U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

x Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the fiscal year ended December 31, 2006

OR

o Transition Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934

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 incorporation or organization)
 
(IRS Employer Identification No.)
     
 
13134 Route 62
 
Salem, Ohio 
 
 44460
(Address of principal executive offices)
 
(Zip Code)
 
 
 
(440) 332-8534
(Registrant's Telephone Number, Including Area Code)

Securities registered pursuant to Section 12(b) of the Exchange Act: None
 
Securities registered pursuant to Section 12(g) of the Exchange Act:

Common Stock, .001 par value per share
(Title of Class)

Series A Warrants to purchase shares of Common Stock, at an exercise price of $.50 per share
(Title of Class)

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes o No x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
 Yes o No x

Indicate by check mark whether registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes x No o

Indicate by check mark if disclosure of delinquent filers in response to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendments to this Form 10-K.
Yes o No x
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one)

Large accelerated filer o Accelerated filer o Non-accelerated filer x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act)
Yes o No x

The aggregate market value of the common equity of the registrant held by non-affiliates as of April 12, 2007 was approximately $944,025 as computed by reference to the closing price of the common stock on the Over-the-Counter Bulletin Board on such date ($0.20). As of April 12, 2007, the number of issued and outstanding shares of common stock of the registrant was 12,213,126.


 
GIANT MOTORSPORTS, INC.

FORM 10-K

FISCAL YEAR ENDED DECEMBER 31, 2006


Item Number in
Form 10-K
Page
 
PART I
 
1
Business
 1
1A.
Risk Factors
8
1B.
Unresolved Staff Comments
15
2.
Properties
15
3.
Legal Proceedings
15
4.
Submission of Matters to a Vote of Security Holders
 
 
PART II
 
5.
Market for Registrant's Common Equity and Related Stockholder Matters and Issuer Purchases of Equity Securities
16
6.
Selected Financial Data
19
7.
Management's Discussion and Analysis of Financial Condition and Results of  Operation
20
7A.
Quantitative and Qualitative Disclosure About Market Risk
31
8.
Financial Statements and Supplementary Data
 32
9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
32
9A.
Controls and Procedures
32
9B.
Other Information
33
 
PART III
 
10.
Directors and Executive Officers of the Registrant
34
11.
Executive Compensation
36
12.
Security Ownership of Certain Beneficial Owners and Management
37
13.
Certain Relationships and Related Transactions
38
14.
Principal Accountant Fees and Services
39
 
PART IV
 
15.
Exhibits, Financial Statement Schedules
40
 
THIS ANNUAL REPORT ON FORM 10-K CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933, AS AMENDED AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934 AS AMENDED AND ARE SUBJECT TO RISKS, UNCERTAINTIES, AND OTHER FACTORS WHICH COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE EXPRESSED OR IMPLIED BY SUCH FORWARD-LOOKING STATEMENTS. SEE ITEM 1. "BUSINESS - A NOTE ABOUT FORWARD LOOKING STATEMENTS."
 
i

 
PART I
ITEM 1.  BUSINESS 

General

Giant Motorsports, Inc. (“us,” “our,” “we,” the “Company” or “Giant”) through our two wholly-owned subsidiaries, owns and operates two retail power sport superstores in the Midwestern United States. Our core brands include Suzuki, Yamaha, Honda, Ducati, Kawasaki and Polaris. Our superstores operate in Salem, Ohio and Chicago, Illinois under the names “Andrews Cycles” and “Chicago Cycles,” respectively.

We are a Nevada corporation with our principal offices located at 13134 State Route 62, Salem Ohio 44460, Tel. (330) 332-8534. Our web sites are: www.andrewscycles.com, www.chicagocycle.com and www.giantcorporate.com. Information on our websites do not constitute part of this report.

Development of Our Business

We commenced our motorcycle and powers sports business with the acquisition of our W.W. Cycles subsidiary in January 2004, and shortly thereafter, in April 2004, expanded our business with the acquisition of our Chicago Cycles business.

W.W. Cycles Subsidiary

Our W.W. Cycles subsidiary, which does business under the name Andrews Cycles, commenced business in 1984 as a Honda products dealership. In 1985 Andrews Cycles acquired an existing motorsports dealership and added Yamaha products to its line of motorsports products. Through the acquisition of two additional motorsports dealerships in 1986 and 1987, Andrews Cycles added the Suzuki and Kawasaki brands to its line of motorsports products. From 1987 through January 2004, Andrews Cycles expanded its power sports business by adding Polaris motorcycles to its product line.

On January 16, 2004, we acquired all of the issued and outstanding shares of W.W. Cycles, Inc. (“W.W. Cycles”), from Gregory A. Haehn and Russell A. Haehn, our current officers and directors, and one other employee of W.W. Cycles, in exchange for our issuance of an aggregate of 7,850,000 shares of our common stock, which resulted in W.W. Cycles' becoming our wholly-owned subsidiary. On that same date, our two current officers and directors also purchased an additional 150,000 shares of our common stock from a then shareholder of the Company for an aggregate purchase price of $178,750. Simultaneously with the closing of this acquisition, the then sole director and officer of the Company resigned as a director and officer and was replaced by our current officers and directors. Russell A. Haehn became the Chairman, Chief Executive Officer, Secretary and a Director of the Company and Gregory A. Haehn became the President, Chief Operating Officer, Treasurer and a Director of the Company, which are the same positions in which they currently serve. The Company, which was then called American Busing Corporation, changed its name to Giant Motorsports, Inc., effective as of April 5, 2004. We currently conduct all of our “Andrews Cycles” business through our W.W. Cycles subsidiary.

Chicago Cycles Subsidiary

On April 30, 2004, we acquired substantially all of the assets of King's Motorsports, Inc. (the “Chicago Cycles Assets”), the corporate entity that conducted business under the name Chicago Cycle Center ("King's Motorsports"). We agreed to pay Kings Motorsports a total of $2,925,000 for the Chicago Cycle Assets, as follows:

1

 
·
$1,250,000 on the date of closing; and
 
·
$1,675,000 through the issuance to Kings Motorsports of a 6% $1,675,000 aggregate principal amount note (the "King's Note").

To fund the amount payable at closing for Chicago Cycles, we borrowed $1,250,000 from The Fifth Third Bancorp Bank (the "Bank"), pursuant to a term loan. This loan, which initially matured on May 31, 2004, was refinanced with the Bank through a term loan amortized over a 72 month period, but is payable in full on May 31, 2007, bearing interest at the rate of prime plus one percent (8% at December 31, 2005). Our payment obligations under this term loan also are personally guaranteed by Russell Haehn and Gregory Haehn. This loan is also secured by a first priority lien on all of our assets (including, without limitation, the Chicago Cycles Assets). As of December 31, 2006, the outstanding amount of this term loan, including accrued interest thereon, was $781,280.

The entire outstanding principal amount of the King's Note and all interest accrued thereon was repaid on October 13, 2005.

Our Chicago Cycles subsidiary commenced business in 1988, under the name Chicago Cycle Center, with its purchase of Ace Honda World. Within its first few months after commencing business Chicago Cycle Center began selling Yamaha motorcycles with its purchase of Yamaha North, a nearby competitor. Shortly thereafter, Can't Beat the Bears, a local Suzuki dealer was acquired. Then in 1990 Chicago Cycle Center added the Ducati brand to its list of products. In November 2000, Chicago Cycle Center was sold to King's Motorsports, the business whose assets we acquired in April 2004.

Products

Our products consist primarily of the sale of new and used motorcycles, all-terrain vehicles ("ATV's"), and scooters. In addition, we sell parts and accessories, extended service contracts, and aftermarket motorcycle products. Our core brands include Honda, Yamaha, Suzuki, Kawasaki, Polaris and Ducati.

We are a retail dealer of power sports products, and sell our products in superstores that operate under the names “Andrews Cycles” and “Chicago Cycles.” Our Andrews Cycles subsidiary is located in Salem, Ohio, had approximately 55 employees, as of April 1, 2007, and sells power sports products to customers residing within an approximate 200 square mile area of its facilities. Our Chicago Cycles operations are located in Skokie, Illinois, has approximately 80 employees as of April 1, 2007, and sells power sports products to customers residing within an approximate 200 square mile area of its facilities. Both Andrews Cycles and Chicago Cycles also sell power sports products and parts through our websites specifically dedicated to those businesses.

During our fiscal years ended December 31, 2006, 2005 and 2004, sales of motorcycles, ATV's and other power sports products, including accessories, accounted for approximately 97%, 97% and 97%, respectively, of our total revenues generated during such periods.
 
Servicing and Repairs

In addition to product sales, we also provide servicing and repair services for the products we sell as a courtesy to our customers. These services, which are provided by mechanics, include crash repairs (body work) and normal wear and tear installation and repairs such as brake replacement, repair of exhaust systems, shock absorber replacement, battery replacement, oil changes and tune-ups. During our fiscal years ended December 31, 2006, 2005 and 2004, servicing and repairs accounted for approximately 2.3%, 3% and 3%, respectively, of our total revenues generated during such periods. Servicing and repairs have always been an insignificant portion of our business. We do not have any plans to increase this part of our business, in the future, as we do not believe that servicing and repairs offers any opportunity for producing significant income for our business.

2

 
Competition

The motorcycle/power sports retailing industry is highly competitive with respect to price, service, location and selection. There are an estimated 4,000 retail stores throughout the United States. We compete with numerous dealerships in each of our market segments, many of which are large and have significant financial and marketing resources. We also compete with private market buyers and sellers of used motorcycles and other power sports products dealers that sell used motorcycles and other power sports products, service center chains and independent shops for service and repair business. Some of these businesses are capable of operating on smaller gross margins than those on which we are capable of operating because they have lower overhead and sales costs.

In many states, dealerships have an exclusive 5 to 10-mile franchised territory, similar to automobile dealerships. While franchised territories can sometimes restrict market entry and subsequently market penetration; franchise restrictions can likewise provide protection from over-saturation.

While we believe that our two current locations are among the larger retail dealerships in the states of Ohio and Illinois, our business represents only a small portion of the retail motorcycle, ATV and other power sports products sales throughout the United States. By implementing our superstore concept through further acquisitions of retail power sports dealerships throughout the United States, we believe that we can provide consumers in acquired markets with wide product diversification. Such diversification, as well as a comprehensive product offering, could result in an increase in our portion of total power sports retail business throughout the United States, and consequently reduce the impact of local competition on our business. There is no assurance that we will ever be able to implement this strategy in such a manner.

Principal Suppliers of our Products

We purchase substantially all of our products from the following manufacturers:

·
American Honda Motor Company, Inc.

·
Yamaha Motor Corporation

·
American Suzuki Motor Corporation

·
Kawasaki Motors Corp. U.S.A., Inc.
 
·
Ducati North America

·
Polaris Industries, Inc.

Our Andrews Cycles and Chicago Cycles power sports dealerships operate pursuant to dealership agreements with all or most of the manufacturers listed above (or authorized distributors of such manufacturers' products), and we are dependent to a significant extent on our relationship with such manufacturers.

Manufacturers exercise a great degree of control over our dealerships, and the dealership agreements provide for termination or non-renewal for a variety of causes. Many of our dealership agreements require prior approval with respect to acquisitions of other motorcycle and/or power sports dealerships, and a manufacturer may deny our application to make an acquisition or seek to impose further restrictions on us as a condition to granting approval of an acquisition. While these restrictions could adversely affect our business strategy of expanding our operations through the acquisition of other retail dealerships, we believe that we will be able to work with these manufacturers to obtain the approvals required for future acquisitions, although there can be no assurance of our success in doing so.

3

 
Market for our Products and Services

According to the Motorcycle Industry Council, an organization that provides sales information for the motorcycle industry, sales of motorcycles in the United States in 2006 modestly increased to 1,022,332 units (including scooters, street bikes, off-road bikes and dual sport vehicles (vehicles used both on and off streets). This was slightly higher than the 1,009,588 units sold in the United States in 2005, representing a 1.3% increase. These statistics generally cover sales of the major U.S. and Japanese brands. Although there was a modest increase in sales in 2006, most of this was attributable to a 19.0% increase in dual sport vehicles. Sales of on-road motorcycles increased only 5.4% and sales of off-road motorcycles decreased 9.0% in 2006 compared to 2005. In addition, sales of ATV’s in 2006 decreased 4.2% in 2006 compared to 2005. This 1.3% increase in industry sales for 2006 reflects a significant downturn in the market compared to a prior report by the Bureau of Transportation Statistics that stated that during 2004 industry sales of motorcycles, parts and accessories generated revenues of approximately $12.7 billion, representing an increase of approximately 15.5% over revenues of approximately $11 billion in 2003.
 
We believe that our 4.6% reduction in sales during 2006 as compared to 2005 was attributable, in part, to the reduction in ATV sales in 2006, as sales of ATV's represented approximately 50% of overall unit sales at our Andrew Cycles location and approximately 20% of unit sales at Chicago Cycles.
 
The industry is highly fragmented with over 9,000 franchises being operated within approximately 4,000 motorcycle dealerships, the majority of which we believe are individually owned. We also believe that many dealership owners are motorcycle enthusiasts with minimal business training and limited capital.

Business Plan

It is our plan to maximize the operating and financial performance of our dealerships by achieving certain efficiencies both at the store and corporate levels. We believe this will enhance internal growth and profitability. We have begun, and plan to continue to centralize certain of our administrative functions including:

·
accounting;
 
·
finance;

·
insurance;

·
employee benefits;

·
strategic planning;
 
·
marketing;

·
purchasing; and

·
Management information systems (MIS).
 
4


 
We believe that by consolidating these functions we will be able to reduce overall expenses, simplify dealership management, create economies of scale with leveraged buying power and provide a level of expertise that would otherwise be unavailable to each dealership individually. We have identified, without limitation, the following strategic components as potentially integral to our overall success and profitability:

·
Super Store Concept. The "Super Store" has proven to be an effective strategy in the successful consolidation of many other retail industries. Super Stores are the choice of consumers nationwide. These large stores represent and imply the widest offerings, the lowest prices, and, we believe, will contribute to the development of a more mainstream motorsports marketplace.

·
Sales and Service Effectiveness. Consumers have become more sophisticated in evaluating and purchasing products, as a result of the wide-spread availability of the internet and greater access to information, and, as a result, require a more comprehensive offering, as well as intelligent and informative presentations. Our superstore selling space provides a larger display of products, with a greater choice of brands and styles. We believe that a greater choice of products, under one roof, will lead to a more satisfying shopping experience for customers and, in turn, increased product sales.

·
Competitive Workforce Development. A significant portion of the compensation we pay to our sales staff is commission based. We believe that commission-based compensation provides incentive for our salespersons to expend their greatest efforts to sell our products and services. Since their compensation is directly related to sales, our ability to hire successful salespersons is conditioned upon their belief that our dealerships will generate significant traffic and provide the inventory levels necessary to maximize sales opportunities. Our goal to build a “market leader” presence, proper inventory levels and an overall aggressive yet tactful approach, we believe, will attract the successful salespersons we need to sell our products and services.

·
Inventory Utilization. We believe that by housing our inventory in one large central facility, and distributing products from that facility to each of our dealerships, on an as-needed basis, we will be able to deliver products to our customers faster than other dealerships which are required to wait, for delivery of out-of-stock products.

·
Marketing Efficiencies. With a regional presence, and the use of single creative themes, tested for effectiveness, we believe that we will be able to take advantage of semi-national and possibly national marketing opportunities which typically offer reduced advertising rates based on the utilization of economies of scale. We also plan to maximize our use of cooperative advertising.

·
E-Commerce and Mail Order Opportunities. We intend to develop e-commerce and mail order strategies for the sale of parts and accessories that will expand our customer base outside of our dealership territories. We believe that the expansion of our business, over the internet and through mail order business, will assist us in the development of a national presence and create customer interest to visit one of our “Super Stores,” although no assurance can be given that it will have such effect. We believe that increased efforts on internet and mail-order sales, will increase revenues and also create additional opportunities for strategic business relationships with dealerships outside of the territories where our dealerships are located, although no assurance can be given.

5


Sales and Marketing

We currently market our products through television, radio, print and outdoor advertising. Advertising costs are funded primarily through cooperative advertising programs established by the manufacturers of the products. Under these programs, most dealers have access to approximately $100 per unit sold during the previous year. In addition, many of the larger and better performing dealership groups are able to access additional advertising funds for special circumstances from the manufacturers. It is our normal strategy to acquire and use the maximum amount of advertising funds available to us.

Floor Plan Financing

We are dependent to a significant extent on our ability to finance the purchase of inventory, which in the motorcycle and power sports retail industries involves significant sums of money in the form of floor plan financing. As of December 31, 2006, the Company had $20,885,887 of floor plan notes payable. Substantially all the assets of our dealerships are pledged to secure such indebtedness, which may impede our ability to borrow from other sources. We currently have floor plan facilities with a variety of lenders, including primarily GE Commercial Distribution Finance Corporation, Fifth Third Bank, Kawasaki Motors Finance Company, and American Honda Finance. Several of such lenders are associated with manufacturers with whom we have dealership agreements. Consequently, deterioration of our relationship with a manufacturer could adversely affect our relationship with the affiliated floor plan lender and vice versa.

Government Regulation

Our business is subject to federal, state and local laws, ordinances and regulations which establish various health and environmental quality standards, and liability related thereto, and provide penalties for violations of those standards. Under certain laws and regulations, a current or previous owner or operator of real property may be liable for the costs of removal and remediation of hazardous or toxic substances or wastes on, under, in or emanating from such property. Such laws typically impose liability whether or not the owner or operator knew of, or was responsible for, the presence of such hazardous or toxic substances or wastes. Certain laws, ordinances and regulations may impose liability on an owner or operator of real property where on-site contamination discharges into waters of the state, including groundwater. Under certain other laws, generators of hazardous or toxic substances or wastes that send such substances or wastes to disposal, recycling or treatment facilities may be liable for remediation of contamination at such facilities. Other laws, ordinances and regulations govern the generation, handling, storage, transportation and disposal of hazardous and toxic substances or wastes, the operation and removal of underground storage tanks, the discharge of pollutants into surface waters and sewers, emissions of certain potentially harmful substances into the air and employee health and safety.

Business operations subject to such laws, ordinances and regulations include the use, handling and contracting for recycling or disposal of hazardous or toxic substances or wastes, including environmentally sensitive materials such as motor oil, waste motor oil and filters, transmission fluid, antifreeze, refrigerants, waste paint and lacquer thinner, batteries, solvents, lubricants, degreasing agents, gasoline and diesel fuels. Our business is also subject to other laws, ordinances and regulations as the result of the past or present existence of underground storage tanks at our properties. Certain laws and regulations, including those governing air emissions and underground storage tanks, have been amended so as to require compliance with new or more stringent standards as of future dates. We cannot predict what other environmental legislation or regulations will be enacted in the future, how existing or future laws or regulations will be administered or interpreted or what environmental conditions may be found to exist in the future. Compliance with new or more stringent laws or regulations, stricter interpretation of existing laws or the future discovery of environmental conditions may require additional expenditures on our part, some of which may be material.
 
6


Employees

As of April 1, 2007, we had approximately 134 employees (excluding our two executive officers), 54 of whom are employed at our Andrews Cycles dealership and the other 80 of whom are employed at our Chicago Cycles dealership. All of our employees were employed on a full-time basis including 2 executives, 82 salespersons, six administrative persons, 26 service technicians and 20 clerical persons. We are not a party to a collective bargaining agreement with our employees and we believe that our relationship with our employees is satisfactory.

Properties

Our principal executive offices are located at our recently expanded 75,000 square foot facility at 13134 State Route 62, Salem Ohio 44460, which is also the offices and showroom for our Andrews Cycles dealership. We lease this facility from an affiliated entity controlled by Russell A. Haehn, our Chairman, Chief Executive Officer and a controlling shareholder. On October 1, 2006 we entered into a new lease for this facility, effective as of January 1, 2007 and continuing through December 2016, at a rental rate of $24,000 per month. The lease provides for two consecutive five-year renewal terms at a rental rate to be negotiated.
 
We also lease a 95,000 square foot retail facility in Skokie, Illinois, which is used for offices, a showroom and service facility for our Chicago Cycles dealership. We lease this facility from an unaffiliated third party under a ten-year lease with a ten year renewal option. The payments on the lease commenced in August 2005 at a monthly rent of $33,333 through May 2006 then increase to $40,000 per month from June 2006 through May 2007, $45,000 per month from June 2007 through May 2008, $46,667 from June 2008 through May 2009 and then increase 3% annually for the remaining term of the lease. We are also liable for a proportionate share of expenses and taxes over a specified amount.

7


A NOTE ABOUT FORWARD-LOOKING STATEMENTS

This Annual Report on Form 10-K (including the Exhibits hereto) contains certain “forward-looking statements” within the meaning of the of Section 27A of the Securities Act of 1933, Section 21E of the Securities Exchange Act of 1934, and the Private Securities Litigation Reform Act of 1995, such as statements relating to our financial condition, results of operations, plans, objectives, future performance and business operations. Such statements relate to expectations concerning matters that are not historical fact. Accordingly, statements that are based on management's projections, estimates, assumptions and judgments are forward-looking statements. These forward-looking statements are typically identified by words or phrases such as “believe,” “expect,” “anticipate,” “plan,” “estimate,” “approximately,” “intend,” and other similar words and expressions, or future or conditional verbs such as “should,” “would,” “could,” and “may.” In addition, we may from time to time make such written or oral “forward-looking statements” in future filings with the Securities and Exchange Commission (the “Commission” or “SEC”) (including exhibits thereto), in our reports to shareholders, and in other communications made by or with our approval. These forward-looking statements are based largely on our current expectations, assumptions, plans, estimates, judgments and projections about our business and our industry, and they involve inherent risks and uncertainties. Although we believe that these forward-looking statements are based upon reasonable estimates and assumptions, we can give no assurance that our expectations will in fact occur or that our estimates or assumptions will be correct, and we caution that actual results may differ materially and adversely from those in the forward-looking statements. Forward-looking statements involve known and unknown risks, uncertainties, contingencies and other factors that could cause our or our industry's actual results, level of activity, performance or achievement to differ materially from those discussed in or implied by any forward-looking statements made by or on behalf of us and could cause our financial condition, results of operations or cash flows to be materially adversely effected. Accordingly, investors and all others are cautioned not to place undue reliance on such forward-looking statements. In evaluating these statements, some of the factors that you should consider include those described below under "Risk Factors" and elsewhere in this annual report.

ITEM1.A.

You should carefully review and consider the following risks as well as all other information contained in this Annual Report on Form 10-K, including our consolidated financial statements and the notes to those statements. The following risks and uncertainties are not the only ones facing us. Additional risks and uncertainties of which we are currently unaware or which we believe are not material also could materially adversely affect our business, financial condition, results of operations, or cash flows. In any case, the value of our common stock could decline. To the extent any of the information contained in this annual report constitutes forward-looking information, the risk factors set forth below are cautionary statements identifying important factors that could cause our actual results for various financial reporting periods to differ materially from those expressed in any forward-looking statements made by or on our behalf and could materially adversely effect our financial condition, results of operations or cash flows. See also, “A Note About Forward-Looking Statements.”

RISKS RELATED TO OUR BUSINESS

Our business is subject to the influence of the manufacturers of motorcycles and the other power sports equipment we sell.

Each of our retail motorcycle and power sports dealerships operates pursuant to dealership agreements between each applicable motorcycle, all terrain vehicle, scooter and personal watercraft manufacturer (or authorized distributor thereof) and the subsidiaries of the Company that operate such dealerships, and we are dependent to a significant extent on our relationship with such manufacturers. Manufacturers exercise a great degree of control over dealerships, and the dealership agreements provide for termination or non-renewal for a variety of causes. Actions taken by manufacturers to exploit their superior bargaining position could have a material adverse effect on our business. Furthermore, many of our dealership agreements require prior manufacturer approval with respect to acquisitions of other motorcycle and/or power sports dealerships, and a manufacturer may deny our application to make an acquisition or seek to impose further restrictions on us as a condition to granting approval of an acquisition.

8

 
We are dependent on the Manufacturers of the products we sell.

The success of each of our dealerships is, in large part, dependent upon the overall success of the applicable manufacturers of our motorcycles and other power sports products. Accordingly, our success is linked to the financial condition, management, marketing, production and distribution capabilities of these manufacturers. Events, such as labor strikes, that may adversely affect a manufacturer, may also adversely affect our business. Similarly, the delivery of motorcycles or other power sports products from manufacturers later than scheduled, which may occur particularly during periods of new product introductions, can lead to reduced sales during such periods. Furthermore, any event that causes adverse publicity involving these manufacturers may have an adverse effect on our business regardless of whether such event directly involves any of our dealerships.

Risks associated with our ability to manage expansion as a result of acquisitions.

The growth of our business depends in large part on our ability to manage expansion, control costs in our operations and consolidate dealership acquisitions into existing operations. This strategy will entail reviewing and potentially reorganizing acquired dealership operations, corporate infrastructure and systems and financial controls. Unforeseen expenses, difficulties, complications and delays frequently encountered in connection with the rapid expansion of operations could inhibit our growth and adversely affect our financial condition, results of operations or cash flow.
 
Risks associated with our inability to identify suitable acquisition candidates.

There can be no assurance that we will be able to identify acquisition candidates that would result in the most successful combinations or that we will be able to consummate acquisitions on acceptable terms. The magnitude, timing and nature of future acquisitions will depend upon various factors, including the availability of suitable acquisition candidates, the negotiation of acceptable terms, our financial capabilities, the availability of skilled employees to manage the acquired companies and general economic and business conditions. In particular, the increasing competition among potential acquirers has resulted in higher prices being paid for attractive targets. If we are unable to acquire other motorcycle and power sports dealerships on acceptable terms we would be unable to realize our business plan which could adversely affect our future business prospects.

We may not be able to obtain required approvals from manufacturers for prospective acquisitions.

The growth of our business through the acquisition of other motorcycle and power sports dealerships will depend on our ability to obtain the requisite manufacturer approvals. There can be no assurance that manufacturers will grant such approvals. While we are not aware of any manufacturers that limit the number of dealerships that may be held by any one company, or the number of dealerships that may be held in any geographic market, we believe that it is currently the policy of some manufacturers to restrict any company from holding contiguous dealerships (i.e. ownership of two dealerships without the existence of an unaffiliated dealership located geographically in between such two dealerships). We believe that our Andrews Cycles and Chicago Cycles distributorships currently are two of the largest volume dealers of power sports products in the Midwestern United States. If we continue to increase our market share for the sales of such products, manufacturers may become more likely to enforce these contiguous ownership restrictions against us. If we are unable to obtain any such required approvals from manufacturers, it could be difficult for us to realize our business plan which could adversely affect our future business prospects.

9

 
Manufacturers may impose additional restrictions on our business as a condition of granting approvals for any of our proposed acquisitions.

In connection with any future acquisitions, one or more manufacturers may seek to impose further restrictions on us relating to their approval of an acquisition. For example, manufacturers may condition such approvals upon our agreement to implement certain measures at our existing dealerships, to provide certain additional training to employees and to achieve higher customer satisfaction ratings. If such goals are not attained, we may be precluded from acquiring, whether directly from such manufacturers or through acquisitions, additional dealerships, and it may lead such manufacturers to conclude that they have a basis pursuant to which they may seek to terminate or refuse to renew our existing dealerships with those manufacturers. Furthermore, factors outside our control may cause a manufacturer to reject our application to make acquisitions. Any of these actions by manufacturers could adversely affect our financial condition, results of operations or cash flows.

We may be unable to obtain financing for the acquisitions that are available to us.

Although we do not currently have any plans to raise additional financing through the sale of any of our securities, we may, in the future, attempt to obtain financing for acquisition opportunities through a combination of loans and equity investments from commercial sources, seller debt financing, issuance of our equity securities as part of the purchase price, and other sources. Commercial sources will tend to come from investment funds, private equity funds, and other non-traditional sources, usually at a very high borrowing cost. Use of our equity securities could result in material dilution to our existing shareholders. There can be no assurance that we will be able to obtain adequate financing for any acquisition, or that, if available, such financing will be on favorable terms.
 
Dependence on Floor Plan Financing.

We are dependent to a significant extent on our ability to finance the purchase of inventory, which in the motorcycle and power sports retail industries involves significant sums of money in the form of floor plan financing. As of December 31, 2006, we had $20,885,887 of floor plan notes payable. Substantially all the assets of our dealerships are pledged to secure such indebtedness, which may impede our ability to borrow from other sources. We currently have floor plan facilities with a variety of lenders, including primarily GE Commercial Distribution Finance Corporation, Fifth Third Bank, Kawasaki Motors Finance Company, and American Honda Finance. Several of such lenders are associated with manufacturers with whom we have dealership agreements. Consequently, deterioration of our relationship with a manufacturer could adversely affect our relationship with the affiliated floor plan lender and vice versa.

We have substantial outstanding indebtedness.

As of December 31, 2006, based upon our financial statements, our outstanding indebtedness to third parties, including the $20,885,887 of floor plan notes payable under our floor plan financing arrangements was approximately $25,429,389. As of December 31, 2006 approximately $781,280 of our outstanding indebtedness to third parties was represented by debt incurred by us, in connection with the acquisition of Chicago Cycles, which reflected the remaining outstanding amount of the $1,250,000 we borrowed from the Fifth Third Bank, pursuant to a Term Note dated March 12, 2004, to fund the initial $1,250,000 payment for such acquisition. The original loan from Fifth Third Bank matured on May 31, 2004, and we converted the entire $1,250,000 principal amount of this loan to a six (6) year term loan, which bears interest at the rate of prime plus one percent (9.25% at December 31, 2006) and is secured by a first priority lien on all of our assets, including the assets acquired from Chicago Cycles.
 
10


The motorcycle and power sports industries are subject to cyclical movements in the economy.

Sales of motorcycles/power sports products, historically have been cyclical, fluctuating with general economic cycles. During economic downturns, this industry tends to experience similar periods of decline and recession as the general economy. We believe that the industry is influenced by general economic conditions and particularly by consumer confidence, the level of personal discretionary spending, interest rates and credit availability. During 2006, the motorcycle industry experienced a significant downturn in sales as a result of increases in consumer financing interest rates and more restrictive credit requirements to obtain consumer financing, which resulted in a reduction in our sales. There can be no assurance that the industry will not experience sustained periods of decline in sales in the future, and that such decline would not continue to have a material adverse effect on our operations.

Our business experiences seasonal trends.

Our business is seasonal, with a disproportionate amount of our sales occurring in the second and third fiscal quarters. This is particularly the case, as our existing dealerships are in Chicago and Ohio, both of which experience extremely cold winter seasons. In the event that we acquire future dealerships in regions with more temperate climates all year round (e.g. Southern Florida or Southern California), those dealerships may experience less seasonality in sales, although there can be no assurances given that such dealerships would not experience similar seasonal fluctuations.
 
We are dependent on foreign manufacturers, particularly from Japan, for our products.

A significant portion of the motorcycle and other power sports products sold by us, as well as the components and accessories for these products are of foreign origin - primarily from Japan. Accordingly, we are subject to the import and export restrictions of various jurisdictions and are dependent to some extent upon general economic conditions in and political relations with these foreign countries, particularly Japan. In the event of a severe downturn in the Japanese economy or problems in political or economic relations between the U.S. and Japan, such as, for example, disputes relating to import duties, subsidies, etc., our business could be materially adversely affected.

The retail motorcycle/power sports business is highly competitive.

The motorcycle/power sports retailing industry is highly competitive with respect to price, service, location and selection. There are an estimated 4,000 retail stores throughout the United States. We compete with numerous dealerships in each of our market segments, many of which are large and have significant financial and marketing resources. We also compete with private market buyers and sellers of used motorcycles and other power sports products, dealers that sell used motorcycles and other power sports products, service center chains and independent shops for service and repair business. Some of these businesses are capable of operating on smaller gross margins than those on which we are capable of operating because they have lower overhead and sales costs. Our inability to compete with these other businesses could have a material adverse effect on our operations.

Our business is subject to environmental regulations.

Our business is subject to federal, state and local laws, ordinances and regulations which establish various health and environmental quality standards, and liability related thereto, and provide penalties for violations of those standards. Under certain laws and regulations, a current or previous owner or operator of real property may be liable for the costs of removal and remediation of hazardous or toxic substances or wastes on, under, in or emanating from such property. Such laws typically impose liability whether or not the owner or operator knew of, or was responsible for, the presence of such hazardous or toxic substances or wastes. Certain laws, ordinances and regulations may impose liability on an owner or operator of real property where on-site contamination discharges into waters of the state, including groundwater. Under certain other laws, generators of hazardous or toxic substances or wastes that send such substances or wastes to disposal, recycling or treatment facilities may be liable for remediation of contamination at such facilities. Other laws, ordinances and regulations govern the generation, handling, storage, transportation and disposal of hazardous and toxic substances or wastes, the operation and removal of underground storage tanks, the discharge of pollutants into surface waters and sewers, emissions of certain potentially harmful substances into the air and employee health and safety.

11

 
Business operations subject to such laws, ordinances and regulations include the use, handling and contracting for recycling or disposal of hazardous or toxic substances or wastes, including environmentally sensitive materials such as motor oil, waste motor oil and filters, transmission fluid, antifreeze, refrigerants, waste paint and lacquer thinner, batteries, solvents, lubricants, degreasing agents, gasoline and diesel fuels. Our business is also subject to other laws, ordinances and regulations as the result of the past or present existence of underground storage tanks at our properties. Certain laws and regulations, including those governing air emissions and underground storage tanks, have been amended so as to require compliance with new or more stringent standards as of future dates. We cannot predict what other environmental legislation or regulations will be enacted in the future, how existing or future laws or regulations will be administered or interpreted or what environmental conditions may be found to exist in the future. Compliance with new or more stringent laws or regulations, stricter interpretation of existing laws or the future discovery of environmental conditions may require additional expenditures on our part, some of which may be material.

We are heavily dependent on our management.

Our success depends to a large degree upon the skills of our senior management team and current key employees at our subsidiaries. The Company depends particularly upon the following key executives: Gregory A. Haehn, who is our President, Chief Operating Officer and a director, and Russell A. Haehn, who is our Chief Executive Officer and Chairman of the board of directors. In addition, we rely on the management skills of Philip A. Andrews, the general manager of our Andrews Cycles business conducted by our W.W. Cycles subsidiary in Salem, Ohio, and we also rely on Paul Katsiadas, the general manager of our Chicago Cycle business conducted by our Chicago Cycles, Inc. subsidiary in Chicago, Illinois.

We maintain Keyman life insurance on the life of Russell A. Haehn in an amount of $2,000,000, with the beneficiary being our W.W. Cycles subsidiary. In addition, we maintain Keyman life insurance on the life of Gregory A. Haehn in an amount of $1,000,000, with the beneficiary being the Company.

RISKS RELATED TO OUR SECURITIES

We do not expect to pay dividends.

Except for dividends that we are required to pay on our Series A Shares (which dividends may be paid in cash or shares of our common stock, in our sole discretion), we do not currently anticipate paying any cash dividends on any of our capital stock in the foreseeable future. Furthermore, for the foreseeable future, we intend to retain profits, if any, to fund our planned growth and expansion. In the event that we desire to pay dividends on any shares of our capital stock, in the future (other than on the Series A Shares), we are required to obtain the separate approval of the holders of the Series A Shares in order to declare and pay any such dividends. See "Risk Factors - Holders of our Series A Shares have special approval rights on certain matters requiring approval of our board of directors and/or shareholders."

Control by Management.

Subject to the requirement for us to obtain the separate approval of the holders of our Series A Shares, with respect to certain matters, our officers and directors may be able to influence matters requiring shareholders approval because they own a majority of our outstanding shares of voting stock. Our executive officers and directors beneficially own in the aggregate 9,020,000 shares of common stock (including options to purchase 1,500,000 shares of common stock at an exercise price of $1.25 per share), or approximately 65.8% of our outstanding shares of common stock. Because our Series A Shares are entitled to vote along with our common stock on all matters presented to our shareholders for approval, our executive officers and directors actually own approximately 48.5% of our outstanding shares of voting stock (giving effect to the voting rights of the 2450 Series A Shares outstanding at a rate of 2,000 votes for each such preferred share outstanding, and assuming exercise of all options held by such executive officers and directors). This concentration of ownership provides such persons with the ability, except with respect to those matters upon which the holders of the Series A Shares have a separate right of approval, to control and influence all corporate decisions and policies of shareholder voting matters, including, without limitation, the removal of directors. Additionally, except with respect to those matters upon which the holders of the Series A Shares have a separate right of approval, these persons would be able to approve any proposed amendment to our charter, a merger proposal, a proposed sale of assets or other major corporate transaction or a non-negotiated takeover attempt. This concentration of ownership may discourage a potential acquirer from making an offer to buy us, which, in turn, could adversely affect the market price of our common stock and warrants.

12

 
Holders of our Series A Shares have special approval rights on certain matters requiring approval of our board of directors and/or shareholders.

Under the provisions of our certificate of designation designating the rights, preferences and privileges of our Series A Shares, the vote or consent of the holders of at least a majority of our outstanding Series A Shares, voting separately as a class, is required for the approval of certain matters including (i) any alteration or repeal of our articles of incorporation or certificate of designation that adversely affects the rights, preferences or privileges of the Series A Shares, including to create, authorize or issue any series or shares of senior stock or parity stock or to increase the amount of authorized capital stock of any such class; (ii) the creation, authorization or issuance of any series or shares of capital stock convertible into common stock which is on parity with or senior to the Series A Shares in terms of liquidation, dividends or otherwise; (iii) any merger, consolidation or entering into a business combination or similar transaction, other than if (1) we are the surviving entity and (2) our shareholders prior to such transaction continue to hold a majority of our capital stock following the transaction; (iv) the incurrence or permission to exist any inventory or equipment indebtedness or liens relating thereto, except that we are permitted to borrow in connection with institutional financing of inventory and equipment and mortgage financing in connection with acquisitions of real estate; (v) (1) the declaration or payment of any dividends on any of our capital stock (other than the Series A Shares), (2) the purchase, redemption or retirement for value, of any of our capital stock (other than the Series A Shares) or (3) the distribution of our assets, capital stock, warrants, rights, options, indebtedness or obligations to our shareholders; (vi) the sale, transfer or disposal of a material portion of our assets, unless the sale is not of all or substantially all of our assets and is approved by a majority or our independent and disinterested directors; and (vii) entering into any transactions, or agreement or amending or modifying any existing agreement, with any officers, directors or our principal shareholders, or any of their affiliates, which transaction, agreement amendment or modification is not approved by a majority of our independent and disinterested directors.
 
As a result of the foregoing rights granted to the holders of the Series A Shares, as long as we have any Series A Shares outstanding, we will not be able to (i) effect certain financing through the issuance of securities on parity with or senior to the Series A Shares or (ii) enter into certain merger transactions with other businesses or conduct certain other transactions, without the approval of the holders of a majority of the outstanding Series A Shares. In the event that the interests of the holders of the Series A Shares are not aligned with the interests of our other shareholders, it is likely that the holders of the Series A Shares will act in their own best interests, which could be to the detriment of our other shareholders with respect to any matters for which their approval is required. In addition, these special approval rights may discourage a potential acquiror from making an offer to buy us, which, in turn, could adversely affect the market price of our common stock and warrants.

13

 
Trading in our common stock is limited and the price of our common stock may be subject to substantial volatility.

Our common stock is traded on the Over the Counter Bulletin Board, and therefore the trading volume is more limited and sporadic than if our common stock were traded on NASDAQ or a national stock exchange such as Amex. Additionally, the price of our common stock may be volatile as a result of a number of factors, including, but not limited to, the following:

·
quarterly variations in our operating results;

·
large purchases or sales of common stock;

·
actual or anticipated announcements of new products or services by us or competitors;

·
acquisitions of new dealerships;

·
investor perception of our business prospects or the motorcycle/power sports industry in general;

·
general conditions in the markets in which we compete; and

·
economic and financial conditions.

If outstanding Series A Shares, options and warrants are exercised or converted, the value of those shares of common stock outstanding just prior to the conversion will be diluted.

As of April 1, 2007, there are outstanding Series A Shares convertible into a total of 4,900,000 shares of our common stock and options and warrants to purchase 8,340,000 shares of common stock, with exercise prices ranging from $0.40 to $2.25 per share. If the holders exercise a significant number of these securities at any one time, the market price of the common stock could fall. In the event that the anti-dilution provisions contained in the Series A Shares and the Series A Warrants are triggered and we also issue additional shares of our common stock as dividends on the Series A Shares so that all or a significant portion of our outstanding common stock becomes available for resale, this could cause an even greater reduction in the market price of our common stock. The value of the common stock held by other shareholders will be diluted. The holders of the options and warrants have the opportunity to profit if the market price for the common stock exceeds the exercise price of their respective securities, without assuming the risk of ownership. If the market price of the common stock does not rise above the exercise price of these securities, then they will expire without exercise. The holders of these options and warrants may also exercise their securities if we are able to raise capital privately or from the public on terms more favorable than those provided in these securities. We cannot predict exactly if, or when, such a financing will be needed or obtained. Furthermore, we cannot predict whether any such financing will be available on acceptable terms, or at all.

“Penny stock” regulations may impose certain restrictions on the marketability of our securities.

The Securities and Exchange Commission has adopted regulations which generally define a “penny stock” to be any equity security that has a price of less than $5.00 per share or an exercise price of less than $5.00 per share, subject to certain exceptions (including the issuer of the securities having net tangible assets (i.e. total assets less intangible assets and liabilities) in excess of $2,000,000 or average revenue of at least $6,000,000 for the last three years). As a result, our common stock could be subject to these rules that impose additional sales practice requirements on broker-dealers who sell our securities to persons other than established customers and accredited investors (generally persons with a net worth in excess of $1,000,000 or annual income exceeding $200,000, or $300,000 together with their spouse). For transactions covered by these rules, the broker-dealer must make a special suitability determination for the purchase of such securities and have received the purchaser's written consent to the transaction prior to the purchase. Additionally, for any transaction involving a “penny stock,” unless exempt, the rules require the delivery, prior to the transaction, of a risk disclosure document mandated by the Securities and Exchange Commission relating to the “penny stock” market. The broker-dealer must also disclose the commissions payable to both the broker-dealer and the registered representative, current quotations for the securities and, if the broker-dealer is the sole market maker, the broker-dealer must disclose this fact and the broker-dealer's presumed control over the market. Finally, monthly statements must be sent disclosing recent price information for the “penny stock” held in the account and information on the limited market in “penny stocks.” Consequently, although the “penny stock” rules do not currently apply to our securities, if these rules do become applicable in the future, this may restrict the ability of broker-dealers to sell our securities.

14

 
ITEM 1B.
UNRESOLVED STAFF COMMENTS.

This item is not applicable to the Company.
 
ITEM 2.
PROPERTIES

Set forth below is summary information of our current operating facilities:

LOCATION
 
PRINCIPAL USES OF SPACE
 
(IN SQUARE FEET)
 
LEASE EXPIRATION
Salem, Ohio
 
Offices, showroom
 
75,000
 
 
December 2016, and may be extended to December 2026
Skokie, Illinois
 
Offices, showroom and service facility
 
95,000
 
May 31, 2015 and may be renewed until May 31, 2025

We believe that our operating facilities are adequate for our present purposes and that additional operating facilities, if required, will be available to us on reasonably acceptable terms.

ITEM 3.
LEGAL PROCEEDINGS
 
Except for (i) a contract dispute with a public relations firm and (ii) a customer dispute relating to our Chicago Cycles subsidiary, both of which are not material, we are not currently subject to any legal proceedings, and to the best of our knowledge, none are threatened, the results of which would have a material adverse effect on our properties, results of operations or financial condition. Additionally, to our knowledge, neither of our officers and directors are involved in any legal proceedings in which we are an adverse party.
 
ITEM 4.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

There were no matters submitted to a vote of our security holders during the fourth quarter of our fiscal year ended December 31, 2006.

15


PART II
 
ITEM5.

Our common stock is traded in the over-the-counter market on the Nasdaq OTC Bulletin Board under the symbol “GMOS.” The following table shows the price range of the Company's common stock for each quarter ended during the last two fiscal years.

   
BID
 
ASK
 
Quarter Ended
 
High
 
Low
 
High
 
Low
 
                   
3/31/05
   
1.30
   
1.26
   
1.30
   
1.26
 
6/31/05
   
.61
   
.60
   
.61
   
.60
 
9/30/05
   
1.03
   
.95
   
1.03
   
.95
 
12/31/05
   
1.01
   
.58
   
1.06
   
.60
 
3/31/06
   
.94
   
.90
   
.75
   
.62
 
6/30/06
   
.63
   
.45
   
.62
   
.35
 
9/30/06
   
.63
   
.38
   
.60
   
.38
 
12/31/06
   
.60
   
.17
   
.60
   
.17
 

HOLDERS

As of April 1, 2007, there were approximately 37 holders of record of the Company’s common stock.

DIVIDENDS

Subject to the rights that have been designated to the holders of our Series A Convertible Preferred Stock (the “Series A Shares”), which dividends are payable in cash or shares of our common stock, as determined in our sole discretion, and any other holders of preferred stock that may be authorized by our Board, holders of our common stock are entitled to receive dividends when and if declared by our Board of Directors out of funds legally available. We have not paid any dividends on our common stock. The payment of dividends, if any, in the future is within the discretion of the Board of Directors and is also subject to the approval of the holders of the Series A Shares. The payment of dividends, if any, in the future will depend upon our earnings, capital requirements, financial condition and other relevant factors. Our Board of Directors does not presently intend to declare any dividends in the foreseeable future. Instead, our Board of Directors intends to retain all earnings, if any, for use in our business operations.

Pursuant to our Restated Articles of Incorporation, our Board of Directors is authorized, subject to any limitations prescribed by law, and subject to certain approval right we have provided to the holders of our Series A Shares, to provide for the issuance of up to 5,000,000 shares of preferred stock from time to time in one or more series and to establish the number of shares to be included in each such series and to fix the designation, powers, preferences and relative, participating, optional and other special rights of the shares of each such series and any qualifications, limitations or restrictions thereof. Because the Board of Directors has such power to establish the powers, preferences and rights of each series, it may afford the holders of preferred stock preferences, powers and rights (including voting rights and rights to receive dividends) senior to the rights of the holders of common stock. The issuance of shares of preferred stock, or the issuance of rights to purchase such shares, could be used to discourage an unsolicited acquisition proposal.

16

 
There is currently one series of preferred stock issued and outstanding: Series A Shares, with 5,000 shares being authorized and 2,450 shares being issued and outstanding. Up to an additional 4,995,000 shares of preferred stock remain authorized. Set forth below is a summary only and it is qualified by our Restated Articles of Incorporation and the Certificate of Designation for our Series A Shares, copies of which are available from the Company upon request.

Rank. The Series A Shares rank senior to (1) the common stock and (2) each other class or series of preferred stock now or hereafter established by the Board of Directors, the terms of which do not expressly provide that it ranks senior to, or on a parity with, the Series A Shares as to dividend rights and rights on liquidation, winding-up and dissolution of the Company (collectively referred to as “Junior Stock”).

Dividends. The holders of shares of Series A Shares will receive dividends at the rate of $100.00 per Series A Share per annum, payable, at the option of the Company, in cash or shares of Common Stock, provided that, the dividend rate will be reduced to $70.00 per Series A Share per annum at such time as and for as long as our shares of common stock issuable upon conversion of the Series A Shares are covered by an effective registration statement. In the event of certain defaults by the Company, the dividend rate will be increased to $200.00 per Series A Share until the default has been cured. Dividends will accrue and be payable semi-annually, in arrears, on the first day of March and September in each year, beginning March 2006. Dividends payable on the Series A Shares are cumulative and any accrued and unpaid dividends are included in the payment of a liquidation preference to the holders of Series A Shares, as described below.

Liquidation Preference. In the event of a liquidation, dissolution or winding up of the Company, whether voluntary or involuntary, the holders of the Series A Shares are entitled to receive, after all payments to holders of any securities that rank senior to the Series A Shares, $1,000.00 per Series A Share, together with an amount equal to the dividends accrued and unpaid thereon (whether or not declared) to the date of final distribution to the holders of Series A Shares, without interest, before any payment shall be made or any assets distributed to the holders of any of the Company's securities that rank junior to the Series A Shares, including the common stock. After the full payment of the liquidation preference to the holders of Series A Shares, they are not entitled to any further participation in any distribution of the Company's assets. At the option of any holder of Series A Shares, a consolidation or merger of the Company with another corporation in which the Company is not the surviving entity, or a sale or transfer of all or part of the Company's assets for cash, securities or other property will be considered a liquidation, dissolution or winding up of the Company.

Conversion.

Election to Convert. Each Series A Share may initially be converted, at any time, at the election of the holder, into 2,000 shares of our common stock, subject to certain adjustments.

Mandatory Conversion. We have the right, in our sole discretion, to require that all of the outstanding Series A Shares be converted into shares of our common stock at the same conversion rate applicable to a conversion election. We have this right to require conversion at any time: (1) the last trade price of our common stock reported on the OTC Bulletin Board for each of the ten consecutive trading days ending two business days prior to the date of our conversion election exceeds $1.50 per share (subject to certain adjustments, including adjustments for anti-dilution) and (2) the common stock issuable upon conversion of the Series A Shares is covered by an effective registration statement during the entire ten-day period and through the date of the conversion.

Anti-Dilution Adjustments. Subject to certain exceptions, if we issue securities, in the future, at an effective price of less than $.50 per share of common stock (or the then current price as reduced by prior anti-dilution events), then the rate of conversion of the Series A Shares into our common stock will be reduced to the effective price of our common stock as issued. In addition, the rate of conversion may also be reduced as a result of certain recapitalization events, including (1) a split or reverse split of our shares of common stock and (2) the payment of a dividend in shares of our common stock (other than dividends payable on the Series A Shares in common Stock).

17

 
Reduction in Conversion Rate due to Default. Upon the occurrence of certain types of defaults, such as a default: (i) under our certificate of designation of the Series A Shares; (ii) under our subscription agreements with the investors in the September 2005 Private Placement; (iii) subject to certain exceptions, of any obligation of indebtedness or financing in excess of $250,000; or (iv) under any material contract, the then applicable conversion rate will be adjusted to an amount equal to 80% of the Conversion Price then in effect.

Voting Rights. Holders of the Series A Shares vote together with the holders of common stock as a single class on all matters submitted to shareholders for a vote and shall have a number of votes equal to 2,000 votes for each Series A Share, subject to certain adjustments. Additionally, the approval of the holders of a majority of the Series A Shares is required for the approval of the following matters:

(1) Any amendment, alteration or repeal of the Articles or the certificate of designation relating to the Series A Shares, if such amendment, alteration or repeal adversely affects the rights, preferences or privileges of the Series A Shares, including the right to create, authorize or issue any series or shares of stock senior to or on parity with the Series A Shares, or to increase the amount of authorized capital stock of any such class;

(2) The creation, authorization or issuance of any series or shares of capital stock convertible into common stock which is on parity with or senior to the Series A Shares in terms of liquidation, dividends or otherwise;

(3) The merger, consolidation or entering into a business combination or similar transaction, other than if (i) the Company is the surviving entity and (ii) the shareholders of the Company prior to such transaction continue to hold a majority of the capital stock of the Company following the transaction;

   (4) The incurrence or permission to exist of any inventory or equipment indebtedness or liens relating thereto, except that the Company may borrow in connection with institutional financing of inventory and equipment and mortgage financing in connection with acquisitions of real estate;

(5) The declaration or payment of any dividends on, purchase, redemption or retirement for value, of any capital stock (other than the Series A Shares), or make any distribution of assets, capital stock, warrants, rights, options, indebtedness or obligations to the Company's shareholders;

(6) The sale or other transfer of a material portion of the Company's assets; provided, however, that such a sale or other transfer will be permitted if (i) it is not of all or substantially all of the Company's assets and (b) is approved by a majority of the independent and disinterested members of the board of directors; and

(7) The entering into any transaction or agreement, or the amendment or modification of any existing agreement, with any officers, directors or principal shareholders of the Company, or any of their affiliates, which transaction, agreement amendment or modification is not approved by a majority of the independent and disinterested members of the board of directors.
 
18


RECENT SALES OF UNREGISTERED SECURITIES

We did not sell any unregistered securities during the year ended December 31, 2006:

Securities Authorized for Issuance under Equity Compensation Plans

The following table provides information about the Company’s common stock that may be issued upon the exercise of stock options under all of our equity compensation plans in effect as of December 31, 2006.

 
 
 
 
Plan Category
 
 
 
Number of securities to
be issued upon exercise
of outstanding options,
warrants and rights
 
 
 
Weighted average
exercise price of
outstanding options,
warrants and rights
 
Number of securities
remaining available for
future issuance under
equity compensation
plan (excluding securities
reflected in column (a))
 
               
Equity compensation plan
approved by security holders
   
   
   
 
                     
Equity compensation plan not
approved by security holders
   
1,500,000 (1
)
$
1.25
   
0
 
_

(1) Reflects options granted to the two our two executive officers in August 2004 to purchase shares of our common stock.

ITEM6.
SELECTED FINANCIAL DATA

SELECTED FINANCIAL INFORMATION

The selected consolidated financial data presented below should be read in conjunction with “Management's Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and the notes thereto included elsewhere in this Annual Report. Our statement of operations data for the years ended December 31, 2006, 2005, 2004, 2003 (restated), and 2002 (restated) and our balance sheet data as of December 31, 2006, 2005, 2004, 2003 (restated) and 2002 have been derived from our audited consolidated financial statements, all of which except our balance sheet data at December 31, 2003 and 2002, are included elsewhere in this Annual Report.

19

 
   
2002
 
2003
 
2004
 
2005
 
2006
 
 
Net Sales (1)
 
$
38,461,692
 
$
45,217,270
 
$
77,615,237
 
$
103,117,471
 
$
97,637,103
 
 
Income from Continuing Operations
   
1,242,854
   
852,831
   
2,168,256
   
631,526
   
1,117,702
 
 
Income from Continuing Operations Per Share
   
0.16
   
0.11
   
0.21
   
0.06
   
0.10
 
 
Total Assets
   
10,084,106
   
14,303,028
   
24,017,727
   
25,832,117
   
29,085,638
 
 
Long-term Debt Obligations
   
366,044
   
547,073
   
2,636,027
   
1,498,479
   
1,513,665
 
 
Preferred Stock
   
   
   
   
2,870
   
2,450
 
 
Cash Dividends Declared per Common
   
   
   
   
   
 

(1)  
Does not include revenues from finance, insurance and extended service contracts, which represent less than 3% of total operating income.
 
ITEM 7.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 
  
The following discussion of our results of operations and financial condition should be read together with the consolidated financial statements and the notes to those statements included elsewhere in this Annual Report. This discussion may contain forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from the results anticipated in any forward-looking statements as a result of a variety of factors, including those discussed in “Risk Factors” and elsewhere in this Annual Report.

General.

Our goal is to become one of the largest dealers of power sports vehicles in the United States through acquisitions and internal growth.

The motorsports industry is highly fragmented with an estimated 4,000 retail stores throughout the United States. We are attempting to capitalize upon the consolidation opportunities available and increase our revenues and income by acquiring additional dealers and improving our performance and profitability.

We plan to maximize the operating and financial performance of our dealerships by achieving certain efficiencies that will enhance internal growth and profitability. By consolidating our corporate and administrative functions, we believe we can reduce overall expenses, simplify dealership management and create economies of scale.

We will specifically target dealers in markets with strong buyer demographics that, due to under-management or under-capitalization, are unable to realize their market share potential and can benefit substantially from our systems and operating strategy.

Together with our two wholly-owned subsidiaries, we own and operate two retail power sports superstores. Our core brands include Suzuki, Yamaha, Honda, Ducati and Kawasaki. Our superstores operate under the names “Andrews Cycles” and “Chicago Cycles.” Andrews Cycles is located in Salem, Ohio, has approximately 54 employees and operates from an approximately 75,000 square foot facility. Chicago Cycles is located in the Chicago metropolitan area, has approximately 80 employees and operates from an approximately 95,000 square foot facility in Skokie, Illinois, pursuant to a ten-year lease we entered into in October 2004.

20

 
Overview of Economic Trends.

Effects of Increasing Interest Rates

Although the Federal Reserve, during the second half of 2006, temporarily paused its policy of raising the discount rate, we believe that increases in consumer loan interest rates, during the two year period immediately preceding this pause has had a material adverse effect on the sales of our power sports products, and more specifically the sales of new vehicles. Our revenues from sales of power sports products during the year ended December 31, 2006 were approximately 5.3% less than for the same period in 2005. Additionally, during 2006, $32.7 million of the approximately $97.6 million of our power sports sales (33.5%) were financed. In the event that the Federal Reserve resumes its policy of measured increases in the discount rate, the uncertainties created in the consumer financing market as a result of corresponding additional increases in interest rates, can reasonably be expected to have a continuing negative impact on the sale of new motorcycles in the next 12 to 24 months due to the increased costs to our customers.

During the early period of these measured increases in consumer interest rates, we believe that we experienced greater consumer interest in lower-priced used motorcycles, as a result of the increased costs of financing. This was also attributable to the addition of Chicago Cycles to our business in April 2004. Additionally, we commenced the sale of used motorcycles sales at our Andrew Cycles dealership in the second half of 2005, but have not yet achieved the level of sales penetration in used motorcycles at Andrews Cycles that we had forecasted. As consumer interest rates continued to climb throughout 2005 and 2006, it appears that these even higher rates began to negatively affect the sales of lower-priced used motorcycles. During the year ended December 31, 2006 approximately $5.08 million of our approximately $97.6 million (5.2%) in revenues from the sales of power sports equipment were generated from sales of used motorcycles compared to approximately $5.93 million of our approximately $103.1 million in revenues (5.75%) from such sales during the same period in 2005. As a result of the current pause in the Federal Reserve’s increase in the discount rate, and the possibility that the discount rate may remain at its current level, or even be reduced in 2007, we believe that the sales of lower-priced used motorcycles will pick up sooner than new motorcycles. Therefore, we will continue to pursue the goal of increasing used motorcycle sales throughout 2007 and beyond, at both of our locations. Although there can be no assurance, we believe that our greater focus on sales of lower-priced used motorcycles, which generally provide larger sales margins, will help make up for any reduction in sales of new motorcycles.
 
Effects of Increasing Fuel Costs

During 2006, we experienced a decrease in sales of motorcycles and scooters compared to the same period in 2005. We believe this decrease resulted, in part, due to a significant reduction in gasoline prices in the latter part of the third quarter. Lower gas prices may have resulted in less incentive for prospective customers to purchase motorcycles or scooters to reduce fuel costs. Notwithstanding this reversal, prices have recently begun to increase again and we believe that it is reasonable to assume that prices will continue their upward trend during the next six to twelve months, which will likely result in many consumers considering the use of motorcycles and scooters as alternative forms of transportation to automobiles, since motorcycles and scooters provide significantly better gas mileage than automobiles resulting in substantially lower fuel costs. Any such increase in the purchase of motorcycles and scooters could have a positive impact on our sales for the next 12 to 24 months.

21

 
Reduction in Units by Manufacturers

We believe that certain manufacturers of the motorcycles we sell have recently begun to reduce the number of units they manufacture, normally with respect to some higher-end models, in order to increase the price per unit. Because of our position in the market, we believe that we are generally able to receive a larger allocation of these models than many other dealers. Since this pricing normally results in greater sales margins, reduced unit sales and higher pricing by manufacturers, in the future, could result in a material increase in our revenues and profits, provided that there are a sufficient number of customers willing to pay higher prices for these more limited produced models.

Overall impact on our Future Earnings

Notwithstanding our downturn in sales during 2006, we intend to continue to evaluate and analyze our business decisions through effective inventory engagement, as described in greater detail under the heading Inventory Management, included elsewhere in this MD&A. Assuming that gas prices continue their recent increases, we foresee promising opportunities to increase our sales of motorcycles and scooters as consumers again face substantial increases in gas prices, and give greater consideration to the purchase of motorcycles and scooters which provide significantly greater gas mileage than automobiles. Additionally, while our current business has been affected by the Federal Reserve's increase in interest rates, which directly increases the cost of financing purchases of our motorcycles and other power sports products, the current pause in its policy of measured increases to the discount rate, along with the possibility of reductions in 2007, could have a positive financial affect on our business. On the other hand, in the event that the Federal Reserve chooses to resume its increase in the discount rate, this would, in all likelihood, continue to negatively impact sales of motorcycles and other power sports equipment.  Additionally, in the event that we are able to successfully integrate additional dealerships and/or new brands into our existing business, we believe that this could result in greater sales margins and an even greater increase in earnings. These greater sales margins would be created by the consolidation of expenses through the implementation of our superstore business plan, resulting in greater earnings per unit sold. While it is management's intent to pursue the goals described herein, we cannot assure you that these goals will be achieved at any level.

Loan Transactions.

On April 30, 2004, we paid $1,675,000 of the purchase price for Chicago Cycles by issuing to Kings Motorsports a 6% $1,675,000 aggregate principal amount note (the "Note"). We repaid all outstanding principal and interest on the Note, remaining due and payable, on October 13, 2005.

To fund the amount payable at closing for Chicago Cycles, we borrowed $1,250,000 from The Fifth Third Bancorp Bank (the “Bank”), pursuant to a term loan. This loan, which initially matured on May 31, 2004, was refinanced with the Bank through a term loan amortized over a 72 month period, but is payable in full on May 31, 2007, bearing interest at prime plus one percent (9.25% at December 31, 2006). Our payment obligations under this term loan also are personally guaranteed by Russell Haehn and Gregory Haehn. This loan is also secured by a first priority lien on all of our assets (including, without limitation, the Chicago Cycles assets). As of December 31, 2006, the outstanding amount of this term loan, including accrued interest thereon, was $781,280.

On April 20, 2004, pursuant to a $500,000 aggregate principal amount promissory note bearing interest at the rate of fourteen (14%) percent per annum (the “Bridge Note”), we received, from a third party (the “Bridge Lender”), an aggregate principal amount bridge loan (the “Bridge Loan”). All outstanding principal on the Bridge Note was due on October 15, 2004. To secure the repayment of principal and interest on the Bridge Note, each of Russell Haehn and Gregory Haehn (i) pledged to the lender 150,000 shares (300,000 shares in the aggregate) of common stock owned by each of them, and (ii) guaranteed all of our payment obligations to the lender. As partial consideration for the Bridge Loan, we issued to the lender a five-year warrant to purchase 100,000 shares of common stock, at an exercise price of $2.25 per share. We also granted the lender certain piggyback registration rights with respect to the shares of common stock underlying the warrant. We used the $500,000 Bridge Loan proceeds for working and operating capital. On October 15, 2004, we repaid $250,000 of the principal amount outstanding under the Bridge Loan. Pursuant to a letter agreement entered into with the lender on October 6, 2004, payment of the remaining $250,000 of principal and all accrued interest thereon was extended until January 15, 2005. We paid the lender $2,500 in consideration for the extension. In September 2005, the lender assigned its rights to $50,000 of the $250,000 principal amount then outstanding to an affiliate of the lender, who in turn converted it into Series A Shares and Series A Warrants in our September 2005 Private Placement. On September 20, 2005, we used net proceeds from our September 2005 Private Placement, in the amount of $203,383.26 to repay the remaining outstanding principal amount of the Bridge Loan and all accrued and unpaid interest thereon.

22

 
On December 20, 2005, the Bridge Lender provided us with a new bridge loan in the principal amount of $250,000 (the "2005 Bridge Loan"). In connection with the 2005 Bridge Loan we issued to the Bridge Lender a $250,000 principal amount promissory note providing for interest at the rate of fifteen percent (15%) per annum (the "2005 Bridge Note"). Interest on the 2005 Bridge Note is payable monthly, and all outstanding principal and accrued but unpaid interest was due and payable on March 20, 2006. In March 2006 we repaid $25,000 of the outstanding principal amount and at March 31, 2006, the outstanding principal amount was $225,000. We obtained a ninety (90) day extension for the payment of the remaining $225,000. In consideration for this extension we paid the lender $2,500. On June 29, 2006 we repaid an additional $25,000 of the outstanding principal amount and at September 20, 2006, the outstanding principal amount was $200,000. On September 20, 2006, we obtained another sixty (60) day extension for the payment of the remaining $200,000 due on November 20, 2006. We did not pay any additional consideration to the third party for such extension. Payment of the 2005 Bridge Note was further extended to June 15, 2007 in consideration for our payment of $2,250 to the Bridge Lender for both this extension and the extension for repayment of the 2006 Bridge Note discussed below. We have continued to make all interest payments on the 2005 Bridge Loan, when due and payable, and intend to make such interest payments on a timely basis during any further extension thereof.

On October 27, 2006, Russell Haehn, the Company’s Chairman and Chief Executive Officer provided a working capital loan to the Company in the amount of $350,000. This loan is evidenced by a promissory note (the “Note”) in the principal amount of $350,000 payable on demand any time after October 26, 2007. The Note bears interest at a rate of 6% per annum and the outstanding principal amount and all accrued interest are payable upon demand or sooner if prepaid by the Company.

On December 4, 2006, the Bridge Lender provided us with an additional bridge loan in the principal amount of $250,000 (the “2006 Bridge Loan”). In connection with the 2006 Bridge Loan we issued to the Bridge Lender a $250,000 principal amount promissory note providing for interest at the rate of fifteen and ½% percent (15.5%) per annum (the "2006 Bridge Note"). Interest on the 2006 Bridge Note is payable monthly, and all outstanding principal and accrued but unpaid interest was due and payable on March 4, 2007. Payment of the 2006 Bridge Note was extended to June 15, 2007 in consideration for our payment of $2,250 to the Bridge Lender for both this extension and the extension for repayment of the 2005 Bridge Note discussed above. We have continued to make all interest payments on the 2006 Bridge Loan, when due and payable, and intend to make such interest payments on a timely basis during any further extension thereof.

We also have obtained a revolving line of credit with the Bank, in the maximum amount of $250,000. This line of credit bears interest at the rate of prime plus one percent (9.25% at December 31, 2006), and has no stipulated repayment terms. At December 31, 2006, the amount of principal and interest outstanding on this credit line was $249,863. This line of credit is secured by a lien on substantially all of our assets.
 
23


Financing Activities.

In September 2005, the Company sold to accredited investors, in a private placement offering (the “September 2005 Private Placement”), 2,870 Series A Shares and warrants to purchase up to of 5,740,000 shares common stock (the “Series A Warrants”), resulting in the receipt by the Company of $2,870,000 of gross proceeds including the repayment of $50,000 of indebtedness outstanding under the Bridge Loan from HSK Funding, Inc., by the conversion of that amount into Series A Shares and Series A Warrants. These securities are convertible into shares of common stock. After deduction of all offering expenses for the September 2005 Private Placement, including the placement agent's commissions and nonaccountable expense allowance, the Company received net proceeds of $2,485,163. The Company used these net proceeds for debt repayment legal fees, and general working capital purposes. At December 31, 2006, 420 Series A Shares had been converted into 935,800 shares of our common stock. Additionally, during 2006, we issued an aggregate of 408,247 shares of common stock to the holders of our Series A Shares, in lieu of cash dividends.

Anticipated Funding of Operations.

The amount required to fund the growth our ongoing operations, as well as the means by which we obtain this funding, will be wholly dependent on the magnitude and timeframes we set for any growth in our business. Based on our current expected growth in the next 12 to 24 months, we expect to fund our ongoing operations as follows:

Cash Flow from Operations

Notwithstanding the decline in sales, in 2006, as compared to 2005, our goal continues to be to significantly increase our cash flow from operations by growing sales within our current business structure and through the acquisition of other power sports dealers. Based on our current business plan, and assuming that we can resume sales growth consistent with increases achieved prior to 2006, we believe that we will begin to generate sufficient cash flow from operations to fund the growth of our business during the third quarter of 2007. To the extent that the weaker sales climate we experienced during 2006 continues for a sustained period our ability to generate such cash flow could be delayed or may not occur at all. Additionally, to the extent that the growth of our business involves the acquisition of other dealers, our ability to do so will depend on the availability of the types of financing discussed below.

Bank Financing

We currently have a revolving credit line with Fifth Third Bancorp in a total available amount of $250,000 of which $249,863 was funded at December 31, 2006.

Equity Financing

Although it is not our intention to raise additional funds through the sale of our equity securities to directly fund our working capital needs, to the extent that sales of our power sports products continue at the levels experienced in 2006 and/or the growth of our business involves either the acquisition of other power sports dealers or the acquisition of significant assets out of the ordinary course of our business, such as acquiring a new brand of motorcycles, we will most likely be required to raise additional funds through the sale of common stock or preferred stock to consummate any of these acquisitions. It could be difficult for us to raise funds in amounts and on terms sufficient to fund any of these proposed acquisitions.

Funding of Future Acquisitions

Given our experience in financing the purchase of the Chicago Cycles assets, we believe that the terms of future acquisitions, to the extent that they involve significant amounts of debt financing, will require substantially longer periods of time for repayment, which we anticipate to be at least 48 months, in order for these acquisitions to be financially viable for us. We intend to give careful consideration to these terms when deciding whether to acquire debt financing in connection with future acquisitions.

24

 
Results of Operations.

Year ended December 31, 2006 Compared to Year ended December 31, 2005:
   
 
2006
 
 
2005
 
Increase
(Decrease)
 
 
% Change
 
 
Total Revenues
 
$
100,751,786
 
$
105,605,067
   
($4,853,281
)
 
(4.6
%)
Cost of Sales
 
$
86,340,024
 
$
93,327,630
   
($6,987,606
)
 
(7.5
%)
Operating Expenses
 
$
13,294,060
 
$
11,645,911
 
$
1,648,149
   
14.2
%
Income from Operations
 
$
1,117,702
 
$
631,526
 
$
486,176
   
77.0
%
Other Income and (Expenses)
 
$
(1,371,000
)
$
(679,229
)
$
691,771
   
(101.8
%)
Income (Loss) before Provision (Benefit) for Income Taxes
 
$
(253,298
)
$
(47,703
)
$
205,595
   
(430.9
%)
Net Income (Loss) before Preferred Dividends
 
$
(181,198
)
$
(8,803
)
$
172,395
   
(1,958.4
%)
 
Total Revenues:

Total revenues for the year ended December 31, 2006 were $100,751,786 representing a decrease of $4,853,281 (-4.6%) from the $105,605,067 reported for the year ended December 31, 2005. This decrease in revenues was, we believe, primarily attributable to a substantial reduction in the purchase of motorcycles experienced by most dealers. Sales at our Chicago facilities were most affected, representing substantially all of our decrease in revenues between the applicable periods. While it is difficult to determine, with certainty, the reasons for the significant decrease in the sales of motorcycles and other power sports vehicles during 2006, we believe that the following events have contributed to weaker sales:

Continuing increases in consumer interest rates for the eighteen (18) month period through June 2006 has made financing the purchase of motorcycles more expensive and appears to have priced the purchase of a motorcycle out of the price range of many potential customers;

Also as a result of the increase in consumer interest rates, manufacturer financing incentives, which provide purchasers with below market interest rates at the beginning of the loan term and higher interest rates in later years, were not nearly as successful in generating sales as such incentives have been in prior periods;

Gas prices, which had substantially increased during the twelve (12) months prior to the third quarter of 2006, decreased considerably during such quarter, possibly also reducing the incentive for prospective customers to purchase motorcycles and scooters, which provide better gas mileage and therefore lower fuel costs; and

Manufacturers, particularly with respect to all terrain vehicles (“ATVs”), did not introduce distinctively new models of their products for the 2006 model year, which appears to have resulted in less consumer interest and, as a result, significantly weaker sales.

Additionally, during the first quarter of 2006 our sales were down 11.2% compared to the first quarter of 2005, despite an increase in revenues from retail sales of our products, during the first quarter of 2006, as compared to the same period in 2005. This reduction was primarily due to a significant decrease in revenues from wholesale sales of our products to other dealers and distributors, in the first quarter of 2006. Reducing wholesale sales was part of our plan to stabilize our inventory for the purpose of increasing our profit margins for the remainder of 2006. During the second quarter of 2006, revenues increased by 9.9% compared to the same period in 2005. This increase almost completely offset decreases during the first and third quarters. 

25

 
Cost of Sales:

Cost of sales for the year ended December 31, 2006 decreased by $6,987,606 (-7.5%) to $86,340,024 during the year ended December 31, 2006, as compared to $93,327,630 for the same period in 2005. The reduction in the cost of sales for the year ended December 31, 2006 reflects the decrease in sales during 2006 compared to 2005.
 
Operating Expenses:

Operating expenses for the year ended December 31, 2006 were $13,294,060, an increase of $1,648,149 (14.2%) over $11,645,911 for same period in 2005. The aggregate increase in such costs were principally related to (i) an approximate increase of $1,054,870 in salaries and other compensation payable to employees; (ii) an approximate $137,335 increase in insurance; and (iii) an approximate net increase of $289,177 in various other expenses, including (A) a $105,869 increase in credit card fees, (B) a $97,302 increase in utilities, (C) a $84,100 increase in professional fees, and (D) a $46,698 increase in employee benefits during the year ended December 31, 2006 compared to the same period in 2005.

Income from Operations:

We had income from operations before other income and (expenses) for the year ended December 31, 2006 of $1,117,702 compared to income from operations of $631,526 for the same period in 2005, which reflects an increase of $486,176 (77.0%). This increase in income from operations during the year ended December 31, 2006 as compared to the same period in 2005, is a result of the significant reduction in the cost of sales, as described above, and in particular, the significant increase in margin on our sales from the prior period. This reduction in cost of sales was only partially offset by the increase in operating expenses. Depreciation and amortization was approximately $432,338 for the year ended December 31, 2006, as compared to $300,806 for the same period in 2005.

Other Income and (Expenses):

Other expenses for the year ended December 31, 2006 increased $691,771 (101.8%) to $1,371,000 from $679,229 for the same period in 2005. This increase in other expenses was primarily attributable to an increase in net interest expense from $779,943 in 2005 to $1,413,383 in 2006. Such increase in net interest expense was primarily attributable to (i) the additional interest payable on financed inventory which we were unable to sell due to the weak sales environment during a significant portion of 2006 and (ii) an increase in the interest rate payable on our inventory financing from 8% at December 31, 2005 to 9.25% at December 31, 2006.

Income (Loss) before Provision (Benefit) for Taxes:

We had a loss before provision for taxes, for the year ended December 31, 2006 of $253,298 as compared with a loss before provision for taxes of $47,703 for the same period in 2005, which represents a reduction of 430.9%. This increase in loss before provision for taxes is primarily attributable to the substantial increase in net interest expense discussed above.
 
26

 
Net Income (Loss) before Preferred Dividends:
 
We had a net loss before preferred dividends of $181,198 for the year ended December 31, 2006, as compared to a net loss of $8,803 for the same period in 2005, which represents a reduction of 1,958.4%. This increase in net loss before preferred dividends is primarily attributable to the substantial increase in net interest expense discussed above.
 
Year ended December 31, 2005 Compared to Year ended December 31, 2004:

   
 
2005
 
 
2004
 
Increase
(Decrease)
 
 
% Change
 
 
Total Revenues
 
$
105,605,067
 
$
79,950,855
 
$
25,654,212
   
32
%
Cost of Sales
 
$
93,327,630
 
$
70,025,884
 
$
23,301,746
   
33
%
Operating Expenses
 
$
11,645,911
 
$
7,756,715
 
$
3,889,196
   
50
%
Income from Operations
 
$
631,526
 
$
2,168,256
 
$
(1,536,730
)
 
(71
%)
Other Income and (Expenses)
 
$
(679,229
)
$
(587,995
)
$
(91,234
)
 
(15.5
%)
Income (Loss) before Provision (Benefit) for Income Taxes
 
$
(47,703
)
$
1,580,261
 
$
(1,627,964
)
 
(103
%)
Net Income (Loss) before Preferred Dividends
 
$
(8,803
)
$
958,061
 
$
(966,864
)
 
(101
%)

Total Revenues:

Total revenues for the year ended December 31, 2005 were $105,605,067 representing an increase of $25,654,212 (32%) from the $79,950,855 reported for the year ended December 31, 2004. Our results were impacted significantly, in a positive manner, by the acquisition of Chicago Cycles on April 30, 2004, and the inclusion of the additional revenues generated by Chicago Cycles of $39,298,879 in 2005 as compared to only $24,519,662 during the shorter period from May 1, 2004 to December 31, 2004, in the prior year, which reflects a 60% increase in Chicago Cycles' sales. These results also reflect a generally higher level of sales activities at both of our locations and our move to the larger facility in Chicago. Our increase in sales, during the year ended December 31, 2005, also can be attributed to our aggressive marketing and advertising campaigns.

Cost of Sales:

Cost of sales for the year ended December 31, 2005 increased by $23,301,746 (33%) to $93,327,630, compared to $70,025,884 for the same period in 2004. This increase reflects the additional cost of units, in a total amount of $20,814,000 needed to realize the increase in sales, and is also significantly impacted by the inclusion of the costs of Chicago Cycles' sales beginning in April 30, 2004, and our move to the larger facility in Chicago, accounting for approximately $11,412,073 (55%) of this increase in cost of sales.

Operating Expenses:

Selling, general and administrative expenses for the year ended December 31, 2005 were $11,645,911, an increase of $3,899,216 (50%) over $7,756,715 for the same period in 2004. The aggregate increase in such costs were principally related to additional selling, general and administrative expenses relating to Chicago Cycles, commencing April 30, 2004, which accounted for $3,393,682 (87%) of this increase, and includes increases of approximately (i) $1,289,410 in compensation payable to employees at Chicago Cycles; (ii) $1,131,084 in advertising and marketing expenses; and (iii) $558,718 in rent, of which approximately $510,000 is attributable to the higher rent payable for Chicago Cycles’ new facilities. Net interest expense increased approximately $153,356 to $779,943 in the year ended December 31, 2005 as compared to $626,587 for the same period in 2004.

Income from Operations:

We had income from operations before other income (expense) for the year ended December 31, 2005 of $631,526, as compared to income from operations of $2,168,256 for the same period in 2004, which reflects a decrease of $1,580,261(71%). This decrease in income from operations during the year ended December 31, 2005 as compared to the same period in 2004, is a result of the significant increase in operating expenses, as described above, and in particular, the increase in rent expense relating to our move to the new facility in Chicago. Unlike in prior periods where the increase in operating expenses was offset, in part, by an increase in margin on our sales from the prior period, our percentage increase in sales in 2005 compared to 2004 was only nominally greater than the increase in our cost of sales between those two periods. Depreciation and amortization was approximately $300,806 for the year ended December 31, 2005, as compared to $19,636 for the same period in 2004.

27

 
Other Income and (Expenses):

Other expenses for the year ended December 31, 2006 increased $91,234 (15.5%) to $679,229 from $587,995 for the same period in 2005. This increase in other expenses was primarily attributable to an increase in net interest expense from $626,587 in 2004 to $779,943 in 2005, which was partially offset by an increase of $62,122 relating to certain other income in 2005 compared to 2004. Such increase in net interest expense was primarily attributable to an increase in the interest rate payable on our inventory financing from 3.8% at December 31, 2004 to 8% at December 31, 2005.

Income (Loss) before Provision (Benefit) for Taxes:

We had a loss before provision for taxes for the year ended December 31, 2005 of $47,703, as compared with income before provision for taxes of $1,580,261 for the same period in 2004. This decrease of $1,627,964 (103%) in income before taxes during the year ended December 31, 2005 as compared to the same period in 2004, is primarily attributable to the increase in operating expenses and, to a lesser extent the increase in net interest expense, both as described above. We received a tax benefit of $38,900 for the year ended December 31, 2005, as a result of our loss during that period, as compared to taxes of $622,200 for the year ended December 31, 2004. Taxes for 2005 were also affected by a net operating loss carryforward from the first quarter of 2005.

Net Income (Loss) before Preferred Dividends:

We had a net loss before preferred dividends of $8,803 for the year ended December 31, 2005, as compared to net income before preferred dividends of $958,601 for the same period in 2004. This reflects a decrease of $966,864 (101%) between these comparable periods. This decrease in net income before preferred dividends during the year ended December 31, 2005 as compared to the same period in 2004, is attributable to the increase in our operating expenses and, to a lesser extent the increase in net interest expense, both as described above. Net income decreased less in percentage terms between 2005 and 2004 than net income before taxes, due to the tax benefit received by us for 2005 compared to taxes that we paid for 2004.

Liquidity and Capital Resources.

Our primary source of liquidity has been cash generated by operations and borrowings under various credit facilities. At December 31, 2006, we had $156,530 in cash and cash equivalents, compared to $227,301 at December 31, 2005. Until required for operations, our policy is to invest excess cash in bank deposits and money market funds. Net working capital at December 31, 2006 was ($77,975) compared to $1,128,886 at December 31, 2005.

The Company receives floor plan financing from six different motorcycle manufacturers for whom the Company sells the manufacturers' products. The Company uses such floor plan financing to assist it in financing and carrying the Company's inventory necessary to achieve the Company's sales goals. Such manufacturers’ collateral includes all unit inventory plus a general lien on all assets of Andrews Cycles and Chicago Cycles.
 
28

 
The Company has acquired the loans described under the heading Loan Transactions above. As a result of the September 2005 Private Placement, the Company also raised additional cash from financing activities of approximately $2,485,000 for use in connection with its operations. As a result of weaker sales during 2006, the Company borrowed an additional $250,000 in December 2006 from the Bridge Lender. Additionally, in the future the Company may attempt to raise additional financing through the sale of its debt and/or equity securities for expansion of its business including acquisitions of other dealers and brands.
 
At December 31, 2006, we had outstanding indebtedness payable within 12 months in an aggregate amount of approximately $4.5 million. Of this amount, approximately $1.5 million is payable to financial institutions in repayment of loans and other credit facilities provided to us and approximately $2.5 million relates to outstanding trade payables. In the event that we are unable to repay all or any portion of these outstanding amounts from cash from operations, we would be required to (i) seek one or more extensions for the payment of such amounts, (ii) refinance such debt to the extent available, (iii) raise additional equity capital or (iv) consummate any combination of the foregoing transactions.
 
Inventory Management.

We believe that successful inventory management is the most important factor in determining our profitability. In the power sports business, and particularly as it relates to the sale of motorcycles, there is normally a limited timeframe for the sale of current year models. For example, if we are unable to sell a significant portion of our 2007 models before the 2008 models are released, it could be very difficult for us to sell our remaining inventory of 2007 models. Therefore, our goal is to limit sales of carryover products (i.e. products that remain in inventory after the release of new models) to no more than 10% of our total sales each year. This is accomplished by making all of our purchasing decisions based on sales information for the prior year and then utilizing aggressive sales and marketing techniques during the early part of a model year in order to assure the timely sale of our products.

Additionally, by limiting our carryover to 10% of total sales, we also are able to benefit from cash incentives provided by manufacturers with respect to most of these products. These cash incentives minimize our need to reduce prices for these models, as our customers are provided with cash reimbursement directly from the manufacturers. Similarly, we are able to use the cash incentives provided on our carryover products to promote new models, as the incentives generate greater showroom traffic.

Seasonality.

Our two main products - motorcycles and all terrain vehicles (“ATVs”) are subject to seasonality. Traditionally, the motorcycle season begins in late February or early March and runs until September. In September/October, the sale of ATVs increases while motorcycle sales decrease.

Impact of Inflation.

General inflation in the economy has driven the operating expenses of many businesses higher, and, accordingly we have experienced increased salaries and higher prices for supplies, goods and services. We continuously seek methods of reducing costs and streamlining operations while maximizing efficiency through improved internal operating procedures and controls. While we are subject to inflation as described above, our management believes that inflation currently does not have a material effect on our operating results, but there can be no assurance that this will continue to be so in the future.

Critical Accounting Policy and Estimates.

Our Management's Discussion and Analysis of Financial Condition and Results of Operations section discusses our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America, as promulgated by the PCAOB. The preparation of these condensed consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. On an on-going basis, management evaluates its estimates and judgments, including those related to revenue recognition, fixed assets, inventory, accounts receivable, accrued expenses, financing operations, and contingencies and litigation. Management bases its estimates and judgments on historical experience and on various other factors that are believed reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. Set forth below are the policies that we have identified as critical to our business operations and the understanding of our results of operations or that involve significant estimates. For detailed discussion of other significant accounting policies see Note A, Summary of Significant Accounting Policies, of Notes to Consolidated Financial Statements, contained elsewhere in this Annual Report.

29

 
Intangibles and Long-lived Assets - Goodwill is tested for impairment on an annual basis, or more frequently if events or circumstances indicate that impairment may have occurred. The Company is subject to financial statement risk to the extent that intangible assets become impaired due to decreases in the fair market value of the related underlying business.

We estimate the depreciable lives of our property and equipment, including any leasehold improvements, and review them on an on-going basis. The Company believes that the long-lived assets are appropriately valued. However, the assumptions and estimates used may change, and the Company may be required to record impairment to reduce the carrying value of these assets.

Revenue Recognition: Vehicle Sales - The Company records revenue when vehicles are delivered and title has passed to the customer, when vehicle service or repair work is performed and when parts are delivered. Sales promotions that are offered to customers are accounted for as a reduction to the sales price at the time of sale. Incentives, rebates and holdbacks offered by manufacturers directly to the Company are recognized at the time of sale if they are vehicle specific, or as earned in accordance with the manufacturer program rules and are recorded as a reduction of cost of merchandise sold.

Revenue Recognition: Finance, Insurance and Extended Service Revenues - The Company arranges financing for customers through various financial institutions and receives a commission from the lender equal to the difference between the interest rates charged to customers and the interest rates set by the financing institution. The Company also receives commissions from the sale of various third party insurance products to customers and extended service contracts. These commissions are recorded as revenue at the time the customer enters into the contract. The Company is not the obligor under any of these contracts. In the case of finance contracts, a customer may prepay or fail to pay their contract, thereby terminating the contract. Customers may also terminate extended service contracts, which are fully paid at purchase, and become eligible for refunds of unused premiums. In these circumstances, a portion of the commissions the Company receives may be charged back based on the relevant terms of the contracts. The revenue the Company records relating to commissions is net of an estimate of the ultimate amount of charge backs the Company will be required to pay. Such estimates of chargeback experience are based on our historical chargeback expense arising from similar contracts. The Company also acts as the warrantor on certain extended service contracts and defers the revenue and recognizes it over the life of the contract on a straight-line basis.

Off-Balance Sheet Arrangements.

We have no off-balance sheet arrangements.
 
30

 
Contractual Obligations.

We have entered into various contractual obligations, which may be summarized as follows:

Contractual Obligations
 
Payments Due By Period
 
   
 
Total
 
Less than 1 year
 
 
1-3 years
 
 
3-5 Years
 
More than 5 Years
 
Long-Term Debt Obligations
 
$
1,513,665
 
$
1,513,665
 
   

   

 
Capital (Finance) Lease Obligations
   

   

   

   

   

 
Operating Lease Obligations
 
$
9,715,671
 
$
944,291
 
$
2,998,980
 
$
2,110,029
 
$
3,662,371
 
Purchase Obligations
   
As Needed
                         
Other Long-Term Liabilities Reflected on the Company’s Balance Sheet under the GAAP of the Primary Financial Statements
   

   

   

   

   

 
Total
 
$
11,229,336
 
$
2,457,956
 
$
2,998,980
 
$
2,110,029
 
$
3,662,371
 

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK 

The Company is exposed to market risk in the ordinary course of its business. These risks are primarily related to changes in short-term interest rates. The potential impact of the Company's exposure to these risks is presented below:

Interest Rates.

Floor Plan Financing

We purchase new and used vehicle inventory by utilizing floor plan financing provided by lending institutions, as well as manufacturers of certain of the products we sell, including Kawasaki Motor Finance Company and America Honda Finance. We had outstanding indebtedness under floor plan notes of $20,885,887, $17,159,719 and $17,788,706, at December 31, 2006, December 31, 2005 and December 31, 2004, respectively. Interest rates in connection with our floor plan financing generally fluctuate based on the prime rate, the type of product being financed and the length of time that such product remains on the floor plan. During the year ended December 31, 2006, interest rates on our floor plan financing have ranged from a low of 3.6% to a high of 18%. Since we are dependent to a significant extent on our ability to finance the purchase of inventory, increases in the prime rate of interest could have a significant negative impact on our income from operations, as a result of the greater interest we will be required to pay with respect to our floor plan financing. When new model inventory is initially purchased usually there is a period of time when zero interest is paid or accrued. However, interest costs on new inventory will begin to accrue in a subsequent period. Continued increases would, in all likelihood, result in a reduction in our income from operations in 2007 and thereafter. Although we cannot determine the precise impact of rate increases, we believe that we would begin to experience a material negative impact on our financial condition if the prime rate were to increase to 10% from its current rate of 8.25%.
 
Line of Credit

We also have an existing revolving credit line with Fifth Third Bancorp, the interest rate of which also fluctuates with the prime rate, at prime plus one percent. Since the outstanding indebtedness of this line of credit was $249,863 at both December 31, 2006 and December 31, 2005, respectively, we do not believe that fluctuations in the prime rate will have more than a slight negative impact on our income from operations.
 
31


Hedging Activities

We normally invest any available cash in short-term investments and do not currently have any investment strategies to hedge against increases in interest rates. Additionally, although we do not currently intend to commence any such hedging investments in the future, in the event that we determine that there is a substantial risk that increases in interest rates would have a material negative impact on our business, we may consider such hedging strategies at that time.

Foreign Exchange Rates

We are not currently, and have not in the past, been subject to fluctuations in exchange rates of foreign currencies against the U.S. Dollar, since virtually all of the vehicles, accessories and parts that we purchase in connection with our business are purchased from the U.S. subsidiaries of Japanese manufacturers in U.S. Dollars. Additionally, all of our product sales are made in the United States in U.S. Dollars. In the event that our business model changes in the future, and we either purchase products in foreign currencies such as Japanese Yen, or sell products outside of the United States, for which we accept payment in foreign currencies, we could become subject to exchange rate fluctuations at that time.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 

The following financial statements are contained in this Annual Report:

- Report of Independent Registered Public Accounting Firm;

- Consolidated Balance Sheets - December 31, 2006 and 2005;

- Consolidated Statements of Income - Years ended December 31, 2006, 2005 and 2004;

- Consolidated Statements of Stockholders' Equity - Years ended December 31, 2006, 2005 and 2004;

- Consolidated Statements of Cash Flow - Years ended December 31, 2006, 2005 and 2004; and

- Notes to Consolidated Financial Statements.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE     

None.

ITEM 9A. CONTROLS AND PROCEDURES 

Our management evaluated, with the participation of our principal executive officer and principal financial officer, the effectiveness of our disclosure controls and procedures as of the end of the period covered by this Annual Report (December 31, 2006). Based on this evaluation, our principal executive officer and our principal financial officer have concluded that, as of the end of the period covered by this Annual Report, our disclosure controls and procedures were effective. Disclosure controls and procedures mean our controls and other procedures that are designed to ensure that information required to be disclosed by us in our reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in our reports that we file or submit under the Securities Exchange Act of 1934 is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure. There have been no changes in our internal control over financial reporting that occurred during the year ended December 31, 2006 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
 
32


ITEM 9B. OTHER INFORMATION

Not applicable.
 
33



PART III

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

Set forth below are the names, ages, and positions of each of our executive officers and directors, together with such person’s business experience during the past five (5) years. Their business experience is based on information provided by each of them to us. Directors are to be elected annually at our annual meeting of shareholders and served in that capacity until the earlier of their resignation, removal or the election and qualification of their successor. Executive officers are elected annually by our Board of Directors to hold office until the earlier of their death, resignation, or removal.
 
 
AGE
 
POSITIONS HELD AND TENURE
Russell A. Haehn
 
59
 
Chairman, Chief Executive Officer and Director since January 2004
Gregory A. Haehn
 
60
 
President, Chief Operating Officer and Director since January 2004
  
Officers and Directors

Russell A. Haehn has been the Chairman, Chief Executive Officer and Secretary of the Company since the acquisition of W.W. Cycles, in January 2004, and holds the same positions with W.W. Cycles since such time. Prior to such acquisition, Mr. Haehn had been the Vice President and a director of W.W. Cycles since its inception in 1984. From 1990 to 2000, Mr. Haehn also was the founder, President, a director and the sole shareholder of Andrew Cycles Incorporated, which was an importer and exporter of motorcycles.

Gregory A. Haehn has been the President, Chief Operating Officer, Treasurer and a director of the Company since the acquisition of W.W. Cycles, in January 2004, and holds the same positions with W.W. Cycles since such time. Mr. Haehn, since its inception in 1998, also has been the President, director and sole shareholder of Yukon International Inc., a manufacturer, distributor and retailer of fitness equipment. From May 2000 to December 2000, Mr. Haehn was President of Interactive Marketing Technologies, Inc., a publicly-traded company in the direct marketing business. From 1988 to 1997, Mr. Haehn was the founder, President and sole shareholder of Midwest Motorsports Inc., a power sports dealership in Akron, Ohio which sold motorcycles. Additionally, from 1976 to 1997, Mr. Haehn was the President of Worldwide Auto Parts Inc., a leading regional auto parts supply business in Northeastern Ohio.

Russell Haehn and Gregory Haehn are brothers. The present term of office of each director will expire at the next annual meeting of shareholders.

Our executive officers are elected annually at the first meeting of our board of directors held after each annual meeting of shareholders. Each executive officer holds office until his successor is duly elected and qualified, until his resignation, or until removed in the manner provided by our bylaws.
 
34


Agreement to Appoint Additional Director

Until February 2011, we have agreed to appoint a designee of HCFP/Brenner Securities LLC, the placement agent in the September 2005 Private Placement, to serve on our board of directors. In the event that said placement agent does not exercise its right to appoint a designee to our board, it shall have the right to send a representative (who need not be the same individual from meeting to meeting) to observe each meeting of the board of directors. Except as provided herein, there are no arrangements between any director or director nominee of the Company and any other person pursuant to which he was, or will be, selected as a director.
 
Director Compensation

We have not paid any cash compensation to our directors for their service on the board of directors, and do not have any plans to do so, in the near future. We do not currently maintain liability insurance coverage for the acts of our officers and directors, but we have agreed to obtain liability insurance in an amount not less than $1,500,000, on or around the date that said placement agent's designee commences services on our board, if this shall occur, and will include said placement agent's designee as an insured under such policy.

Significant Employees

Phillip A. Andrews has been the general manager of our W.W. Cycles subsidiary since 1984.

Paul Katsiadas employed by our Chicago Cycles subsidiary as sales manager from April 2006 through April 2007 and in April 2007 replaced Jerry Fokas as Chicago Cycles’ general manager. During the 12-year period prior to his employment with us, Mr. Katsiadas held several management positions automobile dealerships.

Governance

The Company has not formally appointed an audit committee, and the entire board of directors (two persons) currently serves the function of an audit committee. The Company has not made a determination as to whether any of its directors would qualify as an audit committee financial expert. The Company has not yet adopted a code of ethics applicable to its chief executive officer and chief accounting officer, or persons performing those functions, because of the small number of persons involved in management of the Company.

Compliance with Section 16(a) of the Exchange Act

Section 16(a) of the Securities Exchange Act of 1934, as amended, generally requires our directors and executive officers and persons who own more than 10% of a registered class of our equity securities (“10% owners”) to file with the SEC initial reports of ownership and reports of changes in ownership of common stock and other equity securities of the Company. Directors and executive officers and 10% owners are required by SEC regulation to furnish us with copies of all Section 16(a) reports they file. To our knowledge, based solely on review of copies of the reports furnished to us and verbal representations that no other reports were required to be filed during the fiscal year ended December 31, 2006, all Section 16(a) filing requirements applicable to our directors, executive officers and 10% owners were met.
 
35


ITEM 11. EXECUTIVE COMPENSATION

Compensation Discussion and Analysis

The goal of our executive compensation program is to ensure that our executives are compensated effectively in a manner consistent with our strategy and competitive considerations and based on management’s performance in achieving our corporate goals and objectives. Since we do not have a compensation committee, all decisions regarding compensation of our executive officers are made by our Board of Directors, which is comprised of our Chairman and Chief Executive Officer and our President and Chief Operating Officer. Although we do not have an independent director to review the compensation arrangements provided to our executive officers, we believe that the compensation paid to our executive officers is comparable with compensation programs provided to executives of similarly situated companies and that such compensation is commensurate with the duties and efforts of our executive officers.

Principal Elements of Executive Compensation

Our executive compensation program consists primarily of payments of annual base salaries to our Chairman and Chief Executive Officer and President and Chief Operating Officer. In determining base salaries, we give consideration to the scope of each executive’s responsibilities. We conduct performance reviews of our employees, including our executive officers, annually. Based on the performance assessments, and considering changes in salaries provided comparable personnel of companies with whom we compete for management talent, any changes in job duties and responsibilities and our overall financial results, we make adjustments, usually on an annual basis, in base salary rates.

Perquisites

Our executive officers participate in the same group insurance and employee benefit plans as our other employees. Each of them is also provided with an automobile allowance of $12,000 per year. Our use of perquisites as an element of compensation is limited and is largely based on the historical practices and policies of the Company. We do not view perquisites as a significant element of our comprehensive compensation structure, but do believe that they can be used in conjunction with our general compensation program to attract, motivate and retain desirable managers in a competitive environment.

Summary Compensation Table

The following table sets forth the annual and long-term compensation paid for the fiscal years ended December 31, 2006, 2005 and 2004 to our Chairman and Chief Executive Officer; and President and Chief Operating Officer (collectively, the “Named Executive Officers”). No other officer received compensation in excess of $100,000 in any of those years.


Name and Positions
 
Fiscal
Year
 
Salary ($)
 
Bonus ($)
 
Option Awards ($)
 
All Other
Compensation ($)
 
Total ($)
 
Russell A. Haehn,
 
 
2004
 
$
94,500(1)
 
 
-0-
 
$
390,849 
 
$
137,000(2
)
$
622,349
 
Chairman and
   
2005
 
$
91,000
   
-0-
   
-0-
   
274,935(2
)
$
365,395
 
Chief Executive Officer
   
2006
 
$
101,500
   
-0-
   
-0-
   
175,335(2
)
$
276,835
 
                                       
Gregory A. Haehn,
 
 
2004(3)
 
$
26,000
 
 
-0-
 
$
195,425
 
$
12,000(4
)
$
233,425
 
President and    
2005
 
$
70,700    
-0-
   
-0-
 
$ 
49,000(4
) 
$ 
119,700  
Chief Operating Officer    
2006
 
$
71,600
   
-0-
   
-0-
 
$
34,430(4
)
$
106,030
 

 
 

(1) Russell Haehn was employed by W.W. Cycles, the wholly-owned subsidiary of the Company that was acquired in January 2004. Compensation paid to him from January 1, 2004 through January 14, 2004, reflect amounts paid by W.W. Cycles to him.

(2) Other compensation payable to Russell Haehn includes amounts payable to Mr. Haehn directly from manufacturers of certain of the products we sell, as an incentive to sell these products. The total amounts paid to Mr. Haehn during the years set forth in the above table were $125,000 in 2004, $262,935 in 2005 and $163,335 in 2006. Mr. Haehn also received an automobile allowance of $12,000 per year in each of those years.

(3) Gregory Haehn became an employee of the Company in January 2004.

(4) Other compensation payable to Gregory Haehn reflects an automobile allowance of $12,000 in each of 2004, 2005 and 2006 and an aggregate of $37,000 paid to Mr. Haehn in 2005 and $22,430 in 2006 directly from manufacturers of certain of the products we sell, as an incentive to sell these products.

 
 
Option Awards
 
 
 
Name
 
Number of
Securities
Underlying
Unexercised
Options
Exercisable
 
Number of
Securities
Underlying
Unexercised
Options
Unexercisable
 
Option
Exercise
Price
 
Option
Expiration
Date
 
                    
Russell A. Haehn
   
1,000,000
   
 
$
1.25
   
8/16/2009
 
                           
Gregory A. Haehn
   
500,000
   

 
$
1.25
   
8/16/2009
 

36


Employment Agreements

We do not have a written employment agreement with either of our Named Executive Officers.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT 
 
As of April 12, 2007, we had a total of 12,213,126 shares of common stock issued and outstanding.

The following table sets forth information, as of April 12, 2007, with respect to the beneficial ownership of our common stock by: (i) all directors; (ii) the Named Executive Officers; (iii) all current executive officers and directors as a group; and (iv) each shareholder known by us to be the beneficial owner of more than 5% of our common stock.


Name
 
 
 
Number of Shares Owned Beneficially (1)
 
 
 
Approximate Percent of Class
Owned (1)(2)(3)
 
Russell A. Haehn (4)(6)
   
5,785,000
   
43.8%
 
Gregory A. Haehn (5)(6)
   
3,235,000
   
25.4%
 
           
 
 
All Executive Officers and Directors, as a Group (two persons)
   
9,020,000
   
65.8%
 
 


(1)
Beneficial ownership information is based on information provided to the Company. Except as indicated, and subject to community property laws when applicable, the persons named in the table above have sole voting and investment power with respect to all shares of common stock shown as beneficially owned by them. Except as otherwise indicated, the address of such persons is the Company’s offices at 13134 State Route 62, Salem, Ohio 44460.
 
(2)
The percentages shown are calculated based upon 12,213,126 shares of common stock outstanding on April 12, 2007. The numbers and percentages shown include the shares of common stock actually owned as of April 12, 2007 and the shares of common stock that the person or group had the right to acquire within 60 days of April 12, 2007. In calculating the percentage of ownership, all shares of common stock that the identified person or group had the right to acquire within 60 days of April 12, 2007 upon the exercise of options and warrants are deemed to be outstanding for the purpose of computing the percentage of the shares of common stock owned by such person or group, but are not deemed to be outstanding for the purpose of computing the percentage of the shares of common stock owned by any other person.

(3)
Notwithstanding each person or group’s beneficial ownership of the Company’s common stock, since the Series A Shares are entitled to vote together with the common stock on all matters submitted to shareholders for their approval, each person’s31.9%; Gregory A. Haehn - 18.4%; and all executive officers and directors as a group - 48.5%.

(4)
Includes a five-year non-qualified stock option, granted to Mr. Russell Haehn on August 16, 2004, to purchase up to 1,000,000 shares of common stock at an exercise price of $1.25 per share.
 
37

 
(5)
Includes (i) 2,655,000 shares of common stock owned directly by Mr. Haehn and (ii) 80,000 shares of common stock owned by Mr. Haehn’s minor children. Does not include an additional 80,000 shares of common stock owned by two other of Mr. Haehn’s children for which he disclaims any beneficial ownership. Also includes a five-year non-qualified stock option, granted to Mr. Gregory Haehn on August 16, 2004, to purchase up to 500,000 shares of common stock at an exercise price of $1.25 per share.

(6)
Russell Haehn and Gregory Haehn are brothers.

The Company is not aware of any arrangement which might result in a change in control in the future.
 
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

We lease our 75,000 square foot facility in Salem, Ohio from an affiliated entity controlled by Russell A. Haehn, our Chairman, Chief Executive Officer and a controlling shareholder. Pursuant to the terms of a new lease, effective January 1, 2007, we lease this facility under a 10-year lease at a rental rate of $24,000 per month. The current term expires in December 2006 but may be extended for two additional periods of five years each, at a rental rate to be negotiated. We believe that the terms of this arrangement are no less favorable to us than those that would be available for a similar facility leased from a third party in a bona fide arms length transaction.

In 2002, we provided a loan to Andrews North, Inc., a corporation owned by Russell A. Haehn, in the aggregate amount of $104,899, for use for general working capital purposes. This loan has been repaid in full and there are no loans currently outstanding to Andrews North, Inc. In 2002 and 2003, we also made advances to Mr. Haehn in an aggregate amount of approximately $350,000 to pay income taxes payable by him with respect to income allocated to him from W.W. Cycles, which was then a Subchapter S corporation. We also made loans in September and November of 2004, in an aggregate amount of approximately $66,000, to Marck's Real Estate, Inc, a corporation owned by Russell A. Haehn and the owner of our Salem, Ohio facilities. These loans were used by Marck's Real Estate to pay construction costs relating to the expansion of our Ohio facilities. We made additional loans to Marck's Real Estate in 2005, and at December 31, 2005 the aggregate outstanding amount of such loans was approximately $261,667. All loans to Russell Haehn and Marck's Real Estate were repaid as of March 31, 2006.

On October 27, 2006, Russell Haehn, our Chairman and Chief Executive Officer provided a working capital loan to us in the amount of $350,000. This loan is evidenced by a promissory note (the “Note”) in the principal amount of $350,000 payable on demand any time after October 26, 2007. The Note bears interest at a rate of 6% per annum, and the outstanding principal amount and all accrued interest are payable upon demand or sooner if prepaid by us.
 
38


ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

Our principal outside auditor is Bagell, Josephs, Levine & Company, LLC (“Bagell”). Set forth below are the fees and expenses for Bagell for each of the last two years for the following services provided to us:

   
2006
 
2005
 
           
Annual Audit Fees
 
$
60,000
 
$
55,000
 
               
Audit-Related Fees
 
$
36,000
 
$
25,500 (1
)
               
Tax Fees
   
   
 
               
Other Fees
   
 
$
21,862 (2
)
               
Total Fees
 
$
96,000
 
$
102,362
 
 

(1) Fees paid for quarterly review of financial statements.

(2) Fees paid for services provided in connection with the Company’s Form S-1 Registration Statement, including review of SEC Comment Letter.

Our Board of Directors approves each non-audit engagement or service with or by our independent auditor. Prior to approving any such non-audit engagement or service, it is the Board's practice to first receive information regarding the engagement or service that (i) is detailed as to the specific engagement or service, and (ii) enables the Board to make a well-reasoned assessment of the impact of the engagement or service on the auditor's independence. The Board approved all non-audit engagements with, and services provided by, our auditors during 2005.
 
39

 
PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENTS AND SCHEDULES

Exhibit Number and Document Description

2.1
 
Stock Purchase and Reorganization Agreement dated as of December 30, 2003 (1).
     
2.2
 
 Repurchase Agreement dated December 30, 2003 (1).
     
2.3
 
 Stock Purchase Agreement dated as of December 30, 2003 (1).
     
2.4
 
 Share Purchase Agreement dated as of December 30, 2003 (1).
     
2.5
 
 Asset Purchase Agreement dated April 2004 (Exhibit 2.1) (2).
     
3.1
 
Restated Articles of Incorporation of Giant Motorsports, Inc. (3).
     
3.2
 
 Bylaws of Giant Motorsports, Inc. (4).
     
4.1
 
 Form of Warrant for 1,000,000 shares of common stock dated January 20, 2004 (1).
     
4.2
 
 Form of Warrant for 100,000 shares of common stock dated April 19, 2004 (5).
     
4.3
 
 Stock Option Agreement with Russell A. Haehn (1,000,000 shares) (Exhibit 4.2) (6).
     
4.4
 
 Stock Option Agreement with Gregory A. Haehn (500,000 shares) (Exhibit 4.3) (6).
     
4.5
 
 Certificate of Designation of Series A Convertible Preferred Stock (Exhibit 99.1) (7).
     
4.6
 
 Form of Investor Warrant (September 2005 Private Placement) (Exhibit 99.2) (7).
     
4.7
 
 Form of Purchase Option (September 2005 Private Placement) (Exhibit 99.3) (7).
     
4.8
 
 Registration Rights Agreement (September 2005 Private Placement (Exhibit 99.4) (7).
     
4.9
 
 Specimen stock certificate for shares of common stock (8).
     
4.10
 
 Specimen stock certificate for Series A Shares (8).
     
4.11
 
 Specimen Warrant Certificate (9).
     
4.12
 
Form of Warrant Agreement between Olde Monmouth Stock Transfer Co., Inc. and the Company (9).
     
10.1
 
Agency Agreement between Giant Motorsports, Inc. and HCPF/Brenner Securities LLC dated September 9, 2005 (7).
     
10.2    Lease dated October 1, 2006, effective January 1, 2007, between Russell A. Haehn d/b/a Marck's Real Estate and W.W. Cycles, Inc. *
     
20.1
 
 Secured Promissory Note dated April 2004 in the principal amount of $1,675,000 (2).
     
20.2
 
 Commercial Security Agreement dated April 2004 (2).
 
40

 
20.3
 
Management Agreement between King's Motorsports Inc. d/b/a Chicago Cycle and Giant Motorsports, Inc. dated April 2004 (2).
     
21
 
 Subsidiaries.*
     
31.1
 
 Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Rule 13a-4(a)) *
     
31.2
 
Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Rule 13a-14(a)) *
     
32.1
 
 Certificate of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as Adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Rule 13a-14(b)) *
     
32.2
 
Certificate of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Rule 13a-14(b)) *


* Filed herewith

(1) Filed as an exhibit to the Form 8-K filed January 23, 2004 and incorporated herein by reference.

(2) Filed as an exhibit to the Form 8-K filed May 11, 2004 and incorporated herein by reference.

(3) Filed as an exhibit to the Definitive Schedule 14C filed March 15, 2004 and incorporated herein by reference.

(4) Filed as an exhibit to the Form 10-KSB filed April 15, 2005 and incorporated herein by reference.

(5) Filed as an exhibit to the Form 8-K filed on April 21, 2004 and incorporated herein by reference.

(6) Filed as an exhibit to the Form 8-K filed on August 18, 2004 and incorporated herein by reference.

(7) Filed as an exhibit to the Form 8-K filed on September 22, 2005 and incorporated herein by reference.

(8) Filed as an exhibit to the Registration Statement on Form S1/A filed on January 12, 2006 and incorporated herein by reference.

(9) Filed as an exhibit to the Registration Statement on Form 8-A filed on January 19, 2006 and incorporated herein by reference. 
 
41


SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
     
 
GIANT MOTORSPORTS, INC.
 
 
 
 
 
 
By:    
 
Russell A. Haehn
Chairman and Chief Executive Officer
 

April 13, 2007
 
Pursuant to the requirements of the Securities Exchange Act of 1934, this Annual Report on Form 10-K has been signed by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
  
     
 
 
 
 
 
 
 
April 13 , 2007
 
Russell A. Haehn
Chairman and Chief Executive Officer (principal executive officer)
     
 
 
 
 
 
 
 
April 13, 2007
 
Gregory A. Haehn
President and Chief Operating Officer
(principal financial and accounting officer)


42

 
 

GIANT MOTORSPORTS, INC.

FINANCIAL STATEMENTS

December 31, 2006, 2005 and 2004







- - - o o 0 o o - - -

CONTENTS

 
PAGE
CONSOLIDATED FINANCIAL STATEMENTS:
 
   
REPORT OF INDEPENDENT REGISTERED PUBLIC
 
ACCOUNTING FIRM
F-1
BALANCE SHEETS
F-2 - F-3
STATEMENTS OF INCOME (LOSS)
F-4
STATEMENTS OF STOCKHOLDERS’ EQUITY
F-5
STATEMENTS OF CASH FLOWS
F-6 - F-7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
F-8 - F-27










BAGELL, JOSEPHS, LEVINE & COMPANY, L.L.C.
Certified Public Accountants
High Ridge Commons
Suites 400-403
200 Haddonfield Berlin Road
Gibbsboro, New Jersey 08026
(856) 346-2828 Fax (856) 346-2882

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors
Giant Motorsports, Inc.
Salem, Ohio

We have audited the accompanying consolidated balance sheets of Giant Motorsports, Inc. as of December 31, 2006 and 2005, and the related consolidated statements of income(loss), stockholders' equity, and cash flows for each of the years in the three-year period ended December 31, 2006. . These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Giant Motorsports, Inc. as of December 31, 2006 and 2005, and the results of its operations and its cash flows for the years in the three-year period ended December 31, 2006 in conformity with accounting principles generally accepted in the United States of America.



/s/ BAGELL, JOSEPHS, LEVINE & COMPANY, LLC 
BAGELL, JOSEPHS, LEVINE & COMPANY, LLC
Gibbsboro, New Jersey
April 8, 2007


F-1



GIANT MOTORSPORTS, INC.
 
CONSOLIDATED BALANCE SHEETS
 
DECEMBER 31,
 
   
           
   
2006
 
2005
 
           
ASSETS
 
           
CURRENT ASSETS
         
Cash and cash equivalents
 
$
156,530
 
$
227,301
 
Accounts receivable, net
   
3,803,718
   
4,850,408
 
Accounts receivable, affiliates
   
-
   
261,667
 
Inventories
   
21,267,135
   
16,775,069
 
Federal income tax receivable
   
-
   
119,500
 
Deferred tax assets
   
113,900
   
-
 
Prepaid expenses
   
10,131
   
74,255
 
TOTAL CURRENT ASSETS
   
25,351,414
   
22,308,200
 
               
               
               
PROPERTY AND EQUIPMENT, NET
   
2,004,274
   
1,893,967
 
               
               
               
               
OTHER ASSETS
             
Goodwill
   
1,688,950
   
1,588,950
 
Deposits
   
41,000
   
41,000
 
TOTAL OTHER ASSETS
   
1,729,950
   
1,629,950
 
   
$
29,085,638
 
$
25,832,117
 

The accompanying notes are an integral part of these consolidated financial statements.
           


F-2



GIANT MOTORSPORTS, INC.
 
CONSOLIDATED BALANCE SHEETS (CONTINUED)
 
DECEMBER 31,
 
           
           
   
2006
 
2005
 
           
LIABILITIES AND STOCKHOLDERS' EQUITY
 
           
CURRENT LIABILITIES
         
Current portion of long-term debt
   
1,513,665
   
714,623
 
Notes payable, floor plans
   
20,885,887
   
17,159,719
 
Note payable, officer
   
352,500
   
193,135
 
Accounts payable, trade
   
1,987,152
   
2,370,369
 
Accrued expenses
   
493,939
   
654,417
 
Customer deposits
   
196,246
   
87,051
 
TOTAL CURRENT LIABILITIES
   
25,429,389
   
21,179,314
 
               
DEFERRED TAX LIABILITIES
   
20,600
   
52,100
 
               
LONG-TERM DEBT, Net of current portion
   
-
   
783,856
 
TOTAL LIABILITIES
   
25,449,989
   
22,015,270
 
               
COMMITMENTS
             
               
STOCKHOLDERS' EQUITY
             
Preferred stock, $.001 par value, authorized 5,000,000 shares
             
5,000 shares designated Series A Convertible, $1,000 stated
             
value, 2,450 and 2,870 shares issued and outstanding at
             
December 31, 2006 and 2005, respectively
   
2,450,000
   
2,870,000
 
Common stock, $.001 par value, authorized 75,000,000 shares
             
11,791,747 and 10,445,000 shares issued and outstanding
             
at December 31, 2006 and 2005, respectively
   
11,792
   
10,445
 
Additional paid-in capital
   
1,868,592
   
641,277
 
Additional paid-in capital - Options
   
93,426
   
109,442
 
Additional paid-in capital - Warrants
   
1,724,800
   
2,020,480
 
Additional paid-in capital - Beneficial conversions
   
1,303,400
   
1,526,840
 
Issuance cost on preferred series A convertible
   
(786,762
)
 
(786,762
)
Retained deficit
   
(3,029,599
)
 
(2,574,875
)
TOTAL STOCKHOLDERS' EQUITY
   
3,635,649
   
3,816,847
 
   
$
29,085,638
 
$
25,832,117
 

           
The accompanying notes are an integral part of these consolidated financial statements.
           


F-3



GIANT MOTORSPORTS, INC.
 
CONSOLIDATED STATEMENTS OF INCOME (LOSS)
 
FOR THE YEARS ENDED DECEMBER 31,
 
               
               
   
2006
 
2005
 
2004
 
REVENUES
             
Sales
 
$
97,637,103
 
$
103,117,471
 
$
77,615,237
 
Finance, insurance and extended service revenues
   
3,114,683
   
2,487,596
   
2,335,618
 
 TOTAL REVENUES
   
100,751,786
   
105,605,067
   
79,950,855
 
                     
COST OF SALES
   
86,340,024
   
93,327,630
   
70,025,884
 
 GROSS PROFIT
   
14,411,762
   
12,277,437
   
9,924,971
 
                     
OPERATING EXPENSES
                   
Selling expenses
   
8,313,676
   
7,359,362
   
5,003,299
 
General and administrative expenses
   
4,980,384
   
4,286,549
   
2,753,416
 
     
13,294,060
   
11,645,911
   
7,756,715
 
 INCOME FROM OPERATIONS
   
1,117,702
   
631,526
   
2,168,256
 
                     
OTHER INCOME AND (EXPENSE)
                   
Other income, net
   
20,883
   
100,714
   
38,592
 
Interest expense, net
   
(1,413,383
)
 
(779,943
)
 
(626,587
)
Gain on sale of assets
   
21,500
   
-
   
-
 
     
(1,371,000
)
 
(679,229
)
 
(587,995
)
                     
INCOME (LOSS) BEFORE PROVISION
                   
(BENEFIT) FOR TAXES
   
(253,298
)
 
(47,703
)
 
1,580,261
 
                     
PROVISION (BENEFIT) FOR INCOME TAXES
   
(72,100
)
 
(38,900
)
 
622,200
 
NET INCOME (LOSS) BEFORE PREFERRED DIVIDENDS
   
(181,198
)
 
(8,803
)
 
958,061
 
                     
PREFERRED DIVIDENDS
   
(273,526
)
 
(2,870,000
)
 
-
 
                     
 NET INCOME (LOSS) ATTRIBUTABLE TO
                   
 COMMON STOCKHOLDERS
 
$
(454,724
)
$
(2,878,803
)
$
958,061
 
                     
 BASIC EARNINGS (LOSS) PER SHARE
 
$
(0.04
)
$
(0.28
)
$
0.09
 
                     
 DILUTED EARNINGS (LOSS) PER SHARE
 
$
(0.04
)
$
(0.28
)
$
0.08
 
                     
 WEIGHTED AVERAGE SHARES OUTSTANDING
                   
                     
 BASIC
   
11,090,020
   
10,435,904
   
10,425,000
 
 DILUTED
   
11,090,020
   
10,435,904
   
12,001,503
 

The accompanying notes are an integral part of these consolidated financial statements.
 
                 


F-4



GIANT MOTORSPORTS, INC.
 
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
 
FOR THE YEARS ENDED DECEMBER 31, 2006, 2005, AND 2004
 
                                               
                                               
                                               
                                               
   
Preferred Stock
 
Common Stock
  Paid-in    
Paid-in Capital -
 
Paid-in Capital -
 
Paid-in Capital - Beneficial
 
Issuance Costs Preferred
 
Retained Earnings
     
   
Shares
 
Amount
 
Shares
 
Amount
 
Capital
 
Options
 
Warrants
 
Conversion
 
 Series A
 
(Deficit)
 
Total
 
                                               
Balance, December 31, 2003,
   
-
   
-
   
7,850,000
   
7,850
   
37,150
   
-
   
-
   
-
   
-
   
986,209
   
1,031,209
 
                                                                     
Effects of reverse merger
   
-
   
-
   
2,575,000
   
2,575
   
(2,575
)
 
-
   
-
   
-
   
-
   
-
   
-
 
                                                                     
Reallocation of S-Corporation earnings
   
-
   
-
   
-
   
-
   
986,209
   
-
   
-
   
-
   
-
   
(986,209
)
 
-
 
                                                                     
Retirment of loan
   
-
   
-
   
-
   
-
   
(21,250
)
 
-
   
-
   
-
   
-
   
-
   
(21,250
)
                                                                     
Stock warrants issued as compensation
   
-
   
-
   
-
   
-
   
15,000
   
-
   
-
   
-
   
-
   
-
   
15,000
 
                                                                     
Distributions
   
-
   
-
   
-
   
-
   
-
   
-
   
-
   
-
   
-
   
(654,133
)
 
(654,133
)
                                                                     
Net income for the year
ended December 31, 2004
   
-
   
-
   
-
   
-
   
-
   
-
   
-
   
-
   
-
   
958,061
   
958,061
 
                                                                     
Balance, December 31, 2004
   
-
   
-
   
10,425,000
   
10,425
   
1,014,534
   
-
   
-
   
-
   
-
   
303,928
   
1,328,887
 
                                                                     
Issuance of common stock
 for services
   
-
   
-
   
20,000
   
20
   
11,580
   
-
   
-
   
-
   
-
   
-
   
11,600
 
                                                                     
Issuance of preferred stock
   
2,870
   
2,870,000
   
-
   
-
   
-
   
-
   
-
   
-
   
-
   
-
   
2,870,000
 
                                                                     
Allocation of equity
proceeds
   
-
   
-
   
-
   
-
   
(384,837
)
 
109,442
   
2,020,480
   
1,526,840
   
(786,762
)
 
(2,870,000
)
 
(384,837
)
                                                                     
Net loss for the year ended
 December 31, 2005
   
-
   
-
   
-
   
-
   
-
   
-
   
-
   
-
   
-
   
(8,803
)
 
(8,803
)
                                                                     
Balance, December 31, 2005
   
2,870
   
2,870,000
   
10,445,000
   
10,445
   
641,277
   
109,442
   
2,020,480
   
1,526,840
   
(786,762
)
 
(2,574,875
)
 
3,816,847