SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 for the quarterly period ended
September 30, 2004
OR
[ ] Transition report pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934 for the transition period
from ___________ to ____________
Commission File Number: 000-50243
--------------
GIANT MOTORSPORTS, INC.
------------------------------------------------------
(Exact Name of Registrant as Specified in Its Charter)
Nevada 33-1025552
------------------------------- -------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
13134 State Route 62, Salem, Ohio 44460
---------------------------------------- -------------------
(Address of Principal Executive Offices) (Zip Code)
(330) 332-8534
----------------------------------------------------
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the Registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the past 12 months (or for
such shorter period that the Registrant was required to file such
reports), and (2) has been subject to such filing requirements
for the past 90 days.
Yes [X] No [ ]
Indicate by check mark whether the Registrant is an accelerated
filer (as defined in Rule 12b-2 of the Exchange Act)
Yes [ ] No [X]
As of November 12, 2004 the registrant had 10,425,000 shares of
common stock, $.001 par value, issued and outstanding.
GIANT MOTORSPORTS, INC.
INDEX TO FORM 10-Q
PAGE
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of September 30, 2004
(Unaudited) and December 31, 2003 (Audited).......................... 2
Condensed Consolidated Unaudited Statements of Income
for the Nine Months Ended September, 2004 and 2003 and
for the Three Months Ended September 30, 2004 and 2003................ 4
Condensed Consolidated Unaudited Statements of Cash Flows for
the Nine Months Ended September 30, 2004 and 2003..................... 5
Notes to Condensed Consolidated Unaudited Financial Statements........ 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations............... 14
Item 3. Quantitative and Qualitative Disclosures about
Market Risk............................................ 20
Item 4. Controls and Procedures..................................... 20
PART II. OTHER INFORMATION
Item 1. Legal Proceedings........................................... 21
Item 2. Changes in Securities, Use of Proceeds and
Issuer Purchases of Equity Securities....................... 21
Item 3. Defaults Upon Senior Securities............................. 21
Item 4. Submission of Matters to a Vote of Security
Holders..................................................... 21
Item 5. Other Information........................................... 21
Item 6. Exhibits and Reports on Form 8-K............................ 21
SIGNATURES............................................................ 23
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements
GIANT MOTORSPORTS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
September 30, 2004 and December 31, 2003
2004 2003
------------ ------------
(Unaudited) (Audited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 1,204,726 $ 587,917
Accounts receivable, net 4,078,762 1,285,106
Accounts receivable, affiliates - 315,343
Inventories 14,243,801 10,986,080
Deferred federal income taxes 159,000 -
Note receivable, officer 802,247 679,405
Prepaid expenses 99,339 8,000
------------ ------------
TOTAL CURRENT ASSETS 20,587,875 13,861,851
------------ ------------
PROPERTY AND EQUIPMENT, NET 1,083,050 425,177
------------ ------------
OTHER ASSETS
Intangibles, net 1,588,950 -
Deferred federal income taxes 137,000 -
Deposits 41,000 16,000
------------ ------------
TOTAL OTHER ASSETS 1,766,950 16,000
------------ ------------
$ 23,437,875 $ 14,303,028
============ ============
The accompanying notes are an integral part of the condensed
financial statements.
-2-
GIANT MOTORSPORTS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (CONTINUED)
CONDENSED CONSOLIDATED BALANCE SHEETS
September 30, 2004 and December 31, 2003
2004 2003
------------ ------------
(Unaudited) (Audited)
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Lines of credit $ 450,000 $ 450,000
Notes payable, floor plans 15,281,124 11,575,660
Notes payable 1,699,000 -
Accounts payable, trade 842,144 675,042
Accrued expenses 244,506 178,412
Accrued income taxes 559,000 -
Deferred service contract income 442,230 80,000
Customer deposits 872,515 215,632
Current portion of long-term debt 238,563 97,073
------------ ------------
TOTAL CURRENT LIABILITIES 20,629,082 13,271,819
DEFERRED FEDERAL INCOME TAXES 22,700 -
DEFERRED SERVICE CONTRACT INCOME 402,940 -
LONG-TERM DEBT, NET 1,041,680 -
------------ ------------
TOTAL LIABILITIES 22,096,402 13,271,819
------------ ------------
COMMITMENTS - NOTE I
STOCKHOLDERS' EQUITY
Common stock, $.001 par value at
September 30, 2004;
Authorized 75,000,000 shares at
September 30, 2004;
Issued and outstanding 10,425,000
shares at September 30, 2004
and 8,000,000 shares at
December 31, 2003 10,425 8,000
Paid-in capital 648,534 1,023,209
Retained earnings 682,514 -
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 1,341,473 1,031,209
------------ ------------
$ 23,437,875 $ 14,303,028
============ ============
The accompanying notes are an integral part of the condensed
financial statements.
-3-
GIANT MOTORSPORTS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
For the nine and three months ended September 30, 2004 and 2003
Nine Months Ended Three Months Ended
September 30, September 30, September 30, September 30,
2004 2003 2004 2003
------------- ------------- ------------- -------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
OPERATING INCOME
Sales $ 58,937,527 $ 36,588,424 $ 25,773,937 $ 12,501,727
Finance, insurance and extended
service revenues 1,339,985 671,403 551,150 220,720
------------ ------------ ------------ ------------
TOTAL OPERATING INCOME 60,277,512 37,259,827 26,325,087 12,722,447
COST OF MERCHANDISE SOLD 52,996,143 33,695,725 23,099,271 11,492,906
------------ ------------ ------------ ------------
GROSS PROFIT 7,281,369 3,564,102 3,225,816 1,229,541
------------ ------------ ------------ ------------
OPERATING EXPENSES
Selling expenses 3,705,101 1,941,759 1,762,275 623,546
General and administrative expenses 1,916,998 1,031,567 741,949 366,969
------------ ------------ ------------ ------------
5,622,099 2,973,326 2,504,224 990,515
------------ ------------ ------------ ------------
INCOME FROM OPERATIONS 1,659,270 590,776 721,592 239,026
------------ ------------ ------------ ------------
OTHER INCOME AND (EXPENSES)
Other income, net 17,313 56,921 9,940 50,453
Interest expense, net (508,369) (247,837) (202,296) (90,275)
Loss on sale of assets - (1,300) - -
------------ ------------ ------------ ------------
(491,056) (192,216) (192,356) (39,822)
------------ ------------ ------------ ------------
INCOME BEFORE INCOME TAXES 1,168,214 398,560 529,236 199,204
INCOME TAXES 485,700 - 240,100 -
------------ ------------ ------------ ------------
NET INCOME ATTRIBUTABLE TO
COMMON SHAREHOLDERS $ 682,514 $ 398,560 $ 289,136 $ 199,204
============ ============ ============ ============
BASIC EARNINGS PER SHARE $ 0.07 $ 0.05 $ 0.03 $ 0.03
DILUTED EARNINGS PER SHARE $ 0.06 $ 0.05 $ 0.02 $ 0.03
WEIGHTED AVERAGE SHARES OUTSTANDING
BASIC 10,425,000 8,000,000 10,425,000 8,000,000
============ ============ ============ ============
DILUTED 11,408,333 8,000,000 12,275,000 8,000,000
============ ============ ============ ============
The accompanying notes are an integral part of the condensed
financial statements.
-4-
GIANT MOTORSPORTS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the nine months ended September 30, 2004 and 2003
2004 2003
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 682,514 $ 398,560
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation 109,420 55,923
Deferred federal income taxes (273,300) -
(Increase) in accounts receivable, net (2,793,656) (153,567)
(Increase) decrease in inventories (3,257,721) 872,263
Increase (decrease) in floor plan liability 3,705,464 (1,324,372)
(Increase) in prepaid expenses (91,339) (72,186)
Increase (decrease) in customer deposits 656,883 (3,488)
Increase in deferred service contract income 765,170 80,000
Increase (decrease) in accounts payable trade 167,102 (1,930)
Increase in accrued income taxes 559,000 -
Increase (decrease) in accrued expenses 66,094 (162,219)
------------ ------------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 295,631 (311,016)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment (681,243) (74,297)
Increase in deposits (25,000) -
Decrease (increase) in accounts receivable affiliates 315,343 (121,708)
(Increase) in notes receivable from officers (122,842) (250,616)
------------ ------------
NET CASH (USED IN) INVESTING ACTIVITIES (513,742) (446,621)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Short-term borrowings on note 500,000 -
Long-term borrowings on note 1,250,000 -
Loans from affiliate - 104,899
Payments on long-term debt (66,830) (95,366)
Payments on short-term debt (476,000) -
Distributions (366,000) (30,002)
Issue 2,600,000 stock warrants 15,000 -
Repurchase 8,000,000 shares of common stock (21,250) -
------------ ------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 834,920 (20,469)
------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 616,809 (778,106)
CASH AND CASH EQUIVALENTS, beginning of Year 587,917 780,372
------------ ------------
CASH AND CASH EQUIVALENTS, end of quarter $ 1,204,726 $ 2,266
============ ============
OTHER SUPPLEMENTARY CASH FLOW INFORMATION
Short-term borrowings incurred for the acquisition
of assets $ 1,675,000 $ -
============ ============
Interest paid for the nine months $ 515,720 $ 258,766
============ ============
The accompanying notes are an integral part of the condensed
financial statements.
-5-
GIANT MOTORSPORTS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2004 and 2003
(UNAUDITED)
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation:
The condensed consolidated financial statements included herein
have been prepared pursuant to the rules and regulations of the
Securities and Exchange Commission. The condensed consolidated
financial statements and notes are presented as permitted on Form
10-Q and do not contain information included in the Company's
annual consolidated statements and notes. Certain information
and footnote disclosures normally included in financial
statements prepared in accordance with accounting principles
generally accepted in the United States of America have been
condensed or omitted pursuant to such rules and regulations,
although the Company believes that the disclosures are adequate
to make the information presented not misleading. It is
suggested that these condensed consolidated financial statements
be read in conjunction with the December 31, 2003 audited
financial statements and accompanying notes thereto. While
management believes the procedures followed in preparing these
condensed consolidated financial statements are reasonable, the
accuracy of the amounts are in some respects dependent upon the
facts that will exist, and procedures that will be accomplished
by the Company later in the year.
These condensed consolidated financial statements reflect all
adjustments, including normal recurring adjustments which, in the
opinion of management, are necessary to present fairly the
consolidated operations and cash flows for the periods presented.
Organization:
Giant Motorsports, Inc., (the Company) through its wholly-owned
subsidiaries, W.W. Cycles, Inc. doing business as Andrews Cycles
and Chicago Cycles, Inc. doing business as Chicago Cycle Center,
operates two retail dealerships of motorcycles, all terrain
vehicles, scooters and personal watercraft in northeastern Ohio
and northern Illinois. On December 30, 2003, the stockholders of
W.W. Cycles, Inc. entered into a Stock Purchase and
Reorganization Agreement in which effective January 16, 2004 W.W.
Cycles, Inc. was issued an aggregate of 8,000,000 restricted
shares of common stock, $.001 par value, of American Busing
Corporation in exchange for all of the outstanding shares of the
common stock of the Company, resulting in W.W. Cycles, Inc.
becoming a wholly-owned subsidiary of American Busing
Corporation, an inactive public company. The acquisition was
accounted for as a reverse merger whereby, for accounting
purposes, WW Cycles, Inc. is considered the accounting acquirer
and the historical financial statements of WW Cycles, Inc. became
the historical financial statements of Giant Motorsports, Inc.
Effective April 5, 2004 American Busing Corporation changed its
name to Giant Motorsports, Inc. On April 30, 2004, Giant
Motorsports, Inc. acquired substantially all of the assets and
certain liabilities of Chicago Cycle Center pursuant to an Asset
-6-
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.
Principles of Consolidation:
The condensed consolidated financial statements include the
accounts of the Company and all of its wholly owned subsidiaries.
All significant intercompany accounts and transactions have been
eliminated in consolidation.
Cash and Cash Equivalents:
Cash and cash equivalents include amounts held in demand deposit
accounts and overnight investment accounts. The Company
considers all highly liquid investments with original maturities
of three months or less to be cash equivalents. The Company
periodically maintains cash deposits in financial institutions in
excess of the federally insured limits.
Contracts in Transit:
Contracts in transit represent customer finance contracts
evidencing loan agreements or lease agreements between the
Company, as creditor, and the customer, as borrower, to acquire
or lease a vehicle whereby a third-party finance source has given
the Company initial, non-binding approval to assume the Company's
position as creditor. Funding and approval from the finance
source is provided upon the finance source's review of the loan
or lease agreement and related documentation executed by the
customer at the dealership. These finance contracts are
typically funded within ten days of the initial approval of the
finance transaction by the third-party finance source. The
finance source is not contractually obligated to make the loan or
lease to the customer until it gives its final approval and funds
the transaction. Until such final approval is given, contracts
in transit represent amounts due from the customer to the
Company. See Note B for additional information.
Allowance for Doubtful Accounts:
Accounts are written off when management determines that an
account is uncollectible. Recoveries of accounts previously
written off are recorded when received. An estimated allowance
for doubtful accounts is determined to reduce the Company's
receivables to their carrying value, which approximates fair
value. The allowance is estimated based on historical collection
experience, specific review of individual customer accounts, and
current economic and business conditions. Historically, the
Company has not incurred any significant credit related losses.
Management has determined that an allowance of $25,000 is
necessary at September 30, 2004 and December 31, 2003.
Revenue Recognition:
Vehicle Sales:
The Company records revenue when vehicles are delivered and title
has passed to the customer, when vehicle service or repair work
is performed and when parts are delivered. Sales promotions that
are offered to customers are accounted for as a reduction to the
sales price at the time of sale. Incentives, rebates and
holdbacks offered by manufacturers directly to the Company are
recognized at the time of sale if they are vehicle specific, or
as earned in accordance with the manufacturer program rules and
are recorded as a reduction of cost of merchandise sold.
-7-
Revenue Recognition (continued):
Finance, Insurance and Extended Service Revenues:
The Company arranges financing for customers through various
financial institutions and receives a commission from the lender
equal to the difference between the interest rates charged to
customers and the interest rates set by the financing
institution. The Company also receives commissions from the sale
of various third party insurance products to customers and
extended service contracts. These commissions are recorded as
revenue at the time the customer enters into the contract. The
Company is not the obligor under any of these contracts. In the
case of finance contracts, a customer may prepay or fail to pay
their contract, thereby terminating the contract. Customers may
also terminate extended service contracts, which are fully paid
at purchase, and become eligible for refunds of unused premiums.
In these circumstances, a portion of the commissions the Company
receives may be charged back based on the relevant terms of the
contracts. The revenue the Company records relating to
commissions is net of an estimate of the ultimate amount of
chargebacks the Company will be required to pay. Such estimates
of chargeback experience is based on our historical chargeback
expense arising from similar contracts. The Company also acts as
the warrantor on certain extended service contracts and defers
the revenue and 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.
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.
-8-
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 years
Impairment of Long-Lived Assets:
Long-lived assets are reviewed for impairment whenever events
such as product discontinuances, product dispositions or other
changes in circumstances indicate that the carrying amount may
not be recoverable. An impairment loss is recognized when the
carrying amount of a long-lived asset exceeds the sum of non-
discounted cash flows expected to result from the asset's use and
eventual disposition. An impairment loss is measured as the
amount by which the carrying amount exceeds its fair value, which
is typically calculated using discounted expected future cash
flows. The discount rate to these cash flows is based on the
Company's weighted average cost of capital, which represents the
blended after-tax costs of debt and equity. There were no
indications of impairments at September 30, 2004
Income Taxes:
Income taxes are calculated using the liability method specified
by Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes."
At September 30, 2004, income taxes are provided for amounts
currently due and deferred amounts arising from temporary
differences between income for financial reporting and income tax
purposes.
Advertising Costs:
Advertising costs are expensed when incurred. Charges to
operations amounted to $815,241 and $653,465 for the nine months
ended September 30, 2004 and 2003 respectively.
Earnings Per Share of Common Stock:
Historical net income per share is computed using the weighted
average number of shares of common shares outstanding. Diluted
earnings per share (EPS) includes additional dilution from common
stock equivalents, such as stock issuable pursuant to the
exercise of stock options and warrants.
-9-
The following is a reconciliation of the computation for basic
and diluted EPS:
Nine Months Ended Three Months Ended
September September September September
2004 2003 2004 2003
----------- ----------- ----------- -----------
Net Income $ 682,514 $ 398,560 $ 289,136 $ 199,204
=========== =========== =========== ===========
Weighted-average common
shares outstanding (Basic) 10,425,000 8,000,000 10,425,000 8,000,000
Weighted-average common stock
equivalents:
Warrants 2,600,000 0 1,500,000 0
----------- ----------- ----------- -----------
Weighted-average common
shares outstanding (Diluted) 11,408,333 8,000,000 12,275,000 8,000,000
=========== =========== =========== ===========
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 September 30, 2004 and December 31, 2003.
Also included in accounts receivable at September 30, 2004 is
approximately $481,000 due from Kings Motorsports, Inc., the
former owner of Chicago Cycle Center, for contract fundings that
were put in their cash account during the transition period.
These monies are expected to be reimbursed to the Company by
December 31, 2004.
NOTE C - INVENTORIES
Inventories consisted of vehicles and parts and accessories.
-10-
NOTE D - PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
September 30 December 31
2004 2003
------------ -----------
Fixtures and equipment $ 916,986 $ 178,737
Vehicles 252,522 234,558
Leasehold improvements 275,408 264,328
------------ -----------
1,444,916 677,623
Less accumulated depreciation 361,866 252,446
------------ -----------
NET PROPERTY AND EQUIPMENT $ 1,083,050 $ 425,177
============ ===========
Depreciation expense charged to operations amounted to $109,420
and $55,923 for the nine months ended September 30, 2004 and 2003
respectively.
NOTE E - NOTES RECEIVABLE OFFICERS
Notes receivable officers consisted of advances to officers and
advances to companies that the officers own bearing interest at
6% with no stipulated repayment terms. Interest income on these
notes amounted to $32,408 for the nine months ended September 30,
2004. The notes are expected to be repaid by December 31, 2004.
NOTE F - LINES OF CREDIT
The Company has a $250,000 line of credit with one of its
suppliers and a $300,000 revolving line of credit with a bank
which aggregate $450,000 at September 30, 2004 and December 31,
2003. The line of credit with the supplier is payable in full by
December 2004 but the Company can re-borrow on the line one month
subsequent to payoff. The revolving line of credit has no
stipulated repayment terms. These loans bear interest at 7.5%
and prime plus one percent (5.75% at September 30, 2004),
respectively, and are collateralized by substantially all of the
Company's assets.
NOTE G - NOTES PAYABLE - FLOOR PLANS
The Company has various floor plan financing agreements
aggregating $15,281,124 at September 30, 2004 and $11,575,660
at December 31, 2003. Interest is payable monthly and fluctuates
with prime and varies based on the type of unit financed and the
length of time the unit remains on the floor plan (ranging
from 3% to 18% at September 30, 2004). Principal payments are
due upon the sale of the specific unit financed. The floor plans
are collateralized by substantially all corporate assets.
-11-
NOTE H - NOTES PAYABLE
Notes payable consisted of a $1,199,000 loan payable to Kings
Motorsports, Inc. at September 30, 2004 for the purchase of the
assets of Chicago Cycles, Inc. bearing interest at 6%, payable in
installments of $274,000 on October 24, 2004 and $925,000 plus
accrued interest on April 30, 2005. Also included in notes
payable is a $500,000 demand loan, bearing interest at 14%, due
on October 15, 2004.
NOTE I - LONG-TERM DEBT
Long-term debt consisted of various notes aggregating $1,280,243
at September 30, 2004 and $97,073 at December 31, 2003. These
amounts mature at various times ranging from 2004 to 2007,
bearing interest at various rates ranging from 5.75% to 6.85% per
year. The notes are collateralized by substantially all of the
Company's assets.
NOTE J - INCOME TAXES
Income taxes (credit) consisted of the following:
September 30 December 31
2004 2003
------------ -----------
Federal:
Current $ 619,000 $ -
Deferred (288,300) -
------------ -----------
330,700 -
------------ -----------
State:
Current 155,000 -
Deferred - -
------------ -----------
155,000 -
------------ -----------
TOTALS $ 485,700 $ -
============ ===========
Income taxes paid amounted to $200,000 and $-0-, respectively,
for the nine months ended September 30, 2004 and 2003.
Deferred tax assets (liabilities) consisted of the following:
September 30 December 31
2004 2003
------------ -----------
Deferred tax liabilities - long-term:
Depreciation $ (7,700) $ -
Amortization (15,000) -
------------ -----------
Gross deferred tax liabilities (22,700) -
------------ -----------
Deferred tax assets - current and long-term:
Allowance for doubtful accounts 8,500 -
Deferred revenue 287,500 -
------------ -----------
Gross deferred tax assets 296,000 -
------------ -----------
TOTALS $ 273,300 $ -
============ ===========
-12-
NOTE K - RELATED PARTY TRANSACTIONS
Related Party Transactions:
Accounts receivable, affiliates consisted of the following:
September 30 December 31
2004 2003
------------ -----------
Noninterest bearing advances to and
transfer of product at cost to
Andrews North, Inc., a corporation
in Cleveland, Ohio affiliated
through common ownership interest
to be repaid within one year $ - $ 220,000
Non-interest bearing advances of
$-0- at September 30, 2004 and
$90,000 at December 31, 2003 and
sale of product of $-0- at
September 30, 2004 and $5,343 at
December 31, 2003 to individuals
related to the stockholders of
the corporation to be repaid
within one year - 95,343
------------ -----------
TOTALS $ - $ 315,343
============ ===========
Note receivable officers amounted to $802,247 at September 30,
2004 and $679,405 at December 31, 2003 (See Note E).
The Company leases its retail facility from a shareholder under a
five-year agreement with two five year renewal terms. The
Company guarantees the debt on the building which amounted to
approximately $344,000 at September 30, 2004.
Charges to operations amounted to $135,000 for the nine months
ended September 30, 2004 and 2003.
The following is a summary of future minimum lease payments under
operating leases that have initial or remaining noncancellable
terms in excess of one year as of September 30, 2004:
-13-
YEAR ENDING AMOUNT
----------- ----------
2004 $ 45,000
2005 180,000
2006 180,000
2007 180,000
2008 180,000
----------
$ 765,000
==========
NOTE L - SUBSEQUENT EVENTS
The Company is moving it's Chicago subsidiary to a building in
Skokie, Illinois in 2005. The Company entered into a ten year
lease with a ten year renewal option for the building on October
26, 2004 and is expected to move into the building in February
2005. The lease is contingent upon the Village of Skokie
granting a special use permit to the Company and can be
terminated by either party if the permit is not received by
January 31, 2005. The payments on the lease will commence in
July 2005 at a monthly rent of $33,333 through May 2006 then
increasing to $40,000 per month from June 2006 through May 2007,
$45,000 per month from June 2007 through May 2008, $46,667 from
June 2008 through May 2009 and then increasing 3% annually for
the remaining term of the lease. The Company will also be liable
for a proportionate share of expenses and taxes over a specified
amount.
-13-
Item 2. Management's Discussion and Analysis of Financial
Conditions and Results of Operations
This document includes statements that may constitute
forward-looking statements made pursuant to the Safe Harbor
provisions of the Private Securities Litigation Reform Act of
1995. The Company would like to caution readers regarding certain
forward-looking statements in this document and in all of its
communications to shareholders and others, press releases,
securities filings, and all other communications. Statements that
are based on management's projections, estimates and assumptions
are forward-looking statements. The words "believe," "expect,"
"anticipate," "intend," "will," and similar expressions
generally identify forward-looking statements. While the Company
believes in the veracity of all statements made herein, forward-
looking statements are necessarily based upon a number of
estimates and assumptions that, while considered reasonable by
the Company, are inherently subject to significant business,
economic and competitive uncertainties and contingencies and
known and unknown risks. Many of the uncertainties and
contingencies can affect events and the Company's actual results
and could cause its actual results to differ materially from
those expressed in any forward-looking statements made by, or on
behalf of, the Company.
GENERAL
The Company's goal is to become one of the largest dealers
of powersports 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. The
Company is attempting to capitalize upon the consolidation
opportunities available and increase its revenues and income by
acquiring additional dealers and improving its performance and
profitability.
Management plans to maximize the operating and financial
performance of its dealerships by achieving certain efficiencies
that will enhance internal growth and profitability. By
consolidating functions within the Company, management believes
it can reduce overall expenses, simplify dealership management
and create economies of scale.
The Company will specifically target dealers in markets with
strong buyer demographics that, due to under-management or under-
capitalization, are unable to realize their market share
potential and can benefit substantially from the Company's
systems and operating strategy.
-14-
The Company, together with its two (2) wholly-owned
subsidiaries, owns and operates two (2) retail powersports
superstores. The Company's core brands include Suzuki, Yamaha,
Honda, Ducati and Kawasaki. The Company superstores operate
under the names "Andrews Cycles" and "Chicago Cycles." Andrews
Cycles is located in Salem, Ohio, has approximately fifty (50)
employees as of September 30, 2004 and operates from an
approximately thirty-five thousand (35,000) square foot facility.
Chicago Cycles is located in Chicago, Illinois, has approximately
fifty-five (55) employees and operates from an approximately
thirty thousand (30,000) square foot facility. The Company, in
October 2004, entered into a ten-year lease for a new sixty-one
thousand (61,000) square foot facility in Skokie, Illinois, for
its Chicago Cycles operations, which it intends to move into in
February 2005. The Company believes Andrews Cycles and Chicago
Cycles are two of the largest volume dealers of powersports
vehicles in the Midwest.
On April 30, 2004, pursuant to an Asset Purchase Agreement
(the "Asset Agreement"), dated as of April 30, 2004 by and among
the Company, King's Motorsports, Inc., d/b/a Chicago Cycle
("Chicago Cycle"), Jason Haubner and Jerry Fokas, the two (2)
shareholders of Chicago Cycle, the Company acquired (the
"Acquisition"), substantially all of the assets of Chicago Cycle
(the "Chicago Assets"). In consideration for the Chicago Assets
and pursuant to the Asset Agreement, the Company (i) assumed
certain specified liabilities of Chicago Cycle, and (ii) agreed
to pay to Chicago Cycle $2,925,000, as follows: (a) $1,250,000 at
the closing of the Acquisition (the "Initial Payment"), and (b)
$1,675,000 through the issuance to Chicago Cycle of a 6%
$1,675,000 aggregate principal amount promissory note (the
"Note"). The principal amount of the Note matures as follows: (i)
$500,000 on July 29, 2004, (ii) $250,000 on October 27, 2004, and
(iii) the remaining $925,000, plus accrued but unpaid interest on
April 30, 2005. The first $500,000 installment of principal had
been repaid as of September 30, 2004. The Note is secured by a
second lien on the Chicago Assets pursuant to a Commercial
Security Agreement dated as of April 30, 2004, by and among the
Company and Chicago Cycle, and guaranteed pursuant to a Guaranty
dated April 30, 2004 by and among Chicago Cycle, the Company,
Russell Haehn and Gregory Haehn, the current executive officers,
directors and controlling shareholders of the Company (each an
"Executive," and, collectively, the "Executives").
To fund the $1,250,000 Initial Payment, the Company pursuant
to a Term Note dated March 12, 2004, by and among the Company and
The Fifth Third Bancorp Bank (the "Bank") borrowed $1,250,000
(the "Initial Loan") from the Bank. The Initial Loan, which
matured on May 31, 2004, was refinanced with the Bank through a
term loan which is amortized over a seventy-two (72) month period, but
is payable in full on May 31, 2007 (the "Term Loan"), which bears
interest at the rate of prime plus one percent (1%) per annum.
The Company's payment obligations under the Term Loan are
guaranteed by the Executives pursuant to a Secured Continuing
Guaranty Unlimited dated as of March 12, 2004 by each Executive
and the Bank. The Loan is also secured pursuant to a Security
Agreement dated March 12, 2004 by and between the Bank and the
Company, by a first priority lien on all of the assets of the
Company (including, but not limited to, the Chicago Assets).
-15-
In connection with the Acquisition and pursuant to the Asset
Purchase Agreement, the Company entered into a Noncompetition
Agreement ("Noncompetition Agreement"), dated April 30, 2004 with
Mr. Haubner, pursuant to which Mr. Haubner agreed to limit his
business activities to those not competing with Chicago Cycle
until December 31, 2006. In consideration for the Noncompetition
Agreement, the Company agreed to (i) pay to Mr. Haubner a monthly
fee of $20,833 from January 20, 2005 through December 31, 2006,
and (ii) provide Mr. Haubner with certain health insurance
coverage.
Pursuant to an Employment Agreement ("Employment
Agreement"), dated April 30, 2004 between the Company and Jerry
Fokas (the "Employee"), the Company agreed to employ Mr. Fokas as
a sales manager for a two (2) year period. In consideration for
such employment, the Company agreed to, among other things, pay
to the Employee (i) a salary of $2,500 per week from May 1, 2004
to April 30, 2005, and $3,000 per week from May 1, 2005 to April
30, 2006, and (ii) a quarterly bonus equal to five percent (5%)
of Chicago Cycle's quarterly earnings before interest, taxes,
depreciation and amortization (as determined by the certified
public accounting firm that regularly provides accounting
services to Chicago Cycle and/or the Company).
On April 20, 2004, pursuant to a $500,000 aggregate
principal amount promissory note bearing interest at the rate of
fourteen (14%) percent per annum (the "Bridge Note"), the Company
received from a third party lender (the "Lender") a $500,000
aggregate principal amount bridge loan (the "Bridge Loan"). All
outstanding principal on the Bridge Note was due on October 15,
2004. To secure the repayment of principal and interest on the
Bridge Note, each Executive (i) pledged to the Lender 150,000
shares (300,000 shares in the aggregate) of the common stock, par
value $0.001 per share, of the Company (the "Common Stock") owned
by each such Executive, and (ii) guaranteed the payment of all of
the Company's payment obligations to the Lender under the Bridge
Note. As partial consideration for the Bridge Loan, the Company
issued to the Lender a five (5) year warrant to purchase 100,000
shares of Common Stock (the "Warrant Shares"), at an exercise
price of $2.25. The Company also granted to the Lender certain
piggyback registration rights with respect to the Warrant Shares.
The Company used the $500,000 Bridge Loan proceeds for working
and operating capital.
On April 5, 2004, the Company changed its name from American
Busing Corporation to Giant Motorsports, Inc.
On January 16, 2004, pursuant to a Stock Purchase and
Reorganization Agreement dated as of December 30, 2003 (the
"Agreement"), between, among others, the Company, W.W. Cycles,
Inc. ("Cycles") and the Executives, the Company issued to the
Executives and one (1) other Cycles' employee, an aggregate of
7,850,000 shares of Common Stock in exchange for all of the
issued and outstanding shares of the capital stock of Cycles,
resulting in Cycles becoming a wholly-owned subsidiary of the
Company (the "Initial Acquisition"). On such date, the
Executives also purchased an additional 150,000 shares of Common
Stock from a then shareholder of the Company for an aggregate
purchase price of $178,750. Simultaneously with the Closing of
the Initial Acquisition, the then sole director and officer of
the Company resigned as a director and officer of the Company and
was replaced by the Executives. Russell A. Haehn became the
Chairman, Chief Executive Officer, Secretary and a Director of
the Company and Gregory A. Haehn became the President, Chief
Operating Officer, Treasurer and a Director of the Company.
-16-
Immediately following the Initial Acquisition and the
consummation of certain other related transactions, the Company
had 10,425,000 issued and outstanding shares of Common Stock, of
which the Executives owned in the aggregate, 7,850,000 shares of
Common Stock, representing approximately 76.74% of the issued and
outstanding shares of Common Stock. Of such amount, Russell A.
Haehn owns 4,710,000 shares of Common Stock, Gregory A. Haehn
owns 2,740,000 shares of Common Stock and a third prior
shareholder of Cycles owns the remaining 400,000 shares of Common
Stock. The Company also issued to a financial advisor six-year
warrants to purchase up to 1,000,000 shares of the Common Stock
in consideration for financial advisory services provided to
Cycles in connection with the Initial Acquisition and to the
Company following the Initial Acquisition.
RESULTS OF OPERATIONS
Revenues
--------
Revenues during the third quarter of 2004 were $26,325,087
representing an increase of $13,602,640 (107%) from the
$12,722,447 reported for the quarter ending September 30, 2003.
Revenues for the first nine months of 2004 were $60,277,512
representing an increase of $23,017,685 (62%) from the
$37,259,827 reported for the nine months ending September 30,
2003. Our results, specifically those for the third quarter of
2004, were impacted significantly, in a positive manner, by the
acquisition of Chicago Cycle on April 30, 2004, and the inclusion
of the additional revenues generated by Chicago Cycle from that
date through September 30, 2004. Additionally, our sales
increase can also be attributed to our aggressive marketing and
advertising campaigns.
Cost of Sales
-------------
Cost of sales for the third quarter of 2004 increased by
$11,606,365 (101%) from the same period in 2003. Cost of sales
for the first nine months of 2004 increased by $19,300,418 (57%)
from the same period in 2003. This increase reflects the
additional cost of units needed to realize the increase in sales,
and is also significantly impacted by the inclusion of the costs
of Chicago Cycle's sales from April 30, 2004.
Operating Expenses
------------------
Selling, general and administrative expenses for the third
quarter of 2004 were $2,504,224, an increase of $1,513,709 (153%)
over the same period in 2003. Selling, general and
administrative expenses for the first nine months of 2004 were
$5,622,099, an increase of $2,648,773 (89%) over the same period
in 2003. The aggregate increase in such costs were principally
related to (i) additional selling, general and administrative
expenses relating to Chicago Cycle, commencing April 30, 2004,
and (ii) approximately $304,632 of legal, accounting and auditing
fees, incurred during the first nine months of 2004, which was
significantly more than comparable expenses during the same
period in 2003, which additional fees were associated with the
requirements of becoming a public entity and the ongoing
compliance and maintenance requirements ("Public Company
Expenses"). Interest expense increased approximately $112,021
to $202,296 in the third quarter of 2004 as compared to the third
quarter of 2003, and $260,532 to $508,369 for the first nine
months of 2004 compared to the same period in 2003. This
increase is primarily due to (i) interest payable by the Company
relating to the Initial Loan, the Term Loan and the Bridge Note,
and (ii) an increase in interest bearing floor plan inventory,
and most significantly the addition of the floor plan inventory
of Chicago Cycle.
-17-
Operating Income
----------------
Income from Operations for the three months ended September
30, 2004 increased by $482,566 to $721,592, as compared to
$239,026 over the same period in 2003. Income from Operations
for the first nine months of 2004 increased by $1,068,494 to
$1,659,270, as compared to $590,776 over the same period in 2003.
Income from Operations in 2004 was also substantially affected by
the addition of Chicago Cycle's operations on April 30, 2004 and
approximately $304,632 of Public Company Expenses. This
generally is a result of an increase of sales.
Income before Taxes, Depreciation and Amortization
--------------------------------------------------
Income before provision for taxes, depreciation and
amortization, for the three months ended September 30, 2004 was
$529,236, which is $330,032 greater than the comparable period
last year. Income before provision for taxes, depreciation and
amortization, for the first nine months of 2004 was $1,277,634,
which is $823,151 greater than the comparable period last year.
The income tax increase of $485,700 for the first nine months of
2004, as compared to the same period in 2003, is a result of the
Company's tax filing status that changed from an S-Corp in 2003
to a C-Corp effective on January 1, 2004. Depreciation and
amortization was approximately $109,420 for the first nine months
of 2004 as compared to $55,923 for the comparable period in 2003.
Net Income
----------
Net income for the three months ended September 30, 2004 was
$289,136 as compared to $199,204 for the comparable period in
2003. Net income for the first nine months of 2004 was $682,514
as compared to $398,560 for the comparable period in 2003. As
discussed above, net income in 2004 was substantially affected by
the addition of the Chicago Cycles operations and approximately
$304,632 of Public Company Expenses.
-18-
LIQUIDITY AND CAPITAL RESOURCES
Our primary source of liquidity has been cash generated by
operations and borrowings under various credit facilities. At
September 30, 2004, we had $1,204,726 in cash and cash
equivalents, compared to $587,917 at December 31, 2003. Until
required for operations, our policy is to invest excess cash in
bank deposits and money market funds. Net working capital at
September 30, 2004 was $(41,207) compared to $590,032 at December
31, 2003. The Company's negative net working capital at
September 30, 2004, was mostly attributable to its financing of
the Chicago Cycle Acquisition through short-term debt and an
increase in floor plan financing, as a result of the additional
inventory acquired in the Chicago Cycle Acquisition.
The Company receives floor plan financing from five
different motorcycle manufacturers for whom the Company sells the
manufacturers' products. The Company uses such floor plan
financing to assist it in financing and carrying the Company's
inventory necessary to achieve the Company's sales goals. Such
manufacturer's collateral includes all unit inventory plus a
general lien on all assets of Cycles and Chicago Cycles.
On April 20, 2004, the Company borrowed from a third party
lender (the "Lender") the $500,000 Bridge Loan, evidenced by the
Bridge Note. All outstanding principal on the Bridge Note is due
on October 15, 2004. To secure the repayment of principal and
interest on the Bridge Note, each Executive (i) pledged to the
Lender 150,000 shares (300,000 shares in the aggregate) of Common
Stock owned by each such Executive, and (ii) guaranteed the
payment of all of the Company's payment obligations to the Lender
under the Bridge Note. As partial consideration for the Bridge
Loan, the Company issued to the Lender the Bridge Warrant to
purchase 100,000 Warrant Shares at an exercise price of $2.25 per
share. The Company also granted to the Lender certain piggyback
registration rights with respect to the Warrant Shares. The
Company used the $500,000 Bridge Loan proceeds for working and
operating capital.
On March 12, 2004, the Company received the $1,250,000
Initial Loan from the Bank, which it used for the Initial Payment
for its Acquisition of Chicago Cycle. The Initial Loan matured
on May 31, 2004 and was refinanced and replaced with the Term
Loan, which is amortized over a period of seventy-two (72)
months, but is payable in full on May 31, 2007, and is guaranteed
by each of the Executives.
Although the Company believes that its current borrowing
facilities together with its cash generated from operations, will
be adequate to meet the Company's working capital requirements
for its current operating levels, the Company may in the future
attempt to raise additional financing through the sale of its
debt and/or equity securities.
-19-
SEASONALITY
The Company's two main products - Motorcycles and All
Terrain Vehicles ("ATVs") are subject to seasonality.
Traditionally, the motorcycle season begins in late February or
early March and runs until September. In September/October, the
sale of ATVs increases while motorcycle sales decrease.
IMPACT OF INFLATION
General inflation in the economy has driven the operating
expenses of many businesses higher, and, accordingly, the Company
has experienced increased salaries and higher prices for
supplies, goods and services. The Company continuously seeks
methods of reducing costs and streamlining operations while
maximizing efficiency through improved internal operating
procedures and controls. While the Company is subject to
inflation as described above, the Company's management believes
that inflation currently does not have a material effect on its
operating results, but there can be no assurance that this will
continue to be so in the future.
Item 3. Quantitative and Qualitative Disclosures about
Market Risk
The Company does not have any material risk with respect to
changes in foreign currency exchange rates, commodities prices or
interest rates. The Company does not believe that it has any
other relevant market risk with respect to the categories
intended to be discussed in this item of this Report.
Item 4. Controls and Procedures
The Company's Chief Executive Officer and Chief Financial
Officer, after evaluating the effectiveness of the Company's
disclosure controls and procedures (as defined in Rules 13a-14(c)
and 15d-14(c) under the Securities Exchange Act of 1934, as
amended) as of December 31, 2003, (the "Evaluation Date"), have
concluded that, as of the Evaluation Date, the Company's
disclosure controls and procedures were effective to ensure the
timely collection, evaluation, and disclosure of information
relating to the Company that would potentially be subject to
disclosure under the Securities Exchange Act of 1934, as amended,
and the rules and regulations promulgated under the Act. There
were no significant changes in the Company's internal controls or
in other factors that could significantly affect the internal
controls subsequent to the Evaluation Date.
-20-
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities, Use of Proceeds and Issuer
Purchases of Equity Securities
None
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits And Reports On Form 8-K
(a) Exhibits (Filed herewith)
--------
31.1 Certification of the Chief Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002 (Rule 13a-4(a))
31.2 Certification of the Chief Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002 (Rule 13a-4(a))
32.1 Certification pursuant to 18 U.S.C. Section 1350 as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(Rule 13a-14(b)).
32.2 Certification pursuant to 18 U.S.C. Section 1350 as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(Rule 13a-14(b)).
-21-
(b) Reports on Form 8-K
-------------------
(i) Current Report on Form 8-K filed with the SEC on
August 18, 2004 (reporting grants of stock options to
the Company's two executive officers).
(ii) Current Report on Form 8-K/A filed with the SEC on
July 16, 2004 (filing the required financial statements
in connection with the acquisition of Kings Motorsports,
Inc. d/b/a Chicago Cycle).
-22-
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act
of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
GIANT MOTORSPORTS, INC.
Date: November 12, 2004 /s/ Russell A. Haehn
------------------------------------
Name: Russell A. Haehn
Title: Chairman of the Board of
Directors, Chief Executive
Officer and a Director
(Principal Executive Officer)
Date: November 12, 2004 /s/ Gregory A. Haehn
------------------------------------
Name: Gregory A. Haehn
Title: President, Chief Operating
Officer, Treasurer, Secretary
and a Director
(Principal Financial and
Accounting Officer)
-23-