, it could be difficult
for
us to realize our business plan which could adversely affect our future business
prospects.
Manufacturers
may impose additional restrictions on our business as a condition of granting
approvals for any of our proposed acquisitions.
In
connection with any future acquisitions, one or more manufacturers may seek
to
impose further restrictions on us relating to their approval of an acquisition.
For example, manufacturers may condition such approvals upon our agreement
to
implement certain measures at our existing dealerships, to provide certain
additional training to employees and to achieve higher customer satisfaction
ratings. If such goals are not attained, we may be precluded from acquiring,
whether directly from such manufacturers or through acquisitions, additional
dealerships, and it may lead such manufacturers to conclude that they have
a
basis pursuant to which they may seek to terminate or refuse to renew our
existing dealerships with those manufacturers. Furthermore, factors outside
our
control may cause a manufacturer to reject our application to make acquisitions.
Any of these actions by manufacturers could adversely affect our financial
condition, results of operations or cash flows.
We
may be unable to obtain financing for the acquisitions that are available to
us.
Although
we do not currently have any plans to raise additional financing through the
sale of any of our securities, we may, in the future, attempt to obtain
financing for acquisition opportunities through a combination of loans and
equity investments from commercial sources, seller debt financing, issuance
of
our equity securities as part of the purchase price, and other sources.
Commercial sources will tend to come from investment funds, private equity
funds, and other non-traditional sources, usually at a very high borrowing
cost.
Use of our equity securities could result in material dilution to our existing
shareholders. There can be no assurance that we will be able to obtain adequate
financing for any acquisition, or that, if available, such financing will be
on
favorable terms.
Dependence
on Floor Plan Financing.
We
are
dependent to a significant extent on our ability to finance the purchase of
inventory, which in the motorcycle and power sports retail industries involves
significant sums of money in the form of floor plan financing. As of December
31, 2006, we had $20,885,887 of floor plan notes payable. Substantially all
the
assets of our dealerships are pledged to secure such indebtedness, which may
impede our ability to borrow from other sources. We currently have floor plan
facilities with a variety of lenders, including primarily GE Commercial
Distribution Finance Corporation, Fifth Third Bank, Kawasaki Motors Finance
Company, and American Honda Finance. Several of such lenders are associated
with
manufacturers with whom we have dealership agreements. Consequently,
deterioration of our relationship with a manufacturer could adversely affect
our
relationship with the affiliated floor plan lender and vice versa.
We
have substantial outstanding indebtedness.
As
of
December 31, 2006, based upon our financial statements, our outstanding
indebtedness to third parties, including the $20,885,887 of floor plan notes
payable under our floor plan financing arrangements was approximately
$25,429,389. As
of
December 31, 2006 approximately $781,280 of our outstanding indebtedness to
third parties was represented by debt incurred by us, in connection with the
acquisition of Chicago Cycles, which reflected the remaining outstanding amount
of the $1,250,000 we borrowed from the Fifth Third Bank, pursuant to a Term
Note
dated March 12, 2004, to fund the initial $1,250,000 payment for such
acquisition. The original loan from Fifth Third Bank matured on May 31, 2004,
and we converted the entire $1,250,000 principal amount of this loan to a six
(6) year term loan, which bears interest at the rate of prime plus one percent
(9.25% at December 31, 2006) and is secured by a first priority lien on all
of
our assets, including the assets acquired from Chicago Cycles.
The
motorcycle and power sports industries are subject to cyclical movements in
the
economy.
Sales
of
motorcycles/power sports products, historically have been cyclical, fluctuating
with general economic cycles. During economic downturns, this industry tends
to
experience similar periods of decline and recession as the general economy.
We
believe that the industry is influenced by general economic conditions and
particularly by consumer confidence, the level of personal discretionary
spending, interest rates and credit availability. During 2006, the motorcycle
industry experienced a significant downturn in sales as a result of increases
in
consumer financing interest rates and more restrictive credit requirements
to
obtain consumer financing, which resulted in a reduction in our sales. There
can
be no assurance that the industry will not experience sustained periods of
decline in sales in the future, and that such decline would not continue to
have
a material adverse effect on our operations.
Our
business experiences seasonal trends.
Our
business is seasonal, with a disproportionate amount of our sales occurring
in
the second and third fiscal quarters. This is particularly the case, as our
existing dealerships are in Chicago and Ohio, both of which experience extremely
cold winter seasons. In the event that we acquire future dealerships in regions
with more temperate climates all year round (e.g. Southern Florida or Southern
California), those dealerships may experience less seasonality in sales,
although there can be no assurances given that such dealerships would not
experience similar seasonal fluctuations.
We
are dependent on foreign manufacturers, particularly from Japan, for our
products.
A
significant portion of the motorcycle and other power sports products sold
by
us, as well as the components and accessories for these products are of foreign
origin - primarily from Japan. Accordingly, we are subject to the import and
export restrictions of various jurisdictions and are dependent to some extent
upon general economic conditions in and political relations with these foreign
countries, particularly Japan. In the event of a severe downturn in the Japanese
economy or problems in political or economic relations between the U.S. and
Japan, such as, for example, disputes relating to import duties, subsidies,
etc., our business could be materially adversely affected.
The
retail motorcycle/power sports business is highly
competitive.
The
motorcycle/power sports retailing industry is highly competitive with respect
to
price, service, location and selection. There are an estimated 4,000 retail
stores throughout the United States. We compete with numerous dealerships in
each of our market segments, many of which are large and have significant
financial and marketing resources. We also compete with private market buyers
and sellers of used motorcycles and other power sports products, dealers that
sell used motorcycles and other power sports products, service center chains
and
independent shops for service and repair business. Some of these businesses
are
capable of operating on smaller gross margins than those on which we are capable
of operating because they have lower overhead and sales costs. Our inability
to
compete with these other businesses could have a material adverse effect on
our
operations.
Our
business is subject to environmental regulations.
Our
business is subject to federal, state and local laws, ordinances and regulations
which establish various health and environmental quality standards, and
liability related thereto, and provide penalties for violations of those
standards. Under certain laws and regulations, a current or previous owner
or
operator of real property may be liable for the costs of removal and remediation
of hazardous or toxic substances or wastes on, under, in or emanating from
such
property. Such laws typically impose liability whether or not the owner or
operator knew of, or was responsible for, the presence of such hazardous or
toxic substances or wastes. Certain laws, ordinances and regulations may impose
liability on an owner or operator of real property where on-site contamination
discharges into waters of the state, including groundwater. Under certain other
laws, generators of hazardous or toxic substances or wastes that send such
substances or wastes to disposal, recycling or treatment facilities may be
liable for remediation of contamination at such facilities. Other laws,
ordinances and regulations govern the generation, handling, storage,
transportation and disposal of hazardous and toxic substances or wastes, the
operation and removal of underground storage tanks, the discharge of pollutants
into surface waters and sewers, emissions of certain potentially harmful
substances into the air and employee health and safety.
Business
operations subject to such laws, ordinances and regulations include the use,
handling and contracting for recycling or disposal of hazardous or toxic
substances or wastes, including environmentally sensitive materials such as
motor oil, waste motor oil and filters, transmission fluid, antifreeze,
refrigerants, waste paint and lacquer thinner, batteries, solvents, lubricants,
degreasing agents, gasoline and diesel fuels. Our business is also subject
to
other laws, ordinances and regulations as the result of the past or present
existence of underground storage tanks at our properties. Certain laws and
regulations, including those governing air emissions and underground storage
tanks, have been amended so as to require compliance with new or more stringent
standards as of future dates. We cannot predict what other environmental
legislation or regulations will be enacted in the future, how existing or future
laws or regulations will be administered or interpreted or what environmental
conditions may be found to exist in the future. Compliance with new or more
stringent laws or regulations, stricter interpretation of existing laws or
the
future discovery of environmental conditions may require additional expenditures
on our part, some of which may be material.
We
are heavily dependent on our management.
Our
success depends to a large degree upon the skills of our senior management
team
and current key employees at our subsidiaries. The Company depends particularly
upon the following key executives: Gregory A. Haehn, who is our President,
Chief
Operating Officer and a director, and Russell A. Haehn, who is our Chief
Executive Officer and Chairman of the board of directors. In addition, we rely
on the management skills of Philip A. Andrews, the general manager of our
Andrews Cycles business conducted by our W.W. Cycles subsidiary in Salem, Ohio,
and we also rely on Paul Katsiadas, the general manager of our Chicago Cycle
business conducted by our Chicago Cycles, Inc. subsidiary in Chicago,
Illinois.
We
maintain Keyman life insurance on the life of Russell A. Haehn in an amount
of
$2,000,000, with the beneficiary being our W.W. Cycles subsidiary. In addition,
we maintain Keyman life insurance on the life of Gregory A. Haehn in an amount
of $1,000,000, with the beneficiary being the Company.
RISKS
RELATED TO OUR SECURITIES
We
do not expect to pay dividends.
Except
for dividends that we are required to pay on our Series A Shares (which
dividends may be paid in cash or shares of our common stock, in our sole
discretion), we do not currently anticipate paying any cash dividends on any
of
our capital stock in the foreseeable future. Furthermore, for the foreseeable
future, we intend to retain profits, if any, to fund our planned growth and
expansion. In the event that we desire to pay dividends on any shares of our
capital stock, in the future (other than on the Series A Shares), we are
required to obtain the separate approval of the holders of the Series A Shares
in order to declare and pay any such dividends. See "Risk Factors - Holders
of
our Series A Shares have special approval rights on certain matters requiring
approval of our board of directors and/or shareholders."
Control
by Management.
Subject
to the requirement for us to obtain the separate approval of the holders of
our
Series A Shares, with respect to certain matters, our officers and directors
may
be able to influence matters requiring shareholders approval because they own
a
majority of our outstanding shares of voting stock. Our executive officers
and
directors beneficially own in the aggregate 9,020,000 shares of common stock
(including options to purchase 1,500,000 shares of common stock at an exercise
price of $1.25 per share), or approximately 65.8% of our outstanding shares
of
common stock. Because our Series A Shares are entitled to vote along with our
common stock on all matters presented to our shareholders for approval, our
executive officers and directors actually own approximately 48.5% of our
outstanding shares of voting stock (giving effect to the voting rights of the
2450 Series A Shares outstanding at a rate of 2,000 votes for each such
preferred share outstanding, and assuming exercise of all options held by such
executive officers and directors). This concentration of ownership provides
such
persons with the ability, except with respect to those matters upon which the
holders of the Series A Shares have a separate right of approval, to control
and
influence all corporate decisions and policies of shareholder voting matters,
including, without limitation, the removal of directors. Additionally, except
with respect to those matters upon which the holders of the Series A Shares
have
a separate right of approval, these persons would be able to approve any
proposed amendment to our charter, a merger proposal, a proposed sale of assets
or other major corporate transaction or a non-negotiated takeover attempt.
This
concentration of ownership may discourage a potential acquirer from making
an
offer to buy us, which, in turn, could adversely affect the market price of
our
common stock and warrants.
Holders
of our Series A Shares have special approval rights on certain matters requiring
approval of our board of directors and/or
shareholders.
Under
the
provisions of our certificate of designation designating the rights, preferences
and privileges of our Series A Shares, the vote or consent of the holders of
at
least a majority of our outstanding Series A Shares, voting separately as a
class, is required for the approval of certain matters including (i) any
alteration or repeal of our articles of incorporation or certificate of
designation that adversely affects the rights, preferences or privileges of
the
Series A Shares, including to create, authorize or issue any series or shares
of
senior stock or parity stock or to increase the amount of authorized capital
stock of any such class; (ii) the creation, authorization or issuance of any
series or shares of capital stock convertible into common stock which is on
parity with or senior to the Series A Shares in terms of liquidation, dividends
or otherwise; (iii) any merger, consolidation or entering into a business
combination or similar transaction, other than if (1) we are the surviving
entity and (2) our shareholders prior to such transaction continue to hold
a
majority of our capital stock following the transaction; (iv) the incurrence
or
permission to exist any inventory or equipment indebtedness or liens relating
thereto, except that we are permitted to borrow in connection with institutional
financing of inventory and equipment and mortgage financing in connection with
acquisitions of real estate; (v) (1) the declaration or payment of any dividends
on any of our capital stock (other than the Series A Shares), (2) the purchase,
redemption or retirement for value, of any of our capital stock (other than
the
Series A Shares) or (3) the distribution of our assets, capital stock, warrants,
rights, options, indebtedness or obligations to our shareholders; (vi) the
sale,
transfer or disposal of a material portion of our assets, unless the sale is
not
of all or substantially all of our assets and is approved by a majority or
our
independent and disinterested directors; and (vii) entering into any
transactions, or agreement or amending or modifying any existing agreement,
with
any officers, directors or our principal shareholders, or any of their
affiliates, which transaction, agreement amendment or modification is not
approved by a majority of our independent and disinterested
directors.
As
a
result of the foregoing rights granted to the holders of the Series A Shares,
as
long as we have any Series A Shares outstanding, we will not be able to (i)
effect certain financing through the issuance of securities on parity with
or
senior to the Series A Shares or (ii) enter into certain merger transactions
with other businesses or conduct certain other transactions, without the
approval of the holders of a majority of the outstanding Series A Shares. In
the
event that the interests of the holders of the Series A Shares are not aligned
with the interests of our other shareholders, it is likely that the holders
of
the Series A Shares will act in their own best interests, which could be to
the
detriment of our other shareholders with respect to any matters for which their
approval is required. In addition, these special approval rights may discourage
a potential acquiror from making an offer to buy us, which, in turn, could
adversely affect the market price of our common stock and warrants.
Trading
in our common stock is limited and the price of our common stock may be subject
to substantial volatility.
Our
common stock is traded on the Over the Counter Bulletin Board, and therefore
the
trading volume is more limited and sporadic than if our common stock were traded
on NASDAQ or a national stock exchange such as Amex. Additionally, the price
of
our common stock may be volatile as a result of a number of factors, including,
but not limited to, the following:
|
· |
quarterly
variations in our operating
results;
|
|
· |
large
purchases or sales of common stock;
|
|
· |
actual
or anticipated announcements of new products or services by us or
competitors;
|
|
· |
acquisitions
of new dealerships;
|
|
· |
investor
perception of our business prospects or the motorcycle/power sports
industry in general;
|
|
· |
general
conditions in the markets in which we compete;
and
|
|
· |
economic
and financial conditions.
|
If
outstanding Series A Shares, options and warrants are exercised or converted,
the value of those shares of common stock outstanding just prior to the
conversion will be diluted.
As
of
April 1, 2007, there are outstanding Series A Shares convertible into a total
of
4,900,000 shares of our common stock and options and warrants to
purchase 8,340,000
shares
of common stock, with exercise prices ranging from $0.40
to
$2.25
per
share. If
the
holders exercise a significant number of these securities at any one time,
the
market price of the common stock could fall. In the event that the anti-dilution
provisions contained in the Series A Shares and the Series A Warrants are
triggered and we also issue additional shares of our common stock as dividends
on the Series A Shares so that all or a significant portion of our outstanding
common stock becomes available for resale, this could cause an even greater
reduction in the market price of our common stock. The value of the common
stock
held by other shareholders will be diluted. The holders of the options and
warrants have the opportunity to profit if the market price for the common
stock
exceeds the exercise price of their respective securities, without assuming
the
risk of ownership. If the market price of the common stock does not rise above
the exercise price of these securities, then they will expire without exercise.
The holders of these options and warrants may also exercise their securities
if
we are able to raise capital privately or from the public on terms more
favorable than those provided in these securities. We cannot predict exactly
if,
or when, such a financing will be needed or obtained. Furthermore, we cannot
predict whether any such financing will be available on acceptable terms, or
at
all.
“Penny
stock” regulations may impose certain restrictions on the marketability of our
securities.
The
Securities and Exchange Commission has adopted regulations which generally
define a “penny stock” to be any equity security that has a price of less than
$5.00 per share or an exercise price of less than $5.00 per share, subject
to
certain exceptions (including the issuer of the securities having net tangible
assets (i.e. total assets less intangible assets and liabilities) in excess
of
$2,000,000 or average revenue of at least $6,000,000 for the last three years).
As a result, our common stock could be subject to these rules that impose
additional sales practice requirements on broker-dealers who sell our securities
to persons other than established customers and accredited investors (generally
persons with a net worth in excess of $1,000,000 or annual income exceeding
$200,000, or $300,000 together with their spouse). For transactions covered
by
these rules, the broker-dealer must make a special suitability determination
for
the purchase of such securities and have received the purchaser's written
consent to the transaction prior to the purchase. Additionally, for any
transaction involving a “penny stock,” unless exempt, the rules require the
delivery, prior to the transaction, of a risk disclosure document mandated
by
the Securities and Exchange Commission relating to the “penny stock” market. The
broker-dealer must also disclose the commissions payable to both the
broker-dealer and the registered representative, current quotations for the
securities and, if the broker-dealer is the sole market maker, the broker-dealer
must disclose this fact and the broker-dealer's presumed control over the
market. Finally, monthly statements must be sent disclosing recent price
information for the “penny stock” held in the account and information on the
limited market in “penny stocks.” Consequently, although the “penny stock” rules
do not currently apply to our securities, if these rules do become applicable
in
the future, this may restrict the ability of broker-dealers to sell our
securities.
ITEM
1B. |
UNRESOLVED
STAFF COMMENTS.
|
This
item
is not applicable to the Company.
Set
forth
below is summary information of our current operating facilities:
LOCATION
|
|
PRINCIPAL
USES OF SPACE
|
|
(IN
SQUARE FEET)
|
|
LEASE
EXPIRATION
|
Salem,
Ohio
|
|
Offices,
showroom
|
|
75,000
|
|
December
2016, and may be extended to December 2026
|
Skokie,
Illinois
|
|
Offices,
showroom and service facility
|
|
95,000
|
|
May
31, 2015 and may be renewed until May 31,
2025
|
We
believe that our operating facilities are adequate for our present purposes
and
that additional operating facilities, if required, will be available to us
on
reasonably acceptable terms.
ITEM
3. |
LEGAL
PROCEEDINGS
|
Except
for (i) a contract dispute with a public relations firm and (ii) a customer
dispute relating to our Chicago Cycles subsidiary, both of which are not
material, we are not currently subject to any legal proceedings, and to the
best
of our knowledge, none are threatened, the results of which would have a
material adverse effect on our properties, results of operations or financial
condition. Additionally, to our knowledge, neither of our officers and directors
are involved in any legal proceedings in which we are an adverse
party.
ITEM
4. |
SUBMISSION
OF MATTERS TO A VOTE OF SECURITY
HOLDERS
|
There
were no matters submitted to a vote of our security holders during the fourth
quarter of our fiscal year ended December 31, 2006.
PART
II
Our
common stock is traded in the over-the-counter market on the Nasdaq OTC Bulletin
Board under the symbol “GMOS.” The following table shows the price range of the
Company's common stock for each quarter ended during the last two fiscal years.
|
|
BID
|
|
ASK
|
|
Quarter
Ended
|
|
High
|
|
Low
|
|
High
|
|
Low
|
|
|
|
|
|
|
|
|
|
|
|
3/31/05
|
|
|
1.30
|
|
|
1.26
|
|
|
1.30
|
|
|
1.26
|
|
6/31/05
|
|
|
.61
|
|
|
.60
|
|
|
.61
|
|
|
.60
|
|
9/30/05
|
|
|
1.03
|
|
|
.95
|
|
|
1.03
|
|
|
.95
|
|
12/31/05
|
|
|
1.01
|
|
|
.58
|
|
|
1.06
|
|
|
.60
|
|
3/31/06
|
|
|
.94
|
|
|
.90
|
|
|
.75
|
|
|
.62
|
|
6/30/06
|
|
|
.63
|
|
|
.45
|
|
|
.62
|
|
|
.35
|
|
9/30/06
|
|
|
.63
|
|
|
.38
|
|
|
.60
|
|
|
.38
|
|
12/31/06
|
|
|
.60
|
|
|
.17
|
|
|
.60
|
|
|
.17
|
|
HOLDERS
As
of
April 1, 2007, there were approximately 37
holders
of record of the Company’s common stock.
DIVIDENDS
Subject
to the rights that have been designated to the holders of our Series A
Convertible Preferred Stock (the “Series A Shares”), which dividends are payable
in cash or shares of our common stock, as determined in our sole discretion,
and
any other holders of preferred stock that may be authorized by our Board,
holders of our common stock are entitled to receive dividends when and if
declared by our Board of Directors out of funds legally available. We have
not
paid any dividends on our common stock. The payment of dividends, if any, in
the
future is within the discretion of the Board of Directors and is also subject
to
the approval of the holders of the Series A Shares. The payment of dividends,
if
any, in the future will depend upon our earnings, capital requirements,
financial condition and other relevant factors. Our Board of Directors does
not
presently intend to declare any dividends in the foreseeable future. Instead,
our Board of Directors intends to retain all earnings, if any, for use in our
business operations.
Pursuant
to our Restated Articles of Incorporation, our Board of Directors is authorized,
subject to any limitations prescribed by law, and subject to certain approval
right we have provided to the holders of our Series A Shares, to provide for
the
issuance of up to 5,000,000 shares of preferred stock from time to time in
one
or more series and to establish the number of shares to be included in each
such
series and to fix the designation, powers, preferences and relative,
participating, optional and other special rights of the shares of each such
series and any qualifications, limitations or restrictions thereof. Because
the
Board of Directors has such power to establish the powers, preferences and
rights of each series, it may afford the holders of preferred stock preferences,
powers and rights (including voting rights and rights to receive dividends)
senior to the rights of the holders of common stock. The issuance of shares
of
preferred stock, or the issuance of rights to purchase such shares, could be
used to discourage an unsolicited acquisition proposal.
There
is
currently one series of preferred stock issued and outstanding: Series A Shares,
with 5,000 shares being authorized and 2,450 shares being issued and
outstanding. Up to an additional 4,995,000 shares of preferred stock remain
authorized. Set forth below is a summary only and it is qualified by our
Restated Articles of Incorporation and the Certificate of Designation for our
Series A Shares, copies of which are available from the Company upon
request.
Rank.
The
Series A Shares rank senior to (1) the common stock and (2) each other class
or
series of preferred stock now or hereafter established by the Board of
Directors, the terms of which do not expressly provide that it ranks senior
to,
or on a parity with, the Series A Shares as to dividend rights and rights on
liquidation, winding-up and dissolution of the Company (collectively referred
to
as “Junior Stock”).
Dividends.
The
holders of shares of Series A Shares will receive dividends at the rate of
$100.00 per Series A Share per annum, payable, at the option of the Company,
in
cash or shares of Common Stock, provided that, the dividend rate will be reduced
to $70.00 per Series A Share per annum at such time as and for as long as our
shares of common stock issuable upon conversion of the Series A Shares are
covered by an effective registration statement. In the event of certain defaults
by the Company, the dividend rate will be increased to $200.00 per Series A
Share until the default has been cured. Dividends will accrue and be payable
semi-annually, in arrears, on the first day of March and September in each
year,
beginning March 2006. Dividends payable on the Series A Shares are cumulative
and any accrued and unpaid dividends are included in the payment of a
liquidation preference to the holders of Series A Shares, as described
below.
Liquidation
Preference.
In the
event of a liquidation, dissolution or winding up of the Company, whether
voluntary or involuntary, the holders of the Series A Shares are entitled to
receive, after all payments to holders of any securities that rank senior to
the
Series A Shares, $1,000.00 per Series A Share, together with an amount equal
to
the dividends accrued and unpaid thereon (whether or not declared) to the date
of final distribution to the holders of Series A Shares, without interest,
before any payment shall be made or any assets distributed to the holders of
any
of the Company's securities that rank junior to the Series A Shares, including
the common stock. After the full payment of the liquidation preference to the
holders of Series A Shares, they are not entitled to any further participation
in any distribution of the Company's assets. At the option of any holder of
Series A Shares, a consolidation or merger of the Company with another
corporation in which the Company is not the surviving entity, or a sale or
transfer of all or part of the Company's assets for cash, securities or other
property will be considered a liquidation, dissolution or winding up of the
Company.
Conversion.
Election
to Convert.
Each
Series A Share may initially be converted, at any time, at the election of
the
holder, into 2,000 shares of our common stock, subject to certain
adjustments.
Mandatory
Conversion.
We have
the right, in our sole discretion, to require that all of the outstanding Series
A Shares be converted into shares of our common stock at the same conversion
rate applicable to a conversion election. We have this right to require
conversion at any time: (1) the last trade price of our common stock reported
on
the OTC Bulletin Board for each of the ten consecutive trading days ending
two
business days prior to the date of our conversion election exceeds $1.50 per
share (subject to certain adjustments, including adjustments for anti-dilution)
and (2) the common stock issuable upon conversion of the Series A Shares is
covered by an effective registration statement during the entire ten-day period
and through the date of the conversion.
Anti-Dilution
Adjustments.
Subject
to certain exceptions, if we issue securities, in the future, at an effective
price of less than $.50 per share of common stock (or the then current price
as
reduced by prior anti-dilution events), then the rate of conversion of the
Series A Shares into our common stock will be reduced to the effective price
of
our common stock as issued. In addition, the rate of conversion may also be
reduced as a result of certain recapitalization events, including (1) a split
or
reverse split of our shares of common stock and (2) the payment of a dividend
in
shares of our common stock (other than dividends payable on the Series A Shares
in common Stock).
Reduction
in Conversion Rate due to Default.
Upon the
occurrence of certain types of defaults, such as a default: (i) under our
certificate of designation of the Series A Shares; (ii) under our subscription
agreements with the investors in the September 2005 Private Placement; (iii)
subject to certain exceptions, of any obligation of indebtedness or financing
in
excess of $250,000; or (iv) under any material contract, the then applicable
conversion rate will be adjusted to an amount equal to 80% of the Conversion
Price then in effect.
Voting
Rights.
Holders
of the Series A Shares vote together with the holders of common stock as a
single class on all matters submitted to shareholders for a vote and shall
have
a number of votes equal to 2,000 votes for each Series A Share, subject to
certain adjustments. Additionally, the approval of the holders of a majority
of
the Series A Shares is required for the approval of the following
matters:
(1) Any
amendment, alteration or repeal of the Articles or the certificate of
designation relating to the Series A Shares, if such amendment, alteration
or
repeal adversely affects the rights, preferences or privileges of the Series
A
Shares, including the right to create, authorize or issue any series or shares
of stock senior to or on parity with the Series A Shares, or to increase the
amount of authorized capital stock of any such class;
(2) The
creation, authorization or issuance of any series or shares of capital stock
convertible into common stock which is on parity with or senior to the Series
A
Shares in terms of liquidation, dividends or otherwise;
(3) The
merger, consolidation or entering into a business combination or similar
transaction, other than if (i) the Company is the surviving entity and (ii)
the
shareholders of the Company prior to such transaction continue to hold a
majority of the capital stock of the Company following the
transaction;
(4) The
incurrence or permission to exist of any inventory or equipment indebtedness
or
liens relating thereto, except that the Company may borrow in connection with
institutional financing of inventory and equipment and mortgage financing in
connection with acquisitions of real estate;
(5) The
declaration or payment of any dividends on, purchase, redemption or retirement
for value, of any capital stock (other than the Series A Shares), or make any
distribution of assets, capital stock, warrants, rights, options, indebtedness
or obligations to the Company's shareholders;
(6) The
sale
or other transfer of a material portion of the Company's assets; provided,
however, that such a sale or other transfer will be permitted if (i) it is
not
of all or substantially all of the Company's assets and (b) is approved by
a
majority of the independent and disinterested members of the board of directors;
and
(7) The
entering into any transaction or agreement, or the amendment or modification
of
any existing agreement, with any officers, directors or principal shareholders
of the Company, or any of their affiliates, which transaction, agreement
amendment or modification is not approved by a majority of the independent
and
disinterested members of the board of directors.
RECENT
SALES OF UNREGISTERED SECURITIES
We
did
not sell any unregistered securities during the year ended December 31,
2006:
Securities
Authorized for Issuance under Equity Compensation Plans
The
following table provides information about the Company’s common stock that may
be issued upon the exercise of stock options under all of our equity
compensation plans in effect as of December 31, 2006.
Plan
Category
|
|
Number
of securities to
be
issued upon exercise
of
outstanding options,
warrants
and rights
|
|
Weighted
average
exercise
price of
outstanding
options,
warrants
and rights
|
|
Number
of securities
remaining
available for
future
issuance under
equity
compensation
plan
(excluding securities
reflected
in column (a))
|
|
|
|
|
|
|
|
|
|
Equity
compensation plan
approved
by security holders
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
compensation plan not
approved
by security holders
|
|
|
1,500,000
(1
|
)
|
$
|
1.25
|
|
|
0
|
|
(1)
Reflects options granted to the two our two executive officers in August 2004
to
purchase shares of our common stock.
ITEM6. |
SELECTED
FINANCIAL DATA
|
SELECTED
FINANCIAL INFORMATION
The
selected consolidated financial data presented below should be read in
conjunction with “Management's Discussion and Analysis of Financial Condition
and Results of Operations” and our consolidated financial statements and the
notes thereto included elsewhere in this Annual Report. Our statement of
operations data for the years ended December 31, 2006, 2005, 2004, 2003
(restated), and 2002 (restated) and our balance sheet data as of December 31,
2006, 2005, 2004, 2003 (restated) and 2002 have been derived from our audited
consolidated financial statements, all of which except our balance sheet data
at
December 31, 2003 and 2002, are included elsewhere in this Annual Report.
|
|
2002
|
|
2003
|
|
2004
|
|
2005
|
|
2006
|
|
Net
Sales (1)
|
|
$
|
38,461,692
|
|
$
|
45,217,270
|
|
$
|
77,615,237
|
|
$
|
103,117,471
|
|
$
|
97,637,103
|
|
Income
from Continuing Operations
|
|
|
1,242,854
|
|
|
852,831
|
|
|
2,168,256
|
|
|
631,526
|
|
|
1,117,702
|
|
Income
from Continuing Operations Per Share
|
|
|
0.16
|
|
|
0.11
|
|
|
0.21
|
|
|
0.06
|
|
|
0.10
|
|
Total
Assets
|
|
|
10,084,106
|
|
|
14,303,028
|
|
|
24,017,727
|
|
|
25,832,117
|
|
|
29,085,638
|
|
Long-term
Debt Obligations
|
|
|
366,044
|
|
|
547,073
|
|
|
2,636,027
|
|
|
1,498,479
|
|
|
1,513,665
|
|
Preferred
Stock
|
|
|
|
|
|
|
|
|
|
|
|
2,870
|
|
|
2,450
|
|
Cash
Dividends Declared per Common
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
Does
not include revenues from finance, insurance and extended service
contracts, which represent less than 3% of total operating
income.
|
ITEM
7. |
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
The
following discussion of our results of operations and financial condition should
be read together with the consolidated financial statements and the notes to
those statements included elsewhere in this Annual Report. This discussion
may
contain forward-looking statements that involve risks and uncertainties. Our
actual results could differ materially from the results anticipated in any
forward-looking statements as a result of a variety of factors, including those
discussed in “Risk Factors” and elsewhere in this Annual Report.
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 54
employees and operates from an approximately 75,000 square foot facility.
Chicago Cycles is located in the Chicago metropolitan area, has approximately
80
employees and operates from an approximately 95,000 square foot facility in
Skokie, Illinois, pursuant to a ten-year lease we entered into in October
2004.
Overview
of Economic Trends.
Effects
of Increasing Interest Rates
Although
the Federal Reserve, during the second half of 2006, temporarily paused its
policy of raising the discount rate, we
believe that increases in consumer loan interest rates, during the two year
period immediately preceding this pause has had a material adverse effect on
the
sales of our power sports products, and more specifically the sales of new
vehicles. Our revenues from sales of power sports products during the year
ended
December 31, 2006 were approximately 5.3% less than for the same period in
2005.
Additionally, during 2006, $32.7 million of the approximately $97.6 million
of
our power sports sales (33.5%) were financed. In the event that the Federal
Reserve resumes its policy of measured increases in the discount rate, the
uncertainties created in the consumer financing market as a result of
corresponding additional increases in interest rates, can reasonably be expected
to have a continuing negative impact on the sale of new motorcycles in the
next
12 to 24 months due to the increased costs to our customers.
During
the early period of these measured increases in consumer interest rates, we
believe that we experienced greater consumer interest in lower-priced used
motorcycles, as a result of the increased costs of financing. This was also
attributable to the addition of Chicago Cycles to our business in April 2004.
Additionally, we commenced the sale of used motorcycles sales at our Andrew
Cycles dealership in the second half of 2005, but have not yet achieved the
level of sales penetration in used motorcycles at Andrews Cycles that we had
forecasted. As consumer interest rates continued to climb throughout 2005 and
2006, it appears that these even higher rates began to negatively affect the
sales of lower-priced used motorcycles. During the year ended December 31,
2006
approximately $5.08 million of our approximately $97.6 million (5.2%) in
revenues from the sales of power sports equipment were generated from sales
of
used motorcycles compared to approximately $5.93 million of our approximately
$103.1 million in revenues (5.75%) from such sales during the same period in
2005. As a result of the current pause in the Federal Reserve’s increase in the
discount rate, and the possibility that the discount rate may remain at its
current level, or even be reduced in 2007, we believe that the sales of
lower-priced used motorcycles will pick up sooner than new motorcycles.
Therefore, we will continue to pursue the goal of increasing used motorcycle
sales throughout 2007 and beyond, at both of our locations. 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
During
2006, we experienced a decrease in sales of motorcycles and scooters compared
to
the same period in 2005. We believe this decrease resulted, in part, due to
a
significant reduction in gasoline prices in the latter part of the third
quarter. Lower gas prices may have resulted in less incentive for prospective
customers to purchase motorcycles or scooters to reduce fuel costs. Notwithstanding
this reversal, prices have recently begun to increase again and we
believe that it is reasonable to assume that prices will continue their upward
trend during the next six to twelve months, which will likely 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. Any such increase in the purchase of motorcycles and scooters
could have a positive impact on our sales for the next 12 to 24 months.
Reduction
in Units by Manufacturers
We
believe that certain manufacturers of the motorcycles we sell have recently
begun to reduce the number of units they manufacture, normally with respect
to
some higher-end models, in order to increase the price per unit. Because of
our
position in the market, we believe that we are generally able to receive a
larger allocation of these models than many other dealers. Since this pricing
normally results in greater sales margins, reduced unit sales and higher pricing
by manufacturers, in the future, could result in a material increase in our
revenues and profits, provided that there are a sufficient number of customers
willing to pay higher prices for these more limited produced models.
Overall
impact on our Future Earnings
Notwithstanding
our downturn in sales during 2006, 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. Assuming that gas prices continue their recent increases, we
foresee promising opportunities to increase our sales of motorcycles and
scooters as consumers again 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. Additionally,
while our current business has been affected by the Federal Reserve's increase
in interest rates, which directly increases the cost of financing purchases
of
our motorcycles and other power sports products, the current pause in its policy
of measured increases to the discount rate, along with the possibility of
reductions in 2007, could have a positive financial affect on our business.
On
the other hand, in the event that the Federal Reserve chooses to resume its
increase in the discount rate, this would, in all likelihood, continue to
negatively impact sales of motorcycles and other power sports
equipment.
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
could 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"). 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 (9.25% at December 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 December 31, 2006, the outstanding amount of this term loan,
including accrued interest thereon, was $781,280.
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 (the “Bridge Lender”), 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
Bridge Lender 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 Bridge Lender a $250,000
principal amount promissory note providing for interest at the rate of fifteen
percent (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 2006 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. On June 29, 2006 we repaid an additional $25,000 of the
outstanding principal amount and at September 20, 2006, the outstanding
principal amount was $200,000. On September 20, 2006, we obtained another sixty
(60) day extension for the payment of the remaining $200,000 due on November
20,
2006. We did not pay any additional consideration to the third party for such
extension. Payment of the 2005 Bridge Note was further extended to June 15,
2007
in consideration for our payment of $2,250 to the Bridge Lender for both this
extension and the extension for repayment of the 2006 Bridge Note discussed
below. We have continued to make all interest payments on the 2005 Bridge Loan,
when due and payable, and intend to make such interest payments on a timely
basis during any further extension thereof.
On
October 27, 2006, Russell Haehn, the Company’s Chairman and Chief Executive
Officer provided a working capital loan to the Company in the amount of
$350,000. This loan is evidenced by a promissory note (the “Note”) in the
principal amount of $350,000 payable on demand any time after October 26, 2007.
The Note bears interest at a rate of 6% per annum and
the
outstanding principal amount and all accrued interest are payable upon demand
or
sooner if prepaid by the Company.
On
December 4, 2006, the Bridge Lender provided us with an additional bridge loan
in the principal amount of $250,000 (the “2006 Bridge Loan”). In connection with
the 2006 Bridge Loan we issued to the Bridge Lender a $250,000 principal amount
promissory note providing for interest at the rate of fifteen and ½% percent
(15.5%) per annum (the "2006 Bridge Note"). Interest on the 2006 Bridge Note
is
payable monthly, and all outstanding principal and accrued but unpaid interest
was due and payable on March 4, 2007. Payment of the 2006 Bridge Note was
extended to June 15, 2007 in consideration for our payment of $2,250 to the
Bridge Lender for both this extension and the extension for repayment of the
2005 Bridge Note discussed above. We have continued to make all interest
payments on the 2006 Bridge Loan, when due and payable, and intend to make
such
interest payments on a timely basis during any further extension thereof.
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 (9.25% at December 31, 2006), and has no stipulated repayment terms.
At
December 31, 2006, the 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
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
December 31, 2006, 420 Series A Shares had been converted into 935,800 shares
of
our common stock. Additionally, during 2006, we issued an aggregate of 408,247
shares of common stock to the holders of our Series A Shares, in lieu of cash
dividends.
Anticipated
Funding of Operations.
The
amount required to fund the growth our ongoing operations, as well as the means
by which we obtain this funding, will be wholly dependent on the magnitude
and
timeframes we set for any growth in our business. Based on our current expected
growth in the next 12 to 24 months, we expect to fund our ongoing operations
as
follows:
Cash
Flow from Operations
Notwithstanding
the decline in sales, in 2006, as compared to 2005, our goal continues to be
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, and assuming that we can resume
sales growth consistent with increases achieved prior to 2006, we believe that
we will begin to generate sufficient cash flow from operations to fund the
growth of our business during the third quarter of 2007. To the extent that
the
weaker sales climate we experienced during 2006 continues for a sustained period
our ability to generate such cash flow could be delayed or may not occur at
all.
Additionally, 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 December 31,
2006.
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 sales
of our power sports products continue at the levels experienced in 2006 and/or
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.
Results
of Operations.
Year
ended December 31, 2006 Compared to Year ended December 31,
2005:
|
|
2006
|
|
2005
|
|
Increase
(Decrease)
|
|
%
Change
|
|
Total
Revenues
|
|
$
|
100,751,786
|
|
$
|
105,605,067
|
|
|
($4,853,281
|
)
|
|
(4.6
|
%)
|
Cost
of Sales
|
|
$
|
86,340,024
|
|
$
|
93,327,630
|
|
|
($6,987,606
|
)
|
|
(7.5
|
%)
|
Operating
Expenses
|
|
$
|
13,294,060
|
|
$
|
11,645,911
|
|
$
|
1,648,149
|
|
|
14.2
|
%
|
Income
from Operations
|
|
$
|
1,117,702
|
|
$
|
631,526
|
|
$
|
486,176
|
|
|
77.0
|
%
|
Other
Income and (Expenses)
|
|
$
|
(1,371,000
|
)
|
$
|
(679,229
|
)
|
$
|
691,771
|
|
|
(101.8
|
%)
|
Income
(Loss) before Provision (Benefit) for Income Taxes
|
|
$
|
(253,298
|
)
|
$
|
(47,703
|
)
|
$
|
205,595
|
|
|
(430.9
|
%)
|
Net
Income (Loss) before Preferred Dividends
|
|
$
|
(181,198
|
)
|
$
|
(8,803
|
)
|
$
|
172,395
|
|
|
(1,958.4
|
%)
|
Total
Revenues:
Total
revenues for the year ended December 31, 2006 were $100,751,786 representing
a
decrease of $4,853,281 (-4.6%) from the $105,605,067 reported for the year
ended
December 31, 2005. This decrease in revenues was, we believe, primarily
attributable to a substantial reduction in the purchase of motorcycles
experienced by most dealers.
Sales
at our Chicago facilities were most affected, representing substantially all
of
our decrease in revenues between the applicable periods. While it is difficult
to determine, with certainty, the reasons for the significant decrease in the
sales of motorcycles and other power sports vehicles during 2006, we believe
that the following events have contributed to weaker sales:
●
|
Continuing
increases in consumer interest rates for the eighteen (18) month
period
through June 2006 has made financing the purchase of motorcycles
more
expensive and appears to have priced the purchase of a motorcycle
out of
the price range of many potential customers;
|
●
|
Also
as a result of the increase in consumer interest rates, manufacturer
financing incentives, which provide purchasers with below market
interest
rates at the beginning of the loan term and higher interest rates
in later
years, were not nearly as successful in generating sales as such
incentives have been in prior periods;
|
●
|
Gas
prices, which had substantially increased during the twelve (12)
months
prior to the third quarter of 2006, decreased considerably during
such
quarter, possibly also reducing the incentive for prospective customers
to
purchase motorcycles and scooters, which provide better gas mileage
and
therefore lower fuel costs; and
|
●
|
Manufacturers,
particularly with respect to all terrain vehicles (“ATVs”), did not
introduce distinctively new models of their products for the 2006
model
year, which appears to have resulted in less consumer interest and,
as a
result, significantly weaker sales.
|
Additionally,
during the first quarter of 2006 our sales were down 11.2% compared to the
first
quarter of 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. This reduction was primarily due to a significant decrease in revenues
from wholesale sales of our products to other dealers and distributors, in
the
first quarter of 2006. Reducing wholesale sales was part of our plan to
stabilize our inventory for the purpose of increasing our profit margins for
the
remainder of 2006. During the second quarter of 2006, revenues increased by
9.9%
compared to the same period in 2005. This increase almost completely offset
decreases during the first and third quarters.
Cost
of
Sales:
Cost
of
sales for the year ended December 31, 2006 decreased by $6,987,606 (-7.5%)
to
$86,340,024 during the year ended December 31, 2006, as compared to $93,327,630
for the same period in 2005. The reduction in the cost of sales for the year
ended December 31, 2006 reflects the decrease in sales during 2006 compared
to
2005.
Operating
Expenses:
Operating
expenses for the year ended December 31, 2006 were $13,294,060, an increase
of
$1,648,149
(14.2%)
over $11,645,911 for same period in 2005. The aggregate increase in such costs
were principally related to (i) an approximate increase of $1,054,870 in
salaries and other compensation payable to employees; (ii) an approximate
$137,335 increase in insurance; and (iii) an approximate net increase of
$289,177 in various other expenses, including (A) a $105,869 increase in credit
card fees, (B) a $97,302 increase in utilities, (C) a $84,100 increase in
professional fees, and (D) a $46,698 increase in employee benefits during the
year ended December 31, 2006 compared to the same period in 2005.
Income
from Operations:
We
had
income from operations before other income and (expenses) for the year ended
December 31, 2006 of $1,117,702 compared to income from operations of $631,526
for the same period in 2005, which reflects an increase of $486,176 (77.0%).
This increase in income from operations during the year ended December 31,
2006
as compared to the same period in 2005, is a result of the significant reduction
in the cost of sales, as described above, and in particular, the significant
increase in margin on our sales from the prior period. This reduction in cost
of
sales was only partially offset by the increase in operating expenses.
Depreciation and amortization was approximately $432,338 for the year ended
December 31, 2006, as compared to $300,806 for the same period in
2005.
Other
Income and (Expenses):
Other
expenses for the year ended December 31, 2006 increased $691,771 (101.8%) to
$1,371,000 from $679,229 for the same period in 2005. This increase in other
expenses was primarily attributable to an increase in net interest expense
from
$779,943 in 2005 to $1,413,383 in 2006. Such
increase in net interest expense was primarily attributable to (i) the
additional interest payable on financed inventory which we were unable to sell
due to the weak sales environment during a significant portion of 2006 and
(ii)
an increase in the interest rate payable on our inventory financing from 8%
at
December 31, 2005 to 9.25% at December 31, 2006.
Income
(Loss) before Provision (Benefit) for Taxes:
We
had a
loss before provision for taxes, for the year ended December 31, 2006 of
$253,298 as compared with a loss before provision for taxes of $47,703 for
the
same period in 2005, which represents a reduction of 430.9%. This increase
in
loss before provision for taxes is primarily attributable to the substantial
increase in net interest expense discussed above.
Net
Income (Loss) before Preferred Dividends:
We
had a
net loss before preferred dividends of $181,198 for the year ended December
31,
2006, as compared to a net loss of $8,803 for the same period in 2005, which
represents a reduction of 1,958.4%. This increase in net loss before preferred
dividends is primarily attributable to the substantial increase in net interest
expense discussed above.
Year
ended December 31, 2005 Compared to Year ended December 31,
2004:
|
|
2005
|
|
2004
|
|
Increase
(Decrease)
|
|
%
Change
|
|
Total
Revenues
|
|
$
|
105,605,067
|
|
$
|
79,950,855
|
|
$
|
25,654,212
|
|
|
32
|
%
|
Cost
of Sales
|
|
$
|
93,327,630
|
|
$
|
70,025,884
|
|
$
|
23,301,746
|
|
|
33
|
%
|
Operating
Expenses
|
|
$
|
11,645,911
|
|
$
|
7,756,715
|
|
$
|
3,889,196
|
|
|
50
|
%
|
Income
from Operations
|
|
$
|
631,526
|
|
$
|
2,168,256
|
|
$
|
(1,536,730
|
)
|
|
(71
|
%)
|
Other
Income and (Expenses)
|
|
$
|
(679,229
|
)
|
$
|
(587,995
|
)
|
$
|
(91,234
|
)
|
|
(15.5
|
%)
|
Income
(Loss) before Provision (Benefit) for Income Taxes
|
|
$
|
(47,703
|
)
|
$
|
1,580,261
|
|
$
|
(1,627,964
|
)
|
|
(103
|
%)
|
Net
Income (Loss) before Preferred Dividends
|
|
$
|
(8,803
|
)
|
$
|
958,061
|
|
$
|
(966,864
|
)
|
|
(101
|
%)
|
Total
Revenues:
Total
revenues for the year ended December 31, 2005 were $105,605,067 representing
an
increase of $25,654,212 (32%) from the $79,950,855 reported for the year ended
December 31, 2004. Our results were impacted significantly, in a positive
manner, by the acquisition of Chicago Cycles on April 30, 2004, and the
inclusion of the additional revenues generated by Chicago Cycles of $39,298,879
in 2005 as compared to only $24,519,662 during the shorter period from May
1,
2004 to December 31, 2004, in the prior year, which reflects a 60% increase
in
Chicago Cycles' sales. These results also reflect a generally higher level
of
sales activities at both of our locations and our move to the larger facility
in
Chicago. Our increase in sales, during the year ended December 31, 2005, also
can be attributed to our aggressive marketing and advertising
campaigns.
Cost
of
Sales:
Cost
of
sales for the year ended December 31, 2005 increased by $23,301,746 (33%) to
$93,327,630, compared to $70,025,884 for the same period in 2004. This increase
reflects the additional cost of units, in a total amount of $20,814,000 needed
to realize the increase in sales, and is also significantly impacted by the
inclusion of the costs of Chicago Cycles' sales beginning in April 30, 2004,
and
our move to the larger facility in Chicago, accounting for approximately
$11,412,073 (55%) of this increase in cost of sales.
Operating
Expenses:
Selling,
general and administrative expenses for the year ended December 31, 2005 were
$11,645,911, an increase of $3,899,216 (50%) over $7,756,715 for the same period
in 2004. The aggregate increase in such costs were principally related to
additional selling, general and administrative expenses relating to Chicago
Cycles, commencing April 30, 2004, which accounted for $3,393,682 (87%) of
this
increase, and includes increases of approximately (i) $1,289,410 in compensation
payable to employees at Chicago Cycles; (ii) $1,131,084 in advertising and
marketing expenses; and (iii) $558,718 in rent, of which approximately $510,000
is attributable to the higher rent payable for Chicago Cycles’ new facilities.
Net interest expense increased approximately $153,356 to $779,943 in the year
ended December 31, 2005 as compared to $626,587 for the same period in 2004.
Income
from Operations:
We
had
income from operations before other income (expense) for the year ended December
31, 2005 of $631,526, as compared to income from operations of $2,168,256 for
the same period in 2004, which reflects a decrease of $1,580,261(71%). This
decrease in income from operations during the year ended December 31, 2005
as
compared to the same period in 2004, is a result of the significant increase
in
operating expenses, as described above, and in particular, the increase in
rent
expense relating to our move to the new facility in Chicago. Unlike in prior
periods where the increase in operating expenses was offset, in part, by an
increase in margin on our sales from the prior period, our percentage increase
in sales in 2005 compared to 2004 was only nominally greater than the increase
in our cost of sales between those two periods. Depreciation and amortization
was approximately $300,806 for the year ended December 31, 2005, as compared
to
$19,636 for the same period in 2004.
Other
Income and (Expenses):
Other
expenses for the year ended December 31, 2006 increased $91,234 (15.5%) to
$679,229 from $587,995 for the same period in 2005. This increase in other
expenses was primarily attributable to an increase in net interest expense
from
$626,587 in 2004 to $779,943 in 2005, which was partially offset by an increase
of $62,122 relating to certain other income in 2005 compared to 2004.
Such
increase in net interest expense was primarily attributable to an increase
in
the interest rate payable on our inventory financing from 3.8% at December
31,
2004 to 8% at December 31, 2005.
Income
(Loss) before Provision (Benefit) for Taxes:
We
had a
loss before provision for taxes for the year ended December 31, 2005 of $47,703,
as compared with income before provision for taxes of $1,580,261 for the same
period in 2004. This decrease of $1,627,964 (103%) in income before taxes during
the year ended December 31, 2005 as compared to the same period in 2004, is
primarily attributable to the increase in operating expenses and, to a lesser
extent the increase in net interest expense, both as described above. We
received a tax benefit of $38,900 for the year ended December 31, 2005, as
a
result of our loss during that period, as compared to taxes of $622,200 for
the
year ended December 31, 2004. Taxes for 2005 were also affected by a net
operating loss carryforward from the first quarter of 2005.
Net
Income (Loss) before Preferred Dividends:
We
had a
net loss before preferred dividends of $8,803 for the year ended December 31,
2005, as compared to net income before preferred dividends of $958,601 for
the
same period in 2004. This reflects a decrease of $966,864 (101%) between these
comparable periods. This decrease in net income before preferred dividends
during the year ended December 31, 2005 as compared to the same period in 2004,
is attributable to the increase in our operating expenses and, to a lesser
extent the increase in net interest expense, both as described above. Net income
decreased less in percentage terms between 2005 and 2004 than net income before
taxes, due to the tax benefit received by us for 2005 compared to taxes that
we
paid for 2004.
Liquidity
and Capital Resources.
Our
primary source of liquidity has been cash generated by operations and borrowings
under various credit facilities. At December 31, 2006, we had $156,530 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 December 31, 2006 was ($77,975) compared
to
$1,128,886 at December 31, 2005.
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
manufacturers’ 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. As a result of weaker sales during 2006,
the Company borrowed an additional $250,000 in December 2006 from the Bridge
Lender. Additionally, in the future the Company may attempt to raise additional
financing through the sale of its debt and/or equity securities for expansion
of
its business including acquisitions of other dealers and brands.
At
December 31, 2006, we had outstanding indebtedness payable within 12 months
in
an aggregate amount of approximately $4.5 million. Of this amount, approximately
$1.5 million is payable to financial institutions in repayment of loans and
other credit facilities provided to us and approximately $2.5 million relates
to
outstanding trade payables. In the event that we are unable to repay all
or any
portion of these outstanding amounts from cash from operations, we would
be
required to (i) seek one or more extensions for the payment of such amounts,
(ii) refinance such debt to the extent available, (iii) raise additional
equity
capital or (iv) consummate any combination of the foregoing
transactions.
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 2007 models before the 2008 models are released,
it
could be very difficult for us to sell our remaining inventory of 2007 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
condensed 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 Annual Report.
Intangibles
and Long-lived Assets
-
Goodwill is tested for impairment on an annual basis, or more frequently if
events or circumstances indicate that impairment may have occurred. The Company
is subject to financial statement risk to the extent that intangible assets
become impaired due to decreases in the fair market value of the related
underlying business.
We
estimate the depreciable lives of our property and equipment, including any
leasehold improvements, and review them on an on-going basis. The Company
believes that the long-lived assets are appropriately valued. However, the
assumptions and estimates used may change, and the Company may be required
to
record impairment to reduce the carrying value of these assets.
Revenue
Recognition: Vehicle Sales
- The
Company records revenue when vehicles are delivered and title has passed to
the
customer, when vehicle service or repair work is performed and when parts are
delivered. Sales promotions that are offered to customers are accounted for
as a
reduction to the sales price at the time of sale. Incentives, rebates and
holdbacks offered by manufacturers directly to the Company are recognized at
the
time of sale if they are vehicle specific, or as earned in accordance with
the
manufacturer program rules and are recorded as a reduction of cost of
merchandise sold.
Revenue
Recognition: Finance, Insurance and Extended Service Revenues
- The
Company arranges financing for customers through various financial institutions
and receives a commission from the lender equal to the difference between the
interest rates charged to customers and the interest rates set by the financing
institution. The Company also receives commissions from the sale of various
third party insurance products to customers and extended service contracts.
These commissions are recorded as revenue at the time the customer enters into
the contract. The Company is not the obligor under any of these contracts.
In
the case of finance contracts, a customer may prepay or fail to pay their
contract, thereby terminating the contract. Customers may also terminate
extended service contracts, which are fully paid at purchase, and become
eligible for refunds of unused premiums. In these circumstances, a portion
of
the commissions the Company receives may be charged back based on the relevant
terms of the contracts. The revenue the Company records relating to commissions
is net of an estimate of the ultimate amount of charge backs the Company will
be
required to pay. Such estimates of chargeback experience are based on our
historical chargeback expense arising from similar contracts. The Company also
acts
as
the warrantor on certain extended service contracts and defers the revenue
and
recognizes it over the life of the contract on a straight-line basis.
Off-Balance
Sheet Arrangements.
We
have
no off-balance sheet arrangements.
Contractual
Obligations.
We
have
entered into various contractual obligations, which may be summarized as
follows:
Contractual
Obligations
|
|
Payments
Due By Period
|
|
|
|
Total
|
|
Less
than 1 year
|
|
1-3
years
|
|
3-5
Years
|
|
More
than 5 Years
|
|
Long-Term
Debt Obligations
|
|
|
1,513,665
|
|
|
1,513,665
|
|
|
—
|
|
|
|
|
|
|
|
Capital
(Finance) Lease Obligations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Lease Obligations
|
|
$
|
9,715,671
|
|
$
|
944,291
|
|
$
|
2,998,980
|
|
$
|
2,110,029
|
|
$
|
3,662,371
|
|
Purchase
Obligations
|
|
|
As
Needed
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
Long-Term Liabilities Reflected on the Company’s Balance Sheet under the
GAAP of the Primary Financial Statements
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
11,229,336
|
|
$
|
2,457,956
|
|
$
|
2,998,980
|
|
$
|
2,110,029
|
|
$
|
3,662,371
|
|
ITEM
7A. 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 $20,885,887,
$17,159,719 and $17,788,706, at December 31, 2006, December 31, 2005 and
December 31, 2004, respectively. Interest rates in connection with our floor
plan financing generally fluctuate based on the prime rate, the type of product
being financed and the length of time that such product remains on the floor
plan. During the year ended December 31, 2006, interest rates on our floor
plan
financing have ranged from a low of 3.6%
to a
high of 18%.
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.
When new model inventory is initially purchased usually there is a period of
time when zero interest is paid or accrued. However, interest costs on new
inventory will begin to accrue in a subsequent period. Continued increases
would, in all likelihood, result in a reduction in our income from operations
in
2007 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 8.25%.
Line
of Credit
We
also
have an existing revolving credit line with Fifth Third Bancorp, the interest
rate of which also fluctuates with the prime rate, at prime plus one percent.
Since the outstanding indebtedness of this line of credit was $249,863 at both
December 31, 2006 and December 31, 2005, respectively, we do not believe that
fluctuations in the prime rate will have more than a slight negative impact
on
our income from operations.
Hedging
Activities
We
normally invest any available cash in short-term investments and do not
currently have any investment strategies to hedge against increases in interest
rates. Additionally, although we do not currently intend to commence any such
hedging investments in the future, in the event that we determine that there
is
a substantial risk that increases in interest rates would have a material
negative impact on our business, we may consider such hedging strategies at
that
time.
Foreign
Exchange Rates
We
are
not currently, and have not in the past, been subject to fluctuations in
exchange rates of foreign currencies against the U.S. Dollar, since virtually
all of the vehicles, accessories and parts that we purchase in connection with
our business are purchased from the U.S. subsidiaries of Japanese manufacturers
in U.S. Dollars. Additionally, all of our product sales are made in the United
States in U.S. Dollars. In the event that our business model changes in the
future, and we either purchase products in foreign currencies such as Japanese
Yen, or sell products outside of the United States, for which we accept payment
in foreign currencies, we could become subject to exchange rate fluctuations
at
that time.
ITEM
8. FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
The
following financial statements are contained in this Annual Report:
-
Report
of Independent Registered Public Accounting Firm;
-
Consolidated Balance Sheets - December 31, 2006 and 2005;
-
Consolidated Statements of Income - Years ended December 31, 2006, 2005 and
2004;
-
Consolidated Statements of Stockholders' Equity - Years ended December 31,
2006,
2005 and 2004;
-
Consolidated Statements of Cash Flow - Years ended December 31, 2006, 2005
and
2004; and
-
Notes
to Consolidated Financial Statements.
ITEM
9. CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None.
ITEM
9A. 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 Annual Report
(December 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 Annual 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 year ended December 31, 2006 that has materially affected,
or is reasonably likely to materially affect, our internal control over
financial reporting.
ITEM
9B. OTHER
INFORMATION
Not
applicable.
PART
III
ITEM
10. DIRECTORS,
EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Set
forth
below are the names, ages, and positions of each of our executive officers
and
directors, together with such person’s business experience during the past five
(5) years. Their business experience is based on information provided by each
of
them to us. Directors are to be elected annually at our annual meeting of
shareholders and served in that capacity until the earlier of their resignation,
removal or the election and qualification of their successor. Executive officers
are elected annually by our Board of Directors to hold office until the earlier
of their death, resignation, or removal.
|
|
AGE
|
|
POSITIONS
HELD AND TENURE
|
Russell
A. Haehn
|
|
59
|
|
Chairman,
Chief Executive Officer and Director
since January 2004
|
Gregory
A. Haehn
|
|
60
|
|
President,
Chief Operating Officer and
Director since January 2004
|
Officers
and Directors
Russell
A. Haehn
has been
the Chairman, Chief Executive Officer and Secretary of the Company since the
acquisition of W.W. Cycles, in January 2004, and holds the same positions with
W.W. Cycles since such time. Prior to such acquisition, Mr. Haehn had been
the
Vice President and a director of W.W. Cycles since its inception in 1984. From
1990 to 2000, Mr. Haehn also was the founder, President, a director and the
sole
shareholder of Andrew Cycles Incorporated, which was an importer and exporter
of
motorcycles.
Gregory
A. Haehn
has been
the President, Chief Operating Officer, Treasurer and a director of the Company
since the acquisition of W.W. Cycles, in January 2004, and holds the same
positions with W.W. Cycles since such time. Mr. Haehn, since its inception
in
1998, also has been the President, director and sole shareholder of Yukon
International Inc., a manufacturer, distributor and retailer of fitness
equipment. From May 2000 to December 2000, Mr. Haehn was President of
Interactive Marketing Technologies, Inc., a publicly-traded company in the
direct marketing business. From 1988 to 1997, Mr. Haehn was the founder,
President and sole shareholder of Midwest Motorsports Inc., a power sports
dealership in Akron, Ohio which sold motorcycles. Additionally, from 1976 to
1997, Mr. Haehn was the President of Worldwide Auto Parts Inc., a leading
regional auto parts supply business in Northeastern Ohio.
Russell
Haehn and Gregory Haehn are brothers. The present term of office of each
director will expire at the next annual meeting of shareholders.
Our
executive officers are elected annually at the first meeting of our board of
directors held after each annual meeting of shareholders. Each executive officer
holds office until his successor is duly elected and qualified, until his
resignation, or until removed in the manner provided by our bylaws.
Agreement
to Appoint Additional Director
Until
February 2011, we have agreed to appoint a designee of HCFP/Brenner Securities
LLC, the placement agent in the September 2005 Private Placement, to serve
on
our board of directors. In the event that said placement agent does not exercise
its right to appoint a designee to our board, it shall have the right to send
a
representative (who need not be the same individual from meeting to meeting)
to
observe each meeting of the board of directors. Except as provided herein,
there
are no arrangements between any director or director nominee of the Company
and
any other person pursuant to which he was, or will be, selected as a
director.
Director
Compensation
We
have
not paid any cash compensation to our directors for their service on the board
of directors, and do not have any plans to do so, in the near future. We do
not
currently maintain liability insurance coverage for the acts of our officers
and
directors, but we have agreed to obtain liability insurance in an amount not
less than $1,500,000, on or around the date that said placement agent's designee
commences services on our board, if this shall occur, and will include said
placement agent's designee as an insured under such policy.
Significant
Employees
Phillip
A. Andrews
has been
the general manager of our W.W. Cycles subsidiary since 1984.
Paul
Katsiadas
employed
by our Chicago Cycles subsidiary as sales manager from April 2006 through April
2007 and in April 2007 replaced Jerry Fokas as Chicago Cycles’ general manager.
During the 12-year period prior to his employment with us, Mr. Katsiadas held
several management positions automobile dealerships.
Governance
The
Company has not formally appointed an audit committee, and the entire board
of
directors (two persons) currently serves the function of an audit committee.
The
Company has not made a determination as to whether any of its directors would
qualify as an audit committee financial expert. The Company has not yet adopted
a code of ethics applicable to its chief executive officer and chief accounting
officer, or persons performing those functions, because of the small number
of
persons involved in management of the Company.
Compliance
with Section 16(a) of the Exchange Act
Section
16(a) of the Securities Exchange Act of 1934, as amended, generally requires
our
directors and executive officers and persons who own more than 10% of a
registered class of our equity securities (“10% owners”) to file with the SEC
initial reports of ownership and reports of changes in ownership of common
stock
and other equity securities of the Company. Directors and executive officers
and
10% owners are required by SEC regulation to furnish us with copies of all
Section 16(a) reports they file. To our knowledge, based solely on review of
copies of the reports furnished to us and verbal representations that no other
reports were required to be filed during the fiscal year ended December 31,
2006, all Section 16(a) filing requirements applicable to our directors,
executive officers and 10% owners were met.
ITEM
11. EXECUTIVE
COMPENSATION
Compensation
Discussion and Analysis
The
goal
of our executive compensation program is to ensure that our executives are
compensated effectively in a manner consistent with our strategy and competitive
considerations and based on management’s performance in achieving our corporate
goals and objectives. Since we do not have a compensation committee, all
decisions regarding compensation of our executive officers are made by our
Board
of Directors, which is comprised of our Chairman and Chief Executive Officer
and
our President and Chief Operating Officer. Although we do not have an
independent director to review the compensation arrangements provided to our
executive officers, we believe that the compensation paid to our executive
officers is comparable with compensation programs provided to executives of
similarly situated companies and that such compensation is commensurate with
the
duties and efforts of our executive officers.
Principal
Elements of Executive Compensation
Our
executive compensation program consists primarily of payments of annual base
salaries to our Chairman and Chief Executive Officer and President and Chief
Operating Officer. In determining base salaries, we give consideration to the
scope of each executive’s responsibilities. We conduct performance reviews of
our employees, including our executive officers, annually. Based on the
performance assessments, and considering changes in salaries provided comparable
personnel of companies with whom we compete for management talent, any changes
in job duties and responsibilities and our overall financial results, we make
adjustments, usually on an annual basis, in base salary rates.
Perquisites
Our
executive officers participate in the same group insurance and employee benefit
plans as our other employees. Each of them is also provided with an automobile
allowance of $12,000 per year. Our use of perquisites as an element of
compensation is limited and is largely based on the historical practices and
policies of the Company. We do not view perquisites as a significant element
of
our comprehensive compensation structure, but do believe that they can be used
in conjunction with our general compensation program to attract, motivate and
retain desirable managers in a competitive environment.
Summary
Compensation Table
The
following table sets forth the annual and long-term compensation paid for the
fiscal years ended December 31, 2006, 2005 and 2004 to our Chairman and Chief
Executive Officer; and President and Chief Operating Officer (collectively,
the
“Named Executive Officers”). No other officer received compensation in excess of
$100,000 in any of those years.
Name
and Positions
|
|
Fiscal
Year
|
|
Salary
($)
|
|
Bonus
($)
|
|
Option
Awards ($)
|
|
All
Other
Compensation
($)
|
|
Total
($)
|
|
Russell
A. Haehn,
|
|
|
2004
|
|
$
|
94,500(1)
|
|
|
-0-
|
|
$
|
390,849
|
|
$
|
137,000(2
|
)
|
$
|
622,349
|
|
Chairman
and
|
|
|
2005
|
|
$
|
91,000
|
|
|
-0-
|
|
|
-0-
|
|
|
274,935(2
|
)
|
$
|
365,395
|
|
Chief
Executive Officer
|
|
|
2006
|
|
$
|
101,500
|
|
|
-0-
|
|
|
-0-
|
|
|
175,335(2
|
)
|
$
|
276,835
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gregory
A. Haehn,
|
|
|
2004(3)
|
|
$
|
26,000
|
|
|
-0-
|
|
$
|
195,425
|
|
$
|
12,000(4
|
)
|
$
|
233,425
|
|
President
and |
|
|
2005
|
|
$
|
70,700 |
|
|
-0-
|
|
|
-0-
|
|
$
|
49,000(4 |
)
|
$
|
119,700 |
|
Chief
Operating
Officer |
|
|
2006
|
|
$
|
71,600
|
|
|
-0-
|
|
|
-0-
|
|
$
|
34,430(4
|
)
|
$
|
106,030
|
|
(1) Russell
Haehn was employed by W.W. Cycles, the wholly-owned subsidiary of the Company
that was acquired in January 2004. Compensation paid to him from January 1,
2004
through January 14, 2004, reflect amounts paid by W.W. Cycles to
him.
(2) Other
compensation payable to Russell Haehn includes amounts payable to Mr. Haehn
directly from manufacturers of certain of the products we sell, as an incentive
to sell these products. The total amounts paid to Mr. Haehn during the years
set
forth in the above table were $125,000 in 2004, $262,935 in 2005 and $163,335
in
2006. Mr. Haehn also received an automobile allowance of $12,000 per year in
each of those years.
(3) Gregory
Haehn became an employee of the Company in January 2004.
(4) Other
compensation payable to Gregory Haehn reflects an automobile allowance of
$12,000 in each of 2004, 2005 and 2006 and an aggregate of $37,000 paid to
Mr.
Haehn in 2005 and $22,430 in 2006 directly from manufacturers of certain of
the
products we sell, as an incentive to sell these products.
|
|
Option
Awards
|
|
|
|
Name
|
|
Number of
Securities
Underlying
Unexercised
Options
Exercisable
|
|
Number of
Securities
Underlying
Unexercised
Options
Unexercisable
|
|
Option
Exercise
Price
|
|
Option
Expiration
Date
|
|
|
|
|
|
|
|
|
|
|
|
Russell
A. Haehn
|
|
|
1,000,000
|
|
|
—
|
|
$
|
1.25
|
|
|
8/16/2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gregory
A. Haehn
|
|
|
500,000
|
|
|
|
|
$
|
1.25
|
|
|
8/16/2009
|
|
Employment
Agreements
We
do not
have a written employment agreement with either of our Named Executive
Officers.
ITEM
12. SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
As
of
April 12, 2007, we had a total of 12,213,126 shares of common stock issued
and
outstanding.
The
following table sets forth information, as of April 12, 2007, with respect
to
the beneficial ownership of our common stock by: (i) all directors; (ii) the
Named Executive Officers; (iii) all current executive officers and directors
as
a group; and (iv) each shareholder known by us to be the beneficial owner of
more than 5% of our common stock.
Name
|
|
Number
of Shares Owned Beneficially
(1)
|
|
Approximate
Percent of Class
Owned
(1)(2)(3)
|
|
Russell
A. Haehn (4)(6)
|
|
|
5,785,000
|
|
|
43.8%
|
|
Gregory
A. Haehn (5)(6)
|
|
|
3,235,000
|
|
|
25.4%
|
|
|
|
|
|
|
|
|
|
All
Executive Officers and Directors, as a Group (two persons)
|
|
|
9,020,000
|
|
|
65.8%
|
|
(1) |
Beneficial
ownership information is based on information provided to the Company.
Except as indicated, and subject to community property laws when
applicable, the persons named in the table above have sole voting
and
investment power with respect to all shares of common stock shown
as
beneficially owned by them. Except as otherwise indicated, the address
of
such persons is the Company’s offices at 13134 State Route 62, Salem, Ohio
44460.
|
(2) |
The
percentages shown are calculated based upon 12,213,126 shares of
common
stock outstanding on April 12, 2007. The numbers and percentages
shown
include the shares of common stock actually owned as of April 12,
2007 and
the shares of common stock that the person or group had the right
to
acquire within 60 days of April 12, 2007. In calculating the percentage
of
ownership, all shares of common stock that the identified person
or group
had the right to acquire within 60 days of April 12, 2007 upon the
exercise of options and warrants are deemed to be outstanding for
the
purpose of computing the percentage of the shares of common stock
owned by
such person or group, but are not deemed to be outstanding for the
purpose
of computing the percentage of the shares of common stock owned by
any
other person.
|
(3) |
Notwithstanding
each person or group’s beneficial ownership of the Company’s common stock,
since the Series A Shares are entitled to vote together with the
common
stock on all matters submitted to shareholders for their approval,
each
person’s31.9%; Gregory A. Haehn - 18.4%; and all executive officers and
directors as a group - 48.5%.
|
(4) |
Includes
a five-year non-qualified stock option, granted to Mr. Russell
Haehn on
August 16, 2004, to purchase up to 1,000,000 shares of common
stock at an
exercise price of $1.25 per
share.
|
(5) |
Includes
(i) 2,655,000 shares of common stock owned directly by Mr. Haehn
and (ii)
80,000 shares of common stock owned by Mr. Haehn’s minor children. Does
not include an additional 80,000 shares of common stock owned
by two other
of Mr. Haehn’s children for which he disclaims any beneficial ownership.
Also includes a five-year non-qualified stock option, granted
to Mr.
Gregory Haehn on August 16, 2004, to purchase up to 500,000 shares
of
common stock at an exercise price of $1.25 per
share.
|
(6) |
Russell
Haehn and Gregory Haehn are
brothers.
|
The
Company is not aware of any arrangement which might result in a change in
control in the future.
ITEM
13. CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS
We
lease
our 75,000 square foot facility in Salem, Ohio from an affiliated entity
controlled by Russell A. Haehn, our Chairman, Chief Executive Officer and a
controlling shareholder. Pursuant to the terms of a new lease, effective January
1, 2007, we lease this facility under a 10-year lease at a rental rate of
$24,000 per month. The
current term expires in December 2006 but may be extended for two
additional periods of five years each, at a rental rate to be negotiated. We
believe that the terms of this arrangement are no less favorable to us than
those that would be available for a similar facility leased from a third party
in a bona fide arms length transaction.
In
2002,
we provided a loan to Andrews North, Inc., a corporation owned by Russell A.
Haehn, in the aggregate amount of $104,899, for use for general working capital
purposes. This loan has been repaid in full and there are no loans currently
outstanding to Andrews North, Inc. In 2002 and 2003, we also made advances
to
Mr. Haehn in an aggregate amount of approximately $350,000 to pay income taxes
payable by him with respect to income allocated to him from W.W. Cycles, which
was then a Subchapter S corporation. We also made loans in September and
November of 2004, in an aggregate amount of approximately $66,000, to Marck's
Real Estate, Inc, a corporation owned by Russell A. Haehn and the owner of
our
Salem, Ohio facilities. These loans were used by Marck's Real Estate to pay
construction costs relating to the expansion of our Ohio facilities. We made
additional loans to Marck's Real Estate in 2005, and at December 31, 2005 the
aggregate outstanding amount of such loans was approximately $261,667. All
loans
to Russell Haehn and Marck's Real Estate were repaid as of March 31,
2006.
On
October 27, 2006, Russell Haehn, our Chairman and Chief Executive Officer
provided a working capital loan to us in the amount of $350,000. This loan
is
evidenced by a promissory note (the “Note”) in the principal amount of $350,000
payable on demand any time after October 26, 2007. The Note bears interest
at a
rate of 6% per annum, and the outstanding principal amount and all accrued
interest are payable upon demand or sooner if prepaid by us.
ITEM
14. PRINCIPAL
ACCOUNTANT FEES AND SERVICES
Our
principal outside auditor is Bagell, Josephs, Levine & Company, LLC
(“Bagell”). Set forth below are the fees and expenses for Bagell for each of the
last two years for the following services provided to us:
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
Annual
Audit Fees
|
|
$
|
60,000
|
|
$
|
55,000
|
|
|
|
|
|
|
|
|
|
Audit-Related
Fees
|
|
$
|
36,000
|
|
$
|
25,500
(1
|
)
|
|
|
|
|
|
|
|
|
Tax
Fees
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
Fees
|
|
|
|
|
$
|
21,862
(2
|
)
|
|
|
|
|
|
|
|
|
Total
Fees
|
|
$
|
96,000
|
|
$
|
102,362
|
|
(1)
Fees
paid for quarterly review of financial statements.
(2)
Fees
paid for services provided in connection with the Company’s Form S-1
Registration Statement, including review of SEC Comment Letter.
Our
Board
of Directors approves each non-audit engagement or service with or by our
independent auditor. Prior to approving any such non-audit engagement or
service, it is the Board's practice to first receive
information regarding the engagement or service that (i) is detailed as to
the
specific engagement or service, and (ii) enables the Board to make a
well-reasoned assessment of the impact of the engagement or service on the
auditor's independence. The Board approved all non-audit engagements
with,
and
services provided by, our auditors during 2005.
PART
IV
ITEM
15. EXHIBITS,
FINANCIAL STATEMENTS AND SCHEDULES
Exhibit Number
and Document Description
2.1
|
|
Stock
Purchase and Reorganization Agreement dated as of December 30,
2003
(1).
|
|
|
|
2.2
|
|
Repurchase
Agreement dated December 30, 2003 (1).
|
|
|
|
2.3
|
|
Stock
Purchase Agreement dated as of December 30, 2003 (1).
|
|
|
|
2.4
|
|
Share
Purchase Agreement dated as of December 30, 2003 (1).
|
|
|
|
2.5
|
|
Asset
Purchase Agreement dated April 2004 (Exhibit 2.1) (2).
|
|
|
|
3.1
|
|
Restated
Articles of Incorporation of Giant Motorsports, Inc.
(3).
|
|
|
|
3.2
|
|
Bylaws
of Giant Motorsports, Inc. (4).
|
|
|
|
4.1
|
|
Form
of Warrant for 1,000,000 shares of common stock dated January 20,
2004
(1).
|
|
|
|
4.2
|
|
Form
of Warrant for 100,000 shares of common stock dated April 19, 2004
(5).
|
|
|
|
4.3
|
|
Stock
Option Agreement with Russell A. Haehn (1,000,000 shares) (Exhibit
4.2)
(6).
|
|
|
|
4.4
|
|
Stock
Option Agreement with Gregory A. Haehn (500,000 shares) (Exhibit
4.3)
(6).
|
|
|
|
4.5
|
|
Certificate
of Designation of Series A Convertible Preferred Stock (Exhibit
99.1)
(7).
|
|
|
|
4.6
|
|
Form
of Investor Warrant (September 2005 Private Placement) (Exhibit
99.2)
(7).
|
|
|
|
4.7
|
|
Form
of Purchase Option (September 2005 Private Placement) (Exhibit
99.3)
(7).
|
|
|
|
4.8
|
|
Registration
Rights Agreement (September 2005 Private Placement (Exhibit 99.4)
(7).
|
|
|
|
4.9
|
|
Specimen
stock certificate for shares of common stock (8).
|
|
|
|
4.10
|
|
Specimen
stock certificate for Series A Shares (8).
|
|
|
|
4.11
|
|
Specimen
Warrant Certificate (9).
|
|
|
|
4.12
|
|
Form
of Warrant Agreement between Olde Monmouth Stock Transfer Co.,
Inc. and
the Company (9).
|
|
|
|
10.1
|
|
Agency
Agreement between Giant Motorsports, Inc. and HCPF/Brenner Securities
LLC
dated September 9, 2005 (7).
|
|
|
|
10.2 |
|
Lease
dated October 1, 2006, effective January 1, 2007, between Russell A.
Haehn d/b/a Marck's Real Estate and W.W. Cycles, Inc. * |
|
|
|
20.1
|
|
Secured
Promissory Note dated April 2004 in the principal amount of $1,675,000
(2).
|
|
|
|
20.2
|
|
Commercial
Security Agreement dated April 2004
(2).
|
20.3
|
|
Management
Agreement between King's Motorsports Inc. d/b/a Chicago Cycle and
Giant
Motorsports, Inc. dated April 2004 (2).
|
|
|
|
21
|
|
Subsidiaries.*
|
|
|
|
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-14(a)) *
|
|
|
|
32.1
|
|
Certificate
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
|
|
Certificate
of the Chief 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)) *
|
*
Filed
herewith
(1)
Filed
as an exhibit to the Form 8-K filed January 23, 2004 and incorporated herein
by
reference.
(2)
Filed
as an exhibit to the Form 8-K filed May 11, 2004 and incorporated herein by
reference.
(3)
Filed
as an exhibit to the Definitive Schedule 14C filed March 15, 2004 and
incorporated herein
by
reference.
(4)
Filed
as an exhibit to the Form 10-KSB filed April 15, 2005 and incorporated herein
by
reference.
(5)
Filed
as an exhibit to the Form 8-K filed on April 21, 2004 and incorporated herein
by
reference.
(6)
Filed
as an exhibit to the Form 8-K filed on August 18, 2004 and incorporated herein
by reference.
(7)
Filed
as an exhibit to the Form 8-K filed on September 22, 2005 and incorporated
herein by reference.
(8) Filed
as
an exhibit to the Registration Statement on Form S1/A filed on January 12,
2006
and incorporated herein by reference.
(9) Filed
as
an exhibit to the Registration Statement on Form 8-A filed on January 19, 2006
and incorporated herein by reference.
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) 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.
|
|
|
|
|
By: |
|
|
Russell
A. Haehn
Chairman
and Chief Executive Officer
April
13, 2007
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, this Annual Report
on Form 10-K has been signed by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
|
|
|
|
|
|
|
|
April
13 , 2007
|
|
|
|
Russell
A. Haehn
Chairman
and Chief Executive Officer (principal executive
officer)
|
|
|
|
|
|
|
|
|
April
13, 2007
|
|
|
|
Gregory
A. Haehn
President
and Chief Operating Officer
(principal
financial and accounting
officer)
|
GIANT
MOTORSPORTS, INC.
FINANCIAL
STATEMENTS
December
31, 2006, 2005 and 2004
-
- - o o
0 o o - - -
CONTENTS
|
PAGE
|
CONSOLIDATED
FINANCIAL STATEMENTS:
|
|
|
|
REPORT
OF INDEPENDENT REGISTERED PUBLIC
|
|
ACCOUNTING
FIRM
|
F-1
|
BALANCE
SHEETS
|
F-2
- F-3
|
STATEMENTS
OF INCOME (LOSS)
|
F-4
|
STATEMENTS
OF STOCKHOLDERS’ EQUITY
|
F-5
|
STATEMENTS
OF CASH FLOWS
|
F-6
- F-7
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
F-8
- F-27
|
BAGELL,
JOSEPHS, LEVINE & COMPANY, L.L.C.
Certified
Public Accountants
High
Ridge Commons
Suites
400-403
200
Haddonfield Berlin Road
Gibbsboro,
New Jersey 08026
(856)
346-2828 Fax (856) 346-2882
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To
the
Board of Directors
Giant
Motorsports, Inc.
Salem,
Ohio
We
have
audited the accompanying consolidated balance sheets of Giant Motorsports,
Inc.
as of December 31, 2006 and 2005, and the related consolidated statements
of
income(loss), stockholders' equity, and cash flows for each of the years
in the
three-year period ended December 31, 2006. . These financial statements are
the
responsibility of the Company's management. Our responsibility is to express
an
opinion on these financial statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that
we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. The Company is not
required to have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audits included consideration of internal
control over financial reporting as a basis for designing audit procedures
that
are appropriate in the circumstances, but not for the purpose of expressing
an
opinion on the effectiveness of the Company’s internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures
in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In
our
opinion, the consolidated financial statements referred to above present
fairly,
in all material respects, the financial position of Giant Motorsports, Inc.
as
of December 31, 2006 and 2005, and the results of its operations and its
cash
flows for the years in the three-year period ended December 31, 2006 in
conformity with accounting principles generally accepted in the United States
of
America.
/s/
BAGELL, JOSEPHS, LEVINE & COMPANY, LLC
BAGELL,
JOSEPHS, LEVINE & COMPANY, LLC
Gibbsboro,
New Jersey
April
8,
2007
GIANT
MOTORSPORTS, INC.
|
|
CONSOLIDATED
BALANCE SHEETS
|
|
DECEMBER
31,
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
CURRENT
ASSETS
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
156,530
|
|
$
|
227,301
|
|
Accounts
receivable, net
|
|
|
3,803,718
|
|
|
4,850,408
|
|
Accounts
receivable, affiliates
|
|
|
-
|
|
|
261,667
|
|
Inventories
|
|
|
21,267,135
|
|
|
16,775,069
|
|
Federal
income tax receivable
|
|
|
-
|
|
|
119,500
|
|
Deferred
tax assets
|
|
|
113,900
|
|
|
-
|
|
Prepaid
expenses
|
|
|
10,131
|
|
|
74,255
|
|
TOTAL
CURRENT ASSETS
|
|
|
25,351,414
|
|
|
22,308,200
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PROPERTY
AND EQUIPMENT, NET
|
|
|
2,004,274
|
|
|
1,893,967
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER
ASSETS
|
|
|
|
|
|
|
|
Goodwill
|
|
|
1,688,950
|
|
|
1,588,950
|
|
Deposits
|
|
|
41,000
|
|
|
41,000
|
|
TOTAL
OTHER ASSETS
|
|
|
1,729,950
|
|
|
1,629,950
|
|
|
|
$
|
29,085,638
|
|
$
|
25,832,117
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
|
|
|
|
|
|
|
GIANT
MOTORSPORTS, INC.
|
|
CONSOLIDATED
BALANCE SHEETS (CONTINUED)
|
|
DECEMBER
31,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
CURRENT
LIABILITIES
|
|
|
|
|
|
Current
portion of long-term debt
|
|
|
1,513,665
|
|
|
714,623
|
|
Notes
payable, floor plans
|
|
|
20,885,887
|
|
|
17,159,719
|
|
Note
payable, officer
|
|
|
352,500
|
|
|
193,135
|
|
Accounts
payable, trade
|
|
|
1,987,152
|
|
|
2,370,369
|
|
Accrued
expenses
|
|
|
493,939
|
|
|
654,417
|
|
Customer
deposits
|
|
|
196,246
|
|
|
87,051
|
|
TOTAL
CURRENT LIABILITIES
|
|
|
25,429,389
|
|
|
21,179,314
|
|
|
|
|
|
|
|
|
|
DEFERRED
TAX LIABILITIES
|
|
|
20,600
|
|
|
52,100
|
|
|
|
|
|
|
|
|
|
LONG-TERM
DEBT, Net of current portion
|
|
|
-
|
|
|
783,856
|
|
TOTAL
LIABILITIES
|
|
|
25,449,989
|
|
|
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,
2,450 and 2,870 shares issued and outstanding at
|
|
|
|
|
|
|
|
December
31, 2006 and 2005, respectively
|
|
|
2,450,000
|
|
|
2,870,000
|
|
Common
stock, $.001 par value, authorized 75,000,000 shares
|
|
|
|
|
|
|
|
11,791,747
and 10,445,000 shares issued and outstanding
|
|
|
|
|
|
|
|
at
December 31, 2006 and 2005, respectively
|
|
|
11,792
|
|
|
10,445
|
|
Additional
paid-in capital
|
|
|
1,868,592
|
|
|
641,277
|
|
Additional
paid-in capital - Options
|
|
|
93,426
|
|
|
109,442
|
|
Additional
paid-in capital - Warrants
|
|
|
1,724,800
|
|
|
2,020,480
|
|
Additional
paid-in capital - Beneficial conversions
|
|
|
1,303,400
|
|
|
1,526,840
|
|
Issuance
cost on preferred series A convertible
|
|
|
(786,762
|
)
|
|
(786,762
|
)
|
Retained
deficit
|
|
|
(3,029,599
|
)
|
|
(2,574,875
|
)
|
TOTAL
STOCKHOLDERS' EQUITY
|
|
|
3,635,649
|
|
|
3,816,847
|
|
|
|
$
|
29,085,638
|
|
$
|
25,832,117
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
|
|
|
|
|
|
|
GIANT
MOTORSPORTS, INC.
|
|
CONSOLIDATED
STATEMENTS OF INCOME (LOSS)
|
|
FOR
THE YEARS ENDED DECEMBER 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
REVENUES
|
|
|
|
|
|
|
|
Sales
|
|
$
|
97,637,103
|
|
$
|
103,117,471
|
|
$
|
77,615,237
|
|
Finance,
insurance and extended service revenues
|
|
|
3,114,683
|
|
|
2,487,596
|
|
|
2,335,618
|
|
TOTAL
REVENUES
|
|
|
100,751,786
|
|
|
105,605,067
|
|
|
79,950,855
|
|
|
|
|
|
|
|
|
|
|
|
|
COST
OF SALES
|
|
|
86,340,024
|
|
|
93,327,630
|
|
|
70,025,884
|
|
GROSS
PROFIT
|
|
|
14,411,762
|
|
|
12,277,437
|
|
|
9,924,971
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING
EXPENSES
|
|
|
|
|
|
|
|
|
|
|
Selling
expenses
|
|
|
8,313,676
|
|
|
7,359,362
|
|
|
5,003,299
|
|
General
and administrative expenses
|
|
|
4,980,384
|
|
|
4,286,549
|
|
|
2,753,416
|
|
|
|
|
13,294,060
|
|
|
11,645,911
|
|
|
7,756,715
|
|
INCOME
FROM OPERATIONS
|
|
|
1,117,702
|
|
|
631,526
|
|
|
2,168,256
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER
INCOME AND (EXPENSE)
|
|
|
|
|
|
|
|
|
|
|
Other
income, net
|
|
|
20,883
|
|
|
100,714
|
|
|
38,592
|
|
Interest
expense, net
|
|
|
(1,413,383
|
)
|
|
(779,943
|
)
|
|
(626,587
|
)
|
Gain
on sale of assets
|
|
|
21,500
|
|
|
-
|
|
|
-
|
|
|
|
|
(1,371,000
|
)
|
|
(679,229
|
)
|
|
(587,995
|
)
|
|
|
|
|
|
|
|
|
|
|
|
INCOME
(LOSS) BEFORE PROVISION
|
|
|
|
|
|
|
|
|
|
|
(BENEFIT)
FOR TAXES
|
|
|
(253,298
|
)
|
|
(47,703
|
)
|
|
1,580,261
|
|
|
|
|
|
|
|
|
|
|
|
|
PROVISION
(BENEFIT) FOR INCOME TAXES
|
|
|
(72,100
|
)
|
|
(38,900
|
)
|
|
622,200
|
|
NET
INCOME (LOSS) BEFORE PREFERRED DIVIDENDS
|
|
|
(181,198
|
)
|
|
(8,803
|
)
|
|
958,061
|
|
|
|
|
|
|
|
|
|
|
|
|
PREFERRED
DIVIDENDS
|
|
|
(273,526
|
)
|
|
(2,870,000
|
)
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
INCOME (LOSS) ATTRIBUTABLE TO
|
|
|
|
|
|
|
|
|
|
|
COMMON
STOCKHOLDERS
|
|
$
|
(454,724
|
)
|
$
|
(2,878,803
|
)
|
$
|
958,061
|
|
|
|
|
|
|
|
|
|
|
|
|
BASIC
EARNINGS (LOSS) PER SHARE
|
|
$
|
(0.04
|
)
|
$
|
(0.28
|
)
|
$
|
0.09
|
|
|
|
|
|
|
|
|
|
|
|
|
DILUTED
EARNINGS (LOSS) PER SHARE
|
|
$
|
(0.04
|
)
|
$
|
(0.28
|
)
|
$
|
0.08
|
|
|
|
|
|
|
|
|
|
|
|
|
WEIGHTED
AVERAGE SHARES OUTSTANDING
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BASIC
|
|
|
11,090,020
|
|
|
10,435,904
|
|
|
10,425,000
|
|
DILUTED
|
|
|
11,090,020
|
|
|
10,435,904
|
|
|
12,001,503
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
|
|
|
|
|
|
|
|
|
|
|
GIANT
MOTORSPORTS, INC.
|
|
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS' EQUITY
|
|
FOR
THE YEARS ENDED DECEMBER 31, 2006, 2005, AND 2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred
Stock
|
|
Common
Stock
|
|
Paid-in |
|
Paid-in
Capital -
|
|
Paid-in
Capital -
|
|
Paid-in
Capital - Beneficial
|
|
Issuance
Costs Preferred
|
|
Retained
Earnings
|
|
|
|
|
|
Shares
|
|
Amount
|
|
Shares
|
|
Amount
|
|
Capital
|
|
Options
|
|
Warrants
|
|
Conversion
|
|
Series
A
|
|
(Deficit)
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
December 31, 2003,
|
|
|
-
|
|
|
-
|
|
|
7,850,000
|
|
|
7,850
|
|
|
37,150
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
986,209
|
|
|
1,031,209
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effects
of reverse merger
|
|
|
-
|
|
|
-
|
|
|
2,575,000
|
|
|
2,575
|
|
|
(2,575
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reallocation
of S-Corporation earnings
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
986,209
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(986,209
|
)
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retirment
of loan
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(21,250
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(21,250
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
warrants issued as compensation
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
15,000
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
15,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributions
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(654,133
|
)
|
|
(654,133
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income for the year
ended
December 31, 2004
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
958,061
|
|
|
958,061
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
December 31, 2004
|
|
|
-
|
|
|
-
|
|
|
10,425,000
|
|
|
10,425
|
|
|
1,014,534
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
303,928
|
|
|
1,328,887
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of common stock
for
services
|
|
|
-
|
|
|
-
|
|
|
20,000
|
|
|
20
|
|
|
11,580
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
11,600
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of preferred stock
|
|
|
2,870
|
|
|
2,870,000
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
2,870,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allocation
of equity
proceeds
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(384,837
|
)
|
|
109,442
|
|
|
2,020,480
|
|
|
1,526,840
|
|
|
(786,762
|
)
|
|
(2,870,000
|
)
|
|
(384,837
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss for the year ended
December
31, 2005
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(8,803
|
)
|
|
(8,803
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
December 31, 2005
|
|
|
2,870
|
|
|
2,870,000
|
|
|
10,445,000
|
|
|
10,445
|
|
|
641,277
|
|
|
109,442
|
|
|
2,020,480
|
|
|
1,526,840
|
|
|
(786,762
|
)
|
|
(2,574,875
|
)
|
|
3,816,847
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion
of Series A
preferred
stock
|
|
|
(420
|
)
|
|
(420,000
|
)
|
|
938,500
|
|
|
939
|
|
|
954,197
|
|
|
(16,016
|
)
|
|
(295,680
|
)
|
|
(223,440
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
shares dividends
issued
|
|
|
-
|
|
|
-
|
|
|
408,247
|
|
|
408
|
|
|
273,118
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(273,526
|
)
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss for the year ended
December
31, 2006
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(181,198
|
)
|
|
(181,198
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
December 31, 2006
|
|
|
2,450
|
|
$
|
2,450,000
|
|
|
11,791,747
|
|
$
|
11,792
|
|
$
|
1,868,592
|
|
$
|
93,426
|
|
$
|
1,724,800
|
|
$
|
1,303,400
|
|
$
|
(786,762
|
)
|
$
|
(3,029,599
|
)
|
$
|
3,635,649
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these consolidated financial
statements
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GIANT
MOTORSPORTS, INC.
|
|
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|
FOR
THE YEARS ENDED DECEMBER 31,
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$
|
(181,198
|
)
|
$
|
(8,803
|
)
|
$
|
958,061
|
|
Adjustments
to reconcile net income (loss) to net cash
|
|
|
|
|
|
|
|
|
|
|
provided
by (used in) operating activities:
|
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
432,558
|
|
|
335,581
|
|
|
165,043
|
|
Amortization
|
|
|
-
|
|
|
130,000
|
|
|
-
|
|
Provision
for doubtful accounts
|
|
|
48,977
|
|
|
-
|
|
|
-
|
|
Deferred
federal income taxes (credit)
|
|
|
(145,400
|
)
|
|
23,200
|
|
|
28,900
|
|
(Gain)
on sale of property and equipment
|
|
|
(21,500
|
)
|
|
-
|
|
|
-
|
|
Issuance
of common stock for services
|
|
|
-
|
|
|
11,600
|
|
|
-
|
|
(Increase)
in accounts receivable, net
|
|
|
992,938
|
|
|
(2,385,039
|
)
|
|
(1,180,263
|
)
|
(Increase)
in accounts receivable, employees
|
|
|
4,775
|
|
|
-
|
|
|
-
|
|
(Increase)
in inventories
|
|
|
(4,492,066
|
)
|
|
(236,982
|
)
|
|
(5,552,007
|
)
|
(Increase)
in income taxes receivable
|
|
|
119,500
|
|
|
(119,500
|
)
|
|
-
|
|
(Increase)
decrease in prepaid expenses
|
|
|
64,124
|
|
|
(12,380
|
)
|
|
(53,875
|
)
|
Decrease
in deposits
|
|
|
-
|
|
|
26,240
|
|
|
-
|
|
Increase
(decrease) in customer deposits
|
|
|
109,195
|
|
|
(257,089
|
)
|
|
128,508
|
|
Increase
(decrease) in floor plan liability
|
|
|
3,726,168
|
|
|
(597,927
|
)
|
|
6,213,046
|
|
Increase
(decrease) in deferred service contract revenue
|
|
|
-
|
|
|
(90,000
|
)
|
|
10,000
|
|
Increase
(decrease) in accounts payable trade
|
|
|
(383,217
|
)
|
|
1,112,323
|
|
|
551,944
|
|
Increase
in accrued expenses
|
|
|
(160,478
|
)
|
|
88,866
|
|
|
387,169
|
|
NET
CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES
|
|
|
114,376
|
|
|
(1,979,910
|
)
|
|
1,656,526
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
Purchase
of property and equipment
|
|
|
(542,865
|
)
|
|
(1,123,881
|
)
|
|
(741,519
|
)
|
Proceeds
from sale of property and equipment
|
|
|
21,500
|
|
|
-
|
|
|
-
|
|
Decrease
(increase) in accounts receivable affiliates
|
|
|
261,667
|
|
|
(195,844
|
)
|
|
249,520
|
|
(Increase)
decrease in notes receivable from officers
|
|
|
-
|
|
|
-
|
|
|
425,376
|
|
(Increase)
in deposits
|
|
|
-
|
|
|
-
|
|
|
(51,240
|
)
|
Covenant
not to compete incurred
|
|
|
-
|
|
|
(130,000
|
)
|
|
-
|
|
NET
CASH (USED IN) INVESTING ACTIVITIES
|
|
|
(259,698
|
)
|
|
(1,449,725
|
)
|
|
(117,863
|
)
|
|
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
Short-term
borrowings on note
|
|
|
200,000
|
|
|
-
|
|
|
750,000
|
|
Long-term
borrowings on note
|
|
|
-
|
|
|
-
|
|
|
1,250,000
|
|
Payments
on short-term debt
|
|
|
-
|
|
|
(925,137
|
)
|
|
(1,450,000
|
)
|
Payments
on long-term debt
|
|
|
(284,814
|
)
|
|
(212,411
|
)
|
|
(154,010
|
)
|
Proceeds
from officer loan
|
|
|
159,365
|
|
|
447,164
|
|
|
-
|
|
Proceeds
from stock issuance - net
|
|
|
-
|
|
|
2,485,133
|
|
|
-
|
|
Issuance
of 1,000,000 stock warrants
|
|
|
-
|
|
|
-
|
|
|
15,000
|
|
Repurchase
of 8,000,000 shares of common stock
|
|
|
-
|
|
|
-
|
|
|
(21,250
|
)
|
Distributions
|
|
|
-
|
|
|
-
|
|
|
(654,133
|
)
|
NET
CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES
|
|
|
74,551
|
|
|
1,794,749
|
|
|
(264,393
|
)
|
NET
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
|
|
|
(70,771
|
)
|
|
(1,634,886
|
)
|
|
1,274,270
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH
AND CASH EQUIVALENTS, Beginning of Year
|
|
|
227,301
|
|
|
1,862,187
|
|
|
587,917
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH
AND CASH EQUIVALENTS, End of Year
|
|
$
|
156,530
|
|
$
|
227,301
|
|
$
|
1,862,187
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
|
|
|
|
|
|
|
|
|
|
|
GIANT
MOTORSPORTS, INC.
|
|
CONSOLIDATED
STATEMENTS OF CASH FLOW
|
|
FOR
THE YEARS ENDED DECEMBER 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
|
|
|
|
|
|
OTHER
SUPPLEMENTARY CASH FLOW INFORMATION
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accretion
of preferred stock discount
|
|
$
|
-
|
|
$
|
2,870,000
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt
incurred for acquisition of sales agreement
|
|
$
|
100,000
|
|
$
|
-
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
issued for outside services
|
|
$
|
-
|
|
$
|
11,600
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term
borrowings incurred for the acquisition of assets
|
|
$
|
-
|
|
$
|
-
|
|
$
|
1,675,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Note
payable to officer incurred for the acquisition of assets
|
|
$
|
-
|
|
$
|
243,572
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
paid
|
|
$
|
1,445,662
|
|
$
|
762,736
|
|
$
|
642,859
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
taxes paid
|
|
$
|
-
|
|
$
|
151,000
|
|
$
|
200,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred
stock dividends paid in common stock
|
|
$
|
273,526
|
|
$
|
-
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
|
|
|
|
|
|
|
|
|
|
|
GIANT
MOTORSPORTS, INC.
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2006, 2005 and 2004
NOTE
A -
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization:
Giant
Motorsports, Inc., (the Company) through its wholly owned subsidiaries, W.W.
Cycles, Inc. doing business as Andrews Cycles and Chicago Cycles, Inc. doing
business as Chicago Cycle Center, operates two retail dealerships of
motorcycles, all terrain vehicles, scooters and personal watercraft in
northeastern Ohio and northern Illinois. On December 30, 2003, the stockholders
of W.W. Cycles, Inc. entered into a Stock Purchase and Reorganization Agreement
in which effective January 16, 2004 W.W. Cycles, Inc. was issued an aggregate
of
7,850,000 restricted shares of common stock, $.001 par value, of American
Busing
Corporation in exchange for all of the outstanding shares of the common stock
of
the Company, resulting in W.W. Cycles, Inc. becoming a wholly-owned subsidiary
of American Busing Corporation. The acquisition was accounted for as a reverse
merger whereby, for accounting purposes, WW Cycles, Inc. is considered the
accounting acquirer and the historical financial statements of WW Cycles,
Inc.
became the historical financial statements of Giant Motorsports, Inc. Effective
April 5, 2004 American Busing Corporation changed its name to Giant Motorsports,
Inc. On April 30, 2004, Giant Motorsports, Inc. acquired substantially all
of
the assets and certain liabilities of Chicago Cycle Center pursuant to an
Asset
Purchase Agreement and entered into a Non-competition Agreement with one
of the
former owners and entered into an Employment Agreement with the other former
owner.
Principles
of Consolidation:
The
consolidated financial statements include the accounts of the Company and
all of
its wholly owned subsidiaries. All significant inter-company accounts and
transactions have been eliminated in consolidation.
Cash
and Cash Equivalents:
Cash
and
cash equivalents include amounts held in demand deposit accounts and overnight
investment accounts. The Company considers all highly liquid investments
with
original maturities of three months or less to be cash equivalents.
Contracts
in Transit:
Contracts
in transit represent customer finance contracts evidencing loan agreements
or
lease agreements between the Company, as creditor, and the customer, as
borrower, to acquire or lease a vehicle whereby a third-party finance source
has
given the Company initial, non-binding approval to assume the Company’s position
as creditor. Funding and approval from the finance source is provided upon
the
finance source’s review of the loan or lease agreement and related documentation
executed by the customer at the dealership. These finance contracts are
typically funded within ten days of the initial approval of the finance
transaction by the third-party finance source. The finance source is not
contractually obligated to make the loan or lease to the customer until it
gives
its final approval and funds the transaction. Until such final approval is
given, contracts in transit represent amounts due from the customer to the
Company. See Note B for additional information.
GIANT
MOTORSPORTS, INC.
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December
31, 2006, 2005 and 2004
NOTE
A -
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Allowance
for Doubtful Accounts:
Accounts
are written off when management determines that an account is uncollectible.
Recoveries of accounts previously written off are recorded when received.
An
estimated allowance for doubtful accounts is determined to reduce the Company’s
receivables to their carrying value, which approximates fair value. The
allowance is estimated based on historical collection experience, specific
review of individual customer accounts, and current economic and business
conditions. Management has determined that an allowance of $25,000 is sufficient
at December 31, 2006 and December 31, 2005.
Revenue
Recognition:
Vehicle
Sales:
The
Company records revenue when vehicles are delivered and title has passed
to the
customer, when vehicle service or repair work is performed and when parts
are
delivered. Sales promotions that are offered to customers are accounted for
as a
reduction to the sales price at the time of sale. Incentives, rebates and
holdbacks offered by manufacturers directly to the Company are recognized
at the
time of sale if they are vehicle specific, or as earned in accordance with
the
manufacturer program rules and are recorded as a reduction of cost of
merchandise sold.
Finance,
Insurance and Extended Service Revenues:
The
Company arranges financing for customers through various financial institutions
and receives a commission from the lender equal to the difference between
the
interest rates charged to customers and the interest rates set by the financing
institution. The Company also receives commissions from the sale of various
third party insurance products to customers and extended service contracts.
These commissions are recorded as revenue at the time the customer enters
into
the contract. The Company is not the obligor under any of these contracts.
In
the case of finance contracts, a customer may prepay or fail to pay their
contract, thereby terminating the contract. Customers may also terminate
extended service contracts, which are fully paid at purchase, and become
eligible for refunds of unused premiums. In these circumstances, a portion
of
the commissions the Company receives may be charged back based on the relevant
terms of the contracts. The revenue the Company records relating to commissions
is net of an estimate of the ultimate amount of chargebacks the Company will
be
required to pay. Such estimates of chargeback experience are based on our
historical chargeback expense arising from similar contracts. The Company
also
acts as the warrantor on certain extended service contracts and defers the
revenue and recognized it over the life of the contract on a straight-line
basis.
GIANT
MOTORSPORTS, INC.
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December
31, 2006, 2005 and 2004
NOTE
A -
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Fair
Value of Financial Instruments:
Financial
instruments consist of cash and cash equivalents, accounts receivable, accounts
payable and debt, including floor plan notes payable. The carrying amount
of all
significant financial instruments approximates fair value due either to length
or maturity or variable interest rates that approximate prevailing market
rates.
Inventories:
Parts
and
accessories inventories are stated at the lower of cost or market using the
first-in, first-out method. Vehicle inventories are stated at the lower of
cost
or market using the specific identification method.
Concentration
of Credit Risk:
Financial
instruments that potentially subject the Company to credit risk consist of
cash
equivalents and accounts receivable.
The
Company’s policy is to review the amount of credit exposure to any one financial
institution and place investments with financial institutions evaluated as
being
creditworthy. In the ordinary course of business, the Company has bank deposits
and overnight repurchase agreements that may exceed federally insured limits.
As
of December 31, 2006 and 2005 the Company had $301,955 and $462,702 in excess
of
the $100,000 insured limit.
Concentration
of credit risk, with respect to accounts receivable-customers, is limited
through the Company’s credit evaluation process. The Company reviews the credit
history before extending credit. Generally, the Company does not require
collateral from its customers
Property
and Equipment:
Property
and equipment are stated at cost. Maintenance and repairs that do not add
materially to the value of the asset nor appreciably prolong its useful life
are
charged to expense as incurred. Gains or losses on the disposal of property
and
equipment are included in the determination of income.
Depreciation
of property and equipment and amortization of leasehold improvements are
provided using the straight-line method over the following estimated useful
lives:
Fixtures,
and equipment
|
3-7
years
|
Vehicles
|
5
years
|
Leasehold
Improvements
|
15-39years
|
GIANT
MOTORSPORTS, INC.
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December
31, 2006, 2005 and 2004
NOTE
A -
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Goodwill
And Other Intangible Assets:
In
June
2001, the Financial Accounting Standards Board (“FASB”) issued Statement No. 142
“Goodwill and Other Intangible Assets”. This statement addresses financial
accounting and reporting for acquired goodwill and other intangible assets
and
supercedes APB opinion No. 17, “Intangible Assets”. It addresses how intangible
assets that are acquired individually or with a group of other assets (but
not
those acquired in a business combination) should be accounted for in the
financial statements upon their acquisition. This Statement also addresses
how
goodwill and other intangible assets should be accounted for after they have
been initially recognized in the financial statements. The Company, in its
acquisitions, recognized $1,588,950 of goodwill and $100,000 of other intangible
assets associated with a licensing sales agreement. The Company performs
its
annual impairment test for goodwill at year-end. As of December 31, 2006,
the
Company has determined that no impairment is necessary.
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
Goodwill
|
|
$
|
1,588,950
|
|
$
|
1,588,950
|
|
Licensing
Agreement
|
|
|
100,000
|
|
|
-0-
|
|
TOTAL
|
|
$
|
1,688,950
|
|
$
|
1,588,950
|
|
Income
Taxes:
Income
taxes are calculated using the liability method specified by Statement of
Financial Accounting Standards No. 109, “Accounting for Income
Taxes.”
At
December 31, 2006 and 2005, income taxes are provided for amounts currently
due
and deferred amounts arising from temporary differences between income for
financial reporting and income tax purposes.
Advertising
Costs:
Advertising
costs are expensed when incurred. Charges to operations amounted to $2,198,800,
$2,296,491 and $1,265,407 for the years ended December 31, 2006, 2005 and
2004
respectively.
Earnings
(Loss) Per Share of Common Stock:
Historical
net income (loss) per share is computed using the weighted average number
of
common shares outstanding. Diluted earnings per share (EPS) include additional
dilution from common stock equivalents, such as stock issuable pursuant to
the
exercise of stock options and warrants. Common stock equivalents are not
included in the computation of diluted earnings per share when the Company
reports a loss because to do so would be anti-dilutive for the periods
presented.
GIANT
MOTORSPORTS, INC.
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December
31, 2006, 2005 and 2004
NOTE
A -
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Earnings
(Loss) Per Share of Common Stock (Continued):
The
following is a reconciliation of the computation for basic and diluted
EPS:
|
|
Years
Ended December
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
|
|
|
|
|
|
Net
income (loss) attributed to common shares
|
|
$
|
(454,724
|
)
|
$
|
(2,878,803
|
)
|
$
|
958,061
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average
common shares outstanding (Basic)
|
|
|
11,090,020
|
|
|
10,435,904
|
|
|
10,425,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average
common stock equivalents:
|
|
|
|
|
|
|
|
|
|
|
Warrants
|
|
|
0
|
|
|
0
|
|
|
1,010,929
|
|
Options
|
|
|
0
|
|
|
0
|
|
|
565,574
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average
common shares
|
|
|
|
|
|
|
|
|
|
|
outstanding
(diluted)
|
|
|
11,090,020
|
|
|
10,435,904
|
|
|
12,001,503
|
|
The
Company uses the intrinsic value method to account for warrants granted to
executive officer, directors, key employees and advisors for the purchase
of
common stock. No compensation expense is recognized on the grant date, since
at
that date, the warrant price equals or is higher than the market price of
the
underlying common stock. The Company discloses the pro forma effect of
accounting for stock warrants under the fair value method. The Company uses
the
fair value method to account for warrants granted to advisors for the purchase
of common stock. There were 11,779,574, 7,316,503 and 1,576,503 common stock
equivalents available at December 31, 2006, 2005, and 2004,
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.
Stock-Based
Compensation:
Effective
January 1, 2006, the Company adopted the provisions of Financial Accounting
Standards Board Statement of Financial Accounting Standards (“SFAS”) No. 123R,
“Share-Based Payment” which establishes the accounting for employee stock-based
awards. Under the provisions of SFAS 123R, stock-based compensation is measured
at the grant date, based on the calculated fair value of the award, and is
recognized as an expense over the requisite employee service period. The
Company
adopted SFAS 123R using the modified prospective method, and as such, periods
prior to December 31, 2005 have not been restated.
GIANT
MOTORSPORTS, INC.
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December
31, 2006, 2005 and 2004
NOTE
A -
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Stock-Based
Compensation (Continued):
Prior
to
December 31, 2005, the Company accounted for stock-based compensation in
accordance with the provisions of Accounting Principles Board Opinion No.
25
(“APB 25”), “Accounting for Stock Issued to Employees”, and related
interpretations. Under APB No. 25,
compensation
cost was recognized based on the difference, if any, on the date of grant
between the fair value of the Company’s stock and the amount an employee must
pay to acquire the stock. In 2004, the Company granted options at an exercise
price greater than the market value on the date of grant. Accordingly, no
compensation expense was recognized for the stock option in periods prior
to the
adoption of SFAS No. 123R.
SFAS
No.
123R requires disclosure of pro-forma information for periods prior to adoption.
The pro-forma disclosures are based on the fair value of awards at the grant
date, amortized to expense over the service period. The following table
illustrates the effect on net income and earnings per share as if the Company
has applied the fair value recognition provisions of SFAS No. 123, “Accounting
for Stock-Based Compensation”, for the period prior to adoption of SFAS No.
123R, and the actual effect on net income and earnings per share for the
period
after adoption of SFAS No. 123R.
If
compensation expensed for the Company’s stock-based compensation plans had been
determined consistent with SFAS 123, the Company’s net income (loss) per share
including pro-forma results would have been the amounts indicated
below:
|
|
2006
|
|
2005
|
|
2004
|
|
Net
income (loss);
|
|
|
|
|
|
|
|
As
reported
|
|
$
|
(181,198
|
)
|
$
|
(8,803
|
)
|
$
|
958,061
|
|
Deduct:
Total stock-based employee
|
|
|
|
|
|
|
|
|
|
|
Compensation
determined under fair
|
|
|
|
|
|
|
|
|
|
|
Value
based method for all awards,
|
|
|
|
|
|
|
|
|
|
|
Net
of related tax effects.
|
|
|
-0-
|
|
|
-0-
|
|
|
586,274
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income, pro forma
|
|
$
|
(181,198
|
)
|
$
|
(8,803
|
)
|
$
|
371,787
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
As
reported:
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.04
|
)
|
$
|
(0.28
|
)
|
$
|
0.09
|
|
Diluted
|
|
$
|
(0.04
|
)
|
$
|
(0.28
|
)
|
$
|
0.08
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro
forma:
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.04
|
)
|
$
|
(0.28
|
)
|
$
|
0.06
|
|
Diluted
|
|
$
|
(0.04
|
)
|
$
|
(0.28
|
)
|
$
|
0.03
|
|
GIANT
MOTORSPORTS, INC.
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December
31, 2006, 2005 and 2004
NOTE
A -
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Stock-Based
Compensation (Continued):
For
purposes of the above table, the fair value of the options granted is estimated
as of the date of grant using the Black-Scholes option-pricing model with
the
following assumptions:
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
|
|
|
|
|
|
Dividend
yield
|
|
|
0.0
|
%
|
|
0.0
|
%
|
|
0.0
|
%
|
Expected
volatility
|
|
|
107.38
|
|
|
107.38
|
|
|
19.27
|
|
Risk-free
interest rate
|
|
|
4.50
|
%
|
|
4.50
|
%
|
|
4.50
|
%
|
Expected
life in years
|
|
|
1
- 5
|
|
|
1
- 5
|
|
|
1
- 5
|
|
Recent
Accounting Pronouncements:
On
December 16, 2004, the Financial Accounting Standards Board ("FASB") published
Statement of Financial Accounting Standards No. 123 (Revised 2004), Share-Based
Payment ("SFAS 123R"). SFAS 123R requires that compensation cost related
to
share-based payment transactions be recognized in the financial statements.
Share-based payment transactions within the scope of SFAS 123R include stock
options, restricted stock plans, performance-based awards, stock appreciation
rights, and employee share purchase plans. The provisions of SFAS 123R are
effective for small business issuers as of the first interim period that
begins
after December 15, 2005. For the year ended December 31, 2006, FAS 123R did
not
have any impact on the financial statements.
On
December 16, 2004, FASB issued Financial Accounting Standards No. 153, Exchanges
of Non-monetary Assets, an amendment of APB Opinion No. 29, Accounting for
Non-monetary Transactions ("FAS 153"). This statement amends APB Opinion
29 to
eliminate the exception for non-monetary exchanges of similar productive
assets
and replaces it with a general exception for exchanges of non-monetary assets
that do not have commercial substance. Under FAS 153, if a non-monetary exchange
of similar productive assets meets a commercial-substance criterion and fair
value is determinable, the transaction must be accounted for at fair value
resulting in recognition of any gain or loss. FAS153 is effective for
non-monetary transactions in fiscal periods that begin after June 15, 2005.
The
implementation of this standard did not have a material impact on its financial
position, results of operations or cash flows.
In
May
2005, the FASB issued SFAS No. 154, "Accounting Changes and Error Corrections."
SFAS No. 154 replaces Accounting Principles Board ("APB") Opinion No. 20,
"Accounting Changes" and SFAS No. 3, "Reporting Accounting Changes in Interim
Financial Statements." SFAS No. 154 requires retrospective application to
prior
periods' financial statements of a voluntary change in accounting principle
unless it is impracticable. APB No. 20 previously required that most voluntary
changes in accounting principle be recognized by including the cumulative
effect
of changing to the new accounting principle in net income in the period of
the
change. SFAS No. 154 is effective for accounting changes and corrections
of
errors made in fiscal years beginning after December 15, 2005. The adoption
of
SFAS No. 154 did not have a material impact on the Company's financial position,
results of operations, or cash flows for the year ended December 31,
2006.
GIANT
MOTORSPORTS, INC.
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December
31, 2006, 2005 and 2004
NOTE
A -
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Recent
Accounting Pronouncements (Continued):
In
February 2006, the FASB issued SFAS No. 155, "Accounting for Certain Hybrid
Financial Instruments, an amendment of FASB Statements No. 133 and 140."
SFAS
No. 155 resolves issues addressed in SFAS No. 133 Implementation Issue No.
D1,
"Application of Statement 133 to Beneficial Interests in Securitized Financial
Assets," and permits fair value re-measurement for any hybrid financial
instrument that contains an embedded derivative that otherwise would require
bifurcation, clarifies which interest-only strips and principal-only strips
are
not subject to the requirements of SFAS No. 133, establishes a requirement
to
evaluate interests in securitized financial assets to identify interests
that
are freestanding derivatives or that are hybrid financial instruments that
contain an embedded derivative requiring bifurcation, clarifies that GIANT
concentrations of credit risk in the form of subordination are not embedded
derivatives and amends SFAS No. 140 to eliminate the prohibition on a qualifying
special-purpose entity from holding a derivative financial instrument that
pertains to a beneficial interest other than another derivative financial
instrument. SFAS No. 155 is effective for all financial instruments acquired
or
issued after the beginning of the first fiscal year that begins after September
15, 2006. The Company is currently evaluating the effect the adoption of
SFAS
No. 155 will have on its financial position, results of operations, and cash
flows.
In
March
2006, the FASB issued SFAS No. 156, "Accounting for Servicing of Financial
Assets, an amendment of FASB Statement No. 140." SFAS No. 156 requires an
entity
to recognize a servicing asset or liability each time it undertakes an
obligation to service a financial asset by entering into a servicing contract
under a transfer of the servicer's financial assets that meets the requirements
for sale accounting, a transfer of the servicer's financial assets to a
qualified special-purpose entity in a guaranteed mortgage securitization
in
which the transferor retains all of the resulting securities and classifies
them
as either available-for-sale or trading securities in accordance with SFAS
No.
115, "Accounting for Certain Investments in Debt and Equity Securities" and
an
acquisition or assumption of an obligation to service a financial asset that
does not relate to financial assets of the servicer or its consolidated
affiliates. Additionally, SFAS No. 156 requires all separately recognized
servicing assets and servicing liabilities to be initially measured at fair
value, permits an entity to choose either the use of an amortization or fair
value method for subsequent measurements, permits at initial adoption a one-time
reclassification of available-for-sale securities to trading securities by
entities with recognized servicing rights and requires separate presentation
of
servicing assets and liabilities subsequently measured at fair value and
additional disclosures for all separately recognized servicing assets and
liabilities. SFAS No. 156 is effective for transactions entered into after
the
beginning of the first fiscal year that begins after September 15, 2006.
The
Company is currently evaluating the effect the adoption of SFAS No. 156 will
have on its financial position, results of operations, and cash
flows.
GIANT
MOTORSPORTS, INC.
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December
31, 2006, 2005 and 2004
NOTE
A -
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Recent
Accounting Pronouncements (Continued):
In
June
2006, the FASB issued Interpretation No. 48, "Accounting for Uncertainty
in
Income Taxes" (FIN 48), which clarifies the accounting for uncertainty in
income
taxes recognized in an enterprise's financial statements in accordance with
SFAS
No. 109, "Accounting for Income Taxes." FIN 48 establishes a recognition
threshold and measurement attribute for the financial statement recognition
and
measurement of a tax position taken or expected to be taken in a tax return.
This interpretation also provides guidance on derecognition, classification,
interest and
penalties,
accounting in interim periods, disclosure, and transition. FIN 48 is effective
for fiscal years beginning after December 15, 2006. The Company is currently
evaluating the impact the adoption of this interpretation will have on its
future financial statements.
In
September 2006, The Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 157, "Fair Value
Measurement" ("SFAS No. 157"). This standard provides guidance for using
fair
value to measure assets and liabilities. SFAS No. 157 applies whenever other
standards require (or permit) assets or liabilities to be measured at fair
value
but does not expand the use of fair value in any new circumstances. Prior
to
SFAS No. 157, the methods for measuring fair value were diverse and
inconsistent, especially for items that are not actively traded. The standard
clarifies that for items that are not actively traded, such as certain kinds
of
derivatives, fair value should reflect the price in a transaction with a
market
participant, including an adjustment for risk, not just the company's
mark-to-model value. SFAS No. 157 also requires expanded disclosure of the
effect on earnings for items measured using unobservable data. SFAS No. 157
is
effective for financial statements issued for fiscal years beginning after
November 15, 2007, and interim periods within those fiscal years. The Company
is
currently evaluating the impact of this statement on its financial statements
and expects to adopt SFAS No.157 on December 31, 2007.
In
September 2006, the FASB issued SFAS No. 158, "Employers' Accounting for
Defined
Benefit Pension and Other Postretirement Plans -- An Amendment of FASB
Statements No. 87, 88, 106, and 132R." This standard requires an employer
to:
(a) recognize in its statement of financial position an asset for a plan's
overfunded status or a liability for a plan's underfunded status; (b) measure
a
plan's assets and its obligations that determine its funded status as of
the end
of the employer's fiscal year (with limited exceptions); and (c) recognize
changes in the funded status of a defined benefit postretirement plan in
the
year in which the changes occur. Those changes will be reported in comprehensive
income. The requirement to recognize the funded status of a benefit plan
and the
disclosure requirements are effective as of the end of the fiscal year ending
after December 15, 2006. The requirement to measure plan assets and benefit
obligations as of the date of the employer's fiscal year-end statement of
financial position is effective for fiscal years ending after December 15,
2008.
The adoption of FAS 158 is not anticipated to have a material impact on the
Company's financial position or results of operations.
GIANT
MOTORSPORTS, INC.
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December
31, 2006, 2005 and 2004
NOTE
B -
ACCOUNTS RECEIVABLE, NET
Accounts
receivable, net consisted of the following:
|
|
2006
|
|
2005
|
|
A/R-Customers
and dealers
|
|
$
|
2,129,416
|
|
$
|
2,770,165
|
|
A/R-Manufacturers
|
|
|
805,279
|
|
|
1,317,542
|
|
A/R-Employees
|
|
|
4,649
|
|
|
9,424
|
|
Contracts
in transit
|
|
|
889,374
|
|
|
778,277
|
|
|
|
|
|
|
|
4,875,408
|
|
Allowance
for doubtful accounts
|
|
|
25,000
|
|
|
25,000
|
|
|
|
|
|
|
$
|
4,850,408
|
|
NOTE
C -
INVENTORIES
Inventories
consisted of the following:
|
|
2006
|
|
2005
|
|
Parts
and accessories
|
|
$
|
1,974,482
|
|
$
|
1,958,330
|
|
Vehicles
|
|
|
19,292,653
|
|
|
14,816,739
|
|
TOTALS
|
|
$
|
21,267,135
|
|
$
|
16,775,069
|
|
The
Company does not provide for allowances on its vehicle and parts and supplies
inventory. With regards to vehicle inventory, all models are specifically
identified. Slow moving vehicles are reduced in price via a rebate offered
by
the manufacturer. Historically, the Company has been successful in selling
its
vehicle inventory. No allowance is made on the parts and supplies inventory,
as
the items that are slow moving are immaterial to the inventory taken as a
whole.
NOTE
D -
PROPERTY AND EQUIPMENT
Property
and equipment consisted of the following:
|
|
2006
|
|
2005
|
|
Fixtures
and equipment
|
|
$
|
2,151,547
|
|
$
|
2,016,383
|
|
Vehicles
|
|
|
429,195
|
|
|
366,326
|
|
Leasehold
improvements
|
|
|
572,776
|
|
|
264,328
|
|
|
|
|
3,153,518
|
|
|
2,647,037
|
|
Less
accumulated depreciation
|
|
|
(1,149,244
|
)
|
|
(753,070
|
)
|
NET
PROPERTY AND EQUIPMENT
|
|
$
|
2,004,274
|
|
$
|
1,893,967
|
|
Depreciation
expense charged to operations amounted to $432,558 in 2006, $335,581 in 2005
and
$165,043 in 2004. During 2006, the Company sold a fully depreciated vehicle
with
a cost of $36,384 for proceeds of $21,500 and accordingly recognized a gain
in
the amount of $21,500.
GIANT
MOTORSPORTS, INC.
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December
31, 2006, 2005 and 2004
NOTE
E -
NOTES PAYABLE - FLOOR PLANS
The
Company has floor plan financing agreements for the purchase of its new and
used
vehicle inventory. The floor plans are collateralized by substantially all
corporate assets. The following is a summary of floor plan financing
agreements:
|
|
2006
|
|
2005
|
|
Kawasaki
Motors Finance Company floor plan
|
|
|
|
|
|
agreement
provides for borrowings up to
|
|
|
|
|
|
$2,300,000.
Interest is payable monthly and
|
|
|
|
|
|
fluctuates
with prime and varies based on the type
|
|
|
|
|
|
of
unit financed and the length of time the unit
|
|
|
|
|
|
remains
on the floor plan (ranging from 8.25% to
|
|
|
|
|
|
12.75%
at December 31, 2006 and 2005, respectively).
|
|
|
|
|
|
Principal
payments are due upon the sale of the
|
|
|
|
|
|
specific
units financed.
|
|
$
|
2,187,507
|
|
$
|
1,750,508
|
|
|
|
|
|
|
|
|
|
GE
Commercial Distribution Finance floor plan agreement
|
|
|
|
|
|
|
|
for
Yamaha units provides for borrowings up to
|
|
|
|
|
|
|
|
$3,000,000.
Interest is payable monthly and fluctuates
|
|
|
|
|
|
|
|
with
prime and varies based on the type of unit financed
|
|
|
|
|
|
|
|
and
the length of time the unit remains on the floor plan
|
|
|
|
|
|
|
|
(ranging
from 6% to 11.25% at December 31, 2006 and
|
|
|
|
|
|
|
|
2005,
respectively). Principal payments are due upon
|
|
|
|
|
|
|
|
the
sale of the specific units financed.
|
|
|
2,715,618
|
|
|
1,929,919
|
|
|
|
|
|
|
|
|
|
GE
Commercial Distribution finance floor plan agreement
|
|
|
|
|
|
|
|
for
Suzuki units provides for borrowings up to $100,000.
|
|
|
|
|
|
|
|
The
manufacturer, at its discretion, may increase the
|
|
|
|
|
|
|
|
borrowings.
Interest is payable monthly and fluctuates
|
|
|
|
|
|
|
|
with
prime and varies based on the type of unit financed
|
|
|
|
|
|
|
|
and
the length of time the unit remains on the floor plan
|
|
|
|
|
|
|
|
(ranging
from 4.8% to 9.25% at December 31, 2006 and
|
|
|
|
|
|
|
|
2005,
respectively). Principal payments are due upon
|
|
|
|
|
|
|
|
the
sale of the specific units financed.
|
|
|
4,719,465
|
|
|
5,032,413
|
|
|
|
|
|
|
|
|
|
Polaris
Acceptance floor plan agreement provides for
|
|
|
|
|
|
|
|
borrowings
up to $450,000. The manufacturer, at its
|
|
|
|
|
|
|
|
discretion,
may increase the borrowings. The agreement
|
|
|
|
|
|
|
|
is
collateralized by specific units financed (rate ranging from
|
|
|
|
|
|
|
|
12%
to 17.25% at December 31, 2006 and 2005,
|
|
|
|
|
|
|
|
respectively).
Principal payments are due at the
|
|
|
|
|
|
|
|
of
date of sale or one year after financing.
|
|
|
289,338
|
|
|
433,248
|
|
GIANT
MOTORSPORTS, INC.
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December
31, 2006, 2005 and 2004
Fifth
Third Bank floor plan agreement provides for
|
|
|
|
|
|
borrowings
up to $2,500,000. Interest is payable
|
|
|
|
|
|
monthly
and fluctuates with prime (8.53% and 7.4%
|
|
|
|
|
|
at
December 31, 2006 and 2005, respectively) and
|
|
|
|
|
|
varies
based on the type of unit financed and the length
|
|
|
|
|
|
of
time the unit remains on the floor plan. Principal
|
|
|
|
|
|
payments
are due upon the sale of the specific units
|
|
|
|
|
|
financed.
|
|
|
2,041,303
|
|
|
1,897,923
|
|
|
|
|
|
|
|
|
|
American
Honda Finance floor plan agreement
|
|
|
|
|
|
|
|
provides
for borrowings up to $2,000,000.
|
|
|
|
|
|
|
|
The
manufacturer, at its discretion, may increase the
|
|
|
|
|
|
|
|
borrowings.
Interest is payable monthly and
|
|
|
|
|
|
|
|
fluctuates
with prime and varies based on the type
|
|
|
|
|
|
|
|
of
unit financed and the length of time the unit remains
|
|
|
|
|
|
|
|
on
the floor plan. Principal payments are
|
|
|
|
|
|
|
|
due
upon the sale of the specific units financed.
|
|
|
1,232,277
|
|
|
477,472
|
|
|
|
|
|
|
|
|
|
GE
Commercial Distribution Finance floor plan agreement
|
|
|
|
|
|
|
|
for
Ducati units provides for borrowings up to $450,000.
|
|
|
|
|
|
|
|
Interest
is payable monthly and fluctuates with prime
|
|
|
|
|
|
|
|
(ranging
from 4.8% to 12.25% at December 31, 2006 and
|
|
|
|
|
|
|
|
2005,
respectively) and varies based on the type of unit
|
|
|
|
|
|
|
|
financed
and the length of time the unit remains on the
|
|
|
|
|
|
|
|
floor
plan. Principal payments are due upon the sale
|
|
|
|
|
|
|
|
of
the specific units financed.
|
|
|
356,021
|
|
|
282,920
|
|
|
|
|
|
|
|
|
|
GE
Commercial Distribution Finance floor plan agreement
|
|
|
|
|
|
|
|
for
Yamaha units provides for borrowings up to $1,900,000.
|
|
|
|
|
|
|
|
Interest
is payable monthly and fluctuates with prime
|
|
|
|
|
|
|
|
(ranging
from 6% to 11.25% at December 31, 2006 and
|
|
|
|
|
|
|
|
2005,
respectively) and varies based on the type of unit
|
|
|
|
|
|
|
|
financed
and the length of time the unit remains on the
|
|
|
|
|
|
|
|
floor
plan. Principal payments due upon the sale of the
|
|
|
|
|
|
|
|
specific
units financed.
|
|
|
1,824,710
|
|
|
1,814,701
|
|
|
|
|
|
|
|
|
|
GE
Commercial Distribution Finance floor plan agreement
|
|
|
|
|
|
|
|
for
Suzuki units provides for borrowings up to $100,000.
|
|
|
|
|
|
|
|
The
manufacturer, at its discretion, may increase the
|
|
|
|
|
|
|
|
borrowings.
Interest is payable monthly and fluctuates
|
|
|
|
|
|
|
|
with
prime (ranging from 3.6% to 9.25% at December 31,
|
|
|
|
|
|
|
|
2006
and 2005, respectively) and varies based on the type
|
|
|
|
|
|
|
|
of
unit financed and the length of time the unit remains
|
|
|
|
|
|
|
|
on
the floor plan. Principal payments are due upon the
|
|
|
|
|
|
|
|
sale
of the specific units financed.
|
|
|
3,400,375
|
|
|
2,310,607
|
|
|
|
|
|
|
|
|
|
GIANT
MOTORSPORTS, INC.
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December
31, 2006, 2005 and 2004
Fifth
Third Bank floor plan agreement provides for
|
|
|
|
|
|
borrowing
up to $2,500,000. Interest is payable
|
|
|
|
|
|
monthly
and fluctuates with prime (8.53% at December
|
|
|
|
|
|
31,
2006 and 7.4% at December 31, 2005) and varies
|
|
|
|
|
|
based
on the type of unit financed and the length of
|
|
|
|
|
|
time
the unit remains on the floor plan. Principal
|
|
|
|
|
|
payments
are due upon the sale of the specific units
|
|
|
|
|
|
units
financed.
|
|
|
728,883
|
|
|
1,230,008
|
|
|
|
|
|
|
|
|
|
Kawasaki
Motors Finance Company floor plan agreement
|
|
|
|
|
|
|
|
provides
for borrowings up to $1,500,000. Interest is
|
|
|
|
|
|
|
|
payable
monthly and fluctuates with prime (18% at
|
|
|
|
|
|
|
|
December
31, 2006) and varies based on the type
|
|
|
|
|
|
|
|
of
unit financed and the length of time the unit remains
|
|
|
|
|
|
|
|
on
the floor plan. Principal payments are due upon the
|
|
|
|
|
|
|
|
sale
of the specific units financed.
|
|
|
1,358,910
|
|
|
-0-
|
|
|
|
|
|
|
|
|
|
GE
Commercial Distribution Finance floor plan agreement
|
|
|
|
|
|
|
|
for
CPI units provides for borrowings up to $150,000.
|
|
|
|
|
|
|
|
Interest
is payable monthly and fluctuates with prime
|
|
|
|
|
|
|
|
(10.25%
at December 31, 2006 ) and varies based on the
|
|
|
|
|
|
|
|
type
of unit financed and the length of time the unit remains
|
|
|
|
|
|
|
|
on
the floor plan. Principal payments are due upon the
|
|
|
|
|
|
|
|
sale
of the specific units financed.
|
|
|
31,480
|
|
|
-0-
|
|
|
|
|
|
|
|
|
|
TOTALS
|
|
$
|
20,885,887
|
|
$
|
17,159,719
|
|
|
|
|
|
|
|
|
|
GIANT
MOTORSPORTS, INC.
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December
31, 2006, 2005 and 2004
NOTE
F -
LONG-TERM DEBT
The
following is a summary of long-term debt:
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
A
$250,000 note payable with HSK Funding bearing
|
|
|
|
|
|
interest
at 15% at December 31, 2006.
|
|
$
|
250,000
|
|
$
|
-0-
|
|
|
|
|
|
|
|
|
|
A
$200,000 note payable with HSK Funding bearing
|
|
|
|
|
|
|
|
interest
at 15.5% at December 31, 2006.
|
|
|
200,000
|
|
|
-0-
|
|
|
|
|
|
|
|
|
|
A
$250,000 note payable with HSK Funding bearing
|
|
|
|
|
|
|
|
interest
at 15% at December 31, 2005.
|
|
|
-0-
|
|
|
250,000
|
|
|
|
|
|
|
|
|
|
A
$250,000 revolving line of credit at a bank bearing
|
|
|
|
|
|
|
|
interest
at a variable rate of prime plus one percent (9.25%
|
|
|
|
|
|
|
|
and
8% at December 31, 2006 and 2005, respectively).
|
|
|
|
|
|
|
|
The
loan is collateralized by substantially all the
|
|
|
|
|
|
|
|
Company’s
assets and the building owned personally
|
|
|
|
|
|
|
|
by
an officer.
|
|
|
249,863
|
|
|
249,863
|
|
|
|
|
|
|
|
|
|
Note
payable to bank bearing interest at 6.25%
|
|
|
|
|
|
|
|
payable
in monthly installments of $17,360, through
|
|
|
|
|
|
|
|
August
2007, at which point there is a balloon
|
|
|
|
|
|
|
|
payment.
The note is collateralized by substantially
|
|
|
|
|
|
|
|
all
Company’s assets, and shareholder guarantees.
|
|
|
781,280
|
|
|
989,600
|
|
|
|
|
|
|
|
|
|
Note
payable to bank bearing interest at 8.6%,
|
|
|
|
|
|
|
|
payable
in monthly installments of $537, through
|
|
|
|
|
|
|
|
May
2007, collateralized by vehicle.
|
|
|
2,522
|
|
|
9,016
|
|
|
|
|
|
|
|
|
|
Note
payable to Champion Cycle for the purchase
|
|
|
|
|
|
|
|
of
their Kawasaki license bearing interest at 5%,
|
|
|
|
|
|
|
|
payable
in monthly installments of $10,000
|
|
|
|
|
|
|
|
plus
interest through June 2007.
|
|
|
30,000
|
|
|
-0- |
|
|
|
|
|
|
|
|
|
|
|
|
1,513,665
|
|
|
1,498,479
|
|
Less
current maturities
|
|
|
1,513,665
|
|
|
714,623
|
|
TOTALS
|
|
$
|
-0-
|
|
$
|
783,856
|
|
GIANT
MOTORSPORTS, INC.
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December
31, 2006, 2005 and 2004
NOTE
G -
NOTE PAYABLE - OFFICER
Note
payable to officer consisted of a promissory note bearing interest at a rate
of
6% per annum. The loan is payable on demand anytime after October 26, 2007,
and
as such, has been classified as a current liability. The balance at December
31,
2006 and 2005 was $352,500 and $193,135, respectively.
NOTE
H -
INCOME TAXES
Income
taxes (credit) consisted of the following:
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
|
|
|
|
|
|
Current
|
|
$
|
(92,700
|
)
|
$
|
(119,500
|
)
|
$
|
593,300
|
|
Deferred
|
|
|
20,600
|
|
|
80,600
|
|
|
28,900
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTALS
|
|
$
|
(72,100
|
)
|
$
|
(38,900
|
)
|
$
|
622,200
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
tax assets (liabilities) consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
Deferred
tax assets - current and long-term:
|
|
|
|
|
|
|
|
|
|
|
Allowance
for doubtful accounts and net
|
|
|
|
|
|
|
|
|
|
|
operating
loss carryforward
|
|
$
|
113,900
|
|
$
|
0
|
|
$
|
8,500
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
tax liabilities - long-term:
|
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
(20,600
|
)
|
|
(52,100
|
)
|
|
(37,400
|
)
|
TOTALS
|
|
$
|
93,300
|
|
$
|
(52,100
|
)
|
$
|
(28,900
|
)
|
GIANT
MOTORSPORTS, INC.
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December
31, 2006, 2005 and 2004
NOTE
I -
RELATED PARTY TRANSACTIONS
Related
Party Transactions:
Accounts
receivable, affiliates consisted of the following:
|
|
|
|
|
|
|
|
2006
|
|
2005
|
|
Noninterest
bearing advances to Marck’s Real
|
|
|
|
|
|
Estate,
LLC., a limited liability company
|
|
|
|
|
|
affiliated
through common ownership,
|
|
|
|
|
|
interest
to be repaid within one year.
|
|
$
|
-0-
|
|
$
|
261,667
|
|
|
|
|
|
|
|
|
|
TOTALS
|
|
$
|
-0-
|
|
$
|
261,667
|
|
The
Company leases its Ohio subsidiary retail facility from an affiliated entity
controlled by an officer of the Company, who has personally guaranteed the
debt
on the building, under a five-year agreement with two five-year renewal terms.
Charges to operations amounted to $228,000 in 2006 and 2005 and $180,000
in
2004.
NOTE
J -
EMPLOYEE BENEFIT PLANS
The
Company sponsors a Simple Retirement Plan for all eligible employees. The
Company matches 100% of employee contributions up to 3% of compensation.
Charges
to operations amounted to $34,664 in 2006, $32,139 in 2005 and $28,198 in
2004.
NOTE
K -
LEASES
The
Company had been leasing its Chicago subsidiary retail facility under a
month-to-month agreement for 2004. In 2005, the Company moved its operations
to
a new facility under a ten-year agreement with a ten-year renewal option.
The
payments on the lease commenced in August 2005 at a monthly amount of $33,333
through May of 2006, then increasing to $40,000 per month from June 2006
through
May 2007, $45,000 per month from June 2007 through May 2008, $46,667 from
June
2008 through May 2009 and then increasing 3% annually for the remaining term
of
the lease. The Company is also liable for a proportionate share of the expenses
and taxes over a specified amount. The Company had been granted a four 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
Company also leases office space at the Chicago location under a ten-year
agreement with a ten-year renewal option. The payments on the lease commenced
in
August 2005 at a monthly amount of $15,295 through May 2006, then increasing
to
$15,754 per month from June 2006 through May 2007, $16,226 per month from
June
2007 through May 2008 and then increasing 3% annually for the remaining term
of
the lease.
GIANT
MOTORSPORTS, INC.
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December
31, 2006, 2005 and 2004
NOTE
K -
LEASES (Continued)
The
following is a summary of future minimum lease payments under the operating
leases that have initial or remaining non-cancellable terms in excess of
one
year as of December 31, 2006:
YEAR
ENDING
|
|
AMOUNT
|
|
|
|
|
|
2007
|
|
$
|
1,004,291
|
|
2008
|
|
|
1,036,549
|
|
2009
|
|
|
1,059,641
|
|
2010
|
|
|
1,082,790
|
|
2011
|
|
|
1,106,631
|
|
|
|
$
|
5,289,902
|
|
The
Company also leased two residential locations in Chicago under a month-to-month
agreement. The amount charged to rent amounted to $27,675, $12,000, and $8,000
for the years ended December 31, 2006, 2005, and 2004,
respectively.
NOTE
L -
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 2,450 shares are issued
and
outstanding at December 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. However, the Company was not able to have its
Registration Statement declared effective by the original due date and
subsequently, each holder of the preferred shares was able to convert their
shares at less than the agreed upon factor. This “triggering event” provided a
discount on the conversion, and additional shares were provided to those
shareholders who did not consent, and consequently, converted their preferred
Series A shares. The Company’s Registration Statement was declared effective by
the Securities and Exchange Commission in February 2006.
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 year ended December 31, 2006, four (4) independent Series A Preferred
shareholders exercised 420 shares of the conversion feature of the stock,
and
subject to the provisions of the conversion, received 938,500 shares of common
stock in exchange for their combined 420 shares of preferred
shares.
GIANT
MOTORSPORTS, INC.
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December
31, 2006, 2005 and 2004
NOTE
L -
PREFERRED STOCK (Continued)
The
Company issued 408,246 shares of its common stock, with a fair market value
of
$273,526, as a dividend to all Series A Preferred shareholders, in accordance
with the placement offering provisions.
In
the
year ended December 31, 2005, in connection with the private placement warrants,
the Company reported an accretion of preferred stock discount in the amount
of
$2,870,000 as a constructive dividend associated with the preferred stock.
This
amount reduced the amount available for the common stockholders.
The
net
proceeds from the issuance of the preferred stock were allocated based on
the
relative fair value of each equity instrument using the Black-Scholes Pricing
Model and current market values where applicable. The preferred stock conversion
price was less than the market value based on these valuations on the date
of
issuance; accordingly a preferred stock discount resulted from the allocation
of
the net proceeds to the other equity instruments issued, which was immediately
distributed, as both the stock and the warrants were convertible and vested,
respectively.
NOTE
M -
COMMON STOCK
The
Company has 75,000,000 shares of $.001 par common stock authorized, with
11,791,747 and 10,445,000 issued and outstanding at December 31, 2006 and
2005,
respectively. As disclosed above, the Company issued 408,247 shares of its
common stock as a dividend to the Preferred Series A shareholders. In addition,
the Company issued 938,500 shares in connection with the conversion feature
associated with the Preferred Series A shares. In 2005, the Company issued
20,000 shares for services rendered. The shares were issued at fair market
value
of $.58 per share.
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:
GIANT
MOTORSPORTS, INC.
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December
31, 2006, 2005 and 2004
NOTE
N -
ACQUISITION OF KINGS MOTORSPORTS, INC. (continued)
(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 balance was repaid in 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).
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.
GIANT
MOTORSPORTS, INC.
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December
31, 2006, 2005 and 2004
NOTE
O -
LITIGATION
The
Company has retained legal counsel on several litigation matters involving
past
due amounts and for breach of contract. The Plaintiffs are requesting relief
in
the aggregate of approximately $200,000. All amounts relating to past due
amounts have been previously recorded. The Company is in the process of
resolving these matters. Legal counsel has advised they cannot evaluate the
likely outcome. As such, no contingency has been recorded for any possible
unlikely outcome.
NOTE
P -
SUBSEQUENT EVENT
On
October 1, 2006, the Company entered into a new lease for the Salem, Ohio
facility. The lease will commence January 1, 2007 and run through December
2016.
The monthly payment has increased from $19,000 to $24,000 per month. The
lease
provides for two (2) consecutive five-year renewal terms at a rate to be
negotiated.
In
connection with the Series A Preferred Convertible Shares, the Company issued
421,379 shares of its common stock as a dividend, as outlined in the Series
A
Preferred Stock Agreement.