UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q/A (Mark One) [X] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended March 31, 2005 OR |_| Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from _______________ to _______________ Commission File Number: 000-50243 GIANT MOTORSPORTS, INC. -------------------------------------------------------------------------------- (Exact Name of Registrant as Specified in Its Charter) Nevada 33-1025552 -------------------------------------------------------------------------------- (State or Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification No.) 13134 State Route 62, Salem, Ohio 44460 -------------------------------------------------------------------------------- (Address of Principal Executive Offices) (Zip Code) (440) 332-8534 -------------------------------------------------------------------------------- (Registrant's Telephone Number, Including Area Code) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes |X| No |_| Indicate by check mark whether the Registrant is an accelerated filer (as defined in rule 12b-2 of the Exchange Act) Yes |_| No |X| Indicate the number of shares outstanding of each of the Registrant's classes of common stock, as of the latest practicable date. As of January 20, 2006 the registrant had 10,445,000 shares of common stock, $.001 par value, issued and outstanding. GIANT MOTORSPORTS, INC. INDEX TO FORM 10-Q/A Page No. PART I. FINANCIAL INFORMATION Item 1. Financial Statements Condensed Consolidated Balance Sheets as of March 31, 2005 (Unaudited) and December 31, 2004 (Audited) 3 Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2005 and 2004 (Unaudited) 5 Condensed Consolidated Statements of Cash Flow for the Three Months Ended March 31, 2005 and 2004 (Unaudited) 6 Notes to Condensed Consolidated Financial Statements 7 Item 2. Management's Discussion and Analysis of Financial Conditions and Results of Operations 18 Item 3. Quantitative and Qualitative Disclosures about Market Risk 26 Item 4. Controls and Procedures 27 PART II. OTHER INFORMATION Item 1. Legal Proceedings 28 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 28 Item 3. Defaults upon Senior Securities 28 Item 4. Submission of Matters to a Vote of Security Holders 28 Item 5. Other Information 28 Item 6. Exhibits 28 SIGNATURES 29 2 GIANT MOTORSPORTS, INC. PART I. FINANCIAL INFORMATION Item 1. Financial Statements GIANT MOTORSPORTS, INC. CONDENSED CONSOLIDATED BALANCE SHEETS March 31, 2005 Dec. 31, 2004 (Unaudited) (Audited) -------------- -------------- ASSETS CURRENT ASSETS Cash and cash equivalents $ 618,986 $ 1,862,187 Accounts receivable, net 3,345,721 2,465,369 Accounts receivable, affiliates 65,823 65,823 Inventories 22,903,101 16,538,087 Accounts receivable, employees 91,579 -- Deferred federal income taxes 8,500 8,500 Note receivable, officer 161,790 254,029 Prepaid expenses 20,223 61,875 -------------- -------------- TOTAL CURRENT ASSETS 27,215,723 21,255,870 -------------- -------------- FIXED ASSETS, NET 1,408,217 1,105,667 -------------- -------------- OTHER ASSETS Intangibles, net 2,026,450 1,588,950 Deposits 84,442 67,240 -------------- -------------- TOTAL OTHER ASSETS 2,110,892 1,656,190 -------------- -------------- $ 30,734,832 $ 24,017,727 ============== ============== The accompanying notes are an integral part of these condensed consolidated financial statements. 3 GIANT MOTORSPORTS, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (CONTINUED) March 31, 2005 Dec. 31, 2004 (Unaudited) (Audited) ---------------- ---------------- LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Notes payable $ 1,425,000 $ 1,425,000 Notes payable, floor plans 23,799,965 17,788,706 Accounts payable, trade 1,714,245 1,226,986 Accrued expenses 290,376 172,281 Accrued income taxes 325,300 393,300 Deferred service contract income 67,500 90,000 Customer deposits 624,576 344,140 Current portion of non-compete agreement 250,000 -- Current portion of long-term debt 214,760 214,760 ---------------- ---------------- TOTAL CURRENT LIABILITIES 28,711,722 21,655,173 DEFERRED FEDERAL INCOME TAXES 37,400 37,400 LONG-TERM PORTION OF NON-COMPETE AGREEMENT 250,000 -- LONG-TERM DEBT, NET 945,033 996,267 ---------------- ---------------- TOTAL LIABILITIES 29,944,155 22,688,840 ---------------- ---------------- COMMITMENTS -- -- STOCKHOLDERS' EQUITY Common stock, $.001 par value, authorized 75,000,000 shares, 10,425,000 shares issued and outstanding at March 31, 2005 and December 31, 2004 10,425 10,425 Paid-in capital 1,014,534 1,014,534 Retained earnings (deficit) (234,282) 303,928 ---------------- ---------------- TOTAL STOCKHOLDERS' EQUITY 790,677 1,328,887 ---------------- ---------------- $ 30,734,832 $ 24,017,727 ================ ================ The accompanying notes are an integral part of these condensed consolidated financial statements. 4 GIANT MOTORSPORTS, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS For the three months ended March 31, 2005 and 2004 2005 2004 (Unaudited) (Unaudited) ------------ ------------ OPERATING INCOME Sales $ 20,426,807 $ 10,996,090 Finance, insurance and extended service revenues 291,200 204,072 ------------ ------------ TOTAL OPERATING INCOME 20,718,007 11,200,162 COST OF MERCHANDISE SOLD 18,727,791 9,710,863 ------------ ------------ GROSS PROFIT 1,990,216 1,489,299 ------------ ------------ OPERATING EXPENSES Selling expenses 1,466,384 596,063 General and administrative expenses 915,771 508,161 ------------ ------------ 2,382,155 1,104,224 ------------ ------------ INCOME (LOSS) FROM OPERATIONS (391,939) 385,075 ------------ ------------ OTHER INCOME AND (EXPENSES) Other income, net 27,570 898 Interest expense, net (173,841) (88,714) ------------ ------------ (146,271) (87,816) ------------ ------------ INCOME (LOSS) BEFORE INCOME TAXES (538,210) 297,259 INCOME TAXES -- 110,000 ------------ ------------ NET INCOME (LOSS) ATTRIBUTABLE TO COMMON SHAREHOLDERS $ (538,210) $ 187,259 ============ ============ BASIC EARNINGS (LOSS) PER SHARE $ (0.05) $ 0.02 ============ ============ DILUTED EARNINGS PER SHARE $ -- $ -- ============ ============ WEIGHTED AVERAGE SHARES OUTSTANDING 10,425,000 10,425,000 ============ ============ BASIC 10,425,000 10,425,000 ============ ============ DILUTED 10,425,000 11,202,778 ============ ============ The accompanying notes are an integral part of these condensed consolidated financial statements. 5 GIANT MOTORSPORTS, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW For the three months ended March 31, 2005 and 2004 2005 2004 (Unaudited) (Unaudited) -------------- -------------- CASH FLOWS FROM OPERATING ACTIVITIES Net income (loss) $ (538,210) $ 187,259 Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation 56,786 20,374 Amortization 62,500 -- Deferred federal income taxes -- (16,000) (Increase) in accounts receivable, net (971,931) (1,223,584) (Increase) in inventories (6,365,014) (1,359,200) Increase (decrease) in floor plan liability 6,011,259 1,760,837 (Increase) decrease in prepaid expenses 41,652 (56,017) Increase (decrease) in customer deposits 280,436 (48,793) (Decrease) in accrued warranty (22,500) -- Increase in accounts payable trade 487,259 38,273 Increase (decrease) in accrued income taxes (68,000) 126,000 Increase in accrued expenses 118,095 10,899 -------------- -------------- NET CASH (USED IN) OPERATING ACTIVITIES (907,668) (559,952) -------------- -------------- CASH FLOWS FROM INVESTING ACTIVITIES Purchase of fixed assets (359,336) (27,527) Decrease in accounts receivable affiliates` -- 310,017 (Increase) decrease in notes receivable from officers 92,239 (89,111) Increase in deposits (17,202) -- -------------- -------------- NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES (284,299) 193,379 -------------- -------------- CASH FLOWS FROM FINANCING ACTIVITIES Short-term borrowings on note -- 1,250,000 Payments on long-term debt (51,234) (35,178) Distributions -- (154,000) Issue 1,000,000 stock warrants -- 15,000 Repurchase 8,000,000 shares of common stock -- (21,250) -------------- -------------- NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (51,234) 1,054,572 -------------- -------------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (1,243,201) 687,999 CASH AND CASH EQUIVALENTS, beginning of period 1,862,187 587,917 -------------- -------------- CASH AND CASH EQUIVALENTS, end of period $ 618,986 $ 1,275,916 ============== ============== OTHER SUPPLEMENTARY CASH FLOW INFORMATION Covenant not to compete incurred commitment $ 500,000 $ -- ============== ============== Long-term borrowings incurred for the acquisition of a vehicle $ -- $ 17,964 ============== ============== Interest paid during the year $ 176,990 $ 94,169 ============== ============== The accompanying notes are an integral part of these condensed consolidated financial statements. 6 GIANT MOTORSPORTS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS March 31, 2005 and 2004 (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, 2004 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. 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. 7 GIANT MOTORSPORTS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) March 31, 2005 and 2004 (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, 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. 8 GIANT MOTORSPORTS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) March 31, 2005 and 2004 (UNAUDITED) NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Revenue Recognition (continued): Finance, Insurance and Extended Service Revenues: The Company arranges financing for customers through various financial institutions and receives a commission from the lender equal to the difference between the interest rates charged to customers and the interest rates set by the financing institution. The Company also receives commissions from the sale of various third party insurance products to customers and extended service contracts. These commissions are recorded as revenue at the time the customer enters into the contract. The Company is not the obligor under any of these contracts. In the case of finance contracts, a customer may prepay or fail to pay their contract, thereby terminating the contract. Customers may also terminate extended service contracts, which are fully paid at purchase, and become eligible for refunds of unused premiums. In these circumstances, a portion of the commissions the Company receives may be charged back based on the relevant terms of the contracts. The revenue the Company records relating to commissions is net of an estimate of the ultimate amount of chargebacks the Company will be required to pay. Such estimates of chargeback experience is based on our historical chargeback expense arising from similar contracts. The Company also acts as the warrantor on certain extended service contracts and defers the revenue and recognized it over the life of the contract on a straight-line basis. Fair Value of Financial Instruments: Financial instruments consist of cash and cash equivalents, accounts receivable, accounts payable and debt, including floor plan notes payable. The carrying amount of all significant financial instruments approximates fair value due either to length or maturity or variable interest rates that approximate prevailing market rates. Inventories: Parts and accessories inventories are stated at the lower of cost or market using the first-in, first-out method. Vehicle inventories are stated at the lower of cost or market using the specific identification method. Concentration of Credit Risk: Financial instruments that potentially subject the Company to credit risk consist of cash equivalents and accounts receivable. The Company's policy is to review the amount of credit exposure to any one financial institution and place investments with financial institutions evaluated as being creditworthy. In the ordinary course of business, the Company has bank deposits and overnight repurchase agreements that may exceed federally insured limits. At March 31, 2005, the Company had $999,419 in excess of the federally insured limit. 9 GIANT MOTORSPORTS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) March 31, 2005 and 2004 (UNAUDITED) NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Concentration of Credit Risk (continued): Concentration of credit risk, with respect to accounts receivable-customers, is limited through the Company's credit evaluation process. The Company reviews the credit history before extending credit. Generally, the Company does not require collateral from its customers Property and Equipment: Property, equipment, and leasehold improvements are stated at cost. Maintenance and repairs that do not add materially to the value of the asset nor appreciably prolong its useful life are charged to expense as incurred. Gains or losses on the disposal of property and equipment are included in the determination of income. Depreciation of property and equipment and amortization of leasehold improvements are provided using the straight-line method over the following estimated useful lives: Fixtures, and equipment................... 3-7 years Vehicles ................................. 5 years Leasehold Improvements.................... 10 years Goodwill And Other Intangible Assets: In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement No. 142 "Goodwill and Other Intangible Assets". This statement addresses financial accounting and reporting for acquired goodwill and other intangible assets and supersedes APB opinion No. 17, "Intangible Assets". It addresses how intangible assets that are acquired individually or with a group of other assets (but not those acquired in a business combination) should be accounted for in the financial statements upon their acquisition. This Statement also addresses how goodwill and other intangible assets should be accounted for after they have been initially recognized in the financial statements. The Company, in its acquisitions, recognized $1,588,950 of goodwill. The Company performs its annual impairment test for goodwill at year-end. In addition, the Company acquired a Non-Compete Agreement that is being amortized over two (2) years, expiring on December 31, 2006. Gross Carrying Accumulated Amount Amortization ------ ------------ Non-Compete Agreements $ 500,000 $ 62,500 Goodwill $ 1,588,950 $ -0- Income Taxes: Income taxes are calculated using the liability method specified by Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes." At March 31, 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. 10 GIANT MOTORSPORTS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) March 31, 2005 and 2004 (UNAUDITED) NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Advertising Costs: Advertising costs are expensed when incurred. Charges to operations amounted to $435,395 and $198,288 for the three months ended March 31, 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 shares of common shares outstanding. Diluted earnings per share (EPS) include additional dilution from common stock equivalents, such as stock issuable pursuant to the exercise of stock options and warrants. Common stock equivalents were not included in the computation of diluted earnings per share when the Company reports a loss because to do so would be anti-dilutive for the periods presented. The following is a reconciliation of the computation for basic and diluted EPS: Three Months Ended March 31 March 31 2005 2004 ------------ ------------ Net Income (Loss) $ (538,210) $ 187,259 ============ ============ Weighted-average common shares outstanding (Basic) 10,425,000 10,425,000 Weighted-average common stock equivalents: Warrants 0 777,778 ------------ ------------ Weighted-average common shares outstanding (Diluted) 10,425,000 11,202,778 ============ ============ Use of Estimates: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect certain reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. 11 GIANT MOTORSPORTS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) March 31, 2005 and 2004 (UNAUDITED) 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, 2005. NOTE C - INVENTORIES Inventories consisted of vehicles and parts and accessories. NOTE D - FIXED ASSETS Fixed assets consisted of the following: March 31 2005 ---------- Fixtures and equipment $1,245,524 Vehicles 354,178 Leasehold improvements 282,108 ---------- 1,881,810 Less accumulated depreciation 473,593 ---------- NET FIXED ASSETS $1,408,217 ========== Depreciation expense charged to operations amounted to $56,786 for the three months ended March 31, 2005. 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 $3,875 for the three months ended March 31, 2005. It is anticipated that the notes will be repaid by December 31, 2005. 12 GIANT MOTORSPORTS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) March 31, 2005 and 2004 (UNAUDITED) NOTE F - LINE OF CREDIT The Company has a $250,000 revolving line of credit, which aggregates $250,000 at March 31, 2005. The revolving line of credit has no stipulated repayment terms. The loan bears interest at prime (5.75% at March 31, 2005) plus one percent, and is collateralized by substantially all of the Company's assets. NOTE G - NOTES PAYABLE - FLOOR PLANS The Company has various floor plan financing agreements aggregating $23,799,965 at March 31, 2005. 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 March 31, 2005). Principle payments are due upon the sale of the specific unit financed. The floor plans are collateralized by substantially all corporate assets. NOTE H - NOTES PAYABLE Notes payable consisted of a $925,000 loan payable to Kings Motorsports, Inc. at March 31, 2005 for the purchase of the assets of Chicago Cycles, Inc. bearing interest at 6%, payable in full April 30, 2005 (See Note L). The Company also has an outstanding Bridge Loan with an independent funding company bearing interest at 14%. This Bridge Loan, which is in a principal amount of $500,000, was due in full on October 15, 2004. The Company paid $250,000 of the outstanding principal amount by such date and also paid such independent funding company a fee in the amount of $2,500 to extend the balance until January 15, 2005. The Company has not made any additional principal payments, but is currently making monthly interest payments. The balance as of March 31, 2005 is $250,000, which is classified as a current liability. NOTE I - LONG-TERM DEBT Long-term debt consisted of various notes aggregating $1,159,793 at March 31, 2005. This amount matures at various times ranging from 2005 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. Long-term debt also includes an indebtedness of the Company to one of the owners of King's Motorsports, under the terms of a Non-Compete Agreement in which the Company agreed to pay such owner a total of $500,000 in consideration for a covenant not to compete with the Company's business At March 31, 2005, $250,000 of this indebtedness was reflected as a current liability and the remaining $250,000 was reflected as a long-term liability. 13 GIANT MOTORSPORTS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) March 31, 2005 and 2004 (UNAUDITED) NOTE J - INCOME TAXES Income taxes (credit) consisted of the following: 2005 ---------- Federal: Current $ 0 Deferred 28,900 ---------- 28,900 State: Current 0 Deferred 0 ---------- 0 ---------- TOTAL $ 28,900 ========== Income taxes paid amounted to $68,000 for the three months ended March 31, 2005. Deferred tax assets (liabilities) consisted of the following: 2005 ---------- Deferred tax liabilities - long-term: Depreciation $ (37,400) Deferred tax assets - current and long-term: Allowance for doubtful accounts 8,500 ---------- TOTAL $ (28,900) ========== 14 GIANT MOTORSPORTS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) March 31, 2005 (UNAUDITED) NOTE K - RELATED PARTY TRANSACTIONS Related Party Transactions: Accounts receivable, affiliates consisted of the following: 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 $ 65,823 ========== Note receivable officers amounted to $146,190 at March 31, 2005 (See Note E). The Company leases its Ohio subsidiary retail facility from a shareholder under a five-year agreement with two five-year renewal terms. The Company guarantees the debt on the building, which amounted to approximately $1,200,000 at March 31, 2005. Charges to operations amounted to $57,000 for the three months ended March 31, 2005. The following is a summary of future minimum lease payments under operating leases that have initial or remaining non-cancellable terms in excess of one year as of March 31, 2005: YEAR ENDING AMOUNT ----------- ------ 2005 $ 446,667 2006 693,333 2007 760,000 2008 793,333 2009 811,200 2010 828,336 ------------ $ 4,332,869 ============ 15 GIANT MOTORSPORTS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) March 31, 2005 and 2004 (UNAUDITED) NOTE L - ACQUISITION OF KINGS MOTOTRSPORTS, 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 had been sought primarily to gain a larger market share of the motorcycle industry. Through the acquisition, goodwill of $1,588,950 was recognized, and will be amortized over 15 years for income tax purposes. In consideration for the Chicago Assets and pursuant to the Asset Agreement, the Company (i) assumed certain specified liabilities of Chicago Cycle, and (ii) agreed to pay to Chicago Cycle $2,925,000, as follows: (a) $1,250,000 at the closing of the Acquisition (the "Initial Payment"), and (b) $1,675,000 through the issuance to Chicago Cycle of a 6% $1,675,000 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 29, 2004, and (iii) the remaining $925,000, plus accrued but unpaid interest on April 30, 2005. The Note is secured by a second lien on the Chicago Assets pursuant to a Commercial Security Agreement dated as of April 30, 2004, by and among the Company and Chicago Cycle, and guaranteed pursuant to a Guaranty dated April 30, 2004 by and among Chicago Cycle, the Company, Russell Haehn and Gregory Haehn, the current executive officers 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, pursuant to which Mr. Haubner agreed to limit his business activities to those not competing with Chicago Cycle until December 31, 2006. The Non-Compete Agreement is set to begin January 1, 2005. In consideration for the Non-Competition Agreement, the Company agreed to pay Mr. Haubner a monthly fee of $20,833. 16 GIANT MOTORSPORTS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) March 31, 2005 and 2004 (UNAUDITED) NOTE M - SUBSEQUENT EVENTS The Company is moving its 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 May 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. The note payable consisting of $925,000 payable to Kings Motorsports, Inc. which was due April 30, 2005 is currently being renegotiated; however, on May 3, 2005, a principle payment in the amount of $75,000 was made to Kings Motorsports, Inc. reducing the outstanding balance to $850,000. The parties have exchanged proposals restructuring the note and for payment plan over an extended period of time. Both parties are evaluating the proposals. 17 Item 2. Management's Discussion and Analysis of Financial Conditions and Results of Operations Special Note of Caution Regarding Forward-Looking Statements Certain statements in this report, including statements in the following discussion, may constitute forward-looking statements made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. The Company would like to caution readers regarding certain forward-looking statements in this document and in all of its communications to shareholders and others, press releases, securities filings, and all other communications. Statements that are based on management's projections, estimates and assumptions are forward-looking statements. The words "believe," "expect," "anticipate," "intend," "will," and similar expressions generally identify forward-looking statements. While the Company believes in the veracity of all statements made herein, forward-looking statements are necessarily based upon a number of estimates and assumptions that, while considered reasonable by the Company, are inherently subject to significant business, economic and competitive uncertainties and contingencies and known and unknown risks. Many of the uncertainties and contingencies can affect events and the Company's actual results and could cause its actual results to differ materially from those expressed in any forward-looking statements made by, or on behalf of, the Company. General Our goal is to become one of the largest dealers of power sports vehicles in the United States through acquisitions and internal growth. The motorsports industry is highly fragmented with an estimated 4,000 retail stores throughout the United States. We are attempting to capitalize upon the consolidation opportunities available and increase our revenues and income by acquiring additional dealers and improving our performance and profitability. We plan to maximize the operating and financial performance of our dealerships by achieving certain efficiencies that will enhance internal growth and profitability. By consolidating our corporate and administrative functions, we believe we can reduce overall expenses, simplify dealership management and create economies of scale. We will specifically target dealers in markets with strong buyer demographics that, due to under-management or under-capitalization, are unable to realize their market share potential and can benefit substantially from our systems and operating strategy. Together with our two wholly-owned subsidiaries, we own and operate two retail power sports superstores. Our core brands include Suzuki, Yamaha, Honda, Ducati and Kawasaki. Our superstores operate under the names "Andrews Cycles" and "Chicago Cycles." Andrews Cycles is located in Salem, Ohio, had approximately 50 employees at March 31, 2005, and operated from an approximately 35,000 square foot facility on March 31, 2005. Chicago Cycles is located in the Chicago metropolitan area, had approximately 62 employees at March 31, 2005 and operated from an approximately 30,000 square foot facility in Chicago, Illinois. We entered into a ten-year lease in October 2004 for a 95,000 square foot facility in Skokie, Illinois, which we moved to in May 2005. 18 Overview of Economic Trends Effects of Increasing Interest Rates Notwithstanding our increase in sales for the three month period ended March 31, 2005 compared to the same period in 2004, a significant portion of which was due to our acquisition of Chicago Cycles in April 2004, we believe that if interest rates on consumer loans continue to rise, as they have during the last twelve months, this could reasonably be expected to have a material adverse effect on the sales of our power sports products, and more specifically the sales of new vehicles. In 2004, approximately $25 million of the approximately $70.7 million of our power sports sales (35.3%) were financed. Although we did not experience a material reduction in sales through March 31, 2005, the uncertainties created in the consumer financing market as a result of continuing increases in interest rates, can reasonably be expected to have a negative impact on the sale of new motorcycles in the next 12 to 24 months due to the increased costs to our customers. We believe that consumer interest in lower-priced used motorcycles will significantly rise, as a result of the increased costs of financing. With the acquisition of our Chicago Cycles dealership we have added sales of used motorcycles to our business. From January 1, 2005 through March 31, 2005, approximately $0.8 million of Chicago Cycles' approximately $5.5 million in revenues (14.5%) were generated from sales of used motorcycles. Although our Andrews Cycles dealership has not yet generated material revenues from the sale of used motorcycles, we intend to commence sales of used motorcycles at Andrews Cycles in the second half of 2005 and intend to substantially increase sales in 2006. We also intend to increase sales of used motorcycles at Chicago Cycles during the remainder of 2005 and thereafter. 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. Reduction in Units by Manufacturers 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. Loan Transactions. On April 30, 2004, we paid $1,675,000 of the purchase price for Chicago Cycles by issuing to Kings Motorsports a 6% $1,675,000 aggregate principal amount note (the "Note"), which Note initially provided for payment as follows: (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. As of March 31, 2005, we had paid the first two installments under the Note, in the aggregate amount of $750,000. The Note is secured by a second lien on Chicago Cycles' assets, and personally guaranteed by Russell Haehn and Gregory Haehn. Subsequent to March 31, 2005, the date of the financial statements included in this report, we made additional payments of principal and interest on the Note until the remaining amount due and payable was fully paid on October 13, 2005. 19 To fund the amount payable at closing for Chicago Cycles, we borrowed $1,250,000 from The Fifth Third Bancorp Bank (the "Bank"), pursuant to a term loan. This loan, which initially matured on May 31, 2004, was refinanced with the Bank through a term loan amortized over a 72 month period, but is payable in full on May 31, 2007, bearing interest at prime plus one percent (6.75% at March 31, 2005). Our payment obligations under this term loan also are personally guaranteed by Russell Haehn and Gregory Haehn. This loan is also secured by a first priority lien on all of our assets (including, without limitation, the Chicago Cycles assets). As of March 31, 2005, the outstanding amount of this term loan, including accrued interest thereon, was $1,145,840. 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, a 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. We did not make any additional payments of principal through March 31, 2005, the date of the financial statements filed with this report, however, we continued to make monthly interest payments at the rate of 14% per annum through such date. Subsequent to March 31, 2005, 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 shares of Series A Convertible Preferred Stock and certain warrants in a private placement we closed in September 2005 (the "September 2005 Private Placement"). On September 20, 2005, we used net proceeds from our September 2005 Private Placement, in the amount of $203,383.26 to repay the remaining outstanding principal amount of the Bridge Loan and all accrued and unpaid interest thereon. We also have obtained a revolving line of credit with the Bank, in the maximum amount of $250,000. The line of credit bears interest at the rate of prime plus one percent (6.75% at March 31, 2005), and has no stipulated repayment terms. At March 31, 2005, the aggregate amount of principal and interest outstanding on this credit line was $250,000. This line of credit is secured by a lien on substantially all of our assets. 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 We intend to significantly increase our cash flow from operations by growing sales within our current business structure and through the acquisition of other power sports dealers. Based on our current business plan, we believe that we will begin to generate sufficient cash flows from operations to fund the growth of our business during the third quarter of 2007. To the extent that the growth of our business involves the acquisition of other dealers, our ability to do so will depend on the availability of the types of financing discussed below. 20 Bank Financing We have a revolving credit line with Fifth Third Bancorp in a total available amount of $250,000 all of which was funded at March 31, 2005. At March 31, 2005 while we were not specifically contemplating any additional bank financing arrangements, we believe that an increased amount of financing would have been available to us if we were to have sought such additional financing, as result of our low outstanding indebtedness Notwithstanding this belief, certain lending institutions may not be willing to provide debt financing to us, due to the fact that we have granted security interests in virtually all of our inventory and accounts receivable to the manufacturers and other institutions that provide us with floor plan financing for our motorcycles and other power sports equipment. Lenders may refuse to accept subordinated security positions or may require us to accept less favorable terms to provide debt financing, which would make it more difficult for us to replace our current credit line with lines providing more favorable terms and/or increased funding availability. Equity Financing At March 31, 2005 we were exploring the acquisition of equity financing in a maximum amount of $5,000,000 for the purpose of funding our working capital needs, as well as the repayment of indebtedness under the outstanding Note to King's Motorsports and the Bridge Loan. We did not on such date have a commitment for any such financing and there was no assurance that we would be able to obtain financing on acceptable terms. Although we believe that equity financing of $5,000,000 would be sufficient to fund our capital requirements for at least the twelve months after March 31, 2005, it is possible that we would be required to raise additional funds, through the sale of our equity securities, sooner than expected, to directly fund our working capital needs, to the extent that the growth of our business involves the acquisition of other power sports dealers, whereby we would 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. 21 Results of Operations. March 31, 2005 March 31, 2004 (Three Months) (Three Months) Increase (Decrease) % Change -------------- -------------- ------------------- -------- Revenues $20,426,807 $10,996,090 $9,430,717 86% Cost of Sales $18,727,791 $9,710,863 $9,016,928 93% Operating Expenses $2,382,155 $1,104,224 $1,277,931 116% Operating Income ($391,939) $385,075 ($777,014) (202%) Income b/f Taxes ($538,210) $297,259 ($835,469) (281%) Net Income ($538,210) $187,259 ($725,469) (387%) Revenues: Revenues for the three months ended March 31, 2005 were $20,426,807 representing an increase of $9,430,717 (86%) from the $10,996,090 reported for the three months ended March 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 during the three months ended March 31, 2005 in the approximate amount of $5,550,188. Additionally, our sales increase can also be attributed to our aggressive marketing and advertising campaigns. Cost of Sales: Cost of sales for the three months ended March 31, 2005 increased by $9,016,928 (93%) to $18,727,791, during the three months ended March 31, 2005, as compared to $9,710,863 for the same period in 2004. 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 cost of Chicago Cycles' sales beginning in April 30, 2004, which represented approximately $5,035,520 of our cost of sales for the three months ended March 31, 2005. Operating Expenses: Selling, general and administrative expenses for the three months ended March 31, 2005 were $2,382,155, an increase of $1,277,931 (116%) over $1,104,224 for the same period in 2004. The aggregate increase in such costs were principally related to (i) additional selling, general and administrative expenses relating to Chicago Cycles, commencing April 30, 2004, including increases of approximately $385,000 in compensation payable to our salespersons and $250,000 in advertising expenses, during the three months ended March 31, 2005 and (ii) an approximate $100,000 increase in legal, accounting, auditing and other professional fees, during the three months ended March 31, 2005, which additional fees were primarily associated with the ongoing compliance and maintenance requirements of being a public company. Net interest expense increased approximately $85,127 to $173,841 in the three months ended March 31, 2005 as compared to $88,714 during the same period in 2004. This increase is primarily due to (i) interest payable by the Company relating to the loans we acquired to pay for Chicago Cycles and the Bridge Loan, and (ii) an increase in interest bearing floor plan inventory, and most significantly the addition of the floor plan inventory of Chicago Cycles, which represented approximately $38,400 of net interest expense for the three months ended March 31, 2005. Operating Income (Loss): We had a loss from operations before other income (expense) of $391,939 for the three month period ended March 31, 2005, as compared to income from operations of $385,075 for the same period in 2004. This loss from operations during the three months ended March 31, 2005, is a result of the substantial increase in selling, general administration expenses, during such period, as described above under Operating Expenses. Depreciation and amortization was approximately $119,286 for the three months ended March 31, 2005, as compared to $20,374 for the same period in 2004. 22 Income (Loss) before Taxes: We had a loss before provision for taxes, for the three months ended March 31, 2005 of $538,210, as compared with income before provision for taxes of $297,259 for the same period in 2004. This loss during the three months ended t 6 0 March 31, 2005, is a result of the substantial increase in selling, general administration expenses, during such period, as described above under Operating Expenses and the expenses related to the integration of Chicago Cycles' new expanded location. We did not have taxable income for the three months ended March 31, 2005, as compared to taxes of $110,000 for the same period in 2004. Net Income (Loss): We had a net loss of $538,210 for the three months ended March 31, 2005, as compared to net income of $187,259 for the same period in 2004. As discussed above, this loss during the three months ended March 31, 2005, is a result of the substantial increase in selling, general administration expenses, during such period, as described above under Operating Expenses. Liquidity and Capital Resources. Our primary source of liquidity has been cash generated by operations and borrowings under various credit facilities. At March 31, 2005, we had $618,986 in cash and cash equivalents, compared to $1,862,187 at December 31, 2004. Until required for operations, our policy is to invest excess cash in bank deposits and money market funds. Net working capital at March 31, 2005 was ($1,495,999) compared to ($399,303) at December 31, 2004. The Company's negative net working capital at March 31, 2005, was mostly attributable to its financing of the Chicago Cycles acquisition through short-term debt, as well as an increase in floor plan financing, as a result of the additional inventory acquired in the Chicago Cycles acquisition. The Company receives floor plan financing from 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 Andrews Cycles and Chicago Cycles. The Company has acquired the loans described under the heading Loan Transactions above. Although the Company believes that its current borrowing facilities together with its cash generated from operations, will be adequate to meet its working capital requirements for its current operating levels, the Company may in the future attempt to raise additional financing through the sale of its debt and/or equity securities. 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 2005 models before the 2006 models are released, it could be very difficult for us to sell our remaining inventory of 2005 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. 23 Additionally, by limiting our carryover to 10% of total sales, we also are able to benefit from cash incentives provided by manufacturers with respect to most of these products. These cash incentives minimize our need to reduce prices for these models, as our customers are provided with cash reimbursement directly from the manufacturers. Similarly, we are able to use the cash incentives provided on our carryover products to promote new models, as the incentives generate greater showroom traffic. Seasonality Our two main products - motorcycles and all terrain vehicles ("ATVs") are subject to seasonality. Traditionally, the motorcycle season begins in late February or early March and runs until September. In September/October, the sale of ATVs increases while motorcycle sales decrease. Impact of Inflation. General inflation in the economy has driven the operating expenses of many businesses higher, and, accordingly we have experienced increased salaries and higher prices for supplies, goods and services. We continuously seek methods of reducing costs and streamlining operations while maximizing efficiency through improved internal operating procedures and controls. While we are subject to inflation as described above, our management believes that inflation currently does not have a material effect on our operating results, but there can be no assurance that this will continue to be so in the future. Critical Accounting Policy and Estimates. Our Management's Discussion and Analysis of Financial Condition and Results of Operations section discusses our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America, as promulgated by the PCAOB. The preparation of these consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. On an on-going basis, management evaluates its estimates and judgments, including those related to revenue recognition, fixed assets, inventory, accounts receivable, accrued expenses, financing operations, and contingencies and litigation. Management bases its estimates and judgments on historical experience and on various other factors that are believed reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. Set forth below are the policies that we have identified as critical to our business operations and the understanding of our results of operations or that involve significant estimates. For detailed discussion of other significant accounting policies see Note A, Summary of Significant Accounting Policies, of Notes to Consolidated Financial Statements, contained elsewhere in this report. 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. 24 We estimate the depreciable lives of our property and equipment, including any leasehold improvements, and review them on an on-going basis. The Company believes that the long-lived assets are appropriately valued. However, the assumptions and estimates used may change, and the Company may be required to record impairment to reduce the carrying value of these assets. Revenue Recognition: Vehicle Sales - The Company records revenue when vehicles are delivered and title has passed to the customer, when vehicle service or repair work is performed and when parts are delivered. Sales promotions that are offered to customers are accounted for as a reduction to the sales price at the time of sale. Incentives, rebates and holdbacks offered by manufacturers directly to the Company are recognized at the time of sale if they are vehicle specific, or as earned in accordance with the manufacturer program rules and are recorded as a reduction of cost of merchandise sold. Revenue Recognition: Finance, Insurance and Extended Service Revenues - The Company arranges financing for customers through various financial institutions and receives a commission from the lender equal to the difference between the interest rates charged to customers and the interest rates set by the financing institution. The Company also receives commissions from the sale of various third party insurance products to customers and extended service contracts. These commissions are recorded as revenue at the time the customer enters into the contract. The Company is not the obligor under any of these contracts. In the case of finance contracts, a customer may prepay or fail to pay their contract, thereby terminating the contract. Customers may also terminate extended service contracts, which are fully paid at purchase, and become eligible for refunds of unused premiums. In these circumstances, a portion of the commissions the Company receives may be charged back based on the relevant terms of the contracts. The revenue the Company records relating to commissions is net of an estimate of the ultimate amount of chargebacks the Company will be required to pay. Such estimates of chargeback experience are based on our historical chargeback expense arising from similar contracts. The Company also acts as the warrantor on certain extended service contracts and defers the revenue and recognizes it over the life of the contract on a straight-line basis. Off-Balance Sheet Arrangements. We have no off-balance sheet arrangements. 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 1-3 years 3-5 years More than 5 year years --------- ------- --------- --------- --------- Long-Term Debt Obligations $1,659,793 $708,320 $ 951,473 -- -- Capital (Finance) Lease Obligations $7,708,582 $156,367 $1,997,671 $2,052,717 $3,501,827 Operating Lease Obligations -- -- -- -- -- Purchase Obligations As Needed Other Long-Term Liabilities Reflected on the Company's Balance Sheet under the GAAP of the primary financial -- -- -- -- -- statements Total $9,368,375 $864,687 $2,949,144 $2,052,717 $3,501,827 25 Item 3 Quantitative and Qualitative Disclosure about Market Risk The Company is exposed to market risk in the ordinary course of its business. These risks are primarily related to changes in short-term interest rates. The potential impact of the Company's exposure to these risks is presented below: Interest Rates Floor Plan Financing We purchase new and used vehicle inventory by utilizing floor plan financing provided by lending institutions, as well as manufacturers of certain of the products we sell, including Kawasaki Motor Finance Company and America Honda Finance. We had outstanding indebtedness under floor plan notes of $23,799,965 and $17,788,706, at March 31, 2005 and December 31, 2004, respectively. Interest rates in connection with our floor plan financing generally fluctuate based on the prime rate, the type of product being financed and the length of time that such product remains on the floor plan. During the first three months of 2005, interest rates on our floor plan financing ranged from a low of 5.64% to a high of 10.9%. Since we are dependent to a significant extent on our ability to finance the purchase of inventory, increases in the prime rate of interest could have a significant negative impact on our income from operations, as a result of the greater interest we will be required to pay with respect to our floor plan financing. While increases in the prime rate did not have a significant impact on our floor plan financing in 2004 and during the first three months of 2005, continued increases would, in all likelihood, result in a reduction in our income from operations during the remainder of 2005 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 rate at March 31, 2005 of 5.75%. Line of Credit We also have an existing revolving credit line with Fifth Third Bancorp, the interest rate of which also fluctuates with the prime rate, at prime plus one percent. Since the aggregate outstanding indebtedness of this line of credit was $250,000 at both March 31, 2005 and December 31, 2004, we do not believe that fluctuations in the prime rate, with respect to this credit line 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. 26 Item 4. Controls and Procedures Our management evaluated, with the participation of our principal executive officer and principal financial officer, the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report (March 31, 2005). Based on this evaluation, our principal executive officer and our principal financial officer have concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were effective. Disclosure controls and procedures mean our controls and other procedures that are designed to ensure that information required to be disclosed by us in our reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in our reports that we file or submit under the Securities Exchange Act of 1934 is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure. There have been no changes in our internal control over financial reporting that occurred during the quarter ended March 31, 2005 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. 27 PART II OTHER INFORMATION Item 1. Legal Proceedings Not applicable. Item 2. Unregistered Sales of Equity Securities and Use of Proceeds Not applicable. Item 3. Defaults Upon Senior Securities. Not applicable. Item 4. Submission of Matters to a Vote of Security Holders Not applicable. Item 5. Other Information None Item 6. Exhibits (a) Exhibits (filed herewith) 31.1 Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Rule 13a-14(a)). 31.2 Certification of the Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Rule 13a-14(a)). 32.1 Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Rule 13a-14(b)). 32.2 Certification of the Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Rule 13a-14(b)). 28 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: January 23, 2006 By: /s/ Russell A. Haehn -------------------------------------- Name: Russell A. Haehn Title: Chairman of the Board of Directors, Chief Executive Officer and Secretary (Principal Executive Officer) Date: January 23, 2006 By: /s/ Gregory A. Haehn -------------------------------------- Name Gregory A. Haehn Title: President, Chief Operating Officer, Treasurer and a Director (Principal Financial and Accounting Officer) 29