Unassociated Document
 
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, 2008

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) 439-9480
(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.
YesNo o

Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-K (§229.405 of this chapter) contained herein, and no disclosure will 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 amendment to this Form 10-K. x
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one)
 
Large accelerated filer o
Accelerated filer o
Non-accelerated filer o (Do not check if a smaller reporting company)
Smaller reporting company 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 8, 2009 was approximately $590,000 as computed by reference to the closing price of the common stock on the Over-the-Counter Bulletin Board as of the last business day of the registrant’s most recently completed second fiscal quarter, June 30, 2008 ($0.15). As of April 8, 2009, the number of issued and outstanding shares of common stock of the registrant was 12,948,316.

 
 

 
 
GIANT MOTORSPORTS, INC.

FORM 10-K

FISCAL YEAR ENDED DECEMBER 31, 2008

Item Number in
Form 10-K
 
Page
   
PART I
   
1
 
Business
 
3
1A.
 
Risk Factors
 
  8
1B.
 
Unresolved Staff Comments
 
  12
2.
 
Properties
 
  12
3.
 
Legal Proceedings
 
  13
4.
 
Submission of Matters to a Vote of Security Holders
 
  13
   
PART II
   
5.
 
Market for Registrant's Common Equity and Related Stockholder Matters and Issuer Purchases of Equity Securities
 
  13
6.
 
Selected Financial Data
 
  16
7.
 
Management's Discussion and Analysis of Financial Condition and Results of  Operations
 
  16
7A.
 
Quantitative and Qualitative Disclosure About Market Risk
 
  22
8.
 
Financial Statements and Supplementary Data
 
  22
9.
 
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
 
  22
9A(T).
 
Controls and Procedures
 
  22
9B.
 
Other Information
 
  23
   
PART III
   
10.
 
Directors, Executive Officers and Corporate Governance
 
  23
11.
 
Executive Compensation
 
  24
12.
 
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
 
  25
13.
 
Certain Relationships and Related Transactions, and Director Independence
 
  26
14.
 
Principal Accountant Fees and Services
 
  27
   
PART IV
 
 
15.
 
Exhibits, Financial Statement Schedules
 
  27
 
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."

 
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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. (440) 439-9480. Our web sites are: www.andrewscycles.com, www.chicagocycle.com and www.giantcorporate.com. Information on our websites does not constitute part of this report.

Development of Our Business

We commenced our motorcycle and powersports 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 King’s Motorsports a total of $2,925,000 for the Chicago Cycles Assets, as follows:
 
·
$1,250,000 on the date of closing; and
 
·
$1,675,000 through the issuance to King’s 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 Fifth Third Bancorp (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, and was payable in full on May 31, 2007, bearing interest at the rate of prime plus one percent (4.25% as of December 31, 2008). This loan was renewed on October 25, 2007 under the same terms and conditions with a maturity date of August 31, 2010. Our payment obligations under this term loan 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, 2008, the outstanding amount of this term loan, including accrued interest thereon, was $399,360.

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.

 
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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 40 employees, as of April 6, 2009, 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, have approximately 48 employees as of April 6, 2009, and sell 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.

In each of fiscal years ended December 31, 2008 and 2007, sales of motorcycles, ATV's and other power sports products, including accessories, accounted for approximately 97% of our total revenues generated during such periods.
 
Servicing and Repairs

In addition to product sales, we also provide servicing and repair services for the products we sell as a courtesy to our customers. These services, which are provided by mechanics, include crash repairs (body work) and normal wear and tear installation and repairs such as brake replacement, repair of exhaust systems, shock absorber replacement, battery replacement, oil changes and tune-ups. During our fiscal years ended December 31, 2008 and 2007, servicing and repairs accounted for approximately 3% of our total revenues generated during such periods. Servicing and repairs have always been an insignificant portion of our business.  Notwithstanding, we believe that today’s more advanced mechanical systems require servicing of motorcycles by professionals, which we believe could result in less self repairs and more opportunities to generate revenue from servicing and repairs in the future.

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 larger 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.;
 

 
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·
Ducati North America; and

·
Polaris Industries, Inc.

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

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

According to the Motorcycle Industry Council, an organization that provides sales information for the motorcycle industry and other organizations that provide sales information, sales of motorcycles in the United States in 2008 decreased to 824,096 units (including  street bikes, off-road bikes and dual sport vehicles (vehicles used both on and off streets)). This represents a decline of 7.2% over the same sales figures in 2007. These statistics do not include Chinese imports.
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).
 
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.

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

Sales and Marketing

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

We are dependent to a significant extent on our ability to finance the purchase of inventory, which in the motorcycle and power sports retail industries involves significant sums of money in the form of floor plan financing. As of December 31, 2008, the Company had $15,047,756 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, Polaris Acceptance 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.

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

Employees

As of April 6, 2009, we had approximately 88 employees (excluding our two executive officers), 40 of whom are employed at our Andrews Cycles dealership and the other 48 of whom are employed at our Chicago Cycles dealership. All of our employees were employed on a full-time basis including two executives, 47 salespersons, 6 administrative persons, 18 service technicians and 17 clerical persons. We are not a party to a collective bargaining agreement with our employees and we believe that our relationship with our employees is satisfactory.

Properties

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

A NOTE ABOUT FORWARD-LOOKING STATEMENTS

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

 
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ITEM 1.A.  RISK FACTORS
 
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. If we were to suffer any adverse circumstance described herein, the value of our common stock could decline. To the extent any of the information contained in this annual report constitutes forward-looking information, the risk factors set forth below are cautionary statements identifying important factors that could cause our actual results for various financial reporting periods to differ materially from those expressed in any forward-looking statements made by or on our behalf and could materially adversely effect our financial condition, results of operations or cash flows. See also, “A Note About Forward-Looking Statements.”

RISKS RELATED TO OUR BUSINESS

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

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

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

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

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

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

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

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

 
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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, 2008, we had $15,047,756 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, 2008, based upon our financial statements, our outstanding indebtedness to third parties, including the $15,047,756 of floor plan notes payable under our floor plan financing arrangements was approximately $19,382,690. As of December 31, 2008 approximately $399,360 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 (4..25% at December 31, 2008) and is secured by a first priority lien on all of our assets, including the assets acquired from Chicago Cycles.
 
The motorcycle and power sports industries are subject to cyclical movements in the economy.

Sales of motorcycles/power sports products, historically have been cyclical, fluctuating with general economic cycles. During economic downturns, this industry tends to experience similar periods of decline and recession as the general economy. We believe that the industry is influenced by general economic conditions and particularly by consumer confidence, the level of personal discretionary spending, interest rates and credit availability. We believe that the downturn within the industry in 2008 was attributable to the following factors: (i) decreased access to credit, as consumers face more stringent requirements in order to obtain financing for motorcycle purchases; (ii) rising food costs, throughout the entire year, and rising energy costs during the first half of 2008, leaving consumers with less of their income for discretionary spending; and (iii) a significant increase in unemployment as well as the fear of unemployment by many who were still employed. There can be no assurance that the industry will not experience sustained periods of declining sales in the future, and that such decline in sales 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.

 
9

 

We are dependent on foreign manufacturers, particularly from Japan, for our products.

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

The retail motorcycle/power sports business is highly competitive.

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

Our business is subject to environmental regulations.

Our business is subject to federal, state and local laws, ordinances and regulations which establish various health and environmental quality standards, and liability related thereto, and provide penalties for violations of those standards. Under certain laws and regulations, a current or previous owner or operator of real property may be liable for the costs of removal and remediation of hazardous or toxic substances or wastes on, under, in or emanating from such property. Such laws typically impose liability whether or not the owner or operator knew of, or was responsible for, the presence of such hazardous or toxic substances or wastes. Certain laws, ordinances and regulations may impose liability on an owner or operator of real property where on-site contamination discharges into waters of the state, including groundwater. Under certain other laws, generators of hazardous or toxic substances or wastes that send such substances or wastes to disposal, recycling or treatment facilities may be liable for remediation of contamination at such facilities. Other laws, ordinances and regulations govern the generation, handling, storage, transportation and disposal of hazardous and toxic substances or wastes, the operation and removal of underground storage tanks, the discharge of pollutants into surface waters and sewers, emissions of certain potentially harmful substances into the air and employee health and safety.
 
Business operations subject to such laws, ordinances and regulations include the use, handling and contracting for recycling or disposal of hazardous or toxic substances or wastes, including environmentally sensitive materials such as motor oil, waste motor oil and filters, transmission fluid, antifreeze, refrigerants, waste paint and lacquer thinner, batteries, solvents, lubricants, degreasing agents, gasoline and diesel fuels. Our business is also subject to other laws, ordinances and regulations as the result of the past or present existence of underground storage tanks at our properties. Certain laws and regulations, including those governing air emissions and underground storage tanks, have been amended so as to require compliance with new or more stringent standards as of future dates. We cannot predict what other environmental legislation or regulations will be enacted in the future, how existing or future laws or regulations will be administered or interpreted or what environmental conditions may be found to exist in the future. Compliance with new or more stringent laws or regulations, stricter interpretation of existing laws or the future discovery of environmental conditions may require additional expenditures on our part, some of which may be material.

We are heavily dependent on our management.

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

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."

 
10

 

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 62.4% 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 46.6% of our outstanding shares of voting stock (giving effect to the voting rights of the 2,450 Series A Shares outstanding at a rate of 2,000 votes for each such preferred share outstanding, and assuming exercise of all options held by such executive officers and directors). This concentration of ownership provides such persons with the ability, except with respect to those matters upon which the holders of the Series A Shares have a separate right of approval, to control and influence all corporate decisions and policies of shareholder voting matters, including, without limitation, the removal of directors. Additionally, except with respect to those matters upon which the holders of the Series A Shares have a separate right of approval, these persons would be able to approve any proposed amendment to our charter, a merger proposal, a proposed sale of assets or other major corporate transaction or a non-negotiated takeover attempt. This concentration of ownership may discourage a potential acquirer from making an offer to buy us, which, in turn, could adversely affect the market price of our common stock and warrants.

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

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

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

 
·
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;

 
11

 

 
·
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 8, 2009, there were outstanding Series A Shares convertible into a total of 4,900,000 shares of our common stock and options and warrants to purchase 8,340,000 shares of common stock, with exercise prices ranging from $0.40 to $2.25 per share. If the holders exercise a significant number of these securities at any one time, the market price of the common stock could fall. In the event that the anti-dilution provisions contained in the Series A Shares and the Series A Warrants are triggered and we also issue additional shares of our common stock as dividends on the Series A Shares so that all or a significant portion of our outstanding common stock becomes available for resale, this could cause an even greater reduction in the market price of our common stock. The value of the common stock held by other shareholders will be diluted. The holders of the options and warrants have the opportunity to profit if the market price for the common stock exceeds the exercise price of their respective securities, without assuming the risk of ownership. If the market price of the common stock does not rise above the exercise price of these securities, then they will expire without exercise. The holders of these options and warrants may also exercise their securities if we are able to raise capital privately or from the public on terms more favorable than those provided in these securities. We cannot predict exactly if, or when, such a financing will be needed or obtained. Furthermore, we cannot predict whether any such financing will be available on acceptable terms, or at all.
 
“Penny stock” regulations may impose certain restrictions on the marketability of our securities.

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

 
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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
 
None.
 
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, 2008.
 
PART II
 
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
 
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
 
                   
3/31/07
 
.16
   
.16
 
.24
   
.24
 
6/31/07
 
.30
   
.30
 
.33
   
.33
 
9/30/07
 
.25
   
.25
 
.40
   
.40
 
12/31/07
 
.28
   
.25
 
.29
   
.29
 
3/31/08
 
.28
   
.16
 
.30
   
.18
 
6/30/08
 
.18
   
.14
 
.15
   
.10
 
9/30/08
 
.19
   
.12
 
.23
   
.17
 
12/31/08
 
.10
   
.09
 
.14
   
.07
 
 
HOLDERS

As of April 9, 2009, there were approximately 33 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 rights 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.

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

Conversion.

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

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

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

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

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

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

 
14

 

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

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

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

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

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

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

RECENT SALES OF UNREGISTERED SECURITIES

We did not sell any unregistered securities during the year ended December 31, 2008..

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, 2008.

 
 
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))
 
Plan Category
(a)
 
(b)
 
(c)
 
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 our two executive officers in August 2004 to purchase shares of our common stock.

 
15

 

ITEM 6.  SELECTED FINANCIAL DATA

Not applicable.
  
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 quarterly 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.

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, Kawasaki, and Polaris. Our superstores operate under the names “Andrews Cycles” and “Chicago Cycles.” Andrews Cycles is located in Salem, Ohio, has approximately 40 employees and operates from an approximately 75,000 square foot facility. Chicago Cycles is located in the Chicago metropolitan area, has approximately 48 employees and operates from an approximately 95,000 square foot facility in Skokie, Illinois, pursuant to a ten-year lease we entered into in October 2004.

Overview of Economic Trends.

Effects of U.S. Credit Markets on Vehicle Financing

During 2007, the U.S. credit markets had dealt with the effects of numerous defaults by homeowners on “sub-prime” mortgage loans. By December 2007 these defaults had also begun to increase with respect to mortgages considered to be of less credit risk than “sub-prime” mortgages. Mortgage default rates have continued to increase through 2008 and are expected to increase for the foreseeable future. Additionally, in 2008, as a result of these defaults and other global credit problems, several banking institutions that have, in the past, provided vehicle financing for motorcycles and other powersports equipment have either ceased doing business or have significantly limited the availability of financing for motorcycles and other powersports equipment. Furthermore, to the extent that financing continues to be available, it is generally only available to consumers with the highest credit ratings, but at interest rates between 14.9% to 19.9% per year, notwithstanding the Federal Reserve’s reduction of the federal discount rate to .25% on December 16, 2008, a situation which can be directly attributed to significant tightening of the global credit markets. In 2008 approximately 26.7% of our motorcycle sales were financed as compared to approximately 31.4% of our sales in 2007.  We believe that this reduction in the number of motorcycle sales financed, in 2008, was primarily attributable to a significant decrease in the number of potential customers who could qualify for financing, as a result of the availability of financing to only those consumers with the highest credit ratings. Additionally, since the reduction in the value of the securities markets has reduced the disposable income of many consumers, including those with the highest credit ratings, our sales have also been negatively impacted by the high interest rates being charged to those who can obtain financing. We believe that our sales will continue to be affected in a negative manner until the credit markets ease and financing becomes more readily available to potential customers for our products.

Effects of Changes in Fuel Costs

Fuel prices rose significantly during the first half of 2008, reaching an all-time high in July 2008, and then fell significantly during the third quarter as a result of a significant reduction in demand caused by a severe weakening of the global economy. Increases in the price of gasoline to over $4.00 per gallon, during the first half of 2008, resulted in a reduction in demand for oil in the second half of 2008. This reduction in demand has continued, to a slightly lesser degree, during the first quarter of 2009 due to the overall weak global economy. Based on current economic forecasts for an extended global recession, we believe that it is reasonable to assume that there will continue to be a lessening of demand for oil throughout at least the first half of 2009, notwithstanding the lower price of oil. To the extent that gas prices remain at their current level of approximately $2.00 per gallon for an extended period of time or fall even further, it is possible that consumers will feel that they have more discretionary income to spend on motorcycles and other powersports equipment, which may be considered more for entertainment and not essential. Notwithstanding these lower prices, there is no assurance that such lower gas prices will provide potential customers with more disposable income as a result of the overall weakness of the economy. If, on the other hand, gas prices increase again to the higher levels experienced during the first half of 2008, we believe that this could 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. While this could have a positive effect on our sales, again the effect of fuel prices may not be enough to counter the overall economic factors that have resulted in a reduction in motorcycle sales throughout the industry.


 
16

 

Effects of Increase in Unemployment 
 
Recently, the rate of unemployment in the United States has reached a historically high level. In addition to all of the other current economic factors contributing to a reduction in sales, it seems very likely that a continued increase in the unemployment rate will have a negative impact on sales.

Overall impact on our Future Earnings

Notwithstanding our downturn in sales during 2008 as compared to 2007, we intend to continue to evaluate and analyze our business decisions through effective inventory management, as described in greater detail under the heading Inventory Management, included elsewhere in this MD&A.    As described in the preceding paragraphs, the health of the U.S. economy, particularly the availability of credit and the discretionary spending power of potential customers, all will have an impact on our future earnings. We believe that we may be able to counter a portion of the reduction in sales by focusing more on sales of used motorcycles which have smaller ticket prices than new motorcycles and provide us with profit margins that can be between 30% and 40% greater than sales of new motorcycles. Additionally, although our revenue per unit may be less, it appears that we have been able to maintain greater sales levels of smaller motorcycles which even when sold new sell at prices significantly less than the larger models. While we are hoping that this strategy will help to increase our sales through the first half of 2009, until the credit markets are hopefully revived, there is no assurance that we will be successful. Furthermore, 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.

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, and was payable in full on May 31, 2007, bearing interest at prime plus one percent (6.25% as of March 31, 2008). This loan was renewed on October 25, 2007 under the same terms and conditions with a maturity date of August 31, 2010. 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, 2008, the outstanding amount of this term loan, including accrued interest thereon, was $399,360.
 
On December 20, 2005, one of our shareholders (the “Bridge Lender”) provided us with a 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 was 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 Bridge 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. The outstanding indebtedness under the 2005 Bridge Note was restructured on December 1, 2007 as provided below.

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 in the principal amount of $350,000 payable on demand any time after October 26, 2007. This 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. The balance as of December 31, 2008 is $168,915.

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 one-half percent (15.5%) per annum (the "2006 Bridge Note"). Interest on the 2006 Bridge Note was 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. The outstanding indebtedness under the 2006 Bridge Note was restructured on December 1, 2007 as provided below.

 
17

 

In consideration of a 1% fee on the principal sum due under the 2005 Bridge Note and the 2006 Bridge Note, on December 1, 2007, we executed a new promissory note in the principal amount of $320,000 (the “2007 Bridge Note”), which reflected the aggregate outstanding principal balance of $70,000 under the 2005 Bridge Note and $250,000 under the 2006 Bridge Note and cancelled the 2005 Bridge Note and the 2006 Bridge Note. The 2007 Bridge Note had an interest rate of 15.5% per annum with a maturity date of August 31, 2008. In August 2008, we repaid all outstanding principal and interest on the 2007 Bridge Note.

On February 26, 2008, Gregory Haehn, the Company’s President and Chief Operating Officer, provided a working capital loan to the Company in the amount of $100,000. This loan is evidenced by a promissory note in the principal amount of $100,000 payable on demand. This 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. The balance as of December 31, 2008 was $92,968.

On October 21, 2008, a stockholder, who is also an employee of the Company, provided a working capital loan to the Company in the amount of $100,000. This loan is evidenced by a promissory note in the principal amount of $100,000 payable on demand. This note bears interest at a rate of 6% per annum commencing on January 1, 2009, and the outstanding principal amount and all accrued interest are payable upon demand or sooner if prepaid by the Company. The balance as of December 31, 2008 was $100,000.

We also had a revolving line of credit with the Bank, in the maximum amount of $250,000. This line of credit bore interest at the rate of prime plus one percent (4.25% as of December 31, 2008), and had no stipulated repayment terms. As of December 31, 2008, the amount of principal and interest outstanding on this credit line was $249,863.  On January 5, 2009, we converted this line of credit into a term loan (the “Term Loan”).  The Term Loan bears interest at a rate of 3.75 points above Libor.  Principal and interest are payable monthly based on a five-year amortization schedule with a balloon payment due and payable on November 30, 2009.

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 of 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. As of December 31, 2008, 420 Series A Shares were converted into 938,500 shares of our common stock. Additionally, during 2007 and through December 31, 2008, we issued an aggregate of 1,156,569 shares of common stock to the holders of our Series A Shares, in lieu of cash dividends. Our dividend payments to the holders of Series A Shares as of September 1, 2008, were paid in cash  and not by issuing additional shares of our common stock. We paid these stockholders an aggregate of $85,750 in respect of this dividend.  We currently intend to pay future dividend payments to the holders of our Series A Shares in cash and not by issuing additional shares of our common stock.
 
Anticipated Funding of Operations.

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

Cash Flow from Operations

We experienced an 11.3% decline in sales in 2008 as compared to 2007, and a reduction in cash flow from operations.  In an attempt to increase our cash flow from operations during 2009, we intend to continue to significantly reduce our inventory and our operating expenses, as we began doing during the third quarter of 2008. Prior to 2008, we increased our cash flow from operations through a consistent plan of reducing operating costs and increasing profit margins on our sales. We intend to continue this policy throughout the remainder of 2009.  We believe that by further reducing our operating costs beyond the levels we achieved in 2008 and continuing to increase our profit margins, we will continue to generate sufficient cash flow from operations to fund our business for at least the next twelve months. To the extent that we experience a significantly weaker sales climate during the remainder of 2009, our ability to continue to generate such cash flow could be impaired, notwithstanding our reduced operating costs and increased profit margins.
 
Bank Financing

On December 31, 2008, we had a revolving credit line with Fifth Third Bancorp of which $249,863 was funded.  The revolving credit line was converted on January 5, 2009 to the Term Loan described above.

 
18

 

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 2008 and the first quarter of 2009 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 inventory of 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.

Year ended December 31, 2008 Compared to Year ended December 31, 2007:
 
   
2008
   
2007
   
Increase (Decrease)
   
% Change
 
Total Revenues
  $ 87,547,927     $ 98,696,692     $ (11,148,765 )     -11.2 %
Cost of Sales
  $ 74,979,381     $ 84,109,662     $ (9,130,281 )     -10.8 %
Gross Profit
  $ 12,568,546     $ 14,587,030     $ (2,018,484 )     -13.8 %
Operating Expenses
  $ 12,124,990     $ 12,190,626     $ (65,636 )     -0.5 %
Income from Operations
  $ 443,556     $ 2,396,404     $ (1,952,848 )     -81.5 %
Other Income and (Expense)
  $ (838,082 )   $ (1,098,960 )   $ (260,878 )     23.7 %
Income (Loss) before Provision (Benefit) for Income Taxes
  $ (394,526 )   $ 1,297,444     $ (1,691,970 )     -130.4 %
Net Income (Loss) before Preferred Dividends
  $ 39,174     $ 766,444     $ (721,270 )     -94.8 %
 
Total Revenues:

Total revenues for the year ended December 31, 2008 were $87,547,927 representing a decrease of $11,148,765 (11.2%) from the $98,696,692 reported for the year ended December 31, 2007. This reduction in revenues between the two periods was primarily attributable to the weak overall economic environment and the increased difficulty for consumers to obtain loans to finance the purchase of our products, all of which caused a reduction in our motorcycle sales, as well as sales throughout the industry.

Cost of Sales:

Cost of sales for the year ended December 31, 2008 was $74,979,381 which was $9,130,281 (10.8%) less than the cost of sales of $84,109,662 for the year ended December 31, 2007. This reduction in the cost of sales for the comparable periods was primarily attributable to the 11.2% reduction in sales of motorcycles and other powersports products in 2008 compared to 2007.

Gross Profit:

Gross profit for the year ended December 31, 2008 was $12,568,546 which was $2,018,484 (13.8%) less than gross profit for the year ended December 31, 2007.  This reduction in gross profit was primarily attributable to the 11.2% reduction in sales between these two comparable periods which was only partially offset by a 10.8% reduction in the cost of those sales.

Operating Expenses

Operating expenses for the year ended December 31, 2008 were $12,124,990 as compared to $12,190,626 for the year ended December 31, 2007.  This represented a nominal reduction in operating expenses between the two periods.

Income from Operations:

We had income from operations, before other income (expense) for the year ended December 31, 2008 of $ 443,556, as compared to income from operations before other income (expense) of $2,396,404 for the year ended December 31, 2007, which reflects a decrease in income of $1,952,848 (81.5%). This decrease in income from operations was the result of the significant decline in sales and corresponding reduction in gross profit, as discussed above.  This decrease can also be attributed to the fact that notwithstanding the significant decrease in sales of motorcycles and other powersports equipment between these two periods, operating expenses decreased only nominally.   

 
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Other Income and (Expense):

Other expenses for the year ended December 31, 2008 were $838,082, representing a $260,878 decrease (23.7%) from $1,098,960 for the year ended December 31, 2007. This reduction in other expense was primarily attributable to the reduction of interest expenses from $1,272,885 during 2007, compared to $990,450 during 2008. The reduction in interest expenses between the comparable periods was primarily attributable to the reduction in the amount of inventory we carried under our floor plan financing arrangements at both of our locations during 2008.

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

We had a loss before benefit for taxes for the year ended December 31, 2008 of $394,526 as compared with income before provision for taxes of $1,297,444 for the year ended December 31, 2007, which represents a decrease of $1,691,970 (130%).  The change from income before provision for income taxes to a loss before benefit for taxes can be attributed to the same reasons for the decrease in income from operations discussed above.  Income before provision from income taxes during 2008 was somewhat better when compared with the same period in 2007, as a result of the reduction in interest expense, between the two periods, as described in Other Income and (Expense) above.

Net Income before Preferred Dividends:

We had net income before preferred dividends of $39,174 for the year ended December 31, 2008, as compared to net income before preferred dividends of $766,444 for the year ended December 31, 2007. This reflects a decrease in income before preferred dividends of $727,270 (94.8%) between these comparable periods. The decrease in income before preferred dividends can be attributed to the same reasons described under the heading Income (Loss) before Provision (Benefit) for Income Taxes above.  This reduction in net income before preferred dividends would have been greater had we not had a benefit of $433,700 benefit for taxes in 2008 in respect of an adjustment for overstated tax liability in a previous period.

Liquidity and Capital Resources.

Our primary source of liquidity has been cash generated by operations and borrowings under various credit facilities. As of December 31, 2008, we had $549,551 in cash and cash equivalents, compared to $919,784 as of December 31, 2007. Until required for operations, our policy is to invest excess cash in bank deposits and money market funds. Net working capital as of December 31, 2008 was $1,669,936, compared to $1,442,703 as of December 31, 2007.
 
The Company receives floor plan financing from six different motorcycle manufacturers for whom the Company sells the manufacturers' products. The Company uses such floor plan financing to assist it in financing and carrying the Company's inventory necessary to achieve the Company's sales goals. Such manufacturers' collateral includes all unit inventory plus a general lien on all assets of Andrews Cycles and Chicago Cycles.
 
The Company has acquired the loans described under the heading Loan Transactions above. As a result of the September 2005 Private Placement, the Company also raised additional cash from financing activities of approximately $2,485,000 for use in connection with its operations.  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 distribution rights for brands.
 
As of December 31, 2008, we had outstanding indebtedness payable within 12 months in an aggregate amount of approximately $19,176,978. Of this amount, approximately $15,520,395 is payable to financial institutions in repayment of loans and other credit facilities provided to us and approximately $2,842,705 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 2008 models before the 2009 models are released, it could be very difficult for us to sell our remaining inventory of 2008 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.

 
20

 

Management believes from information obtained within the industry that several motorcycle manufacturers will reduce their production in the model year 2009. A reduction in units produced will result in fewer units allocated to most dealerships. However, we believe that because of the number of units sold from our dealerships in 2008 and because allocation of units by dealerships is based upon the number of units a dealership sold during the prior year, we will not be adversely affected by the reduced production in 2009.

With respect to carryover models, while we attempt to limit carryover to 10% of total sales, we are able to benefit from cash incentives provided by manufacturers for most carryover products. These cash incentives minimize our need to reduce prices for carryover 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 publicized offers of large cash rebates generate consumer interest resulting in greater showroom traffic.

Seasonality.

Our two main products - motorcycles and 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 as of the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. On an on-going basis, management evaluates its estimates and judgments, including those related to revenue recognition, fixed assets, inventory, accounts receivable, accrued expenses, financing operations, and contingencies and litigation. Management bases its estimates and judgments on historical experience and on various other factors that are believed reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. Set forth below are the policies that we have identified as critical to our business operations and the understanding of our results of operations or that involve significant estimates. For detailed discussion of other significant accounting policies see Note A, Summary of Significant Accounting Policies, of Notes to Consolidated Financial Statements, contained elsewhere in this Annual Report.
 
Intangibles and Long-lived Assets - Goodwill is tested for impairment on an annual basis, or more frequently if events or circumstances indicate that impairment may have occurred. The Company is subject to financial statement risk to the extent that intangible assets become impaired due to decreases in the fair market value of the related underlying business.

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

Revenue Recognition: Vehicle Sales - The Company records revenue when vehicles are delivered and title has passed to the customer, when vehicle service or repair work is performed and/or 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.

 
21

 

Off-Balance Sheet Arrangements.

We have no off-balance sheet arrangements.

Contractual Obligations.

Not applicable.

ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK 
 
Not applicable.
 
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, 2008 and 2007;

· Consolidated Statements of Income (Loss) - Years ended December 31, 2008 and 2007;

· Consolidated Statements of Stockholders' Equity - Years ended December 31, 2008 and 2007;

· Consolidated Statements of Cash Flow - Years ended December 31, 2008 and 2007; and

· Notes to Consolidated Financial Statements.

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

None.
 
ITEM 9A(T).  CONTROLS AND PROCEDURES 
 
Evaluation of Disclosure Controls and Procedures

In accordance with the rules required by the SEC for information required to be disclosed, in this annual report, the Company’s management evaluated, with the participation of the Company’s President and Chief Executive Officer, the effectiveness and the operation of the Company’s disclosure controls and procedures. Based upon their evaluation of these disclosure controls and procedures, the President and Chief Executive Officer have concluded that the Company’s disclosure controls and procedures were effective for accumulating recording, processing, summarizing and communicating, to the Company’s management, to ensure timely decisions regarding disclosure information needed within the time periods specified in the SEC rules and forms.

Management’s Report on Internal Control over Financial Reporting

The Company’s management is responsible for establishing adequate internal control over financial reporting. Internal control over financial reporting is a process to provide reasonable assurances regarding the reliability of our financial reporting for external purposes. Internal control over financial reporting includes maintaining records that in reasonable detail accurately and fairly reflect our transactions; providing reasonable assurance that transactions are recorded as necessary for the preparation of our financial statements; providing reasonable assurances that receipts and expenditures of Company assets are made with management authorization; and providing reasonable assurances that unauthorized acquisition use or disposition of Company assets that could have a material effect on our financial statements would be prevented or detected on a timely basis.

Under the supervision of management, including the two executive officers, an evaluation was conducted to measure the effectiveness of the Company’s internal control over financial reporting. This evaluation was based on the criteria established by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The evaluation was conducted to assess the effectiveness of the Company’s internal control as it related to the financial reporting as of December 31, 2008.. Management believes that the Company’s internal control over financial reporting was effective as of December 31, 2008. Management’s assessment of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2008 has not been audited by Bagell, Josephs, Levine & Company LLC, the Company’s independent public accounting firm. Management’s report was not subject to attestation by the Company’s public accounting firm pursuant to temporary rules of the SEC.

 
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ITEM 9B.  OTHER INFORMATION

Not applicable.
  
PART III
 
ITEM 10.  DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

Set forth below are the names, ages, and positions of each of our executive officers and directors, together with such person's business experience during the past five (5) years. Their business experience is based on information provided by each of them to us. Directors are to be elected annually at our annual meeting of shareholders and served in that capacity until the earlier of their resignation, removal or the election and qualification of their successor. Executive officers are elected annually by our Board of Directors to hold office until the earlier of their death, resignation, or removal.
 
NAME
 
AGE
 
POSITIONS HELD AND TENURE
Russell A. Haehn
 
61
 
Chairman, Chief Executive Officer and Director since January 2004
Gregory A. Haehn
 
63
 
President, Chief Operating Officer and Director since January 2004
  
Officers and Directors

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

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

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

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

Agreement to Appoint Additional Director

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

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

Significant Employees

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

 
23

 

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.

Code of Ethics

A code of ethics relates to written standards that are reasonably designed to deter wrongdoing and to promote:

 
·
Honest and ethical conduct, including the ethical handling of actual or perceived conflicts of interest between personal and professional relationships;

 
·
Full, fair, accurate, timely and understandable disclosure in reports and documents that are filed with, or submitted to, the SEC and in other public communications made by an issuer;

 
·
Compliance with applicable governmental laws, rules and regulations;

 
·
The prompt internal reporting of violations of the code to an appropriate person or persons identified in the code; and

 
·
Accountability for adherence to the code.

The Company has adopted the Giant Motorsports, Inc. Corporate Code of Professional Conduct (the “corporate code of ethics”), a code of ethics that applies to our Chief Executive Officer, Chief Operating Officer, directors, and inclusive for all other employees. The corporate code of ethics is publicly available on our website at www.giantcorporate.com. If we make any substantive amendments to the corporate code of ethics or grant any waiver, including any implicit waiver, from a provision of the code to our Chief Executive Officer and Chief Operating Officer, we will disclose the nature of such amendment or waiver on that website or in a current report on Form 8-K.

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, 2008, all Section 16(a) filing requirements applicable to our directors, executive officers and 10% owners were met.
  
ITEM 11.  EXECUTIVE COMPENSATION
 
Summary Compensation Table

The following table sets forth the annual and long-term compensation paid for the fiscal years ended December 31, 2008 and 2007 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,
 
2008
 
$
96,425
 
-0-
 
-0-
 
$
102,845
(1)
$
199,270
Chairman and
 
2007
 
106,000
 
-0-
 
-0-
 
$
220,715
(1)
$
326,715
Chief Executive Officer
                             
                               
Gregory A. Haehn,
 
2008
 
$
65,000
 
-0-
 
-0-
 
$
19,100
(2)
$
84,100
President and
 
2007
 
71,700
 
-0-
 
-0-
 
$
21,200
(2)
$
92,900
Chief Operating Officer
                             

 
24

 
 
(1)
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 $90,845 in 2008 and $208,715 in 2007. Mr. Haehn also received an automobile allowance of $12,000 per year in each of those years.

(2)
Other compensation payable to Gregory Haehn reflects an automobile allowance of $12,000 in each of 2008 and 2007 and an aggregate of $7,100 paid to Mr. Haehn in 2008 and $9,200 in 2007 directly from manufacturers of certain of the products we sell, as an incentive to sell these products.

Outstanding Equity Awards at Fiscal-Year End

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

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

ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS 

As of April 8, 2009, we had a total of 12,948,316 shares of common stock issued and outstanding.

The following table sets forth information, as of April 8, 2009, 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
 
41.5
%
Gregory A. Haehn (5)(6)
   
3,235,000
 
24.1
%
             
All Executive Officers and Directors, as a Group (two persons)
   
9,020,000
 
62.4
%
 
(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 12,948,316 shares of common stock outstanding on April 8, 2009. The numbers and percentages shown include the shares of common stock actually owned as of April 8, 2009 and the shares of common stock that the person or group had the right to acquire within 60 days of April 8, 2009. 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 8, 2009 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.

 
25

 

(3)
Notwithstanding each person or group's beneficial ownership of the Company's common stock, since the Series A Shares are entitled to vote together with the common stock on all matters submitted to shareholders for their approval, each person's or groups percentage voting interest (assuming exercise of all options) is: Russell A. Haehn - 30.7%; Gregory A. Haehn - 17.6%; and all executive officers and directors as a group - 46.6%.

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

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

(6)
Russell Haehn and Gregory Haehn are brothers.

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

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 lease, effective January 1, 2007, we lease this facility under a 5-year lease, with an additional 5-year term available, at a rental rate of $24,000 per month. 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.
  
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.  The outstanding principal balance of this loan as of December 31, 2008 was $168,915.

On February 26, 2008, Gregory Haehn, the Company’s President and Chief Operating Officer, provided a working capital loan to the Company in the amount of $100,000. This loan is evidenced by the 2008 Note in the principal amount of $100,000 payable on demand. The 2008 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. The balance as of December 31, 2008 was $92,968.

Director Independence

Our Common Stock is quoted on the OTC bulletin board interdealer quotation system which does not have director independence requirements. Under NASDAQ rule 4200(a)(15), a director is not considered to be independent if he or she also is an executive officer or employee of the corporation.  Under such definition neither of our two directors would be considered independent directors.

 
26

 

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:

   
2008
   
2007
 
Annual Audit Fees
  $ 70,000     $ 60,000  
                 
Audit-Related Fees
  $ 39,000 (1)    $ 55,000 (1)
                 
Tax Fees
  $     $  
                 
Other Fees
  $     $  
                 
Total Fees
  $ 109,000     $ 115,000  

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

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.

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).

 
27

 

     
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. (10)
     
20.1
 
 Secured Promissory Note dated April 2004 in the principal amount of $1,675,000 (2).
     
20.2
 
 Commercial Security Agreement dated April 2004 (2).
 
20.3
 
Management Agreement between King's Motorsports Inc. d/b/a Chicago Cycle and Giant Motorsports, Inc. dated April 2004 (2).
     
21
 
 Subsidiaries (11).
     
31.1
 
 Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Rule 13a-4(a)) (11).
     
31.2
 
Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Rule 13a-14(a)) (11).
     
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)) (11).
     
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)) (11).

(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.


 
28

 

(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.  
 
 
(10) Filed as an exhibit to the Form 10-K filed April 17, 2007 and incorporated herein by reference.

(11) Filed herewith.

 
29

 

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:  
 /s/ Russell A. Haehn
 
Russell A. Haehn
Chairman and Chief Executive Officer
 
April 10, 2009
 
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 10, 2009
 
 /s/ Russell A. Haehn
 
Russell A. Haehn
Chairman and Chief Executive Officer
(principal executive officer)
   
   
 /s/ Gregory A. Haehn
April 10, 2009
Gregory A. Haehn
President and Chief Operating Officer
(principal financial and accounting officer)

 
30

 
 
BAGELL, JOSEPHS, LEVINE & COMPANY, L.L.C.
Certified Public Accountants
406 Lippincott Drive, Suite J
Marlton, New Jersey 08053
(856) 355-5900 Fax (856) 396-0022

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, 2008 and 2007, and the related consolidated statements of income (loss), stockholders' equity, and cash flows for each of the years in the two-year period ended December 31, 2008.  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, 2008 and 2007, and the results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2008 in conformity with accounting principles generally accepted in the United States of America.

BAGELL, JOSPEHS, LEVINE & COMPANY, LLC
BAGELL, JOSEPHS, LEVINE & COMPANY, LLC
Marlton, New Jersey
April 6, 2009

 
F-1

 
 
GIANT MOTORSPORTS, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,

   
2008
   
2007
 
             
ASSETS
 
             
CURRENT ASSETS
           
Cash and cash equivalents
  $ 549,551     $ 919,784  
Accounts receivable, net
    3,114,135       3,421,107  
Inventories
    16,906,246       25,626,033  
Deferred tax assets
    244,000       22,000  
Prepaid expenses
    32,982       28,069  
TOTAL CURRENT ASSETS
    20,846,914       30,016,993  
                 
FIXED ASSETS, NET
    1,295,743       1,666,828  
                 
OTHER ASSETS                 
Intangibles, net
    1,688,950       1,688,950  
Deposits
    45,600       45,600  
TOTAL OTHER ASSETS
    1,734,550       1,734,550  
    $ 23,877,207     $ 33,418,371  

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

F-2


GIANT MOTORSPORTS, INC.
CONSOLIDATED BALANCE SHEETS (CONTINUED)
DECEMBER 31,

   
2008
   
2007
 
             
LIABILITIES AND STOCKHOLDERS' EQUITY
 
             
CURRENT LIABILITIES
           
Current portion of long-term debt
  $ 472,639     $ 796,510  
Notes payable, floor plans
    15,047,756       24,748,401  
Notes payable, officers
    226,510       119,551  
Note payable, shareholder
    100,000       -  
Accounts payable, trade
    2,319,670       1,055,932  
Accrued expenses
    464,035       583,102  
Accrued income taxes
    59,000       436,200  
Customer deposits
    487,368       834,594  
TOTAL CURRENT LIABILITIES
    19,176,978       28,574,290  
                 
DEFERRED TAX LIABILITIES
    139,000       13,500  
                 
LONG-TERM DEBT, Net of current portion
    205,712       428,488  
TOTAL LIABILITIES
    19,521,690       29,016,278  
                 
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 shares issued and outstanding at
               
         December 31, 2008 and 2007
    2,450,000       2,450,000  
Common stock, $.001 par value, authorized 75,000,000 shares
               
         12,452,651 and 11,791,747 shares issued and outstanding at
               
         December 31, 2008 and 2007, respectively
    12,949       12,453  
Additional paid-in capital
    2,141,942       2,053,218  
Additional paid-in capital - Options
    93,426       93,426  
Additional paid-in capital - Warrants
    1,724,800       1,724,800  
Additional paid-in capital - Beneficial conversions
    1,303,400       1,303,400  
Issuance cost on preferred series A convertible
    (786,762 )     (786,762 )
Retained earnings (deficit)
    (2,584,238 )     (2,448,442 )
TOTAL STOCKHOLDERS' EQUITY
    4,355,517       4,402,093  
    $ 23,877,207     $ 33,418,371  

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,

   
2008
   
2007
 
REVENUES
           
Sales
  $ 85,261,044     $ 95,699,650  
Finance, insurance and extended service revenues
    2,286,883       2,997,042  
TOTAL REVENUES
    87,547,927       98,696,692  
                 
COST OF SALES
    74,979,381       84,109,662  
GROSS PROFIT
    12,568,546       14,587,030  
                 
OPERATING EXPENSES
               
Selling expenses
    7,481,390       7,973,104  
General and administrative expenses
    4,643,600       4,217,522  
      12,124,990       12,190,626  
INCOME FROM OPERATIONS
    443,556       2,396,404  
                 
OTHER INCOME AND (EXPENSE)
               
Other income, net
    152,368       193,464  
Interest expense, net
    (990,450 )     (1,272,885 )
Gain (loss) on sale of assets
    -       (19,539 )
      (838,082 )     (1,098,960 )
                 
INCOME (LOSS) BEFORE PROVISION (BENEFITS) FOR TAXES
    (394,526 )     1,297,444  
                 
PROVISION (BENEFIT) FOR TAXES
    (433,700 )     531,000  
INCOME (LOSS) BEFORE PREFERRED DIVIDENDS
    39,174       766,444  
                 
PREFERRED DIVIDENDS
    (174,970 )     (185,287 )
                 
NET INCOME (LOSS) ATTRIBUTABLE TO
               
COMMON SHAREHOLDERS
  $ (135,796 )   $ 581,157  
                 
BASIC INCOME (LOSS) PER SHARE
  $ (0.01 )   $ 0.05  
                 
DILUTED INCOME (LOSS) PER SHARE
  $ 0.00     $ 0.02  
                 
WEIGHTED AVERAGE SHARES OUTSTANDING
               
                 
BASIC
    12,866,837       12,225,073  
DILUTED
    12,866,837       28,904,647  

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, 2008 and 2007

   
Preferred Stock
 
Common Stock
     
Paid-in capital -
 
Paid-in capital -
 
Paid-in capital -
 
Issuance costs
 
Retained
      
   
Shares
   
Amount
 
Shares
   
Amount
 
Paid-in capital
 
Options
 
Warrants
 
Beneficial conversion
 
preferred series A
 
earnings (Deficit)
 
Total
 
                                                   
Balance, December 31, 2006
    2,450     $ 2,450,000     11,791,747     $ 11,792   $ 1,868,592   $ 93,426   $ 1,724,800   $ 1,303,400   $ (786,762 ) $ (3,029,599 ) $ 3,635,649  
                                                                         
Common shares dividends issued
    -       -     660,904       661     184,626     -     -     -     -     (185,287 )   -  
                                                                         
Net income for the year ended December 31, 2007
    -       -     -       -     -     -     -     -     -     766,444     766,444  
                                                                         
Balance, December 31, 2007
    2,450       2,450,000     12,452,651       12,453     2,053,218     93,426     1,724,800     1,303,400     (786,762 )   (2,448,442 )   4,402,093  
                                                                         
Common shares dividends issued
    -       -     495,665       496     88,724     -     -     -     -     (174,970 )   (85,750 )
                                                                         
Net income for the year ended December 31, 2008
    -       -     -       -     -     -     -     -     -     39,174     39,174  
                                                                         
Balance, December 31, 2008
    2,450     $ 2,450,000     12,948,316     $ 12,949   $ 2,141,942   $ 93,426   $ 1,724,800   $ 1,303,400   $ (786,762 ) $ (2,584,238 ) $ 4,355,517  

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

F-5


GIANT MOTORSPORTS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOW
FOR THE YEARS ENDED DECEMBER 31,

   
2008
   
2007
 
CASH FLOWS FROM OPERATING ACTIVITIES
           
Net income
  $ 39,174     $ 766,444  
Adjustments to reconcile net income to net cash
               
provided by operating activities:
               
Depreciation
    429,687       441,481  
Provision for doubtful accounts
    103,395       35,373  
Deferred federal income taxes (credit)
    (96,500 )     84,800  
(Gain) on sale of fixed assets
    -       (184 )
Loss on disposal of fixed assets
    -       19,723  
Decrease in accounts receivable, net
    203,577       347,238  
(Increase) in inventories
    8,719,787       (4,358,898 )
(Increase) decrease in prepaid expenses
    (4,913 )     (17,938 )
Increase in customer deposits
    (347,226 )     638,348  
        Increase in floor plan liability
    (9,700,645 )     3,862,514  
(Decrease) in accounts payable trade
    1,263,738       (931,220 )
Increase (decrease) in accrued expenses
    (496,267 )     525,363  
NET CASH PROVIDED BY OPERATING ACTIVITIES
    113,807       1,413,044  
                 
CASH FLOWS FROM INVESTING ACTIVITIES
               
Purchase of fixed assets
    (58,602 )     (73,482 )
Proceeds from sale of fixed assets
    -       7,000  
(Increase) in deposits
    -       (4,600 )
NET CASH (USED IN) INVESTING ACTIVITIES
    (58,602 )     (71,082 )
                 
CASH FLOWS FROM FINANCING ACTIVITIES
               
Payments on long-term debt
    (546,647 )     (345,759 )
Loans (payments) received from officer loan
    106,959       (232,949 )
Loan received from shareholder
    100,000       -  
Preferred stock dividends to shareholders
    (85,750 )     -  
NET CASH (USED IN) FINANCING ACTIVITIES
    (425,438 )     (578,708 )
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
    (370,233 )     763,254  
                 
CASH AND CASH EQUIVALENTS, beginning of Year
    919,784       156,530  
 
               
CASH AND CASH EQUIVALENTS, end of Year
  $ 549,551     $ 919,784  

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

F-6


GIANT MOTORSPORTS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOW
FOR THE YEARS ENDED DECEMBER 31,

   
2008
   
2007
 
OTHER SUPPLEMENTARY CASH FLOW INFORMATION
           
             
Debt incurred for acquisition of vehicles and equipment
  $ -     $ 57,092  
                 
Interest paid
  $ 990,450     $ 1,272,885  
                 
Income taxes paid
  $ 40,000     $ 10,000  
                 
Preferred stock dividends paid in common stock
  $ 89,220     $ 185,287  

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

F-7


GIANT MOTORSPORTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2008 and 2007

NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Organization:
Giant Motorsports, Inc., (the Company) through its wholly owned subsidiaries, W.W. Cycles, Inc. doing business as Andrews Cycles and Chicago Cycles, Inc. doing business as Chicago Cycle Center, operates two retail dealerships of motorcycles, all terrain vehicles, scooters and personal watercraft in northeastern Ohio and northern Illinois.  On December 30, 2003, the stockholders of W.W. Cycles, Inc. entered into a Stock Purchase and Reorganization Agreement in which effective January 16, 2004 W.W. Cycles, Inc. was issued an aggregate of 7,850,000 restricted shares of common stock, $.001 par value, of American Busing Corporation in exchange for all of the outstanding shares of the common stock of the Company, resulting in W.W. Cycles, Inc. becoming a wholly-owned subsidiary of American Busing Corporation.  The acquisition was accounted for as a reverse merger whereby, for accounting purposes, WW Cycles, Inc. is considered the accounting acquirer and the historical financial statements of WW Cycles, Inc. became the historical financial statements of Giant Motorsports, Inc.  Effective April 5, 2004 American Busing Corporation changed its name to Giant Motorsports, Inc.  On April 30, 2004, Giant Motorsports, Inc. acquired substantially all of the assets and certain liabilities of Chicago Cycle Center pursuant to an Asset Purchase Agreement and entered into a Non-competition Agreement with one of the former owners and entered into an Employment Agreement with the other former owner.

Principles of Consolidation:
The consolidated financial statements include the accounts of the Company and all of its wholly owned subsidiaries.  All significant inter-company accounts and transactions have been eliminated in consolidation.

Cash and Cash Equivalents:
Cash and cash equivalents include amounts held in demand deposit accounts and overnight investment accounts.  The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents.

Contracts in Transit:
Contracts in transit represent customer finance contracts evidencing loan agreements or lease agreements between the Company, as creditor, and the customer, as borrower, to acquire or lease a vehicle whereby a third-party finance source has given the Company initial, non-binding approval to assume the Company’s position as creditor.  Funding and approval from the finance source is provided upon the finance source’s review of the loan or lease agreement and related documentation executed by the customer at the dealership.  These finance contracts are typically funded within ten days of the initial approval of the finance transaction by the third-party finance source.  The finance source is not contractually obligated to make the loan or lease to the customer until it gives its final approval and funds the transaction.  Until such final approval is given, contracts in transit represent amounts due from the customer to the Company.  See Note B for additional information.

 
F-8

 

GIANT MOTORSPORTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 2008 and 2007

NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Allowance for Doubtful Accounts:
Accounts are written off when management determines that an account is uncollectible.  Recoveries of accounts previously written off are recorded when received.  An estimated allowance for doubtful accounts is determined to reduce the Company’s receivables to their carrying value, which approximates fair value.  The allowance is estimated based on historical collection experience, specific review of individual customer accounts, and current economic and business conditions.  Management has determined that an allowance of $25,000 is sufficient at December 31, 2008 and 2007, respectively.

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/or parts are delivered.  Sales promotions that are offered to customers are accounted for as a reduction to the sales price at the time of sale.  Incentives, rebates and holdbacks offered by manufacturers directly to the Company are recognized at the time of sale if they are vehicle specific, or as earned in accordance with the manufacturer program rules and are recorded as a reduction of cost of merchandise sold.

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

 
F-9

 

GIANT MOTORSPORTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 2008 and 2007
 
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Fair Value of Financial Instruments:
Financial instruments consist of cash and cash equivalents, accounts receivable, accounts payable and debt, including floor plan notes payable.  The carrying amount of all significant financial instruments approximates fair value due either to length or maturity or variable interest rates that approximate prevailing market rates.

Inventories:
Parts and accessories inventories are stated at the lower of cost or market using the first-in, first-out method.  Vehicle inventories are stated at the lower of cost or market using the specific identification method.

Concentration of Credit Risk:
Financial instruments that potentially subject the Company to credit risk consist of cash equivalents and accounts receivable.

The Company’s policy is to review the amount of credit exposure to any one financial institution and place investments with financial institutions evaluated as being creditworthy.  In the ordinary course of business, the Company has bank deposits and overnight repurchase agreements that may exceed federally insured limits.  As of December 31, 2008 and 2007, the Company had $1,562 and $821,722, respectively, in excess of the federally insured limit.

Concentration of credit risk, with respect to accounts receivable-customers, is limited through the Company’s credit evaluation process.  The Company reviews the credit history before extending credit.  Generally, the Company does not require collateral from its customers.

Property and Equipment:
Property and equipment are stated at cost.  Maintenance and repairs that do not add materially to the value of the asset nor appreciably prolong its useful life are charged to expense as incurred.  Gains or losses on the disposal of property and equipment are included in the determination of income.

Depreciation of property and equipment and amortization of leasehold improvements are provided using the straight-line method over the following estimated useful lives:

Fixtures, and equipment
3-7  years
Vehicles
5  years
Leasehold Improvements
39 years

 
F-10

 
 
GIANT MOTORSPORTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 2008 and 2007

NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Goodwill and Other Intangible Assets:
In June 2001, the Financial Accounting Standards Board (“FASB”) issued Statement No. 142 “Goodwill and Other Intangible Assets”.  This statement addresses financial accounting and reporting for acquired goodwill and other intangible assets and supersedes APB opinion No. 17, “Intangible Assets”.  It addresses how intangible assets that are acquired individually or with a group of other assets (but not those acquired in a business combination) should be accounted for in the financial statements upon their acquisition.  This Statement also addresses how goodwill and other intangible assets should be accounted for after they have been initially recognized in the financial statements.  The Company, in its acquisitions, recognized $1,588,950 of goodwill and $100,000 of other intangible assets associated with a licensing sales agreement.  The Company performs its annual impairment test for goodwill at year-end.  As of December 31, 2008, the Company has determined that no impairment is necessary.

    
 
 
   
   
2008
 
2007
         
Goodwill
  $ 1,588,950  
1,588,950
Licensing Agreement
    100,000  
100,000
TOTAL
  $ 1,688,950  
1,688,950
 
Income Taxes:
Income taxes are calculated using the liability method specified by Statement of Financial Accounting Standards No. 109, “Accounting for Income Taxes.”

At December 31, 2008 and 2007, income taxes are provided for amounts currently due and deferred amounts arising from temporary differences between income for financial reporting and income tax purposes.

Advertising Costs:
Advertising costs are expensed when incurred.  Charges to operations amounted to $1,322,437 and $1,337,397 for the years ended December 31, 2008 and 2007, respectively.

Earnings (Loss) Per Share of Common Stock:
Historical net income (loss) per share is computed using the weighted average number of shares of common shares outstanding.  Diluted earnings per share (EPS) include additional dilution from common stock equivalents, such as stock issuable pursuant to the exercise of stock options and warrants.  Common stock equivalents are not included in the computation of diluted earnings per share when the Company reports a loss because to do so would be anti-dilutive for the periods presented.

 
F-11

 

GIANT MOTORSPORTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 2008 and 2007

NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Earnings (Loss) Per Share of Common Stock (Continued):
The following is a reconciliation of the computation for basic and diluted EPS:
   
Years Ended December
 
    
2008
   
2007
 
             
Net income (loss) attributed to common shares
  $ (135,796 )   $ 581,157  
                 
Weighted-average common shares outstanding (Basic)
    12,866,837       12,225,073  
                 
Weighted-average common stock equivalents:
               
Warrants
    0       16,114,000  
Options
    0       565,574  
                 
Weighted-average common shares outstanding (diluted)
    12,866,837       28,904,647  

The Company uses the intrinsic value method to account for warrants granted to executive officers, directors, key employees and advisors for the purchase of common stock.  No compensation expense is recognized on the grant date, since at that date, the warrant price equals or is higher than the market price of the underlying common stock.  The Company discloses the pro forma effect of accounting for stock warrants under the fair value method.  The Company uses the fair value method to account for warrants granted to advisors for the purchase of common stock.  There were 16,679,574 common stock equivalents available at December 31, 2008 and 2007.

Use of Estimates:
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect certain reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  Actual results could differ from those estimates.

Recent Accounting Pronouncements:
In June 2006, the FASB issued Interpretation No. 48, "Accounting for Uncertainty in Income Taxes" (FIN 48), which clarifies the accounting for uncertainty in income taxes recognized in an enterprise's financial statements in accordance with SFAS No. 109, "Accounting for Income Taxes." FIN 48 establishes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. This interpretation also provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. FIN 48 is effective for fiscal years beginning after December 15, 2007. The adoption of FIN 48 did not have a material impact on the Company’s financial position, results of operations, or cash flows.

 
F-12

 

GIANT MOTORSPORTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 2008 and 2007

NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Recent Accounting Pronouncements (Continued):
In September 2006, The Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 157, "Fair Value Measurement" ("SFAS No. 157"). This standard provides guidance for using fair value to measure assets and liabilities. SFAS No. 157 applies whenever other standards require (or permit) assets or liabilities to be measured at fair value but does not expand the use of fair value in any new circumstances. Prior to SFAS No. 157, the methods for measuring fair value were diverse and inconsistent, especially for items that are not actively traded. The standard clarifies that for items that are not actively traded, such as certain kinds of derivatives, fair value should reflect the price in a transaction with a market participant, including an adjustment for risk, not just the company's mark-to-model value. SFAS No. 157 also requires expanded disclosure of the effect on earnings for items measured using unobservable data. SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years.  In February 2008, the FASB issued FASB Staff position (“FSP”) No. 157-2, “Effective date of FASB Statement No. 157” which delayed for one year the effective date of SFAS No. 157 for nonfinancial assets and nonfinancial liabilities, except for items that are recognized or disclosed at fair financial fair value in the financial statements on a recurring basis (at least annually).  The Company is currently evaluating the impact of this statement on its future financial statements.

In September 2006, the FASB issued SFAS No. 158, "Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans — An Amendment of FASB Statements No. 87, 88, 106, and 132R." This standard requires an employer to: (a) recognize in its statement of financial position an asset for a plan's overfunded status or a liability for a plan's underfunded status; (b) measure a plan's assets and its obligations that determine its funded status as of the end of the employer's fiscal year (with limited exceptions); and (c) recognize changes in the funded status of a defined benefit postretirement plan in the year in which the changes occur. Those changes will be reported in comprehensive income. The requirement to recognize the funded status of a benefit plan and the disclosure requirements are effective as of the end of the fiscal year ending after December 15, 2006. The requirement to measure plan assets and benefit obligations as of the date of the employer's fiscal year-end statement of financial position is effective for fiscal years ending after December 15, 2008. The adoption of FAS 158 had no impact on the Company's financial position, results of operations or cash flows.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Liabilities, including an amendment of FASB Statement No. 115” (“SFAS No. 159”). SFAS No. 159 permits entities to choose, at specified election dates, to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value. Unrealized gains and losses shall be reported on items for which the fair value option has been elected in earnings at each subsequent reporting date. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007. Early adoption is permitted as of the beginning of a fiscal year that begins on or before November 15, 2007, provided the entity also elects to apply the provisions of SFAS No. 157 “Fair Value Measurements” (“SFAS No. 157”). The Company is currently assessing the impact that SFAS No. 159 will have on its future financial statements.

 
F-13

 

GIANT MOTORSPORTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 2008 and 2007

NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

In December 2007, the FASB issued SFAS No. 141(R), "Business Combinations" ("SFAS No. 141(R)"). SFAS No. 141(R) replaces SFAS No. 141, "Business Combinations", but retains the requirement that the purchase method of accounting for acquisitions be used for all business combinations. SFAS No. 141(R) expands on the disclosures previously required by SFAS No. 141, better defines the acquirer and the acquisition date in a business combination, and establishes principles for recognizing and measuring the assets acquired (including goodwill), the liabilities assumed and any non-controlling interests in the acquired business. SFAS No. 141(R) also requires an acquirer to record an adjustment to income tax expense for changes in valuation allowances or uncertain tax positions related to acquired businesses. SFAS No. 141(R) is effective for all business combinations with an acquisition date in the first annual period following December 15, 2008; early adoption is not permitted. The Company does not expect SFAS No. 141(R) to have a material impact on the Company's financial position, results of operations or cash flows.