Unassociated Document
As
filed with the Securities and Exchange Commission on June 1,
2007
Registration
No. 333-131001
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
POST-EFFECTIVE
AMENDMENT NO. 1
TO
FORM
S-1
REGISTRATION
STATEMENT
UNDER
THE
SECURITIES ACT OF 1933
GIANT
MOTORSPORTS, INC.
(Exact
name of registrant as specified in its charter)
Nevada
|
5900
|
33-1025552
|
(State
or Other Jurisdiction of
Incorporation
or Organization)
|
(Primary
Standard Industrial
Classification
Number)
|
(I.R.S.
Employer
Identification
No.)
|
13134
State Route 62
Salem,
Ohio 44460
(330)
332-8534
|
Gregory
A. Haehn, President and COO
13134
State Route 62
Salem,
Ohio 44460
(330)
332-8534
|
|
|
(Address,
Including Zip Code and Telephone Number,
Including Area Code, of Registrant's Principal Executive Offices)
|
(Name,
Address, Including Zip Code and Telephone Number,
Including
Area Code, of Agent for
Service)
|
With
copies of all correspondence to:
Scott
M. Miller, Esq.
Feldman
Weinstein & Smith LLP
420
Lexington Avenue, Suite 2620
New
York, NY 10170
(212)
869-7000
Approximate
date of commencement of proposed sale to the public: From
time to time after this Registration Statement becomes
effective.
If
any of
the securities being registered on this form are to be offered on a delayed
or
continuous basis pursuant to Rule 415 under the Securities Act of 1933, check
the following box. þ
If
this
Form is filed to register additional securities for an offering pursuant to
Rule
462(b) under the Securities Act, please check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. ¨
If
this
Form is a post-effective amendment filed pursuant to Rule 462(c) under the
Securities Act, check the following box and list the Securities Act registration
statement number of the earlier effective registration statement for the same
offering. ¨
If
this
Form is a post-effective amendment filed pursuant to Rule 462(d) under the
Securities Act, check the following box and list the Securities Act registration
statement number of the earlier effective registration statement for the same
offering. ¨
The
Registrant hereby amends this Registration Statement on such date or dates
as
may be necessary to delay its effective date until the Registrant shall file
a
further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said
Section 8(a), may determine.
Subject
to Completion, Dated June 1,
2007
PROSPECTUS
26,356,000
SHARES OF COMMON STOCK
AND
WARRANTS
TO PURCHASE 6,314,000 SHARES OF COMMON STOCK
OF
GIANT
MOTORSPORTS, INC.
The
persons listed in this prospectus under "Selling Shareholders" may offer and
sell from time to time up to an aggregate of 13,728,000 shares of our common
stock issuable upon (i) the conversion of our Series A convertible preferred
stock ("Series A Shares"); (ii) the exercise of warrants granted by us in
connection with the purchase of the Series A Shares (the "Series A Warrants");
and (iii) the exercise of certain other warrants issued by us (the "Other
Warrants"). Certain of these Selling Shareholders also may offer and sell,
from
time to time, up to an aggregate of an additional 12,628,000 shares of common
stock which may be issued to them (i) as dividends on the Series A Shares in
lieu of cash dividends and (ii) pursuant to certain price anti-dilution
adjustments applicable to the Series A Shares and the Series A Warrants. This
prospectus also includes the offer and sale of the Series A Warrants.
Information on the Selling Shareholders, and the times and manner in which
they
may offer and sell shares of our common stock and/or the Series A Warrants,
is provided under "Selling Shareholders" and "Plan of Distribution" in this
prospectus.
We
will
not receive any proceeds from the sale of the common stock or the Series A
Warrants by the Selling Shareholders, although we may receive proceeds from
the
purchase of the shares of common stock underlying the Series A Warrants and
the
Other Warrants. We will bear the costs and expenses of registering the common
stock and Series A Warrants offered by the Selling Shareholders. Selling
commissions, brokerage fees, and applicable transfer taxes are payable by the
Selling Shareholders.
Our
common stock is listed on the Over-The-Counter Bulletin Board ("OTCBB") under
the symbol "GMOS." On May 30, 2007, the closing price for our common stock
on
the OTCBB was $0.25 per
share. No trading market currently exists
for the Series A Warrants.
BEFORE
PURCHASING ANY OF THE SECURITIES COVERED BY THIS PROSPECTUS, CAREFULLY
READ
AND CONSIDER THE RISK FACTORS INCLUDED IN THE SECTION ENTITLED "RISK
FACTORS"
BEGINNING ON PAGE 6. YOU SHOULD BE PREPARED TO ACCEPT ANY AND ALL OF
THE
RISKS ASSOCIATED WITH PURCHASING THE SECURITIES, INCLUDING A LOSS OF ALL OF
YOUR
INVESTMENT.
NEITHER
THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION
HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ACCURACY
OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
The
date
of this prospectus is ________ ___, 2007
TABLE
OF CONTENTS
|
Page
|
|
|
Prospectus
Summary
|
1
|
|
|
Risk
Factors
|
6
|
|
|
A
Note About Forward-Looking Statements
|
13
|
|
|
Use
of Proceeds
|
14
|
|
|
Market
for Common Equity and Related Stockholder Matters
|
15
|
|
|
Selected
Consolidated Financial Data
|
16
|
|
|
Supplementary
Financial Information - Selected Quarterly Consolidated Financial
Data
|
17
|
|
|
Selling
Shareholders
|
18
|
|
|
Plan
of Distribution
|
24
|
|
|
Business
|
26
|
|
|
Management’s
Discussion and Analysis and Results of Operations
|
33
|
|
|
Management
|
48
|
|
|
Executive
Compensation
|
50
|
|
|
Certain
Relationships and Related Transactions
|
53
|
|
|
Security
Ownership of Certain Beneficial Owners and Management
|
54
|
|
|
Description
of Securities
|
56
|
|
|
Legal
Matters
|
63
|
|
|
Experts
|
63
|
|
|
Where
You Can Find More Information
|
63
|
|
|
Index
to Financial Statements
|
F-1
|
You
should rely only on the information contained in this prospectus. We have not
authorized any other person to provide you with information different from
that
contained in this prospectus. The information contained in this prospectus
is
complete and accurate only as of the date on the front cover page of this
prospectus, regardless of the time of delivery of this prospectus or the sale
of
any common stock or warrants. The prospectus is not an offer to sell, nor is
it
an
offer
to buy, our common stock or Series A Warrants in any jurisdiction in which
the
offer or sale is not permitted.
We
have
not taken any action to permit a public offering of our shares of common stock
or Series A Warrants outside of the United States or to permit the possession
or
distribution of this prospectus outside of the United States. Persons
outside of the United States who came into possession of this prospectus must
inform themselves about and observe any restrictions relating to the offering
of
the shares of common stock or warrants and the distribution of this prospectus
outside of the United States.
PROSPECTUS
SUMMARY
The
following summary is qualified in its entirety by the more detailed information
and financial statements and related notes thereto appearing elsewhere in this
prospectus.
The
Company
Background
We
were
incorporated as American Busing Corporation under the laws of the State of
Nevada on August 5, 2003. On January 16, 2004, we acquired all of the issued
and
outstanding shares of W.W. Cycles, Inc., the corporate entity that conducts
business under the name "Andrews Cycles" ("W.W. Cycles"), from Gregory A. Haehn
and Russell A. Haehn, our current officers and directors, and one other employee
of W.W. Cycles, in exchange for our issuance of an aggregate of 7,850,000 shares
of our common stock, which resulted in W.W. Cycles' becoming our wholly-owned
subsidiary. On that same date, our two current officers and directors also
purchased an additional 150,000 shares of our common stock from a then
shareholder of the Company for an aggregate purchase price of $178,750.
Simultaneously with the closing of this acquisition, the then sole director
and
officer of the Company resigned as a director and officer and was replaced
by
our current officers and directors. Russell A. Haehn became the Chairman, Chief
Executive Officer, Secretary and a Director of the Company and Gregory A. Haehn
became the President, Chief Operating Officer, Treasurer and a Director of
the
Company, which are the same positions in which they currently serve. We changed
our name from American Busing Corporation to Giant Motorsports, Inc., effective
as of April 5, 2004. We currently conduct all of our "Andrews Cycles" business
through our W.W. Cycles subsidiary. On April 30, 2004, we acquired substantially
all of the assets of King's Motorsports, Inc. (the "Chicago Cycles Assets"),
the
corporate entity that conducted business under the name Chicago Cycle Center
("King's Motorsports"). We paid Kings Motorsports a total of $2,925,000 for
the
Chicago Cycle Assets as follows:
o |
$1,250,000
on the date of closing; and
|
o
|
1,675,000
through the issuance to King's Motorsports of a 6% $1,675,000 aggregate
principal amount note (the "King's Note").
|
Our
Business
Giant
Motorsports, Inc. ("us," "our," "we," the "Company" or "Giant") through our
two
wholly-owned subsidiaries, owns and operates two retail power sport superstores
in the Midwestern United States. Our core brands include Suzuki, Yamaha, Honda,
Ducati, Kawasaki and Polaris. Our superstores operate in Salem, Ohio and Skokie,
Illinois under the names "Andrews Cycles" and "Chicago Cycles," respectively.
It
is our plan to maximize the operating and financial performance of our
dealerships by achieving certain efficiencies both at the store and corporate
levels. We believe this will enhance internal growth and profitability. We
have
begun, and plan to continue to centralize certain of our administrative
functions including accounting, finance, insurance, employee benefits, strategic
planning, marketing, purchasing and management information systems (MIS). We
believe that by acquiring additional dealerships that complement our existing
business, we can consolidate these functions, and we will be able to reduce
overall expenses, simplify dealership management, create economies of scale
with
leveraged buying power and provide a level of expertise that would otherwise
be
unavailable to each dealership individually.
Our
executive offices are located at 13134 State Route 62, Salem, Ohio 44460 and
our
telephone number is (330) 332-8534.
The
Offering
Up
to
13,728,000 shares of our common stock which may be issued upon (1) the
conversion of our shares of Series A convertible preferred stock ("Series A
Shares") and exercise of warrants issued in our September 2005 private placement
("Series A Warrants"); (2) (i) the exercise of warrants for an aggregate of
1,000,000 shares of our common stock, originally issued to Moneta Capital,
LLC
on January 20, 2004, in consideration for corporate finance and financial
advisory services provided to the Company relating to the acquisition of our
subsidiary, W.W. Cycles, and our continuing business immediately after the
acquisition and (ii) the exercise of a warrant for 100,000 shares of our common
stock issued on April 20, 2004, in connection with a bridge loan in the
principal amount of $500,000 provided by HSK Funding, Inc. to the Company,
the
net proceeds of which were used for working and operating capital (collectively,
the "Other Warrants"), are being offered and sold by the Selling Shareholders.
In addition, the Series A Warrants are also being offered and sold by the
Selling Shareholders. We will not receive any of the proceeds from the sale
of
these shares or the Series A Warrants, although we will, however, receive the
net proceeds from the exercise of the Series A Warrants and the Other Warrants.
Such shares of common stock include (1) 5,740,000 shares of our common stock
issuable upon the conversion of our Series A Shares and 5,740,000 shares of
our
common stock which may be purchased upon the exercise of Series A Warrants,
at
an initial exercise price of $.50 per share, all of which shares of preferred
stock and warrants were sold in a private placement to accredited investors
in
September 2005 (the "September 2005 Private Placement") and (2) 574,000 shares
of our common stock issuable upon the conversion of our Series A Shares and
574,000 shares of our common stock which may be purchased upon the exercise
of
Series A Warrants, at an initial exercise price of $.50 per share, which are
issuable to the placement agent in the September 2005 Private Placement upon
its
exercise of an option. Additionally, these shares of common stock also include
the shares issuable upon the exercise of the Other Warrants. This prospectus
also covers the offer and sale of the Series A Warrants and the Series A
Warrants issuable to the placement agent upon exercise of its
option.
Up
to an
additional 12,628,000 shares of our common stock also may be issued to the
holders of Series A Shares as dividends, in lieu of the payment of cash
dividends, and pursuant to certain price anti-dilution provisions applicable
to
the Series A Shares and Series A Warrants, all of which, to the extent issued,
also are being offered under this prospectus. As of the date of this prospectus,
we have issued an aggregate of 833,126 shares of common stock in lieu of payment
of cash dividends on the Series A Shares.
The
26,356,000 shares of common stock being registered on behalf of the Selling
Shareholders named in this prospectus was equal to approximately 252% of the
10,445,000 shares of common stock outstanding on February 13, 2006, which was
the date of the initial prospectus, and is equal to approximately 216% of the
12,213,126 shares of common stock currently outstanding. As of May 18, 2007,
the
Selling Shareholders would be able to sell an aggregate of shares of
approximately 14,022,000 shares of common stock, assuming (i) the conversion
of
2,450 Series A Shares into 4,900,000 shares of common stock and the sale of
such
shares; (ii) the sale of (A) 935,800 shares of common stock issued pursuant
to
the prior conversion of 420 Series A Shares and (B) the sale of 833,126 shares
of common stock issued in lieu of cash dividends on the Series A Shares less
(C)
640,875 shares of common stock sold by the Selling Shareholders; (iii) the
exercise of all of the Series A Warrants and Other Warrants, and (iv) the full
exercise of the purchase option by the placement agent in the September 2005
Private Placement; provided,
however,
that
such aggregate amount does not reflect certain limitations on the conversion
of
Series A Shares and Series A Warrants applicable to maintain beneficial
ownership of certain of the Selling Shareholders to less than 5% of the total
number of shares of common stock issued and outstanding.
The
conversion rate applicable to the conversion of the Series A Shares and the
exercise price of the Series A Warrants (until the Series A Warrants are listed
on the OTC Bulletin Board) are subject to full price anti-dilution, in the
event
we, subject to certain exceptions, issue additional shares of common
stock
or
securities convertible into shares of common stock, at an effective price less
than the then current conversion rate or warrant exercise price ($0.50 on the
date of this prospectus). As of the date of this prospectus the conversion
rate
and the warrant exercise price have not been changed by any such additional
issuances. The following table sets forth examples of this anti-dilution upon
the issuance of additional shares of common stock at an effective price of
(i)
$0.375 per share (25% less than the current conversion and exercise prices);
(ii) $0.25 per share (50% less than the current conversion rate and warrant
exercise price); and $0.125 per share (75% less than the current conversion
rate
and warrant exercise price).
|
|
Total
Number of
Common
Shares into
which
Convertible
or
Exercisable
|
|
Total
Number of
Shares
upon
issuance
of
Additional
Stock at
$0.375
per share
|
|
Total
Number of
Shares
upon
issuance
of
Additional
Stock at
$0.25
per share
|
|
Total
Number of
Shares
upon
issuance
of
Additional
Stock at
$0.175
per share
|
|
|
|
|
|
|
|
|
|
|
|
Series
A Shares
|
|
|
4,900,000
|
|
|
7,300,000
|
|
|
10,948,000
|
|
|
21,896,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series
A Warrants
|
|
|
6,314,000
|
|
|
8,400,000
|
|
|
12,628,000
|
|
|
25,256,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
11,214,000
|
|
|
15,700,000
|
|
|
23,576,000
|
|
|
47,152,000
|
|
The
above
table reflects (i) the conversion of Series A Shares and exercise of Series
A
Warrants outstanding as of May 18, 2007 and (ii) the conversion of Series A
Shares and exercise of Series A Warrants issuable to the placement agent
pursuant to the purchase option. As of May 18, 2007 a total of 420 Series A
Shares have been converted into 935,800 shares of common stock. None of the
Series A Warrants have been exercised to date and the purchase option also
has
not been exercised.
Plan
of Distribution
Sales
of
common stock and/or the Series A Warrants may be made by or for the account
of
the Selling Shareholders in the over-the-counter market or on any exchange
on
which our common stock and the Series A Warrants, respectively, may be listed
at
the time of sale. Shares of common stock and Series A warrants may also be
sold
in block transactions or private transactions or otherwise, through brokers
or
dealers. Brokers or dealers may be paid commissions or receive sales discounts
in connection with such sales. The Selling Shareholders must pay their own
commissions and absorb the discounts. Brokers or dealers used by the Selling
Shareholders will be underwriters under the Securities Act of 1933. In addition,
any Selling Shareholders affiliated with a broker/dealer will be underwriters
under the Securities Act with respect to the common stock and/or the Series
A
Warrants offered hereby. In lieu of making sales through the use of this
prospectus, the Selling Shareholders may also make sales of the shares of common
stock and/or the Series A Warrants covered by this prospectus pursuant to Rule
144 under the Securities Act.
Extension
of Bridge Loans Maturity Dates
On
December 20, 2005, we were provided with bridge loan in the principal amount
of
$250,000 (the "2005 Bridge Loan"). The initial maturity date of the 2005
Bridge Loan was March 20, 2006. This maturity date has been extended several
times the last of which was in March 2007 when the outstanding principal amount
was $200,000. On December 4, 2006, we were provided with an additional bridge
loan by the same lender in the principal amount of $250,000 (the "2006 Bridge
Loan"). The initial maturity date of the 2006 Bridge Loan was March 4,
2007. As of March 4, 2007 none of this principal amount has been repaid. The
maturity dates of the 2005 Bridge Loan and the 2006 Bridge Loan were extended
to
June 15, 2007 in consideration for our payment of $2,250 to the lender. See
“Management’s Discussion and Analysis and Results of Operations - Loan
Transactions” beginning on page 36 of this prospectus.
New
Lease for our Salem, Ohio Facilities
Effective
January 1, 2007, we commenced a new 10-year lease for our Salem, Ohio facilities
in which we conduct our Andrews Cycles business. We continue to lease this
property from an affiliated entity of Russell A. Haehn, our Chairman and Chief
Executive Officer. Our month rental rate was increased to $24,000 per month
under the new lease. The current term expires in December 2016 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. See “Business -
Properties” on page 33 and “Certain Relationships and Related Transactions”
beginning on page 54.
SUMMARY
FINANCIAL INFORMATION
The
following tables summarize consolidated financial data regarding our business
and should be read together with “Management’s Discussion and Analysis of
Financial Condition and Results of Operations ” and our consolidated financial
statements and the related notes included in this prospectus. The summary
consolidated financial information for the years ended December 31, 2006,
2005 and 2004 have been derived from our audited consolidated financial
statements. The consolidated financial information for the three months ended
March 31, 2007 and 2006 have been derived from our unaudited consolidated
financial statements. All monetary amounts are expressed in U.S. Dollars unless
otherwise indicated.
|
|
Three
Months Ended
March
31,
|
|
Year
Ended
December
31,
|
|
|
|
2007
(Unaudited)
|
|
2006
(Unaudited)
|
|
2006
|
|
2005
|
|
2004
|
|
Consolidated
Statements of Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
$
|
20,034,116
|
|
$
|
17,783,777
|
|
$
|
97,637,103
|
|
$
|
103,117,471
|
|
$
|
77,615,237
|
|
Operating
Expenses
|
|
|
2,792,780
|
|
|
3,217,
110
|
|
|
13,294,060
|
|
|
11,645,911
|
|
|
7,756,715
|
|
Net
Income (Loss) attributable to Common Stockholders
|
|
|
(566,436
|
)
|
|
(1,067,874
|
)
|
|
(454,724
|
)
|
|
(2,878,803
|
)
|
|
958,061
|
|
Basic
Earnings (Loss) per share
|
|
|
(0.05
|
)
|
|
(0.11
|
)
|
|
(0.04
|
)
|
|
(0.28
|
)
|
|
0.08
|
|
Diluted
Earnings (Loss) per share
|
|
|
(0.05
|
)
|
|
(0.11
|
)
|
|
(0.04
|
)
|
|
(0.28
|
)
|
|
0.09
|
|
Weighted
Average Shares Outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
Basic
|
|
|
11,936,889
|
|
|
10,532,973
|
|
|
11,090,020
|
|
|
10,435,904
|
|
|
10,425,000
|
|
-
Diluted
|
|
|
11,936,889
|
|
|
10,532,973
|
|
|
11,090,020
|
|
|
10,435,904
|
|
|
12,001,503
|
|
|
|
As
of March 31,
|
|
As
of December 31,
|
|
|
|
2007
(Unaudited)
|
|
2006
(Unaudited)
|
|
2006
|
|
2005
|
|
Balance
Sheet Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
817,595
|
|
$
|
651,137
|
|
$
|
156,530
|
|
$
|
227,301
|
|
Accounts
receivable, net
|
|
|
3,580,012
|
|
|
3,465,043
|
|
|
3,803,718
|
|
|
4,850,408
|
|
Accounts
receivable, affiliates
|
|
|
—
|
|
|
|
|
|
|
|
|
261,667
|
|
Inventories
|
|
|
20,656,889
|
|
|
22,982,502
|
|
|
21,267,135
|
|
|
16,775,069
|
|
Federal
income tax receivable
|
|
|
|
|
|
119,500
|
|
|
|
|
|
119,500
|
|
Deferred
tax assets
|
|
|
361,000
|
|
|
|
|
|
113,900
|
|
|
|
|
Prepaid
expenses
|
|
|
33,831
|
|
|
175,625
|
|
|
10,131
|
|
|
74,255
|
|
Fixed
Assets, net
|
|
|
1,904,693
|
|
|
2,240,395
|
|
|
2,004,274
|
|
|
1,893,967
|
|
Total
other Assets
|
|
|
1,729,950
|
|
|
1,629,950
|
|
|
1,729,950
|
|
|
1,629,950
|
|
Total
Assets
|
|
|
29,098,852
|
|
|
31,275,165
|
|
|
29,085,638
|
|
|
25,832,117
|
|
Total
Liabilities
|
|
|
25,936,936
|
|
|
28,399,470
|
|
|
25,449,989
|
|
|
22,015,270
|
|
Total
Stockholders Equity
|
|
|
3,161,916
|
|
|
2,875,695
|
|
|
3,635,649
|
|
|
3,816,847
|
|
RISK
FACTORS
You
should carefully review and consider the following risks as well as all other
information contained in this prospectus, including our consolidated financial
statements and the notes to those statements, before you decide to purchase
any
of our securities. The following risks and uncertainties are not the only ones
facing us. Additional risks and uncertainties of which we are currently unaware
or which we believe are not material also could materially adversely affect
our
business, financial condition, results of operations, or cash flows. In any
case, the value of our common stock and/or Series A Warrants could
decline, and you could lose all or a portion of your investment. To the extent
any of the information contained in this prospectus constitutes forward-looking
information, the risk factors set forth below are cautionary statements
identifying important factors that could cause our actual results for various
financial reporting periods to differ materially from those expressed in any
forward-looking statements made by or on behalf of Giant Motorsports, Inc.
and
could materially adversely affect our financial condition, results of operations
or cash flows.
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 March
31,
2007 we had $19,845,378 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
March 31, 2007, based upon our unaudited financial statements, our outstanding
indebtedness to third parties, including the $19,845,378 of floor plan notes
payable under our floor plan financing arrangements was approximately
$25,900,000. Additionally, as of March 31, 2007 approximately $729,200 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 March 31, 2007) and is secured by a first
priority lien on all of our assets, including the assets acquired from Chicago
Cycles. This term loan, which was due on May 31, 2007, was automatically
extended until August 29, 2007. We, in all likelihood, will not have the funds
available to repay this loan by August 29th
and will
therefore have to refinance the principal amount on terms which may be less
favorable then the current terms.
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 Skokie,
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.
We
do not expect to pay dividends.
Except
for dividends that we are required to pay on our Series A Shares (which
dividends have been paid solely in shares of our common stock, to date, and
which may be paid in cash or shares of our common stock, in our sole discretion,
in the future), 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 8,780,000 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 64.0% 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 47.2% of our
outstanding shares of voting stock (giving effect to the voting rights of the
2,450 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
or
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 acquirer from making an offer to buy us, which, in turn, could
adversely affect the market price of our common stock and warrants.
Trading
in our common stock is limited and the price of our common stock may be subject
to substantial volatility.
Our
common stock is traded on the Over the Counter Bulletin Board, and therefore
the
trading volume is more limited and sporadic than if our common stock were traded
on NASDAQ or a national stock exchange such as Amex. Additionally, the price
of
our common stock may be volatile as a result of a number of factors, including,
but not limited to, the following:
|
o
|
quarterly
variations in our operating
results;
|
|
o
|
large
purchases or sales of common stock;
|
|
o
|
actual
or anticipated announcements of new products or services by us or
competitors;
|
|
o
|
acquisitions
of new dealerships;
|
|
o
|
investor
perception of our business prospects or the motorcycle/power sports
industry in general;
|
|
o
|
general
conditions in the markets in which we compete;
and
|
|
o
|
economic
and financial conditions.
|
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 May
18, 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.
A
NOTE ABOUT FORWARD-LOOKING STATEMENTS
This
prospectus contains forward-looking statements such as statements relating
to
our financial condition, results of operations, plans, objectives, future
performance and business operations. These statements relate to expectations
concerning matters that are not historical fact. Accordingly, statements that
are based on management's projections, estimates, assumptions, and judgments
are
forward-looking statements. These forward-looking statements are typically
identified by words or phrases such as "believes," "expects," "anticipates,"
"plans," "estimates," "approximately," "intend," and other similar words and
phrases, or future or conditional verbs such as "should," "would," "could,"
and
"may." These forward-looking statements are based largely on our current
expectations, assumptions, estimates, judgments, and projections about our
business and our industry, and they involve inherent risks and uncertainties.
Although we believe our expectations are based on reasonable assumptions,
judgments, and estimates, forward-looking statements involve known and unknown
risks, uncertainties, contingencies, and other factors that could cause our
or
our industry's actual results, level of activity, performance or achievement
to
differ materially from those discussed in or implied by any forward-looking
statements made by or on behalf of Giant Motorsports, Inc. and could cause
our
financial condition, results of operations, or cash flows to be materially
adversely affected. In evaluating these statements, some of the factors that
you
should consider include those described under "Risk Factors" and elsewhere
in
this prospectus or incorporated herein by reference.
USE
OF PROCEEDS
We
will
not receive any of the proceeds from the sale of the common stock or Series
A
Warrants offered by this prospectus. The Selling Shareholders will receive
all
of the proceeds.
We,
however, will receive funds upon any exercise of the Series A Warrants and
Other
Warrants held by the Selling Shareholders. If any of such warrants are
exercised, we will receive the exercise price for the warrants. If the Series
A
Warrants are exercised, in full, we would realize proceeds, before expenses
(including a 5% warrant solicitation fee payable to HCFP/Brenner Securities
LLC
for all warrant exercises solicited by it) in the amount of $3,157,000. If
the
Other Warrants are exercised, in full, we would realize proceeds, before
expenses, in the amount of $1,225,000. Any funds received upon exercise of
the
Series A Warrants and/or the Other Warrants would, in all likelihood, first
be
applied to the repayment of any outstanding debt then due and payable and then
for operating capital for our business. At this time our management has not
determined any specific allocations for proceeds allocable to our operations,
but we will use the proceeds, on an as needed basis, as such proceeds become
available. In the event that at such time we have sufficient funds from cash
flow from our operations to satisfy all of our working capital requirements,
we
may also consider prepaying a portion of our outstanding indebtedness to the
extent that management determines such prepayments to be in our best interests.
There can be no assurance that any of the Series A Warrants or the Other
Warrants will be exercised.
MARKET
FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Market
Information
Our
common stock is traded in the over-the-counter market on the Nasdaq OTC Bulletin
Board under the symbol "GMOS." The following table shows the price range of
the
Company's common stock 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
|
|
3/31/07
|
|
|
.30
|
|
|
.16
|
|
|
.35
|
|
|
1.75
|
|
Holders
Our
common stock is issued in registered form. Olde Monmouth Stock Transfer Co.,
Inc., 200 Memorial Parkway, Atlantic Highlands, New Jersey 07716 (Telephone:
732-872-2727; Facsimile: 732-872-2728) is the registrar and transfer agent
for
our common stock. On May 30, 2007, the shareholders' list of our common stock
showed 39 registered shareholders (which includes shares held in street or
nominee names) and 12,213,126 shares outstanding. We believe that on May 30,
2007, there were approximately 125 beneficial owners of our common
stock.
On
May
30, 2007, there were 11 registered holders of Series A Warrants exercisable
for
an aggregate of up to 5,740,000 shares
of
common stock. We do not currently have a warrant agent for the Series A
Warrants, but are required to engage a warrant agent for our Series A Warrants
when the they are first listed.
We have agreed to also engage Olde Monmouth Stock Transfer Co., Inc. as our
warrant agent when the Series A Warrants are listed.
Dividends
We
have
never paid any cash dividends, and, except for dividends we are required to
pay
on our Series A Shares, which dividends are payable in cash or shares of our
common stock, as determined in our sole discretion, we do not anticipate any
stock or cash dividends on any of our securities in the foreseeable
future. Dividends paid, to date, on our Series A Shares have all been paid
in
shares of our common stock. We have issued an aggregate of 833,126 shares
of
common stock as dividends on the Series A Shares.
SELECTED
CONSOLIDATED FINANCIAL DATA
The
selected consolidated financial data presented below should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and our consolidated financial statements and the
notes thereto included elsewhere in this prospectus. Our statement of operations
data for the years ended December 31, 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. The selected consolidated statements of operations data
for the three months ended March 31, 2007 and 2006 and the selected consolidated
balance sheet data as of March 31, 2007 have been derived from unaudited
consolidated financial statements included elsewhere in this prospectus. The
unaudited consolidated financial statements include, in the opinion of
management, all adjustments that management considers necessary for the fair
presentation of the financial information set forth in those statements.
Historical results are not necessarily indicative of the results to be expected
in the future, and the results for the three months ended March 31, 2007 should
not be considered indicative of results expected for the full year.
|
|
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
|
|
|
—
|
|
|
|
|
|
|
|
|
2,870,000
|
|
|
2,450,000
|
|
Cash
Dividends Declared per Common
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
Months Ended March 31,
|
|
|
|
2007
(Unaudited)
|
|
2006
(Unaudited)
|
|
Net
Sales (1)
|
|
$
|
20,034,116
|
|
$
|
17,783,777
|
|
Income
(Loss) from Continuing Operations
|
|
|
(315,512
|
)
|
|
(669,690
|
)
|
Income
(Loss) from Continuing Operations Per Share
|
|
|
|
|
|
|
|
Total
Assets
|
|
|
29,098,852
|
|
|
31,275,165
|
|
Long-term
Debt Obligations
|
|
|
1,449,949
|
|
|
730,166
|
|
Preferred
Stock
|
|
|
2,450,000
|
|
|
2,820,000
|
|
Cash
Dividends Declared per Common
|
|
|
|
|
|
|
|
___________________________
(1)
|
Does
not include revenues from finance, insurance and extended service
contracts, which represent less than 3% of total
revenues.
|
SUPPLEMENTARY
FINANCIAL INFORMATION
Selected
Quarterly Consolidated Financial Data
The
following tables set forth unaudited quarterly operating results for fiscal
2005
and 2006 and for the first quarter of 2007 in dollars and as a percentage of
net
revenue. This information has been prepared on a basis consistent with the
audited consolidated financial statements included elsewhere herein and, in
the
opinion of management, contains all adjustments consisting only of normal
recurring adjustments, necessary for a fair presentation thereof. These
unaudited quarterly results should be read in conjunction with the consolidated
financial statements and notes thereto appearing elsewhere in this prospectus.
The operating results for any quarter are not necessarily indicative of results
for any future period. The sum of the quarterly earnings per share may not
total
annual amounts reported in the consolidated financial statements as a result
of
the fluctuation in the amount of weighted average common shares used in the
calculation of basic and diluted loss per share.
Quarter
ending:
|
|
Total
Revenues
($)
|
|
Gross
Profit
($)
|
|
Net
Income (Loss)
($)
|
|
Earnings
(Loss)
per
share ($)
|
|
3/31/2005
|
|
|
20,718,007
|
|
|
1,990,216
|
|
|
(538,210
|
)
|
|
(0.05
|
)
|
6/30/2005
|
|
|
22,752,262
|
|
|
2,566,253
|
|
|
1,090,191
|
|
|
0.10
|
|
9/30/2005
|
|
|
27,249,505
|
|
|
3,918,318
|
|
|
325,726
|
|
|
0.03
|
|
12/31/2005
|
|
|
34,885,293
|
|
|
3,802,650
|
|
|
(3,756,510
|
)
|
|
(0.28
|
)
|
3/31/2006
|
|
|
18,389,637
|
|
|
2,547,420
|
|
|
(1,067,874
|
)
|
|
(0.11
|
)
|
6/30/2006
|
|
|
39,370,426
|
|
|
5,999,793
|
|
|
1,143,956
|
|
|
0.11
|
|
9/30/2006
|
|
|
24,866,822
|
|
|
3,717,076
|
|
|
(248,673
|
)
|
|
(0.02
|
)
|
12/31/2006
|
|
|
18,124,901
|
|
|
2,147,473
|
|
|
(282,133
|
)
|
|
(0.02
|
)
|
3/31/2007
|
|
|
20,905,904
|
|
|
2,477,268
|
|
|
(566,436
|
)
|
|
(0.05
|
)
|
SELLING
SHAREHOLDERS
The
following table supplements and amends information in our prospectus, dated
February 13, 2006, relating to the offer and sale from time to time by the
Selling Shareholders of the securities described therein. These
include shares of common stock which were acquired or may be acquired by the
Selling Shareholders pursuant to their exercise of their Series A Shares
purchased by them in our September 2005 Private Placement, and the Series A
Warrants issued under that placement. These shares also include shares of our
common stock beneficially owned by HCFP Brenner Securities LLC, a registered
broker/dealer, which were acquired or may be acquired by it through the exercise
of an option granted to it, as part of its compensation for services rendered
in
connection with the September 2005 Private Placement, and its subsequent
conversion of the Series A Shares and exercise of the Series A Warrants
underlying its option. All of the Series A Warrants held by the Selling
Shareholders, including those held by the placement agent, expire in September
2010. These shares also include an additional 1,100,000 shares of common stock
which may be issued upon exercise of the Other Warrants. Other Warrants for
an
aggregate of 1,000,000 shares of common stock will expire in January 2010 and
for 100,000 shares will expire in April 2009. Additionally, we also agreed
to
register the Series A Warrants issued to the Selling Shareholders, and those
issuable to the placement agent upon its exercise of its option, which may
be
exercised for a total of 6,314,000 shares of our common stock. The shares of
common stock beneficially owned by each of the Selling Shareholders and the
Series A Warrants are being registered to permit public secondary trading of
these shares and Series A Warrants, and the Selling Shareholders may offer
these
shares and Series A Warrants for resale from time to time. See "Plan of
Distribution."
The
shares being offered by the Selling Shareholders as set forth in the table
below
include, for those holding Series A Shares and Series A Warrants, their pro
rata
portion of an aggregate maximum of 12,628,000 shares (reduced by 833,126 shares
(the number of shares of common stock issued, to date, in lieu of cash dividends
on the Series A Shares) that have been reserved for issuance in the event (i)
any exercise-price anti-dilution adjustments (which are applicable to the (1)
Series A Shares and (2) the Series A Warrants prior to the listing of such
Warrants, if ever, on the OTC Bulletin Board) are required to be made and/or
(ii) payment of dividends on the Series A Shares are made in shares of common
stock. These additional shares are referred to below as "reserve
shares."
The
following table sets forth the names of the Selling Shareholders, the number
of
shares of common stock, Series A Warrants owned beneficially by each Selling
Shareholder as of May 18, 2007 and the number of shares of common stock and
Series A Warrants that may be offered pursuant to this prospectus. Except as
may
be identified in the footnotes to the table, none of the Selling Shareholders
has, or within the past three years has had, any position, office or material
relationship with us or any of our predecessors or affiliates. The table has
been prepared based upon information furnished to us by the transfer agent
for
our shares of common stock and our internal records with respect to the Series
A
Shares.
The
Selling Shareholders may decide to sell all, some, or none of the shares of
common stock and/or Series A Warrants listed below. We cannot provide you with
any estimate of the number of shares of common stock or Series A Warrants that
any of the Selling Shareholders will hold in the future.
For
purposes of this table, beneficial ownership is based on 12,213,126 shares
of
common stock outstanding and is determined in accordance with the rules of
the
SEC, and includes voting power and investment power with respect to such shares.
All percentages are approximate.
As
explained below under "Plan of Distribution," we have agreed to bear certain
expenses (other than broker discounts and commissions, if any) in connection
with the registration statement, which includes this prospectus.
Selling
Shareholders
|
|
Shares
Beneficially
Owned
Prior to
Offering
(1)(2)
|
|
Number
of
Warrants
Offered
by
this
Prospectus
|
|
Number
of
Shares
Offered
by
this
Prospectus
(4)
|
|
Shares
Beneficially owned
After
the Offering (5)
|
|
|
|
Number
|
|
Percent(3)
|
|
|
|
|
|
Number
|
|
Percent
|
|
Shirley
Stone Koffman
|
|
|
598,000(6
|
)
|
|
4.9
|
%
|
|
100,000
|
|
|
400,000
|
|
|
—
|
|
|
|
|
Meadowbrook
Opportunity Fund LLC
|
|
|
609,000(7
|
)
|
|
4.99
|
%
|
|
300,000
|
|
|
1,200,000(7
|
)
|
|
|
|
|
|
|
Vestal
Venture
Capital
|
|
|
598,000(8
|
)
|
|
4.9
|
%
|
|
1,740,000
|
|
|
6,764,300(8
|
)
|
|
|
|
|
|
|
Richard
Molinsky
|
|
|
173,291
|
|
|
1.4
|
%
|
|
100,000
|
|
|
173,291(9
|
)
|
|
|
|
|
|
|
Robert
A. Melnick
|
|
|
100,000
|
|
|
*
|
|
|
100,000
|
|
|
100,000(10
|
)
|
|
|
|
|
|
|
Milton
Koffman
|
|
|
598,000(11
|
)
|
|
4.9
|
%
|
|
400,000
|
|
|
1,600,000(11
|
)
|
|
|
|
|
|
|
Israel
Feit
|
|
|
208,600
|
|
|
1,7
|
%
|
|
100,000
|
|
|
392,606(12
|
)
|
|
|
|
|
|
|
Edward
J. Gutman
|
|
|
207,082
|
|
|
1.7
|
%
|
|
200,000
|
|
|
207,082(13
|
)
|
|
|
|
|
|
|
Burton
I. Koffman and Ruthanne Koffman, as joint tenants with a right of
survivorship
|
|
|
598,000(14
|
)
|
|
4.9
|
%
|
|
1,000,000
|
|
|
4,000,000(14
|
)
|
|
|
|
|
|
|
Durban
Investment Group, LLC
|
|
|
425,405
|
|
|
3.4
|
%
|
|
200,000
|
|
|
793,418(15
|
)
|
|
|
|
|
|
|
Tech-Aerofoam
Products, Inc.
|
|
|
598,000(16
|
)
|
|
4.9
|
%
|
|
1,000,000
|
|
|
4,000,000(16
|
)
|
|
|
|
|
|
|
James
Scibelli
|
|
|
400,000
|
|
|
3.7
|
%
|
|
200,000
|
|
|
800,000(17
|
)
|
|
|
|
|
|
|
Dov
Schwartz
|
|
|
215,994
|
|
|
1.7
|
%
|
|
100,000
|
|
|
400,000(18
|
)
|
|
|
|
|
|
|
Albert
Nocciolino
|
|
|
431,987
|
|
|
3.4
|
%
|
|
200,000
|
|
|
800,000(19
|
)
|
|
|
|
|
|
|
Selling
Shareholders
|
|
Shares
Beneficially
Owned
Prior to
Offering
(1)(2)
|
|
Number
of
Warrants
Offered
by
this
Prospectus
|
|
Number
of
Shares
Offered
by
this
Prospectus
(4)
|
|
Shares
Beneficially owned
After
the Offering (5)
|
|
|
|
Number
|
|
Percent(3)
|
|
|
|
|
|
Number
|
|
Percent
|
|
HCFP/Brenner
Securities LLC
|
|
|
598,000(20
|
)
|
|
4.9
|
%
|
|
574,000
|
|
|
2,296,000(20
|
)
|
|
|
|
|
|
|
Thomas
A. Gallo
|
|
|
460,000
|
|
|
3.7
|
%
|
|
|
|
|
250,000(21
|
)
|
|
|
|
|
|
|
John
S. Arnone
|
|
|
498,300
|
|
|
4.0
|
%
|
|
|
|
|
250,000(22
|
)
|
|
|
|
|
|
|
Brendan
C. Rempel
|
|
|
470,000
|
|
|
3.7
|
%
|
|
|
|
|
250,000(23
|
)
|
|
|
|
|
|
|
Moneta
Capital Advisors, Inc.
|
|
|
220,000
|
|
|
1.8
|
%
|
|
|
|
|
220,000(24
|
)
|
|
|
|
|
|
|
HSK
Funding, Inc.
|
|
|
100,000
|
|
|
*
|
|
|
|
|
|
100,000(25
|
)
|
|
|
|
|
|
|
Moira
Stodden
|
|
|
10,000
|
|
|
*
|
|
|
|
|
|
10,000(26
|
)
|
|
|
|
|
|
|
Douglas
Gass
|
|
|
10,000
|
|
|
*
|
|
|
|
|
|
10,000(27
|
)
|
|
|
|
|
|
|
Albert
A. Auer
|
|
|
10,000
|
|
|
*
|
|
|
|
|
|
10,000(28
|
)
|
|
|
|
|
|
|
*
Less
than 1%
(1) |
Includes
(i) all shares issued or to be issued pursuant to the conversion
of Series
A Shares, Series A Warrants and/or Other Warrants held by the Selling
Shareholders, which may be converted or exercised within 60 days
after May
18, 2007 less (ii) all shares sold by Selling Shareholders prior
to May
18, 2007.
|
(2)
|
The
actual number of shares of common stock issuable upon conversion
of the
Series A Shares, the exercise of the Series A Warrants and the exercise
of
the Other Warrants is subject to certain anti-dilution and other
adjustments.
|
(3)
|
Percentage
is based upon 12,213,126 shares of common stock outstanding on May
18,
2007, plus, with respect to that Selling Shareholder only, all shares
of
common stock that are issuable to it within 60 days after that date,
upon
conversion of its Series A Shares, exercise of its Series A Warrants
and/or exercise of its Other
Warrants.
|
(4)
|
The
Selling Shareholders are also offering hereunder such indeterminate
number
of additional shares of common stock as may be issued to them because
of
any future stock distributions, stock splits, similar capital
readjustments or other anti-dilution adjustments, relating to the
Series A
Shares, the Series A Warrants and the Other
Warrants.
|
(5)
|
Assumes
the sale of all shares of common stock and Series A Warrants that
may be
sold in the offering.
|
(6)
|
Represents
Mrs. Koffman's beneficial ownership of 4.9% of the Company's issued
and
outstanding shares of common stock. Mrs. Koffman and her husband,
Milton
Koffman, have agreed to restrict their rights to convert the Series
A
Shares and exercise Series A Warrants so that their combined beneficial
ownership of the Company's common stock is less than five percent.
Notwithstanding any restrictions on her beneficial ownership, the
number
of shares offered by Mrs. Koffman by this prospectus includes an
aggregate
of (i) 100,000 shares issuable upon the conversion of Series A Shares;
(ii) 100,000 shares issuable upon the exercise of Series A Warrants;
(iii)
15,994 shares of common stock issued as dividends on the Series A
Shares;
and (iv) 184,006 potential reserve shares.
|
(7)
|
Represents
Meadowbrook Opportunity Fund LLC's beneficial ownership of 4.99%
of the
Company's issued and outstanding shares of common stock. Meadowbrook
Opportunity Fund has agreed to restrict its right to convert the
Series A
Shares and exercise Series A Warrants so that its beneficial ownership
of
the Company's common stock is less than five percent. Notwithstanding
any
restrictions on its beneficial ownership, the number of shares offered
by
Meadowbrook Opportunity Fund by this prospectus includes an aggregate
of
(i) 300,000 shares issuable upon the conversion of Series A Shares;
(ii)
300,000 shares issuable upon the exercise of Series A Warrants; (iii)
48,001 shares of common stock issued as dividends on the Series A
Shares;
and (iv) 551,999 potential reserve shares. Michael Ragins is a managing
member of MYR Partners LLC, the manager of Meadowbrook Opportunity
Fund,
and has sole voting power with respect to the securities being offered
for
resale by Meadowbrook Opportunity Fund in this
prospectus.
|
(8)
|
Represents
Vestal Venture Capital's beneficial ownership of 4.9% of the Company's
issued and outstanding shares of common stock. Vestal Venture Capital
has
agreed to restrict its right to convert the Series A Shares and exercise
Series A Warrants so that its beneficial ownership of the Company's
common
stock is less than five percent. Notwithstanding any restrictions
on its
beneficial ownership, the number of shares offered by Vestal Venture
Capital by this prospectus includes an aggregate of (i) 1,300,000
shares
issuable upon the conversion of Series A Shares; (ii) 1,740,000 shares
issuable upon the exercise of Series A Warrants; (iii) 244,300 shares
of
common stock issued upon conversion of Series A Shares; (iv) 240,535
shares of common stock issued as dividends on Series A Shares; and
(iii)
3,239,465 potential reserve shares. Allan R. Lyons is the sole owner
and
managing member of 21st Century Strategic Investment Planning, LC,
the
general partner of Vestal Venture Capital, and has sole voting power
with
respect to the securities offered for resale by Vestal Venture Capital
in
this prospectus.
|
(9)
|
Represents
an aggregate of (i) 73,291 shares of common stock issued upon the
conversion of Series A Shares and (ii) 100,000 shares issuable upon
the
exercise of Series A Warrants.
|
(10)
|
Represents
100,000 shares issuable upon the exercise of Series A
Warrants.
|
(11)
|
Represents
Mr. Koffman's beneficial ownership of 4.9% of the Company's issued
and
outstanding shares of Common Stock. Mr. Koffman and his wife, Shirley
Stone Koffman, have agreed to restrict their rights to convert the
Series
A Shares and exercise Series A Warrants so that their combined beneficial
ownership of the Company's Common Stock is less than five percent.
Notwithstanding any restrictions on his beneficial ownership, the
number
of shares offered by Mr. Koffman by this prospectus includes (i)
400,000
shares issuable upon the conversion of Series A Shares; (ii) 400,000
shares issuable upon the exercise of Series A Warrants; (iii) 63,994
shares of common stock issued as dividends on Series A Shares; and
(iv)
800,000 potential reserve shares.
|
(12)
|
Represents
an aggregate of (i) 100,000 shares issuable upon the conversion of
Series
A Shares; (ii) 100,000 shares issuable upon the exercise of Series
A
Warrants; (iii) 8,600 shares issued as dividends on the Series A
Shares;
and (iv) 184,006 potential reserve
shares.
|
(13)
|
Represents
an aggregate of (i) 7,082 shares issued upon the conversion of Series
A
Shares; and (ii) 200,000 shares issuable upon the exercise of Series
A
Warrants.
|
(14)
|
Represents
Mr. Koffman's beneficial ownership of 4.9% of the Company's issued
and
outstanding shares of common stock. Mr. Koffman and Tech-Aerofoam
Products, Inc., a corporation with which he is affiliated, have agreed
to
restrict their rights to convert the Series A Shares and exercise
Series A
Warrants so that their combined beneficial ownership of the Company's
common stock is less than five percent. Notwithstanding any restrictions
on his beneficial ownership, the number of shares offered by Mr.
and Mrs.
Koffman by this prospectus includes an aggregate of (i) 1,000,000
shares
issuable upon conversion of Series A Shares; (ii) 1,000,000 shares
issuable upon the exercise of Series A Warrants; (iii) 159,994 shares
of
common stock issued as dividends on the Series Shares and (iii) 1,840,006
potential reserve shares. Mr. Koffman is also deemed to be the beneficial
owner of 100,000 shares issuable upon the exercise of Other Warrants
by
HSK Funding, Inc., which may be exercised until January 2010 at an
exercise price of $1.00 per share.
|
(15)
|
Represents
an aggregate of (i) 200,000 shares issuable upon the conversion of
Series
A Shares; (ii) 200,000 shares issuable upon the exercise of Series
A
Warrants; (iii) 25,405 shares of common stock issued as dividends
on the
Series A Shares; and (iv) 368,013 potential reserve shares. J. Leon
Ellman, Neil Ellman, Lance Ellman and Kevin Sirop, are each managers
of
JLE Investment Managers, LLC, the manager of Durban Investment Group,
LLC,
and each has sole voting power over the securities being offered
for
resale by Durban Investment Group in this
prospectus.
|
(16)
|
Represents
Tech-Aerofoam Products' beneficial ownership of 4.9% of the Company's
issued and outstanding shares of common stock. Tech-Aerofoam Products
and
Burton Koffman, who is an affiliate of Tech-Aerofoam Products, have
agreed
to restrict their rights to convert Series A Shares and exercise
Series A
Warrants so that their combined beneficial ownership of the Company's
common stock is less than five percent. Notwithstanding any restrictions
on its beneficial ownership, the number of shares offered by Tech-Aerofoam
Products by this prospectus includes an aggregate of (i) 1,000,000
shares
issuable upon conversion of Series A Shares; (ii) 1,000,000 shares
issuable upon the exercise of Series A Warrants; (iii) 159,994 shares
of
common stock issued as dividends on the Series A Shares; and (iv)
1,840,006 potential reserve shares. Burton I. Koffman, President,
David L.
Koffman, Vice President, and Jeffrey Koffman, Vice President, each
has
sole voting power over the securities being offered for resale by
Tech
Aerofoam Products in this
prospectus.
|
(17)
|
Represents
an aggregate of (i) 100,000 shares issuable upon the conversion of
Series
A Shares; (ii) 100,000 shares issuable upon the exercise of Series
A
Warrants; (iii) 100,000 shares issuable upon the conversion of Series
A
Shares under Mr. Scibelli's IRA; (iv) 100,000 shares issuable upon
the
exercise of Series A Warrants under Mr. Scibelli's IRA; (v) 15,994
shares
of common stock issued as dividends on the Series A Shares initially
held
by Mr. Scibelli; (vi) 15,994 shares of common stock issued as dividends
on
the Series A Shares initially held by Mr. Scibelli’s IRA; and 368,012
potential reserve shares. Mr. Scibelli was a registered representative
with RG Securities, LLC, a registered broker-dealer. Additionally,
Mr.
Scibelli has represented to us that he purchased his Series A Shares
and
Series A Warrants as an investment for his own account without a
view to
resell. Mr. Scibelli has further represented that he does not have
any
agreements or understandings, directly or indirectly, with any person
to
distribute the securities purchased by him. Mr. Scibelli died subsequent
to the initial offer and sale of his securities under this prospectus.
As
a result, the securities offered hereby may be held by (i) the Estate
of
James Scibelli, Carol Scibelli as Executrix; (ii) Carol Scibelli
IRA;
(iii) Carol Scibelli; or (iv) such other person entitled to receive
such
securities by testamentary
distribution.
|
(18)
|
Represents
an aggregate of (i) 100,000 shares issuable upon the conversion of
Series
A Shares; (ii) 100,000 shares issuable upon the exercise of Series
A
Warrants; (iii) 15,994 shares of common stock issued as dividends
on the
Series A Shares and (iii) 184,006 potential reserve
shares.
|
(19)
|
Represents
an aggregate of (i) 200,000 shares issuable upon the conversion of
Series
A Shares; (ii) 200,000 shares issuable upon the exercise of Series
A
Warrants; (iii) 31,987 shares of common stock issued as dividends
on the
Series A Shares and (iii) 368,013 potential reserve
shares.
|
(20)
|
Represents
HCFP/Brenner Securities' beneficial ownership of 4.9% of the Company's
issued and outstanding shares of common stock. HCFP/Brenner Securities
has
agreed to restrict its right to convert the Series A Shares and exercise
Series A Warrants so that its beneficial ownership of the Company's
common
stock is less than five percent. Notwithstanding any restrictions
on its
beneficial ownership, the number of shares offered by HCFP/Brenner
Securities by this prospectus includes an aggregate of (i) (1) 574,000
shares issuable upon the conversion of Series A Shares and (2) 574,000
shares issuable upon the exercise of Series A Warrants, all of which
are
issuable pursuant to the placement agent's purchase option; and (ii)
1,148,000 potential reserve shares. Steven D. Shaffer, a member of
HCFP/Brenner Securities' Board, has sole voting power with respect
to the
securities offered for resale by HCFP/Brenner Securities in this
prospectus. HCFP/Brenner Securities, the placement agent for the
September
2005 Private Placement, is a registered
broker-dealer.
|
(21)
|
Represents
beneficial ownership of (i) 250,000 shares issuable upon the exercise
of
Other Warrants which may be exercised until January 2010 at an exercise
price of $1.00 per share; and (ii) 100,000 shares of common stock
owned by
Mr. Gallo directly or by his children. Additionally, Mr. Gallo is
a
principal of Moneta Capital Advisors, Inc. ("Moneta") and may therefore
be
deemed to have beneficial ownership of the 220,000 shares underlying
Other
Warrants, held by Moneta, although Mr. Gallo disclaims beneficial
ownership of 110,000 of such
shares.
|
(22)
|
Represents
beneficial ownership of (i) 250,000 shares issuable upon the exercise
of
Other Warrants which may be exercised until January 2010 at an exercise
price of $1.00 per share and (ii) 248,300 shares of common stock
owned by
Mr. Arnone directly or by his
children.
|
(23)
|
Represents
beneficial ownership of (i) 250,000 shares issuable upon the exercise
of
Other Warrants which may be exercised until January 2010 at an exercise
price of $1.00 per share and (ii) 110,000 shares of common stock
owned by
Mr. Rempel. Additionally, Mr. Rempel is a principal of Moneta and
may
therefore be deemed to have beneficial ownership of the 220,000 shares
underlying Other Warrants held by Moneta, although Mr. Rempel disclaims
beneficial ownership of 110,000 of such
shares.
|
(24)
|
Represents
(i) 120,000 shares issuable upon the exercise of Other Warrants which
may
be exercised until January 2010 at an exercise price of $1.00 per
share
and (ii)100,000 shares issuable upon the exercise of Other Warrants
which
may be exercised until April 2009 at an exercise price of $2.25 per
share.
Thomas A. Gallo and Brenda C. Rempel are the officers, directors
and
shareholders of Moneta Capital Advisors, Inc. and have shared voting
power
with respect to the securities of Moneta Capital Advisors being offered
for resale in this prospectus.
|
(25)
|
Represents
100,000 shares issuable upon the exercise of Other Warrants which
may be
exercised until January 2010 at an exercise price of $1.00 per share.
Burton I. Koffman, David L. Koffman and Jeffrey Koffman are the officers
of HSK Funding, and each has sole voting power over the securities
being
offered for resale by HSK Funding in this
prospectus.
|
(26)
|
Represents
10,000 shares issuable upon the exercise of Other Warrants which
may be
exercised until January 2010 at an exercise price of $1.00 per
share.
|
(27)
|
Represents
10,000 shares issuable upon the exercise of Other Warrants which
may be
exercised until January 2010 at an exercise price of $1.00 per
share.
|
(28)
|
Represents
10,000 shares issuable upon the exercise of Other Warrants which
may be
exercised until January 2010 at an exercise price of $1.00 per
share.
|
PLAN
OF DISTRIBUTION
The
Selling Shareholders and any of their pledgees, assignees, and
successors-in-interest (including distributees) may, from time to time, sell
any
or all of their shares of common stock of Giant Motorsports and/or the Series
A
Warrants offered hereby on any stock exchange, market or trading facility on
which such shares and/or Series A Warrants are traded or in private
transactions. These sales may be at fixed or negotiated prices. No short sales
of the shares of common stock being offered for resale under this prospectus
are
permitted prior to the date that the registration statement, of which this
prospectus
forms a part, has been declared effective by the Securities and Exchange
Commission. The Selling Shareholders may use any one or more of, or a
combination of, the following methods when selling shares of common stock and/or
Series A Warrants:
o |
ordinary
brokerage transactions and transactions in which a broker/dealer
solicits
purchasers;
|
o
|
block
trades in which a broker/dealer will attempt to sell the shares and/or
Series A Warrants as agent but may position and resell a portion
of the
block as principal to facilitate the
transaction;
|
o |
purchases
by a broker/dealer as principal and resale by the broker/dealer for
its
account;
|
o |
an
exchange distribution in accordance with the rules of any applicable
exchange;
|
o |
privately
negotiated transactions;
|
o |
settlement
of short sales;
|
o |
broker/dealers
may agree with the Selling Shareholders to sell a specified number
of such
shares of common stock and/or Series A Warrants at a stipulated
price per
share or per warrant, as applicable;
|
o |
a
combination of any such methods of sale;
and
|
o |
any
other method permitted pursuant to applicable
law.
|
The
Selling Shareholders also may sell shares of common stock and/or Series A
Warrants under Rule 144 under the Securities Act, if available, rather than
under this prospectus.
Broker/dealers
engaged by the Selling Shareholders may arrange for other broker/dealers to
participate in sales. Broker/dealers may receive commissions or discounts from
the Selling Shareholders (or, if any broker/dealer acts as agent for the
purchaser of shares or warrants, from the purchaser) in amounts to be
negotiated. The Selling Shareholders do not expect these commissions and
discounts to exceed what is customary in the types of transactions
involved.
The
Selling Shareholders may from time to time pledge or grant a security interest
in some or all of the shares or warrants or shares of common stock issuable
upon
exercise of warrants owned by them and, if they default in the performance
of
their secured obligations, the pledgees or secured parties may offer
and
sell the shares of common stock and Series A Warrants from time to time under
this prospectus, or under an amendment to this prospectus under the applicable
provision of the Securities Act amending the list of Selling Shareholders to
include the pledgee, transferee or other successors in interest as Selling
Shareholders under this prospectus.
The
Selling Shareholders and any broker/dealers or agents that are involved in
selling the shares of common stock or Series A Warrants may be deemed to be
"underwriters" within the meaning of the Securities Act in connection with
such
sales. In such event, any commissions received by such broker/dealers or agents
and any profit on the resale of the shares of common stock or Series A Warrants
purchased by them may be deemed to be underwriting commissions or discounts
under the Securities Act. The Selling Shareholders have informed the Company
that they do not have any agreement or understanding, directly or indirectly,
with any persons to distribute the common stock or the Series A
Warrants.
In
order
to comply with the securities laws of some states, if applicable, the common
stock and/or Series A Warrants may be sold in these jurisdictions only through
registered or licensed brokers or dealers. In addition, in some states the
common stock and/or Series A Warrants may not be sold unless registered
or qualified for sale or an exemption from registration or qualification
requirements is available and is complied with.
We
have
advised the Selling Shareholders that the anti-manipulation rules of Regulation
M under the Exchange Act may apply to sales of shares of common stock and Series
A Warrants in the market and to the activities of the Selling Stockholders
and
their affiliates. In addition, we will make copies of this prospectus
(as it may be supplemented or amended from time to time) available to the
Selling Shareholders for the purpose of satisfying the prospectus delivery
requirements of the Securities Act. The Selling Shareholders may indemnify
any
broker-dealer that participates in transactions involving the sale of the shares
of common stock or Series A Warrants against certain liabilities, including
liabilities arising under the Securities Act.
Although
our shares of common stock are currently traded on the OTC Bulletin Board,
there
does not currently exist a market for the trading of the Series A Warrants
included for registration in this prospectus. We have agreed, upon the request
of any holder of the Series A Warrants (following such holder obtaining the
written consent of the placement agent in our September 2005 Private Placement)
or upon the request of said placement agent, to use our best efforts (subject
to
the willingness of market makers to file Form 211 as required) to cause the
Series A Warrants to be listed on the OTC Bulletin Board and thereafter
concurrently listed and/or quoted on any other trading market or exchange on
which our common stock is quoted or listed. We advise you that it is the
applicable market makers who will be responsible for initiating the listing
of
the Series A Warrants on the OTC Bulletin Board and we have very little control
over the trading of the Series A Warrants on the OTC Bulletin
Board.
We
are
required to pay all fees and expenses incident to the registration of the shares
of common stock and Series A Warrants. We have agreed to indemnify the Selling
Shareholders against certain losses, claims, damages and liabilities, including
liabilities under the Securities Act.
UNDER
THE
SECURITIES EXCHANGE ACT OF 1934, AS AMENDED (THE "EXCHANGE ACT"),
ANY PERSON ENGAGED IN THE DISTRIBUTION OF THE SHARES OF COMMON STOCK OR SERIES
A
WARRANTS MAY NOT SIMULTANEOUSLY ENGAGE IN MARKET-MAKING ACTIVITIES WITH RESPECT
TO THE COMMON STOCK OR SERIES A WARRANTS FOR SPECIFIED PERIODS OF TIME PRIOR
TO
THE START OF THE DISTRIBUTION. IN ADDITION, EACH SELLING SHAREHOLDER AND ANY
OTHER PERSON PARTICIPATING IN A DISTRIBUTION WILL BE SUBJECT TO THE EXCHANGE
ACT, WHICH MAY LIMIT THE TIMING OF PURCHASES AND SALES OF COMMON STOCK AND
SERIES A WARRANTS BY THE SELLING SHAREHOLDER OR ANY SUCH OTHER
PERSON.
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:
o
|
$1,250,000
on the date of closing; and
|
o
|
$1,675,000
through the issuance to Kings Motorsports of a 6% $1,675,000
aggregate
principal
amount note (the "King's Note").
|
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, which date has been automatically extended by the Bank until August 29,
2007, bearing interest at the rate of prime plus one percent (9.25% at March
31,
2007). Our payment obligations under this term loan also are personally
guaranteed by Russell Haehn and Gregory Haehn. This loan is also secured by
a
first priority lien on all of our assets (including, without limitation, the
Chicago Cycles Assets). As of March 31, 2007, the outstanding amount of this
term loan, including accrued interest thereon, was $729,200.
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 May 31, 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 85 employees
as of
May 32, 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
each of 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% 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:
o
|
American
Honda Motor Company, Inc.
|
o
|
Yamaha
Motor Corporation
|
o
|
American
Suzuki Motor Corporation
|
o
|
Kawasaki
Motors Corp. U.S.A., Inc.
|
o
|
Polaris
Industries, Inc.
|
Our
Andrews Cycles and Chicago Cycles power sports dealerships operate pursuant
to
dealership agreements with all or most of the manufacturers listed above (or
authorized distributors of such manufacturers' products), and we are dependent
to a significant extent on our relationship with such
manufacturers.
Manufacturers
exercise a great degree of control over our dealerships, and the dealership
agreements provide for termination or non-renewal for a variety of causes.
Many
of our dealership agreements require prior approval with respect to acquisitions
of other motorcycle and/or power sports dealerships, and a manufacturer may
deny
our application to make an acquisition or seek to impose further restrictions
on
us as a condition to granting approval of an acquisition. While these
restrictions could adversely affect our business strategy of expanding our
operations through the acquisition of other retail dealerships, we believe
that
we will be able to work with these manufacturers to obtain the approvals
required for future acquisitions, although there can be no assurance of our
success in doing so.
Market
for our Products and Services
According
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:
o
|
Management
information systems (MIS).
|
We
believe that by consolidating these functions we will be able to reduce overall
expenses, simplify dealership management, create economies of scale with
leveraged buying power and provide a level of expertise that would otherwise
be
unavailable to each dealership individually. We have identified, without
limitation, the following strategic components as potentially integral to our
overall success and profitability:
|
o
|
Super
Store Concept.
The "Super Store" has proven to be an effective strategy in the successful
consolidation
of many other retail industries. Super Stores are the choice of consumers
nationwide. These
large stores represent and imply the widest offerings, the lowest
prices,
and, we believe, will
contribute to the development of a more mainstream motorsports
marketplace.
|
|
o
|
Sales
and Service Effectiveness.
Consumers have become more sophisticated in evaluating and purchasing
products, as a result of the wide-spread availability of the internet
and
greater access to
information, and, as a result, require a more comprehensive offering,
as
well as intelligent and
informative presentations. Our superstore selling space provides
a larger
display of products, with
a greater choice of brands and styles. We believe that a greater
choice of
products, under one
roof, will lead to a more satisfying shopping experience for customers
and, in turn, increased product
sales.
|
|
o
|
Competitive
Workforce Development.
A
significant portion of the compensation we pay to our sales
staff is commission based. We believe that commission-based compensation
provides incentive for our salespersons to expend their greatest
efforts
to sell our products and services. Since their compensation is directly
related to sales, our ability to hire successful salespersons is
conditioned upon their belief that our dealerships will generate
significant traffic and provide the inventory levels necessary to
maximize
sales opportunities. Our goal to build a “market leader” presence, proper
inventory levels and an overall aggressive yet tactful approach,
we
believe, will attract the successful salespersons we need to sell
our
products and services.
|
|
o
|
Inventory
Utilization.
We believe that by housing our inventory in one large central facility,
and distributing products from that facility to each of our dealerships,
on an as-needed basis, we will be able to deliver products to our
customers faster than other dealerships which are required to wait,
for
delivery of out-of-stock products.
|
|
o
|
Marketing
Efficiencies.
With a regional presence, and the use of single creative themes,
tested
for effectiveness, we believe that we will be able to take advantage
of
semi-national and possibly national marketing opportunities which
typically offer reduced advertising rates based on the utilization
of
economies of scale. We also plan to maximize our use of cooperative
advertising.
|
|
o
|
E-Commerce
and Mail Order Opportunities. We intend to develop e-commerce and
mail order strategies for the sale of parts and accessories that
will
expand our customer base outside of our dealership territories. We
believe
that the expansion of our business, over the internet and through
mail
order business, will assist us in the development of a national presence
and create customer interest to visit one of our “Super Stores,” although
no assurance can be given that it will have such effect. We believe
that
increased efforts on internet and mail-order sales, will increase
revenues
and also create additional opportunities for strategic business
relationships with dealerships outside of the territories where our
dealerships are located, although no assurance can be
given.
|
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 March
31,
2007 the Company had $19,845,378 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 May
31, 2007, we had approximately 140 employees (excluding our two executive
officers), 55 of whom are employed at our Andrews Cycles dealership and the
other 85 of whom are employed at our Chicago Cycles dealership. All of our
employees were employed on a full-time basis including two executives, 88
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 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 increased to $40,000
per
month from June 2006 through May 2007, will increase to $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.
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND
RESULTS OF OPERATIONS
The
following discussion of our results of operations and financial condition should
be read together with the consolidated financial statements and the notes to
those statements included elsewhere in this prospectus. This discussion may
contain forward-looking statements that involve risks and uncertainties. Our
actual results could differ materially from the results anticipated in any
forward-looking statements as a result of a variety of factors, including those
discussed in “Risk Factors” and elsewhere in this prospectus.
General.
Our
goal
is to become one of the largest dealers of power sports vehicles in the United
States through acquisitions and internal growth.
The
motorsports industry is highly fragmented with an estimated 4,000 retail stores
throughout the United States. We are attempting to capitalize upon the
consolidation opportunities available and increase our revenues and income
by
acquiring additional dealers and improving our performance and
profitability.
We
plan
to maximize the operating and financial performance of our dealerships by
achieving certain efficiencies that will enhance internal growth and
profitability. By consolidating our corporate and administrative functions,
we
believe we can reduce overall expenses, simplify dealership management and
create economies of scale.
We
will
specifically target dealers in markets with strong buyer demographics that,
due
to under-management or under-capitalization, are unable to realize their market
share potential and can benefit substantially from our systems and operating
strategy.
Together
with our two wholly-owned subsidiaries, we own and operate two retail power
sports superstores. Our core brands include Suzuki, Yamaha, Honda, Ducati and
Kawasaki. Our superstores operate under the names “Andrews Cycles” and “Chicago
Cycles.” Andrews Cycles is located in Salem, Ohio, has approximately 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.
Overview
of Economic Trends.
Effects
of Increasing Interest Rates
Although
the Federal Reserve, during the second half of 2006 and through the first
quarter of 2007, 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 the second half of 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 the remainder of 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 the second half of 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 (which date has been automatically extended by the Bank until August 29,
2007), bearing interest at prime plus one percent (9.25% at March 31, 2007).
Our
payment obligations under this term loan also are personally guaranteed by
Russell Haehn and Gregory Haehn. This loan is also secured by a first priority
lien on all of our assets (including, without limitation, the Chicago Cycles
assets). As of March 31, 2007, the outstanding amount of this term loan,
including accrued interest thereon, was $729,200.
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 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 (the "2005 Bridge Note") providing for interest at the rate
of
fifteen percent (15%) per annum (which rate was subsequently increased to
fifteen and ½ percent (15.5%)). Interest on the 2005 Bridge Note is payable
monthly, and all outstanding principal and accrued but unpaid interest was
initially 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 March 31, 2007), and has no stipulated repayment terms, but
is
due and payable on May 31, 2007. At March 31, 2007, 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. The Company is currently
involved in negotiations with the Bank to renew this line of
credit.
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 March 31, 2007, 420 Series A Shares
had
been converted into 938,500 shares of our common stock. Additionally, during
2006 and through March 31, 2007, we issued an aggregate of 829,626 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 March 31,
2007.
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:
o
|
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;
|
o
|
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;
|
o
|
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
|
o
|
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, 2005 increased $91,234 (15.5%) to
$679,229 from $587,995 for the same period in 2004. 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.
Three
months ended March 31, 2007 Compared to three months ended March 31,
2006:
|
|
March
31,
2007
|
|
March
31,
2006
|
|
Increase
(Decrease)
|
|
%
Change
|
|
Total
Revenues
|
|
$
|
20,905,904
|
|
$
|
18,389,637
|
|
$
|
2,516,267
|
|
|
13.7
|
%
|
Cost
of Sales
|
|
$
|
18,428,636
|
|
$
|
15,842,217
|
|
$
|
2,586,419
|
|
|
16.3
|
%
|
Operating
Expenses
|
|
$
|
2,792,780
|
)
|
$
|
3,217,110
|
|
$
|
(424,330
|
|
|
13.2
|
%
|
Income
(Loss) from Operations
|
|
$
|
(315,512
|
)
|
$
|
(669,690
|
)
|
$
|
(354,178
|
)
|
|
52.9
|
%
|
Other
Income and (Expenses)
|
|
$
|
(411,721
|
)
|
$
|
(271,462
|
)
|
$
|
140,259
|
|
|
51.7
|
%
|
Income
(Loss) before Provision (Benefit) for Income Taxes
|
|
$
|
(727,233
|
)
|
$
|
(941,152
|
)
|
$
|
(213,919
|
)
|
|
22.7
|
%
|
Net
Income (Loss) before Preferred Dividends
|
|
$
|
(473,733
|
)
|
$
|
(941,152
|
)
|
$
|
(467,419
|
)
|
|
49.7
|
%
|
Total
Revenues:
Total
revenues for the three months ended March 31, 2007 were $20,905,904 representing
an increase of $2,516,267 (13.7%) from the $18,389,637 reported for the three
months ended March 31, 2006. Our results were impacted significantly by our
decision, during the first quarter of 2007, to markdown prices on remaining
2006
inventory that we were unable to sell due to the weak sales environment in
2006.
All terrain vehicles (“ATVs”) comprised the largest portion of these price cuts,
many of which vehicles were sold at less than our cost per unit. Due to these
lower prices customers purchased significantly more vehicles in the first
quarter of 2007 compared to the same period in 2006, resulting in greater total
revenues, even though revenue per unit was less on sales made in the first
quarter of 2007.
Cost
of
Sales:
Cost
of
sales for the three months ended March 31, 2007 increased by $2,586,419 (16.3%)
to $18,428,636, compared to $15,842,217 for the same period in 2006. This
increase reflects the additional cost of units booked by the Company in the
first quarter of 2007, as a result of the increase in sales.
Operating
Expenses:
Selling,
general and administrative expenses for the three months ended March 31, 2007
were $2,792,780, a decrease of $424,330 (13.2%) from $3,217,110 for the same
period in 2006. The aggregate decrease in such costs was primarily attributable
to (i) a reduction in advertising costs of approximately $238,000 and (ii)
a
reduction in insurance costs of approximately $114,000, between the comparable
periods.
Loss
from
Operations:
We
had a
loss from operations before other income (expense) for the three months ended
March 31, 2007 of $315,512, as compared to a loss from operations of $669,690
for the same period in 2006, which reflects a reduction in losses of $354,178
(52.9%). This reduction in losses from operations during the three months ended
March 31, 2007 as compared to the same period in 2006, is a result of the
reduction in operating expenses, as described above, and in particular, the
reduction in advertising costs. Depreciation and amortization was approximately
$109,500 for the three months ended March 31, 2007, as compared to $108,500
for
the same period in 2006.
Other
Income and (Expenses):
Other
expenses for the three months ended March 31, 2007 increased $140,259 (51.7%)
to
$411,721 from $271,462 for the same period in 2006. This increase in other
expenses was primarily attributable to an increase in net interest expense
from
$275,558 in the three month period ended March 31, 2006 to $416,611 during
the
same period in 2007. 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 8.25% at March 31, 2006 to 9.25% at March 31,
2007.
Loss
before Provision (Benefit) for Taxes:
We
had a
loss before provision (benefit) for taxes, for the three months ended March
31,
2007 of $727,233 as compared with a loss before provision (benefit) for taxes
of
$941,152 for the same period in 2006, which represents a reduction of $213,919
(22.7%). This reduction in loss before provision (benefit) for taxes is
primarily attributable to the reduction in operating expenses, described above,
which was partially offset by the increase in net interest expense, also
discussed above.
Loss
before Preferred Dividends:
We
had a
net loss before preferred dividends of $473,733 for the three months ended
March
31, 2007, as compared to a net loss before preferred dividends of $941,152
for
the same period in 2006. This reflects a reduction in losses before preferred
dividends of $467,419 (49.7%) between these comparable periods. This reduction
in net loss before preferred dividends during the three months ended March
31,
2007 as compared to the same period in 2006, is attributable to the reduction
in
our operating expenses, which was partially offset by an increase in net
interest expense, both as described above. Net losses before preferred dividends
were reduced greater in percentage terms between the three month periods ended
March 31, 2007 and 2006 than net losses before taxes, due to the tax benefit
of
$253,500 received by us for the three months ended March 31, 2007.
Liquidity
and Capital Resources.
Our
primary source of liquidity has been cash generated by operations and borrowings
under various credit facilities. At March 31, 2007, we had $817,595 in cash
and
cash equivalents compared to $156,530 at December 31, 2006. Until required
for
operations, our policy is to invest excess cash in bank deposits and money
market funds. Net working capital at March 31, 2007 was ($458,527) compared
to
($77,975) at December 31, 2006.
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
March
31, 2007 we had outstanding indebtedness payable within 12 months in an
aggregate amount of approximately $6.1 million. Of these amounts, approximately
$1.4 million was payable to financial institutions in repayment of loans and
other credit facilities provided to us and approximately $3.1
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.
Quantitative
and Qualitative Disclosures 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 $19,845,378
at March 31, 2007. Interest rates in connection with our floor plan financing
generally fluctuate based on the prime rate, the type of product being financed
and the length of time that such product remains on the floor plan. During
the
first quarter of 2007 interest rates on our floor plan financing 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 March
31, 2007, we do not believe that fluctuations in the prime rate will have more
than a slight negative impact on our income from operations.
Hedging
Activities
We
normally invest any available cash in short-term investments and do not
currently have any investment strategies to hedge against increases in interest
rates. Additionally, although we do not currently intend to commence any such
hedging investments in the future, in the event that we determine that there
is
a substantial risk that increases in interest rates would have a material
negative impact on our business, we may consider such hedging strategies at
that
time.
Foreign
Exchange Rates
We
are
not currently, and have not in the past, been subject to fluctuations in
exchange rates of foreign currencies against the U.S. Dollar, since virtually
all of the vehicles, accessories and parts that we purchase in connection with
our business are purchased from the U.S. subsidiaries of Japanese manufacturers
in U.S. Dollars. Additionally, all of our product sales are made in the United
States in U.S. Dollars. In the event that our business model changes in the
future, and we either purchase products in foreign currencies such as Japanese
Yen, or sell products outside of the United States, for which we accept payment
in foreign currencies, we could become subject to exchange rate fluctuations
at
that time.
Off-Balance
Sheet Arrangements.
We
have
no off-balance sheet arrangements.
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
|
|
$
|
1,449,949
|
|
$
|
1,449,949
|
|
|
|
|
|
|
|
|
|
|
Capital
(Finance) Lease Obligations
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Lease Obligations
|
|
$
|
11,838,764
|
|
$
|
1,028,209
|
|
$
|
3,222,505
|
|
$
|
3,390,174
|
|
$
|
4,197,876
|
|
Purchase
Obligations
|
|
|
As
Needed
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
Long-Term Liabilities Reflected on the Company's Balance Sheet under
the
GAAP of the Primary Financial Statements
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
13,288,713
|
|
$
|
2,478,158
|
|
$
|
3,222,505
|
|
$
|
3,390,174
|
|
$
|
4,197,876
|
|
MANAGEMENT
Set
forth
below are the names, ages, and positions of each of our executive officers
and
directors, together with such person's business experience during the past
five
(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.
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.
Compensation
Committee Interlocks and Insider Participation
No
interlocking relationship exists between our board of directors and the board
of
directors or compensation committee of any other company, nor has any
interlocking relationship existed in the past.
Indemnification
of Directors and Officers
Our
Articles provide for the indemnification of any person entitled to
indemnification pursuant to the Nevada Revised Statutes, to the fullest extent
permitted thereunder.
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.
|
Grants
of Plan-Based Awards
We
did
not grant any plan-based awards to our Named Executive Officers during the
fiscal year ended December 31, 2006
Outstanding
Equity Awards at Fiscal Year-End
The
following table provides information as to options held by each of the Named
Executives at December 31, 2006. Based on the last reported sale price for
our
shares of common stock on December 31, 2006 of $0.22, as reported on the OTC
Bulletin Board Service, none of the options listed in the following table were
in the money on such date.
|
|
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
|
|
Option
Exercises and Stock Vested
None
of
our Named Executive Officers exercised options to purchase our common stock
during 2006.
Pension
Benefits
The
Company does not sponsor any defined benefit pension plans for its employees,
including the Named Executive Officers.
Nonqualified
Deferred Compensation
The
Company did not maintain any nonqualified defined contribution plan for its
employees, including the Named Executive Officers, during 2006.
Employment
Agreements
We
do not
have a written employment agreement with either of our Named Executive
Officers.
Potential
Payments upon Termination or Change in Control
The
Company does not maintain any contracts, agreements, plans, or arrangements
that
provide for payments to the Named Executive Officers at, following, or in
connection with any termination, including, without limitation, resignation,
severance, retirement, or a constructive termination of a Named Executive
Officer, or a change in control of the Company or a change in the Named
Executive Officers responsibilities.
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.
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.
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
As
of May
30, 2007, we had a total of 12,213,126 shares of common stock issued and
outstanding.
The
following table sets forth information, as of May 30, 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)
|
|
|
2,995,000
|
|
|
23.6
|
%
|
|
|
|
|
|
|
|
|
All
Executive Officers and Directors, as a Group (two persons)
|
|
|
8,780,000
|
|
|
64.0
|
%
|
(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 May 30, 2007. The numbers and percentages shown
include the shares of common stock actually owned as of May 30, 2007
and
the shares of common stock that the person or group had the right
to
acquire within 60 days of May 30, 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 May 30, 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's or group's percentage voting interest (assuming exercise
of all
options) is: Russell A. Haehn - 31.9%; Gregory A. Haehn - 17.0%;
and all
executive officers and directors as a group -
47.2%.
|
(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
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.
DESCRIPTION
OF SECURITIES
The
following summary is qualified in its entirety by reference to the Company's
Restated Articles of Incorporation ("Articles") and its bylaws. The Company's
authorized capital stock consists of 75,000,000 shares of common stock, $.001
par value per share, and 5,000,000 shares of preferred stock, $.001 par value
per share.
Common
Stock
As
of May
30, 2007, we have 12,213,126 shares of common stock issued and outstanding.
Each
share of common stock is entitled to one vote at all meetings of shareholders.
All shares of common stock are equal to each other with respect to liquidation
rights and dividend rights. There are no preemptive rights to purchase any
additional shares of common stock. Our Articles do not provide for cumulative
voting in the election of directors. Because holders of common stock do not
have
cumulative voting rights, subject to the rights of the preferred stock to vote
with the holders of common stock, holders or a single holder of more than 50%
of
the outstanding shares of common stock present and voting at an annual meeting
at which a quorum is present can elect all of the Company's directors. In the
event of liquidation, dissolution or winding up of the Company, holders of
shares of common stock will be entitled to receive on a pro rata basis all
assets of the Company remaining after satisfaction of all liabilities and all
liquidation preferences, if any, granted to holders of our preferred stock.
All
of
our issued and outstanding common stock is, and, when distributed according
to
the terms of the offering will be, fully paid and non-assessable and are not
subject to any future call.
The
holders of outstanding shares of common stock are entitled to receive dividends
out of assets legally available therefore at such times and in such amounts
as
our board of directors may from time to time determine, subject to any approval
required by holders of any class of preferred stock. Holders of common stock
will share equally on a per share basis in any dividend declared by the board
of
directors. We have not paid any dividends on our common stock, to date, and
do
not anticipate paying any cash dividends our common stock in the foreseeable
future.
Preferred
Stock
General
The
board
of directors of the Company has the authority to divide the authorized preferred
stock into series, the shares of each series to have such relative rights and
preferences as shall be fixed and determined by the board of directors. The
provisions of a particular series of authorized preferred stock, as designated
by the board of directors, may include restrictions on the payment of dividends
on common stock. Such provisions may also include restrictions on the ability
of
the Company to purchase shares of common stock or to purchase or redeem shares
of a particular series of authorized preferred stock. Depending upon the voting
rights granted to any series of authorized preferred stock, issuance thereof
could result in a reduction in the voting power of the holders of common stock.
In the event of any dissolution, liquidation or winding up of the Company,
whether voluntary or involuntary, the holders of the preferred stock will
receive, in priority over the holders of common stock, a liquidation preference
established by the board of directors, together with accumulated and unpaid
dividends. Depending upon the consideration paid for authorized preferred stock,
the liquidation preference of authorized preferred stock and other matters,
the
issuance of authorized preferred stock could result in a reduction in the assets
available for distribution to the holders of common stock in the event of the
liquidation of the Company.
Series
A Shares
As
of May
30, 2007, we have 2,450 shares of preferred stock issued and outstanding, all
of
which has been designated as Series A convertible preferred stock (the "Series
A
Shares"). Additionally, HCFP/Brenner Securities LLC, the placement agent in
our
September 2005 Private Placement has an option to purchase 287 Series A Shares
at a purchase price of $1,000 per share.
Rank. The
Series A Shares rank senior to (1) the common stock and (2) each other class
or
series of preferred stock now or hereafter established by the board of
directors, the terms of which do not expressly provide that it ranks senior
to,
or on a parity with, the Series A Shares as to dividend rights and rights on
liquidation, winding-up and dissolution of the Company (collectively referred
to
as "Junior Stock").
Dividends. The
holders of shares of Series A Shares 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 is reduced to $70.00
per Series A Share per annum at such time as and for as long as our shares
of
common stock issuable upon conversion of the Series A Shares are covered by
an
effective registration statement. In the event of certain defaults by the
Company, the dividend rate will be increased to $200.00 per Series A Share
until
the default has been cured. Dividends will accrue and be payable semi-annually,
in arrears, on the first day of March and September in each year, beginning
March 2006.
Dividends
payable on the Series A Shares are cumulative and any accrued and unpaid
dividends are included in the payment of a liquidation preference to the holders
of Series A Shares, as described below.
Liquidation
Preference.
In the
event of a liquidation, dissolution or winding up of the Company, whether
voluntary or involuntary, the holders of the Series A Shares are entitled to
receive, after all payments to holders of any securities that rank senior to
the
Series A Shares, $1,000.00 per Series A Share, together with an amount equal
to
the dividends accrued and unpaid thereon (whether or not declared) to the date
of final distribution to the holders of Series A Shares, without interest,
before any payment shall be made or any assets distributed to the holders of
any
of the Company's securities that rank junior to the Series A Shares, including
the common stock. After the full payment of the liquidation preference to the
holders of Series A Shares, they are not entitled to any further participation
in any distribution of the Company's assets. At the option of any holder of
Series A Shares, a consolidation or merger of the Company with another
corporation in which the Company is not the surviving entity, or a sale or
transfer of all or part of the Company's assets for cash, securities or other
property will be considered a liquidation, dissolution or winding up of the
Company.
Conversion.
Election
to Convert. Each
Series A Share may be converted at any time, at the election of the holder,
into
2,000 shares of our common stock, subject to certain adjustments.
Mandatory
Conversion.
We have
the right, in our sole discretion, to require that all of the outstanding Series
A Shares be converted into shares of our common stock at the same conversion
rate applicable to a conversion election. We have this right to require
conversion at any time: (1) the last trade price of our common stock reported
on
the OTC Bulletin Board for each of the ten consecutive trading days ending
two
business days prior to the date of our conversion election exceeds $1.50 per
share (subject to certain adjustments, including adjustments for anti-dilution)
and (2) the common stock issuable upon conversion of the Series A Shares is
covered by an effective registration statement during the entire ten-day period
and through the date of the conversion.
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).
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.
Warrants
Series
A Warrants
We
issued
warrants in our September 2005 Private Placement (the "Series A Warrants")
to
the investors who purchased Series A Shares, providing those shareholders the
right to purchase up to an aggregate of 5,740,000 shares of our common stock,
at
an exercise price of $.50 per share, subject to certain adjustments.
Additionally, the placement agent in our September 2005 Private Placement has
an
option to acquire Series A Warrants to purchase 574,000 shares of our common
stock. The Series A Warrants, which are also being offered for resale by the
Selling Shareholders under this prospectus, may be exercised at any time until
September 16, 2010. Other material terms of the Series A Warrants are as
follows:
(1) Listing.
Upon the
request of any holder of the Series A Warrants (following the holder's obtaining
the written consent of HCFP/Brenner Securities LLC) or of said placement agent,
we have agreed to use our best efforts to list the Series A Warrants on the
OTC
Bulletin Board and to provide for quotation on any other trading market or
exchange on which our common stock becomes quoted or listed in the future.
(2) Anti-Dilution
Adjustments.
At any
time prior to the listing of the Series A Warrants on the OTC Bulletin Board,
the exercise price will be subject to similar adjustments as provided with
respect to reductions in the conversion price, in the event of the issuance
of
additional securities at an effective price per share of common stock less
than
$.50 (or the then current exercise price as reduced by prior anti-dilution
events). The exercise price is also subject to adjustment as a result of certain
recapitalization events.
(3) Appointment
of Warrant Agent.
We are
required, commencing on the first date that the Series A Warrants are listed
on
OTC Bulletin Board, to appoint a warrant agent for the purpose of maintaining
the warrant register, in connection with the issuance of the common stock
issuable upon the exercise of the Series A Warrants, exchanging the Series
A
Warrants, replacing the Series A Warrants or any or all of the foregoing. Upon
said appointment, any registration, issuance, exchange, or replacement of the
Series A Warrants, as the case may be, will be made at the office of the warrant
agent.
(4) Redemption.
Provided
(i) that the shares of common stock underlying the Series A Warrants are
registered for resale under an effective registration statement filed by the
Company with the SEC and (ii) that the registration statement shall be effective
thirty (30) days prior to the date of a notice of redemption, and remains
effective until that date, and provided that the Company obtains the prior
written consent of HCFP/Brenner Securities LLC to redeem the Series A Warrants,
then upon not less than 14 business days' prior written notice to the each
holder, the Series A Warrants may be redeemed by the Company at any time
commencing six months after the date of effectiveness of the registration
statement and prior to expiration of the Series A Warrants, in whole but not
in
part, at the Company's sole option, at the redemption price of $0.01 per share
for every share of common stock purchasable upon exercise the Series A Warrants
at the time of redemption, if the last sale price of a share of our common
stock
is at least $1.50 per share as adjusted for stock splits, dividends and the
like, for all ten of the consecutive trading days ending within three business
days prior to the date of the redemption notice. The sending of a redemption
notice will not affect a holder's ability to exercise his or her Series A
Warrants at any time prior to the date of redemption.
Registration
Rights
In
connection with the issuance of its securities in the September 2005 Private
Placement, we entered into a registration rights agreement with the purchasers
and the placement agent requiring us to file a registration statement to
register (1) the shares of common stock into which the Series A Shares convert
Warrants (including those Series A Shares that may be purchased pursuant to
the
placement agent's option); (2) the shares of common stock that may be paid
as
dividends on the Series A Shares; (3) the Series A Warrants (including those
Series A Warrants that may be issued pursuant to the placement agent's option),
and (4) the shares of common stock underlying the Series A Warrants (including
those underlying the Series A Warrants issuable to the placement agent pursuant
to its option), on a Form SB-2 Registration Statement (or comparable form)
by on
or about October 31, 2005 and ensure that such registration statement is
effective no later than on or about January 16, 2005. If any of the above time
periods were not met, or the registration statement is declared effective by
the
SEC, but the registered securities cannot be sold by a Selling Shareholder
for
any reason other than its own fault, then the Company will pay investors an
amount in cash, as partial liquidated damages and not as a penalty, equal to
2%
per month of the issue price until such deficiency is cured.
In the
event that the Registration Statement was not declared effective by January
16,
2006, we were required to pay investors in the September 2005 Private Placement,
unless these investors agreed otherwise, an aggregate of $57,400 on such date,
and an additional $57,400 each month thereafter until the Registration Statement
was declared effective. Since the Registration Statement was declared effective
on February 13, 2006, we paid these investors liquidated damages in an aggregate
amount of $57,000.
Certain
Rights of Holders of Common Stock
The
Company is a Nevada corporation organized under Chapter 78 of the Nevada Revised
Statutes ("NRS"). Accordingly, the rights of the holders of common stock are
governed by Nevada law. Although it is impracticable to set forth all of the
material provisions of the NRS, the following is a summary of certain
significant provisions of the NRS that affect the rights of securities holders.
Control
Share Statute
Sections
78.378 - 78.3793 of the NRS constitute Nevada's control share statute, which
set
forth restrictions on the acquisition of a controlling interest in a Nevada
corporation which does business in Nevada (directly or through an affiliated
corporation) and which has 200 or more shareholders, at least 100 of whom are
shareholders of record and residents of Nevada. A controlling interest is
defined as ownership of common stock sufficient to enable a person directly
or
indirectly and individually or in association with others to exercise voting
power over at least 20% but less than 33.3% of the common stock, or at least
33.3% but less than a majority of the common stock, or a majority or more of
the
common stock. Generally, any person acquiring a controlling interest must
request a special meeting of shareholders to vote on whether the shares
constituting the controlling interest will be afforded full voting rights,
or
something less. The affirmative vote of the holders of a majority of the common
stock, exclusive of the control shares, is binding. If full voting rights are
not granted, the control shares may be redeemed by the corporation under certain
circumstances. The Company does not believe the foregoing provisions of the
Nevada statutes are presently applicable to it because it does not presently
have the requisite number of shareholders and does not conduct business in
Nevada; however, if in the future it does satisfy these requirements, then
such
provisions may apply.
Business
Combination Statute
Sections
78.411 - 78.444 of the NRS set forth restrictions and prohibitions relating
to
certain business combinations and prohibitions relating to certain business
combinations with interested shareholders. These sections generally prohibit
any
business combination involving a corporation and a person that beneficially
owns
10% or more of the common stock of that corporation (an "Interested
Shareholder") (A) within five years after the date (the "Acquisition Date")
the
Interested Shareholder became an Interested Shareholder, unless, prior to the
Acquisition Date, the corporation's board of directors had approved the
combination or the purchase of shares resulting in the Interested Shareholder
becoming an Interested Shareholder; or (B) unless five years have elapsed since
the Acquisition Date and the combination has been approved by the holders of
a
majority of the common stock not owned by the Interested Shareholder and its
affiliates and associates; or (C) unless the holders of common stock will
receive in such combination, cash and/or property having a fair market value
equal to the higher of (a) the market value per share of common stock on the
date of announcement of the combination or the Acquisition Date, whichever
is
higher, plus interest compounded annually through the date of consummation
of
the combination less the aggregate amount of any cash dividends and the market
value of other dividends, or (b) the highest price per share paid by the
Interested Shareholder for shares of common stock acquired at a time when he
owned 5% or more of the outstanding shares of common stock and which acquisition
occurred at any time within five years before the date of announcement of the
combination or the Acquisition Date, whichever results in the higher price,
plus
interest compounded annually from the earliest date on which such highest price
per share was paid less the aggregate amount of any cash dividends and the
market value of other dividends. For purposes of these provisions, a "business
combination" is generally defined to include (A) any merger or consolidation
of
a corporation or a subsidiary with or into an Interested Shareholder or an
affiliate or associate; (B) the sale, lease or other disposition by a
corporation to an Interested Shareholder or an affiliate or associate of assets
of that corporation representing 5% or more of the value of its assets on a
consolidated basis or 10% or more of its earning power or net income; (C) the
issuance by a corporation of any of its securities to an Interested Shareholder
or an affiliate or associate having an aggregate market value equal to 5% or
more of the aggregate market value of all outstanding shares of that
corporation; (D) the adoption of any plan to liquidate or dissolve a corporation
proposed by or under an agreement with the Interested Shareholder or an
affiliate or associate; (E) any receipt by the Interested Shareholder or an
affiliate, except proportionately as a Shareholder, of any loan, advance,
guarantee, pledge or other financial assistance or tax credit or other tax
advantage; and (F) any recapitalization or reclassification of securities or
other transaction that would increase the proportionate shares of outstanding
securities owned by the Interested Shareholder or an affiliate. Sections
78.411-78.444 of the NRS are presently applicable to the Company.
Mergers,
Consolidations and Sales of Assets
Nevada
law provides that an agreement of merger or consolidation, or the sale or other
disposition of all or substantially all of a corporation's assets, must be
approved by the affirmative vote of the holders of a majority of the voting
power of a corporation (except that no vote of the shareholders of the surviving
corporation is required to approve a merger if certain conditions are met,
unless the articles of incorporation of that corporation states otherwise,
and
except that no vote of shareholders is required for certain mergers between
a
corporation and a subsidiary), but does not require the separate vote of each
class of stock unless the corporation's articles of incorporation provides
otherwise (except that class voting is required in a merger if shares of the
class are being exchanged or if certain other rights of the class are affected).
The Company's certificate of designation of its Series A Shares alters these
provisions of Nevada law by providing for the requirement of the approval of
the
holders of a majority of the Series A Shares, voting separately as a class
for:
(1) the merger, consolidation or entering into a business combination or similar
transaction, other than if (a) the Company is the surviving entity and (b)
the
shareholders of the Company prior to such transaction continue to hold a
majority of the capital stock of the Company following the transaction; and
(2)
the sale, transfer or disposal of a material portion of the Company's assets;
provided, however, that such a sale, transfer or other disposition will be
permitted if (a) it is not of all or substantially all of the Company's assets
and (b) is approved by a majority of the independent and disinterested members
of the Company's board of directors.
Directors;
Removal of Directors
Under
Nevada law, the number of directors may be fixed by, or determined in the manner
provided in the articles of incorporation or bylaws of a corporation, and the
board of directors may be divided into classes as long as at least 25% in number
of the directors are elected annually. Nevada law further requires that a
corporation have at least one director. Directors may be removed under Nevada
law with or without cause by the holders of not less than a majority of the
voting power of the corporation, unless a greater percentage is set forth in
the
articles of incorporation.
Amendments
to Bylaws
The
Company’s bylaws may be amended by the board of directors or by the
shareholders, with respect to any bylaw adopted by the shareholders.
Appraisal
Rights
The
Nevada statutes provide dissenting or objecting security holders with the right
to receive the fair value of their securities in connection with certain
extraordinary corporate transactions. These appraisal rights are available
with
respect to certain mergers and share exchanges and in connection with the
granting of full voting rights to control shares acquired by an interested
shareholder. However, unless the transaction is subject to the control share
provisions of the Nevada statutes, a shareholder of a Nevada corporation may
not
assert dissenters' rights, in most cases, if the stock is listed on a national
securities exchange or held by at least 2,000 shareholders of record (unless
the
articles of incorporation of the corporation expressly provide otherwise or
the
security holders are required to exchange their shares for anything other than
shares of the surviving corporation or another publicly held corporation that
is
listed on a national securities exchange or held of record by more than 2,000
shareholders). The Company's certificate of designation of its Series A Shares
alters these provisions of Nevada law by providing each holder of Series A
Shares, at its option, the right to elect to treat a consolidation or merger
of
the Company with another corporation in which the Company is not the surviving
entity, or a sale or transfer of all or part of the Company's assets for cash,
securities or other property as a liquidation event, which would entitle such
shareholder to payment for its Series A Shares based on the liquidation
preference amount of the Series A Shares.
Cumulative
Voting
Under
the
Nevada statutes, the articles of incorporation of a corporation may provide
for
cumulative voting, which means that the shareholders are entitled to multiply
the number of votes they are entitled to cast by the number of directors for
whom they are entitled to vote and then cast the product for a single candidate
or distribute the product among two or more candidates. Cumulative voting is
not
available to shareholders of a Nevada corporation, unless its articles of
incorporation expressly provide for that voting right. The Company's Articles
do
not contain a provision permitting shareholders to cumulate their votes when
electing directors.
Indemnification
of Directors, Officers and Controlling Persons
Section 78.7502
of the Nevada Revised Statutes requires a corporation to indemnify a director
or
officer who has been successful on the merits or otherwise in defense of any
proceeding to which he or she is made a party by reason of his or her service
as
a director or officer. Nevada law permits a corporation to indemnify its present
and former directors and officers, among others, against judgments, fines,
settlements and reasonable expenses (including attorneys’ fees) actually
incurred by them in connection with any proceeding to which they may be made
a
party by reason of their service as directors or officers (including a
proceeding brought by or in the right of the corporation), but only if:
(i) their liability is not the result of a breach of fiduciary duties
involving intentional misconduct, fraud or a knowing violation of law or
(ii) they acted in good faith and in a manner which they reasonably
believed to be in, or not opposed to, the best interests of the corporation,
and, with respect to any criminal action or proceeding, had no reasonable cause
to believe their conduct was unlawful. A Nevada corporation may not indemnify
directors or officers for final, non-appealable, adverse judgments in a suit
by
or in the right of the corporation unless a court orders determines that
indemnification would be fair and reasonable, but then only for expenses.
In
addition, Section 78.751 of the Nevada Revised Statutes permits a
corporation, if provided in its Articles of Incorporation or By-laws, to advance
reasonable expenses to a director or officer before a final disposition of
a
proceeding, but only upon the corporation’s receipt of a written undertaking by
or on behalf of the director or officer to repay the amount paid or reimbursed
by the corporation if it is ultimately determined that he or she was not
entitled to indemnification.
Our
Articles provide for the indemnification of any person entitled to
indemnification pursuant to the Nevada Revised Statutes, to the fullest extent
permitted thereunder.
Each
Selling Shareholder has agreed to indemnify the Company against certain
liabilities incurred in connection with this offering as the result of claims
made under the Securities Act of 1933, the Securities Exchange Act of 1934
or
state law.
Insofar
as indemnification for liabilities arising under the Securities Act of 1933
may
be permitted to directors, officers, or persons controlling the registrant
pursuant to the foregoing provisions, the registrant has been informed that
in
the opinion of the Securities and Exchange Commission such indemnification
is
against public policy as expressed in the Securities Act and is therefore
unenforceable.
LEGAL
MATTERS
The
validity of the issuance of the shares of common stock offered by this
prospectus has been passed upon for the Company by Gusrae, Kaplan, Bruno &
Nusbaum, PLLC, New York, New York.
EXPERTS
The
consolidated financial statements of Giant Motorsports, Inc. as of December
31,
2006, 2005 and 2004, and for the years then ended, as listed below, included
in
this prospectus and the Registration Statement have been included herein in
reliance upon the report of Bagell Josephs, Levine & Company, LLC,
independent certified public accountants, given on the authority of said firm
as
an expert in auditing and accounting.
WHERE
YOU CAN FIND MORE INFORMATION
The
Company has filed under the Securities Act with the Securities and Exchange
Commission a Registration Statement on Form S-1 with respect to its shares
of
common stock and Series A Warrants offered hereby. This prospectus supplements
and amends the prospectus that was filed as a part of the Registration
Statement. As permitted by the rules and regulations of the Commission, this
prospectus omits certain information contained in the Registration Statement,
and reference is hereby made to the Registration Statement for further
information with respect to the Company and its common stock and the Series
A
Warrants.
We
are
subject to the reporting requirements of the Securities Exchange Act of 1934,
as
amended (the “Exchange
Act”).
Reports filed with the SEC pursuant to the Exchange Act, including proxy
statements, annual and quarterly reports, and other reports filed by the Company
can be inspected and copied at the public reference facilities maintained by
the
SEC at the Headquarters Office, 100 F. Street N.E., Room 1580, Washington,
D.C.
20549. You may obtain information on the operation of the public reference
room
by calling the SEC at 1-800-SEC-0330. You can request copies of these documents
upon payment of a duplicating fee by writing to the SEC. The Company's filings
are also available on the SEC's internet site (
http://www.sec.gov
).
No
person
has been authorized to give any information or to make any representation other
than as contained or incorporated by reference in this prospectus and, if given
or made, such information or representation must not be relied upon as having
been authorized by the Company. Neither the delivery of this
prospectus nor any sale of common stock made hereunder shall, under any
circumstances, create any implication that the information contained herein
is
correct as of any date subsequent to the date hereof. This prospectus does
not
constitute an offer to sell or a solicitation of an offer to buy the securities
offered by this prospectus to any person or by anyone in any jurisdiction in
which it is unlawful to make such an offer or solicitation.
INDEX
TO
FINANCIAL STATEMENTS
Audited
Consolidated Financial Statements:
|
|
|
|
Report
of Independent Registered Public Accounting Firm
|
F-2
|
Consolidated
Balance Sheets as of December 31, 2006 and 2005
|
F-3
|
Consolidated
Statements of Income (Loss) for the years ended December 31, 2006,
2005 and 2004
|
F-5
|
Consolidated
Statements of Stockholders' Equity for the years ended December 31,
2006, 2005 and 2004
|
F-6
|
Consolidated
Statements of Cash Flows for the years ended December 31, 2006,
2005 and 2004
|
F-7
|
Notes
to Consolidated Financial Statements
|
F-9
|
|
|
Unaudited
Condensed Consolidated Financial Statements:
|
|
|
|
Condensed
Consolidated Balance Sheet as of March 31, 2007 (Unaudited) and
December 31, 2006 (Audited)
|
F-29
|
Condensed
Consolidated Statements of Income for the Three
Months ended March 31, 2007 (Unaudited) and 2006
(Unaudited)
|
F-31
|
Condensed
Consolidated Statements of Cash Flows for the Three Months ended
March
31, 2007 (Unaudited) and 2006 (Unaudited)
|
F-32
|
Notes
to Condensed Consolidated Unaudited Financial Statements
|
F-33
|
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
|
15-39
years
|
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.
GIANT
MOTORSPORTS, INC.
|
|
|
|
|
|
|
CONDENSED
CONSOLIDATED BALANCE SHEETS
|
|
|
|
|
|
|
ASSETS
|
|
|
March
31, 2007
|
|
December
31, 2006
|
|
|
|
Unaudited
|
|
Audited
|
|
CURRENT
ASSETS
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
817,595
|
|
$
|
156,530
|
|
Accounts
receivable, net
|
|
|
3,580,012
|
|
|
3,803,718
|
|
Accounts
receivable, employees
|
|
|
14,882
|
|
|
-
|
|
Inventories
|
|
|
20,656,889
|
|
|
21,267,135
|
|
Deferred
tax assets
|
|
|
361,000
|
|
|
113,900
|
|
Prepaid
expenses
|
|
|
33,831
|
|
|
10,131
|
|
TOTAL
CURRENT ASSETS
|
|
|
25,464,209
|
|
|
25,351,414
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FIXED
ASSETS, NET
|
|
|
1,904,693
|
|
|
2,004,274
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER
ASSETS
|
|
|
|
|
|
|
|
Intangibles,
net
|
|
|
1,688,950
|
|
|
1,688,950
|
|
Deposits
|
|
|
41,000
|
|
|
41,000
|
|
TOTAL
OTHER ASSETS
|
|
|
1,729,950
|
|
|
1,729,950
|
|
TOTAL
ASSETS
|
|
$
|
29,098,852
|
|
$
|
29,085,638
|
|
The
accompanying notes are an integral part of these condensed consolidated
financial statements.
|
GIANT
MOTORSPORTS, INC.
|
|
|
|
|
|
|
CONDENSED
CONSOLIDATED BALANCE SHEETS (CONTINUED)
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
March
31, 2007
|
|
December
31, 2006
|
|
|
|
Unaudited
|
|
Audited
|
|
CURRENT
LIABILITIES
|
|
|
|
|
|
Current
portion of long-term debt
|
|
$
|
1,449,949
|
|
$
|
1,513,665
|
|
Notes
payable, floor plans
|
|
|
19,845,378
|
|
|
20,885,887
|
|
Note
payable, officer
|
|
|
270,223
|
|
|
352,500
|
|
Accounts
payable, trade
|
|
|
3,114,164
|
|
|
1,987,152
|
|
Accrued
expenses
|
|
|
627,285
|
|
|
493,939
|
|
Customer
deposits
|
|
|
615,737
|
|
|
196,246
|
|
TOTAL
CURRENT LIABILITIES
|
|
|
25,922,736
|
|
|
25,429,389
|
|
|
|
|
|
|
|
DEFERRED
TAX LIABILITIES
|
|
|
14,200
|
|
|
20,600
|
|
TOTAL
LIABILITIES
|
|
|
25,936,936
|
|
|
25,449,989
|
|
|
|
|
|
|
|
|
|
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 2,450 shares issued and outstanding at
|
|
|
|
|
|
|
|
March
31, 2007 and December 31, 2006, respectively
|
|
|
2,450,000
|
|
|
2,450,000
|
|
Common
stock, $.001 par value, authorized 75,000,000 shares
|
|
|
|
|
|
|
|
12,213,126
and 11,791,747 shares issued and outstanding at
|
|
|
|
|
|
|
|
March
31, 2007 and December 31, 2006, respectively
|
|
|
12,213
|
|
|
11,792
|
|
Additional
paid-in capital
|
|
|
1,960,874
|
|
|
1,868,592
|
|
Additional
paid-in capital - Options
|
|
|
93,426
|
|
|
93,426
|
|
Additional
paid-in capital - Warrants
|
|
|
1,724,800
|
|
|
1,724,800
|
|
Additional
paid-in capital - Beneficial conversions
|
|
|
1,303,400
|
|
|
1,303,400
|
|
Issuance
cost on preferred series A shares convertible
|
|
|
(786,762
|
)
|
|
(786,762
|
)
|
Accumulated
deficit
|
|
|
(3,596,035
|
)
|
|
(3,029,599
|
)
|
TOTAL
STOCKHOLDERS' EQUITY
|
|
|
3,161,916
|
|
|
3,635,649
|
|
TOTAL
LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
$
|
29,098,852
|
|
$
|
29,085,638
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these condensed consolidated
financial statements.
|
GIANT
MOTORSPORTS, INC.
|
|
|
|
|
|
|
|
|
CONDENSED
CONSOLIDATED STATEMENTS OF INCOME
|
|
|
|
|
|
|
|
|
For
the three months ended March 31,
|
|
|
2007
|
|
2006
|
|
|
|
(Unaudited)
|
|
(Unaudited)
|
|
REVENUES
|
|
|
|
|
|
Sales
|
|
$
|
20,034,116
|
|
$
|
17,783,777
|
|
Finance,
insurance and extended service revenues
|
|
|
871,788
|
|
|
605,860
|
|
TOTAL
REVENUES
|
|
|
20,905,904
|
|
|
18,389,637
|
|
|
|
|
|
|
|
|
|
COST
OF SALES
|
|
|
18,428,636
|
|
|
15,842,217
|
|
GROSS
PROFIT
|
|
|
2,477,268
|
|
|
2,547,420
|
|
|
|
|
|
|
|
|
|
OPERATING
EXPENSES
|
|
|
|
|
|
|
|
Selling
expenses
|
|
|
1,790,171
|
|
|
2,045,931
|
|
General
and administrative expenses
|
|
|
1,002,609
|
|
|
1,171,179
|
|
|
|
|
2,792,780
|
|
|
3,217,110
|
|
LOSS
FROM OPERATIONS
|
|
|
(315,512
|
)
|
|
(669,690
|
)
|
|
|
|
|
|
|
|
|
OTHER
INCOME AND (EXPENSE)
|
|
|
|
|
|
|
|
Other
income, net
|
|
|
4,706
|
|
|
4,096
|
|
Gain
on sale of asset
|
|
|
184
|
|
|
-
|
|
Interest
expense, net
|
|
|
(416,611
|
)
|
|
(275,558
|
)
|
|
|
|
(411,721
|
)
|
|
(271,462
|
)
|
|
|
|
|
|
|
|
|
LOSS
BEFORE PROVISION (BENEFIT) FOR TAXES
|
|
|
(727,233
|
)
|
|
(941,152
|
)
|
|
|
|
|
|
|
|
|
PROVISION
(BENEFIT) FOR INCOME TAXES
|
|
|
(253,500
|
)
|
|
-
|
|
|
|
|
|
|
|
|
|
LOSS
BEFORE PREFERRED DIVIDENDS
|
|
|
(473,733
|
)
|
|
(941,152
|
)
|
|
|
|
|
|
|
|
|
PREFERRED
DIVIDENDS
|
|
|
92,703
|
|
|
126,722
|
|
NET
LOSS ATTRIBUTABLE TO
|
|
|
|
|
|
|
|
COMMON
SHAREHOLDERS
|
|
$
|
(566,436
|
)
|
$
|
(1,067,874
|
)
|
|
|
|
|
|
|
|
|
BASIC
LOSS PER SHARE
|
|
$
|
(0.05
|
)
|
$
|
(0.11
|
)
|
|
|
|
|
|
|
|
|
DILUTED
LOSS PER SHARE
|
|
$
|
(0.05
|
)
|
$
|
(0.11
|
)
|
|
|
|
|
|
|
|
|
WEIGHTED
AVERAGE SHARES OUTSTANDING
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BASIC
|
|
|
11,936,889
|
|
|
10,532,973
|
|
DILUTED
|
|
|
11,936,889
|
|
|
10,532,973
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these condensed consolidated
financial statements.
|
GIANT
MOTORSPORTS, INC.
|
|
|
|
|
|
|
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
For
the three months ended March 31, 2007 and
2006
|
|
|
2007
|
|
2006
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
|
|
Net
loss
|
|
$
|
(473,733
|
)
|
$
|
(941,152
|
)
|
Adjustments
to reconcile net loss to net cash
|
|
|
|
|
|
|
|
provided
by operating activities:
|
|
|
|
|
|
|
|
Depreciation
|
|
|
109,487
|
|
|
108,506
|
|
Deferred
federal income tax credit (net)
|
|
|
(253,500
|
)
|
|
-
|
|
Provision
for doubtful accounts
|
|
|
21,831
|
|
|
-
|
|
(Gain)
on sale of asset
|
|
|
(184
|
)
|
|
-
|
|
Decrease
in accounts receivable, net
|
|
|
201,875
|
|
|
1,385,365
|
|
(Increase)
in accounts receivable, employees
|
|
|
(14,882
|
)
|
|
(11,013
|
)
|
(Increase)
decrease in inventories
|
|
|
610,246
|
|
|
(6,207,433
|
)
|
(Increase)
in prepaid expenses
|
|
|
(23,700
|
)
|
|
(101,370
|
)
|
Increase
in customer deposits
|
|
|
419,491
|
|
|
633,375
|
|
Increase
in accounts payable trade
|
|
|
1,127,012
|
|
|
612,355
|
|
Increase
(decrease) in floor plan liability
|
|
|
(1,040,509
|
)
|
|
5,294,542
|
|
Increase
in accrued expenses
|
|
|
133,346
|
|
|
38,108
|
|
NET
CASH PROVIDED BY OPERATING ACTIVITIES
|
|
|
816,780
|
|
|
811,283
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
Purchase
of fixed assets
|
|
|
(16,722
|
)
|
|
(454,934
|
)
|
Proceeds
from sale of property and equipment
|
|
|
7,000
|
|
|
-
|
|
Decrease
in accounts receivable affiliates
|
|
|
-
|
|
|
261,667
|
|
NET
CASH (USED IN) INVESTING ACTIVITIES
|
|
|
(9,722
|
)
|
|
(193,267
|
)
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
Payments
on long-term debt
|
|
|
(63,716
|
)
|
|
(78,690
|
)
|
Payments
on note payable to officer
|
|
|
(82,277
|
)
|
|
(115,490
|
)
|
NET
CASH (USED IN) FINANCING ACTIVITIES
|
|
|
(145,993
|
)
|
|
(194,180
|
)
|
NET
INCREASE IN CASH AND CASH EQUIVALENTS
|
|
|
661,065
|
|
|
423,836
|
|
|
|
|
|
|
|
|
|
CASH
AND CASH EQUIVALENTS, beginning of Period
|
|
|
156,530
|
|
|
227,301
|
|
CASH
AND CASH EQUIVALENTS, end of Period
|
|
$
|
817,595
|
|
$
|
651,137
|
|
|
|
|
|
|
|
|
|
OTHER
SUPPLEMENTARY CASH FLOW INFORMATION
|
|
|
|
|
|
|
|
Income
taxes paid
|
|
$
|
-
|
|
$
|
158,550
|
|
Interest
paid
|
|
$
|
416,611
|
|
$
|
277,412
|
|
Preferred
stock dividends paid in common stock
|
|
$
|
92,703
|
|
$
|
126,722
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these condensed consolidated
financial statements.
|
GIANT
MOTORSPORTS, INC.
NOTES
TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March
31,
2007 and 2006
(UNAUDITED)
NOTE
A -
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis
of
Presentation:
The
condensed consolidated financial statements included herein have been prepared
pursuant to the rules and regulations of the Securities and Exchange Commission.
The condensed consolidated financial statements and notes are presented as
permitted on Form 10-Q and do not contain information included in the Company’s
annual consolidated statements and notes. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with accounting principles generally accepted in the United States of America
have been condensed or omitted pursuant to such rules and regulations, although
the Company believes that the disclosures are adequate to make the information
presented not misleading. It is suggested that these condensed consolidated
financial statements be read in conjunction with the December 31, 2006 audited
financial statements and accompanying notes thereto. While management believes
the procedures followed in preparing these condensed consolidated financial
statements are reasonable, the accuracy of the amounts are in some respects
dependent upon the facts that will exist, and procedures that will be
accomplished by the Company later in the year.
These
condensed consolidated financial statements reflect all adjustments, including
normal recurring adjustments which, in the opinion of management, are necessary
to present fairly the consolidated operations and cash flows for the periods
presented.
Organization:
Giant
Motorsports, Inc., (the Company) through its wholly-owned subsidiaries, W.W.
Cycles, Inc. doing business as Andrews Cycles and Chicago Cycles, Inc. doing
business as Chicago Cycle Center, operates two retail dealerships of
motorcycles, all terrain vehicles, scooters and personal watercraft in
northeastern Ohio and northern Illinois. On December 30, 2003, the stockholders
of W.W. Cycles, Inc. entered into a Stock Purchase and Reorganization Agreement
in which effective January 16, 2004 W.W. Cycles, Inc. was issued an aggregate
of
7,850,000 restricted shares of common stock, $.001 par value, of American
Busing
Corporation in exchange for all of the outstanding shares of the common stock
of
the Company, resulting in W.W. Cycles, Inc. becoming a wholly-owned subsidiary
of American Busing Corporation, an inactive public company. The acquisition
was
accounted for as a reverse merger whereby, for accounting purposes, W.W.
Cycles,
Inc. is considered the accounting acquirer and the historical financial
statements of W.W. Cycles, Inc. became the historical financial statements
of
American Busing Corporation. Effective April 5, 2004 American Busing Corporation
changed its name to Giant Motorsports, Inc. On April 30, 2004, Giant
Motorsports, Inc. acquired substantially all of the assets and certain
liabilities of Chicago Cycle Center pursuant to an Asset Purchase Agreement
and
entered into a Noncompetition Agreement with one of the former owners and
entered into an Employment Agreement with the other former owner.
GIANT
MOTORSPORTS, INC.
NOTES
TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March
31,
2007 and 2006
(UNAUDITED)
NOTE
A -
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Principles
of Consolidation:
The
condensed consolidated financial statements include the accounts of the Company
and all of its wholly owned subsidiaries. All significant inter-company accounts
and transactions have been eliminated in consolidation.
Cash
and Cash Equivalents:
Cash
and
cash equivalents include amounts held in demand deposit accounts and overnight
investment accounts. The Company considers all highly liquid investments
with
original maturities of three months or less to be cash equivalents.
Contracts
in Transit:
Contracts
in transit represent customer finance contracts evidencing loan agreements
or
lease agreements between the Company, as creditor, and the customer, as
borrower, to acquire or lease a vehicle whereby a third-party finance source
has
given the Company initial, non-binding approval to assume the Company’s position
as creditor. Funding and approval from the finance source is provided upon
the
finance source’s review of the loan or lease agreement and related documentation
executed by the customer at the dealership. These finance contracts are
typically funded within ten days of the initial approval of the finance
transaction by the third-party finance source. The finance source is not
contractually obligated to make the loan or lease to the customer until it
gives
its final approval and funds the transaction. Until such final approval is
given, contracts in transit represent amounts due from the customer to the
Company. See Note B for additional information.
Allowance
for Doubtful Accounts:
Accounts
are written off when management determines that an account is uncollectible.
Recoveries of accounts previously written off are recorded when received.
An
estimated allowance for doubtful accounts is determined to reduce the Company’s
receivables to their carrying value, which approximates fair value. The
allowance is estimated based on historical collection experience, specific
review of individual customer accounts, and current economic and business
conditions. Historically, the Company has not incurred any significant credit
related losses. Management has determined that an allowance of $25,000 is
necessary at March 31, 2007.
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.
GIANT
MOTORSPORTS, INC.
NOTES
TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
March
31,
2007 and 2006
(UNAUDITED)
NOTE
A -
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Revenue
Recognition (Continued):
Finance,
Insurance and Extended Service Revenues:
The
Company arranges financing for customers through various financial institutions
and receives a commission from the lender equal to the difference between
the
interest rates charged to customers and the interest rates set by the financing
institution. The Company also receives commissions from the sale of various
third party insurance products to customers and extended service contracts.
These commissions are recorded as revenue at the time the customer enters
into
the contract. The Company is not the obligor under any of these contracts.
In
the case of finance contracts, a customer may prepay or fail to pay their
contract, thereby terminating the contract. Customers may also terminate
extended service contracts, which are fully paid at purchase, and become
eligible for refunds of unused premiums. In these circumstances, a portion
of
the commissions the Company receives may be charged back based on the relevant
terms of the contracts. The revenue the Company records relating to commissions
is net of an estimate of the ultimate amount of chargebacks the Company will
be
required to pay. Such estimates of chargeback experience 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.
Fair
Value of Financial Instruments:
Financial
instruments consist of cash and cash equivalents, accounts receivable, accounts
payable and debt, including floor plan notes payable. The carrying amount
of all
significant financial instruments approximates fair value due either to length
or maturity or variable interest rates that approximate prevailing market
rates.
Inventories:
Parts
and
accessories inventories are stated at the lower of cost or market using the
first-in, first-out method. Vehicle inventories are stated at the lower of
cost
or market using the specific identification method.
Concentration
of Credit Risk:
Financial
instruments that potentially subject the Company to credit risk consist of
cash
equivalents and accounts receivable.
The
Company’s policy is to review the amount of credit exposure to any one financial
institution and place investments with financial institutions evaluated as
being
creditworthy. In the ordinary course of business, the Company has bank deposits
and overnight repurchase agreements that may exceed federally insured limits.
At
March 31, 2007, the Company had $1,101,801 in excess of the federally insured
limit.
GIANT
MOTORSPORTS, INC.
NOTES
TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
March
31,
2007 and 2006
(UNAUDITED)
NOTE
A -
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Concentration
of Credit Risk (Continued):
Concentration
of credit risk, with respect to accounts receivable-customers, is limited
through the Company’s credit evaluation process. The Company reviews the credit
history before extending credit. Generally, the Company does not require
collateral from its customers
Property
and Equipment:
Property,
equipment, and leasehold improvements are stated at cost. Maintenance and
repairs that do not add materially to the value of the asset nor appreciably
prolong its useful life are charged to expense as incurred. Gains or losses
on
the disposal of property and equipment are included in the determination
of
income.
Depreciation
of property and equipment and amortization of leasehold improvements are
provided using the straight-line method over the following estimated useful
lives:
Fixtures,
and equipment
|
3-7
years
|
Vehicles
|
5
years
|
Leasehold
Improvements
|
10
years
|
Goodwill
and Other Intangible Assets:
In
June
2001, the Financial Accounting Standards Board (“FASB”) issued Statement No. 142
“Goodwill and Other Intangible Assets”. This statement addresses financial
accounting and reporting for acquired goodwill and other intangible assets
and
supersedes APB opinion No. 17, “Intangible Assets”. It addresses how intangible
assets that are acquired individually or with a group of other assets (but
not
those acquired in a business combination) should be accounted for in the
financial statements upon their acquisition. This statement also addresses
how
goodwill and other intangible assets should be accounted for after they have
been initially recognized in the financial statements. The Company, in its
acquisitions, recognized $1,588,950 of goodwill 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.
|
|
|
Gross
Carrying Amount
|
|
Goodwill
|
|
$
|
1,588,950
|
|
Licensing
Agreement
|
|
|
100,000
|
|
TOTAL
|
|
$
|
1,688,950
|
|
GIANT
MOTORSPORTS, INC.
NOTES
TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
March
31,
2007 and 2006
(UNAUDITED)
NOTE
A -
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Income
Taxes:
Income
taxes are calculated using the liability method specified by Statement of
Financial Accounting Standards No. 109, “Accounting for Income
Taxes.”
At
March
31, 2007, 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 $495,506
and
$733,474 for the three months ended March 31, 2007 and 2006,
respectively.
Earnings
(Loss) Per Share of Common Stock:
Historical
net income (loss) per share is computed using the weighted average number
of
shares of common shares outstanding. Diluted earnings per share (EPS) include
additional dilution from common stock equivalents, such as stock issuable
pursuant to the exercise of stock options and warrants. Common stock equivalents
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.
The
following is a reconciliation of the computation for basic and diluted
EPS:
|
|
|
Three
Months Ended
|
|
|
|
|
March
31,
2007
|
|
|
March
31,
2006
|
|
Net
income (loss) attributed to common shares
|
|
$
|
(566,436
|
)
|
$
|
(1,067,874
|
)
|
|
|
|
|
|
|
|
|
Weighted-average
common shares outstanding (Basic)
|
|
|
11,936,889
|
|
|
10,532,973
|
|
|
|
|
|
|
|
|
|
Weighted-average
common stock equivalents:
|
|
|
-0-
|
|
|
-0-
|
|
|
|
|
|
|
|
|
|
Weighted-average
common shares outstanding (Diluted)
|
|
|
11,936,889
|
|
|
10,532,973
|
|
There
are
16,679,574 and 7,191,503 common stock equivalents available at March 31,
2007
and 2006, respectively.
GIANT
MOTORSPORTS, INC.
NOTES
TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
March
31,
2007 and 2006
(UNAUDITED)
NOTE
A -
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Use
of Estimates:
The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that
affect certain reported amounts of assets and liabilities and disclosure
of
contingent assets and liabilities at the date of the financial statements
and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
NOTE
B -
ACCOUNTS RECEIVABLE, NET
Accounts
receivable consisted of receivables due from customers and dealers,
manufacturers, employees, and finance companies for contracts in transit
and is
net of an allowance for doubtful accounts of $25,000 at March 31, 2007.
NOTE
C -
INVENTORIES
Inventories
consisted of vehicles and parts and accessories.
NOTE
D -
FIXED ASSETS
Fixed
assets consisted of the following:
|
|
|
March
31, 2007 |
|
Fixtures
and equipment
|
|
$
|
2,153,076
|
|
Vehicles
|
|
|
420,675
|
|
Leasehold
improvements
|
|
|
587,969
|
|
|
|
|
3,161,720
|
|
Less
accumulated depreciation
|
|
|
1,257,027
|
|
NET
FIXED ASSETS
|
|
$
|
1,904,693
|
|
Depreciation
expense charged to operations amounted to $109,487 and $108,506 for the three
months ended March 31, 2007 and 2006, respectively.
GIANT
MOTORSPORTS, INC.
NOTES
TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
March
31,
2007 and 2006
(UNAUDITED)
NOTE
E -
NOTES PAYABLE - FLOOR PLANS
The
Company has various floor plan financing agreements aggregating $19,845,378
at
March 31, 2007. 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 18% at March 31, 2007). Principle payments
are due upon the sale of the specific unit financed. The floor plans are
collateralized by substantially all corporate assets.
NOTE
F -
LONG-TERM DEBT
Long-term
debt consisted of various notes aggregating $750,086 at March 31, 2007. This
amount matures at various times ranging from 2006 to 2009, bearing interest
at
various rates ranging from 5% to 8% to prime plus 1% per year. The notes
are
collateralized by substantially all of the Company’s assets.
The
Company has a $250,000 revolving line of credit with a bank with an outstanding
balance of $249,863 at March 31, 2007. The revolving line of credit has no
stipulated repayment terms. This loan bears interest at prime plus one percent
(9.25% at March 31, 2007) and is collateralized by substantially all of the
Company’s assets.
The
Company has two notes with HSK Funding, each for $250,000. Each note bears
interest at 15.5%. In addition, the Company paid a fee to extend the due
date to
June 15, 2007. The total outstanding balance on these notes in the aggregate
was
$450,000 at March 31, 2007.
NOTE
G -
NOTE PAYABLE - OFFICER
Note
payable to officer consisted a promissory note bearing interest at 6% per
year.
The loan is payable on demand anytime after October 26, 2007, and as such,
has
been classified as a current liability. The balance at March 31, 2007 was
$270,223.
GIANT
MOTORSPORTS, INC.
NOTES
TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
March
31,
2007 and 2006
(UNAUDITED)
NOTE
H -
LEASES
The
Company leases its Illinois subsidiary retail facility under a ten-year
agreement with a ten-year renewal option. The agreement was signed and executed
in April, 2005, and payments on the lease commenced in August 2005 at a monthly
rent of $33,333 through May 2006 then increased to $40,000 per month from
June
2006 through May 2007, $45,000 per month from June 2007 through May 2008,
$46,667 from June 2008 through May 2009 and then increasing 3% annually for
the
remaining term of the lease. The Company is also liable for a proportionate
share of expenses and taxes over a specified amount. The Company was granted
a
four (4) month rent holiday. Rent expense has been calculated using the
straight-line basis over the lease term of ten (10) years to reflect the
inclusion of the rent-free period.
The
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 2007, then increasing
to
$15,754 per month from June 2007 through May 2008, $16,226 per month from
June
2008 through May 2009 and then increasing 3% annually for the remaining term
of
the lease.
The
following is a five year summary of future minimum lease payments under
operating leases that have initial or remaining non cancellable terms in
excess
of one year as of March 31, 2007:
Year
Ending
|
|
|
Amount
|
|
2008
|
|
$
|
1,028,209
|
|
2009
|
|
|
1,051,049
|
|
2010
|
|
|
1,073,940
|
|
2011
|
|
|
1,097,516
|
|
2012
|
|
|
1,121,802
|
|
|
|
$
|
5,372,516
|
|
The
Company also leased two (2) residential locations in Chicago under a
month-to-month agreement. The amount charged to rent amounted to $7,950 and
$3,800 for the three months ended March 31, 2007 and 2006, respectively.
GIANT
MOTORSPORTS, INC.
NOTES
TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
March
31,
2007 and 2006
(UNAUDITED)
NOTE
I -
INCOME TAXES
Income
taxes consisted of the following:
|
|
|
March
31, 2007 |
|
|
December
31,2006 |
|
Current
|
|
$
|
(247,100
|
)
|
$
|
(92,700
|
)
|
Deferred
|
|
|
(6,400
|
)
|
|
20,600
|
|
|
|
$
|
(253,500
|
)
|
$
|
(72,100
|
)
|
Income
taxes paid amounted to $-0- and $158,550 for the three months ended March
31,
2007 and 2006, respectively.
Deferred
tax assets (liabilities) consisted of the following:
|
|
March
31, 2007
|
|
December
31, 2006
|
|
Deferred
tax assets (liabilities) consisted of the following:
|
|
|
|
|
|
Deferred
tax assets - current and long term:
|
|
|
|
|
|
Allowance
for doubtful account and net
|
|
|
|
|
|
operating
loss carryforward
|
|
$
|
361,000
|
|
$
|
113,900
|
|
|
|
|
|
|
|
|
|
Deferred
tax liabilities - long term:
|
|
|
|
|
|
|
|
Depreciation
|
|
|
(14,200
|
)
|
|
(20,600
|
)
|
TOTALS
|
|
$
|
346,800
|
|
$
|
93,300
|
|
NOTE
J -
RELATED PARTY TRANSACTIONS
The
Company leases its Ohio subsidiary retail facility from a shareholder, 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 $72,000 and
$57,000 for each of the three months ended March 31, 2007 and 2006,
respectively.
GIANT
MOTORSPORTS, INC.
NOTES
TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
March
31,
2007 and 2006
(UNAUDITED)
NOTE
K -
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 March 31, 2007. On September 16, 2005, the Company issued
2,870
shares of Series A Convertible Preferred stock with a stated value of $1,000
per
share 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 were 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 subsequently, converted their preferred
Series A shares.
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.
The
Company issued 421,379 shares of its common stock as a dividend to all Series
A
Preferred shareholders, in accordance with the placement offering
provisions.
NOTE
L -
COMMON STOCK
The
Company has 75,000,000 shares of $.001 par common stock authorized, with
12,213,126 and 11,791,747 issued and outstanding at March 31, 2007 and December
31, 2006, respectively.
The
Company issued 421,379 shares of common stock to holders of our Preferred
Series
A, in accordance with the placement offering provisions, as described above
in
NOTE K.
26,356,000
SHARES OF COMMON STOCK
AND
WARRANTS
TO PURCHASE 6,314,000 SHARES OF COMMON STOCK
OF
GIANT
MOTORSPORTS, INC.
PART
II
INFORMATION
NOT REQUIRED TO BE IN PROSPECTUS
Item
13. Other
Expenses of Issuance and Distribution
The
expenses of the registration, all of which were paid by the Company, were as
follows:
SEC
Filing fee
|
|
$
|
2,157.88
|
|
|
|
|
|
|
Accounting
Fees and Expenses
|
|
$
|
25,000.00
|
|
Legal
Fees and Expenses including those of counsel to the Selling
Shareholders
|
|
$
|
54,000.00
|
|
Miscellaneous
Expenses
|
|
$
|
5,000.00
|
|
|
|
|
|
|
TOTAL
|
|
$
|
86,157.88
|
|
Item
14.
Indemnification of Directors and Officers.
Section
78.138(7) of the Nevada Revised Statutes states that, unless a corporation's
articles of incorporation provide differently, the directors and officers of
a
Nevada corporation are not individually liable to the corporation, its
shareholders or its creditors for any damages resulting from the director's
or
officer's act or failure to act, unless it is proven that: (i) the director's
or
officer's act or failure to act constituted a breach of his or her fiduciary
duties; and (ii) his or her breach of those duties involved intentional
misconduct, fraud or a knowing violation of law. Our Articles contain a
provision eliminating our directors' and officers' liability to us and to our
shareholders (a) for acts or omissions that involve intentional misconduct,
fraud or a knowing violation of law or (b) for the payment of dividends or
other
distributions
in violation of the Nevada Revised Statutes.
Section
78.7502 of the Nevada Revised Statutes requires a corporation to indemnify
a
director or officer who has been successful on the merits or otherwise in
defense of any proceeding to which he or she is made a party by reason of his
or
her service as a director or officer. Nevada law permits a corporation to
indemnify its present and former directors and officers, among others, against
judgments, fines, settlements and reasonable expenses (including attorneys'
fees) actually incurred by them in connection with any proceeding to which
they
may be made a party by reason of their service as directors or officers
(including a proceeding brought by or in the right of the corporation), but
only
if: (i) their liability is not the result of a breach of fiduciary duties
involving intentional misconduct, fraud or a knowing violation of law or (ii)
they acted in good faith and in a manner which they reasonably believed to
be
in, or not opposed to, the best interests of the corporation, and, with respect
to any criminal action or proceeding, had no reasonable cause to believe their
conduct was unlawful. A Nevada corporation may not indemnify directors or
officers for final, non-appealable, adverse judgments in a suit by or in the
right of the corporation unless a court orders determines that indemnification
would be fair and reasonable, but then only for expenses.
In
addition, Section 78.751 of the Nevada Revised Statutes permits a corporation,
if provided in its Articles of Incorporation or By-laws, to advance reasonable
expenses to a director or officer before a final disposition of a proceeding,
but only upon the corporation's receipt of a written undertaking by or
on
behalf of the director or officer to repay the amount paid or reimbursed by
the
corporation if it is ultimately determined that he or she was not entitled
to
indemnification.
Our
Articles provide for the indemnification of any person entitled to
indemnification pursuant to the Nevada Revised Statutes, to the fullest extent
permitted thereunder.
The
Company does not currently maintain director and officer liability insurance,
as
permitted by the Nevada Revised Statutes. The Company has agreed with the
placement agent in the September 2005 Private Placement to obtain and maintain
a
liability insurance policy affording coverage for the acts of its officers
and
directors in an amount not less than $1,500,000, on or around the date that
any
designee of said placement agent commences serving on the board of
directors.
Each
Selling Shareholder has agreed to indemnify the Company against certain
liabilities incurred in connection with this offering as the result of claims
made under the Securities Act of 1933, the Securities Exchange Act of 1934
or
state law.
Item
15.
Recent Sales of Unregistered Securities
In
September 2005, the Company sold to accredited investors in a private placement
offering (the "September 2005 Private Placement"), 2,870 shares of its
newly-designated Series A Convertible Preferred Stock, stated value $1,000
per
share (the "Series A Shares"), and common stock purchase warrants (the "Series
A
Warrants") to purchase up to of 5,740,000 shares of Company's common stock,
resulting in the receipt by the Company of $2,870,000 of gross proceeds. In
connection with HCFP/Brenner Securities LLC's acting as placement agent in
the
September 2005 Private Placement, the Company paid it commissions of $229,600
and a nonaccountable expense allowance of $57,400. Additionally, the Company
issued the placement agent an option to purchase 287 Series A Shares and Series
A Warrants to purchase up to 574,000 shares of common stock. After deduction
of
all offering expenses, including the placement agent's commissions and
nonaccountable expense allowance, the Company received net proceeds of
$2,485,163. The securities sold by the Company in the September 2005 Private
Placement were exempt from registration under the Securities Act of 1933, as
amended (the "Securities Act"), pursuant to the provisions of Section 4(2)
of
the Securities Act and Regulation D promulgated thereunder. Sales of these
securities were made pursuant to the provisions of Rule 506 of Regulation D
which provides for an exemption from registration under the Securities Act
of
1933, for sales of securities to no more than 35 "accredited investors" (as
such
term is defined in Rule 501 of Regulation D). Based on the information provided
by the investors in the September 2005 Private Placement in their subscription
documents, the Company sold securities to 15 accredited investors in compliance
with the provisions of Regulation D and filed a Form D with the Securities
and
Exchange Commission reporting this sale.
Item
16. Exhibits
2.1
|
Stock
Purchase and Reorganization Agreement dated as of December 30, 2003
(1).
|
|
|
2.2
|
Repurchase
Agreement dated December 30, 2003 (1).
|
|
|
2.3
|
Stock
Purchase Agreement dated as of December 30, 2003 (1).
|
|
|
2.4
|
Share
Purchase Agreement dated as of December 30, 2003 (1).
|
|
|
2.5
|
Asset
Purchase Agreement dated April 2004 (Exhibit 2.1) (2).
|
|
|
3.1
|
Restated
Articles of Incorporation of Giant Motorsports, Inc.
(3).
|
|
|
3.2
|
Bylaws
of Giant Motorsports, Inc. (4).
|
|
|
4.1
|
Form
of Warrant for 1,000,000 shares of common stock dated January 20,
2004
(1).
|
|
|
4.2
|
Form
of Warrant for 100,000 shares of common stock dated April 19, 2004
(5).
|
|
|
4.3
|
Stock
Option Agreement with Russell A. Haehn (1,000,000 shares) (Exhibit
4.2)
(6).
|
|
|
4.4
|
Stock
Option Agreement with Gregory A. Haehn (500,000 shares) (Exhibit
4.3)
(6).
|
|
|
4.5
|
Certificate
of Designation of Series A Convertible Preferred Stock (Exhibit 99.1)
(7).
|
|
|
4.6
|
Form
of Investor Warrant (September 2005 Private Placement) (Exhibit 99.2)
(7).
|
|
|
4.7
|
Form
of Purchase Option (September 2005 Private Placement) (Exhibit 99.3)
(7).
|
|
|
4.8
|
Registration
Rights Agreement (September 2005 Private Placement (Exhibit 99.4)
(7).
|
|
|
4.9
|
Specimen
stock certificate for shares of common stock (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).
|
|
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5.1
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Opinion
of Gusrae, Kaplan, Bruno & Nusbaum, PLLC.*
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10.1
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Agency
Agreement between Giant Motorsports, Inc. and HCPF/Brenner Securities
LLC
dated
September 9, 2005 (7).
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10.2
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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. (10)
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20.1
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Secured
Promissory Note dated April 2004 in the principal amount of $1,675,000
(2).
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20.2
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Commercial
Security Agreement dated April 2004 (2).
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20.3
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Management
Agreement between King's Motorsports Inc. d/b/a Chicago Cycle and
Giant
Motorsports, Inc. dated April 2004 (2).
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21
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Subsidiaries.*
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23.1
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Consent
of Bagell, Josephs, Levine & Company, LLC.**
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23.4
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Consent
of Gusrae, Kaplan, Bruno & Nusbaum, PLLC, included in the opinion
filed
as Exhibit 5.1
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*
Previously filed
**
Filed
herewith
(1) |
Filed
as an exhibit to the Form 8-K filed January 23, 2004 and incorporated
herein by reference.
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(2) |
Filed
as an exhibit to the Form 8-K filed May 11, 2004 and incorporated
herein
by reference.
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(3) |
Filed
as an exhibit to the Definitive Schedule 14C filed March 15, 2004
and
incorporated herein by reference.
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(4) |
Filed
as an exhibit to the Form 10-KSB filed April 15, 2005 and incorporated
herein by reference.
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(5) |
Filed
as an exhibit to the Form 8-K filed on April 21, 2004 and incorporated
herein by reference.
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(6) |
Filed
as an exhibit to the Form 8-K filed on August 18, 2004 and incorporated
herein by reference.
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(7) |
Filed
as an exhibit to the Form 8-K filed on September 22, 2005 and incorporated
herein by reference.
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(8) |
Filed
as an exhibit to the Registration Statement on Form S1/A filed on
January
12, 2006 and incorporated herein by
reference.
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(9) |
Filed
as an exhibit to the Registration Statement on Form 8-A filed on
January
19, 2006 and incorporated herein by
reference.
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(10) |
Filed
as an exhibit to the Form 10-K filed April 17, 2007
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Item
17. Undertakings
(a)
The
undersigned registrant hereby undertakes:
(1)
To
file, during any period in which offers or sales are being made, a
post-effective amendment to the Registration Statement:
(i)
to
include any prospectus required by Section 10(a)(3) of the Securities Act of
1933;
(ii)
to
reflect in the prospectus any facts or events arising after the effective date
of the Registration Statement (or the most recent post effective amendment
thereof) which, individually or in the aggregate, represent a fundamental change
in the information set forth in the Registration Statement. Notwithstanding
the
foregoing, any increase or decrease in volume of securities offered (if the
total dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated maximum
offering range may be reflected in the form of a prospectus filed with the
Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume
and price represent no more than a 20% change in the maximum aggregate offering
price set forth in the "Calculation of Registration" table in the effective
registration statement; and
(iii)
to
include any material information with respect to the plan of distribution not
previously disclosed in the Registration Statement or any material change to
such information in the Registration Statement;
Provided
however, That:
(A)
Paragraphs (a)(1)(i) and (a)(1)(ii) of this section do not apply if the
Registration Statement is on Form S-8 (ss.239.16b of this chapter), and the
information required to be included in a post-effective amendment by those
paragraphs is contained in reports filed with or furnished to the Commission
by
the registrant pursuant to section 13 or section 15(d) of the Securities
Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)) that are incorporated by
reference in the Registration Statement; and
(B)
Paragraphs (a)(1)(i), (a)(1)(ii) and (a)(1)(iii) of this section do not apply
if
the registration statement is on Form S-3 (ss.239.13 of this chapter) or Form
F-3 (ss.239.33 of this chapter) and the information required to be included
in a
post-effective amendment by those paragraphs is contained in reports filed
with
or furnished to the Commission by the registrant pursuant to section 13 or
section 15(d) of the Securities Exchange Act of 1934 that are incorporated
by
reference in the Registration Statement, or is contained in a form of prospectus
filed pursuant to Rule 424(b) (ss.230.424(b) of this chapter) that is part
of
the Registration Statement.
(C)
Provided further, however, that paragraphs (a)(1)(i) and (a)(1)(ii) do not
apply
if the Registration Statement is for an offering of asset-backed securities
on
Form S-1 (ss.239.11 of this chapter) on Form S-3 (ss.239.13 of this chapter),
and the information required to be included in a post-effective amendment is
provided pursuant to Item 1100(c) of Regulation AB
(ss.229.1100(c)).
(2)
That,
for the purpose of determining any liability under the Securities Act of 1933,
each such post-effective amendment shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.
(3)
To
remove from registration by means of post-effective amendment any of the
securities being registered which remain unsold at the termination of the
offering.
(4)
If
the registrant is a foreign private issuer, to file a post-effective amendment
to the registration statement to include any financial statements required
by
Item 8.A. of Form 20-F at the start of any delayed offering or throughout a
continuous offering. Financial statements and information otherwise required
by
Section 10(a)(3) of the Act need not be furnished, provided that the registrant
includes in the prospectus, by means of a post-effective amendment, financial
statements required pursuant to this paragraph (a)(4) and the information
necessary to ensure that all other information in the prospectus is at least
as
current as the date of those financial statements. Notwithstanding the
foregoing, with respect to registration statements on Form F-3, a post-effective
amendment need not be filed to include financial statements and information
required by Section 10(a)(3) of the Act or Rule 3-19 of this chapter if such
financial statements and information are contained in periodic reports filed
with or furnished to the Commission by the registrant pursuant to section 13
or
section 15(d) of the Securities Exchange Act of 1934 that are incorporated
by
reference in the Form F-3.
(5)
That,
for the purpose of determining liability under the Securities Act of 1933 to
any
purchaser:
(i)
If
the registrant is relying on Rule 430B (ss.230.430B of this
chapter):
(A)
Each
prospectus filed by the registrant pursuant to Rule 424(b)(3)shall be deemed
to
be part of the Registration Statement as of the date the filed prospectus
was
deemed part of and included in the Registration Statement;
and
(B)
Each
prospectus required to be filed pursuant to Rule 4243(b)(2), (b)(5), or
(b)(7)
as part of a Registration Statement in reliance on Rule 430B relating to
an
offering made pursuant to Rule 415(a)(1)(i), (vii), or (x) for the purpose
of
providing the information required by section 10(a) of the Securities Act
of
1933 shall be deemed to be part of and included in the Registration Statement
as
of the earlier of the date such form of prospectus is first used after
effectiveness or the date of the first contract of sale of securities in
the
offering described in the prospectus. As provided in Rule 430B, for liability
purposes of the issuer and any person that is at that date an underwriter,
such
date shall be deemed to be a new effective date of the registration statement
relating to the securities in the registration statement to which that
prospectus relates, and the offering of such securities at that time shall
be
deemed to be the initial bona fide offering thereof. Provided, however,
that no
statement made in a registration statement or prospectus that is part of
the
registration statement or made in a document incorporated or deemed incorporated
by reference into the registration statement or prospectus that is part
of the
registration statement will, as to a purchaser with a time of contract
of sale
prior to such effective date, supersede or modify any statement that was
made in
the registration statement or prospectus that was part of the registration
statement or made in any such document immediately prior to such effective
date;
or
(ii)
If
the registrant is subject to Rule 430C (ss.230.430C of this chapter), each
prospectus filed pursuant to Rule 424(b) as part of a registration statement
relating to an offering, other than Registration Statements relying on Rule
430B
or other than prospectuses filed in reliance on Rule 430A (ss.230.430A of this
chapter), shall be deemed to be part of and included in the Registration
Statement as of the date it is first used after effectiveness. Provided,
however, that no statement made in a Registration Statement or prospectus that
is part of the Registration Statement or made in a document incorporated or
deemed incorporated by reference into the Registration Statement or prospectus
that is part of the Registration Statement will, as to a purchaser with a time
of contract of sale prior to such first use, supersede or modify any statement
that was made in the Registration Statement or prospectus that was part of
the
Registration Statement or made in any such document immediately prior to such
date of first use.
(6)
That,
for the purpose of determining liability of the registrant under the Securities
Act of 1933 to any purchaser in the initial distribution of the
securities:
The
undersigned registrant undertakes that in a primary offering of securities
of
the undersigned registrant pursuant to this Registration Statement, regardless
of the underwriting method used to sell the securities to the purchaser, if
the
securities are offered or sold to such purchaser by means of any of the
following communications, the undersigned registrant will be a seller to the
purchaser and will be considered to offer or sell such securities to such
purchaser:
(i)
Any
preliminary prospectus or prospectus of the undersigned registrant relating
to
the offering required to be filed pursuant to Rule 424 (ss.230.424 of this
chapter);
(ii)
Any
free writing prospectus relating to the offering prepared by or on behalf of
the
undersigned registrant or used or referred to by the undersigned
registrant;
(iii)
The
portion of any other free writing prospectus relating to the offering containing
material information about the undersigned registrant or its securities provided
by or on behalf of the undersigned registrant; and
(iv)
Any
other communication that is an offer in the offering made by the undersigned
registrant to the purchaser.
(b)
Insofar as indemnification for liabilities arising under the Securities Act
may
be permitted to directors, officers and controlling persons of the registrant
pursuant to the foregoing provisions, or otherwise, the registrant has been
advised that in the opinion of the Commission such indemnification is against
public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than director, officer or controlling person in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
SIGNATURES
Pursuant
to the requirements of the Securities Act of 1933, the registrant has duly
caused this Post-Effective Amendment to a Registration Statement on Form S-1
to
be signed on its behalf by the undersigned, thereunto duly authorized,
in
the City
of Salem, State of Ohio, on May 31, 2007.
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GIANT
MOTORSPORTS, INC. |
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Date:
May 31, 2007 |
By: |
/s/ Russell
A. Haehn |
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Russell
A. Haehn, Chairman and
Chief
Executive Officer
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Pursuant
to the requirements of the Securities Act of 1933, this Registration Statement
has been signed below by the following persons in the capacities and on the
dates indicated. Each person whose signature to the Registration Statement
appears below hereby appoints Gregory A. Haehn, as such person's
attorney-in-fact with full power to act alone, with full power of substitution
or resubstitution, for such person and in such person's name, place and stead,
in any and all capacities to sign on such person's behalf, individually and
in
the capacities stated below, and to file any and all amendments and
post-effective amendments to this Registration Statement, which amendment or
amendments may make such changes and additions as such attorney-in-fact may
deem
necessary or appropriate.
Name
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Office
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Date
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/s/
Russell A. Haehn
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Chairman,
Chief Executive Officer and Director
(Principal
Executive Officer)
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May
31, 2007
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Russell
A. Haehn
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/s/
Gregory A. Haehn
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President,
Chief Operating Officer and Director
(Principal
Financial and Accounting Officer)
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May
31, 2007
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Gregory
A. Haehn
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