UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(Mark one)
[X] ANNUAL REPORT UNDER SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended September 30, 2002
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE
EXCHANGE ACT OF 1934
For the transition period from ________ to ________
Commission file number: 333-68570
Cycle Country Accessories Corp.
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(Name of small business issuer in its charter)
Nevada 42-1523809
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(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
2188 Highway 86, Milford, Iowa 51351
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(Address of principal executive offices)
(712) 338-2701
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(Issuer's telephone number)
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, par value $0.0001 per share
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(Title of class)
Check whether the issuer (1) filed all reports required to be
filed by Section 13 or 15(d) of the Exchange Act during the
past 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [ ]
Check if there is no disclosure of delinquent filers in response
to Item 405 of Regulation S-B is not contained in this form, 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-KSB or any
amendment to this Form 10-KSB. [X]
The Company's revenues for the year ended September 30, 2002
were $13,363,552.
As of September 30, 2002, the aggregate market value of the
voting stock held by non-affiliates of the registrant (based on
a closing price of $4.02 per share held by non-affiliates on
December 12, 2002) was $15,104,189.
The number of shares of the registrant's common stock, par value
$0.0001 per share, outstanding as of December 12, 2002 was
3,953,000.
Transitional Small Business Disclosure Format (check one): Yes []; No [X]
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PART I.
Item 1. DESCRIPTION OF THE BUSINESS
GENERAL
Cycle Country Accessories Corp. (a Nevada corporation) was
incorporated in the State of Nevada on August 15, 2001 as a C
corporation. On August 21, 2001, we entered into an agreement
to purchase all of the outstanding common stock of Cycle Country
Accessories Corp. (an Iowa corporation) for $4,500,000 in cash
and 1,375,000 shares of our common stock. Cycle Country
Accessories Corp. (an Iowa corporation) was originally
incorporated on August 8, 1983 and is headquartered in Milford,
Iowa. In addition, on August 14, 2001, Cycle Country
Accessories Corp. (an Iowa corporation) merged with Okoboji
Industries Corporation. Okoboji Industries Corporation
manufactured the plastic wheel covers for what is considered our
Plastic Wheel Cover segment. As a result of these transactions
we are the Successor Company to the business of both companies.
We are one of the world's largest manufacturers of
accessories for all terrain vehicles ("ATVs"). We manufacture a
complete line of branded products, including snowplow blades,
lawnmowers, spreader, sprayers, tillage equipment, winch mounts,
utility boxes, oil filters and oil coolers, wheel covers and an
assortment of other ATV accessory products. These products
custom fit essentially all ATV models from Honda, Yamaha,
Kawasaki, Suzuki, Polaris, Arctic Cat and Bombardier. We
design, engineer and assemble all accessory products at our
headquarters and subcontract the manufacturer of many original
equipment components. Additionally, we recently made the
decision to enter the Lawn and Garden industry.
We are recognized as a leader in the manufacturing of high
quality ATV accessory products. This reputation has enabled us
to develop key, long-term relationships with ATV manufacturers
and distributors. We have sold our products to 16 distributors
in the United States for the past 20 years. The distributors
call on and sell Cycle Country products to virtually every ATV
dealer in North America. Similar strategic arrangements have
also been developed internationally. We currently have 19
international distributors distributing our products to 35
countries.
Additionally, we are the largest manufacturer of golf car
hubcaps in the world. We estimate that we maintain 90% of the
original equipment manufacturer ("OEM") hubcap business. We
have always sold directly to golf car manufacturers and we
believe that we have an excellent distribution network that
reaches the after market throughout the United States, Europe
and Asia.
Our three largest customers accounted for approximately
44% of our net sales in the year ended September 30, 2002.
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These three customers have represented a significant amount of
our business every year for at least the past 16 years. While
the percentage of total net sales these customers represent
should decrease as our sales grow in other areas, such as Lawn
and Garden, we do anticipate these customers will continue to
represent a significant amount of our business.
INDUSTRY OVERVIEW
ATV Accessories:
In today's ATV market there are several OEM's competing
for market share. Honda has been the world leader followed by
Polaris, Yamaha, Kawasaki, Suzuki, Arctic Cat and Bombardier.
According to ATV Magazine, in 2000 there were 800,000 ATV's sold
worldwide. This represented a 19.2% increase over 1999. Of
those 800,000 units 75% were Utility and 40% were Sport Quads.
We consider the Utility Division to be our target market.
Our market research tells us that the manufacturers of garden
tractors and utility vehicles need accessories similar to those
available in the ATV industry. We have identified several Cycle
Country accessories that can be used with lawn and garden
tractors and utility vehicles. We are working with several Lawn
and Garden equipment manufacturers to introduce these
accessories into their product lines. We have also designed
several new accessories that are going to be marketed only in
the Lawn and Garden market. Cycle Country will manufacture most
of these products under the private label of the manufacturer.
We anticipate that 5% of our sales will be derived from the lawn
and garden industry in the next year and will increase to 10% of
sales the following year.
Wheel Covers:
The golf car industry continues to expand each year and is
currently dominated by E-Z-Go, Club Car and Yamaha. Global, Par
Car and a few other OEM's compete for the remainder of the
market. We estimate that we maintain 90% of the OEM hubcap
business and are the largest manufacturer of golf car hubcaps in
the world. We have always sold directly to all the golf car
manufacturers and we have an excellent distribution network
throughout the United States, Europe and Asia to reach the after
market.
COMPANY HISTORY
Cycle Country's market research has been a continued work
in process for the past 21 years and that work still continues
today. Our success was accomplished by constant market research
and a constant effort to adjust to the changes in the industry.
When we started in the ATV accessory industry ATV's were much
smaller. They were small 3-wheeled vehicles with two-wheel
drive. Today they are powerful 4-wheel drive vehicles capable
of doing many more tasks. The ATV industry falls within both
recreational and machinery industry depending on the product and
consumer. In 2000, approximately 800,000 units were sold
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worldwide and there are approximately 3 million units on the
market today. Prospective ATV buyers lean toward a new purchase
because of the strides manufacturers have made in product
development. Partly due to our line of utility products the ATV
manufacturers have focused their efforts to incorporate four
wheel drive and making larger ATV's for greater hauling and work
capacity.
The idea for our business was born in 1981 when Jim Danbom
recognized that an ATV could be used to plow snow. He
manufactured and sold 100 snowplow kits that year. He sold more
the next year and then in 1983 decided to incorporate. The
business has grown every year since. Now in addition to
snowplows, Cycle Country manufactures and sells a full range of
farm products designed for the new and more powerful ATV's.
These products include mowers, sprayers, 3-point hitch,
moldboard plow, disc harrow, furrower, cultivator, rake, row
planter, and seeder. We also manufacture winch mounts, chains,
gun racks, plastic cargo boxes, steel mesh baskets, a rear
hitch, and a very unique 5th wheel trailer.
Over the last several years, we have expanded into
manufacturing injected molded wheel covers primarily for the
golf car industry. We are now crossing over into the lawn &
garden industry with some current products as well as creating
new items specifically for that industry. Our acquisition this
past year of Weekend Warrior, with its garden utility
attachments, has provided us with new products and new markets
within the lawn and garden industry that will allow us to
accelerate our growth in this industry. Another acquisition
this past fiscal year, Perf-Form, Inc., has provided the company
with a new line of premium oil filters and oil cooler products
that fit very well into our current marketing and distribution
channels and provides us the opportunity to expand into the
motorcycle industry.
PRODUCTS
ATV Accessories
We offer a complete line of ATV accessories. Our products
enhance the functionality and versatility of the ATV. The ATV
was initially designed as a recreational vehicle but is rapidly
becoming a multi-purpose vehicle serving both recreational and
utility functions. Our products help ATV owners perform many of
their utility needs. We estimate that approximately 75% of all
the ATV's currently sold are for these utility functions. We
offer a standard one-year warranty on all products except
snowplow blades, on which we offer a limited lifetime warranty.
Seven manufacturers dominate the ATV industry. We
manufacture accessories for all of the major manufacturer's ATV
models.
We manufacture our products from high-quality parts
produced by local metal fabricators and metal stampers, with
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final assembly and packaging performed at our headquarters. The
following lists the major ATV accessory products and their
proportion of total sales of the ATV accessory segment for the
year ended September 30, 2002, which approximates 85% of total
company segment sales: (a) Blades: 63%, (b) Winches and Winch
Mounting Kits: 8%, (c) Mowers: 4%, (d) Tillage Equipment: 2%,
(e) Sprayers: 3%, (f) Spreaders: 1%. "Other" products comprise
the remaining 21% of our sales and comprises some of the
following: John Deere products: 8%, Perf-Form oil filters and
oil coolers: 4%, electric blade lift system: 3%, tire chains:
2%, bed lift kits: 1%.
Our major ATV accessory products include:
Blades.
We manufacture four sizes of steel straight blades, which
include a 42", 48", 60" and 72" models. We also offer 52" and
60" State Plows, a Power "Vee" blade and a 48" and 60" plastic
blade. Standard blade configuration features a universal manual
lift or a universal electric lift. The blades can also be
lifted with a winch.
Winches and Winch Mounts.
We offer a complete line of electric winches and winch
mounts to fit all ATV models. Models include 1,500 and 2,000
pound capacity winches.
Mowers.
We offer two mowing systems, the "Quicksilver 54 Finish
Cut" mower and the "Rough Cut" mower. The Quicksilver 54 is a
54" finish cut mower that can be mounted to the front of an ATV
or towed behind any tractor or ATV. It is powered by a 10.5
horsepower engine by Briggs & Stratton. The Rough Cut is a 48"
mower that is designed to cut thick weeds and overgrown brush.
It's powered by a 12.5 horsepower engine by Briggs & Stratton
and is pulled behind the ATV. The Rough Cut offers an offset
hitch, which allows mowing to the left, right or directly behind
the ATV. Both mowers are also available with Honda engines.
Tillage Equipment.
We manufacture a three-point hitch that transforms the ATV
into a small working tractor. The three-point hitch is designed
to fit on most four-wheel drive ATVs. The hitch is effective
because it locks in the rear suspension and has built-in float
to provide the smooth operation of attached implements. We have
two three-point hitch models, one meets engineering standards
for category zero hitches and the other meets engineering
standards for category one hitches. The hitch design allows the
use of implements such as cultivators, moldboard plow, disc
harrow, furrower, rake, one row planter and a rear blade. We
manufacture and sell all of these implements.
5
Sprayers.
We offer two styles of sprayers. The first is rack-
mounted on the ATV and the other is trailer mounted. Rack-
mounted sprayers are offered in both 15 and 25-gallon sizes.
There are three different models of rack-mounted sprayers
available depending on spraying needs: Econo Spot, Deluxe and
Ag-Commercial. Trailer mounted sprayers are offered in 25 and
55 gallon sizes. Both the rack-mounted sprayers and the
trailer-mounted sprayers can be purchased with either a 43" or
120" spray boom.
Spreaders.
We offer a 100-pound capacity hopper for front or rear
mounting. This product is used for spreading everything from
fertilizer to seed.
Other.
Additionally, we offer a wide array of products such as
tire chains, rack boxes, CV boot guards, spotlights, trailers,
gun racks, cargo boxes, baskets, cab enclosures and bed lift
kits for select utility vehicles. Through acquisitions this
past year we have added two branded product lines to our ATV
accessories segment, Weekend Warrior, a line of garden utility
attachments for ATVs and tractors, and Perf-Form Products, a
line of premium oil filters and oil coolers for motorcycles and
ATVs (see Note 3 to the Consolidated Financial Statements). We
believe both of these products have great potential for growth.
We have also identified several Cycle Country accessories which
can be used with lawn and garden tractors and utility vehicles.
We are working with several Lawn and Garden equipment
manufacturers to introduce these accessories into their product
lines. We have also designed several new accessories that are
going to be marketed only in the Lawn and Garden market. We are
pursuing retail outlets as markets for our lawn and garden
products as well. We believe that this market will represent
sales increases in excess of $1 million annually for the next
three years.
Wheel Covers
We are a leading producer of injection-molded plastic
specialty vehicle wheel covers for vehicles such as golf cars,
riding lawn mowers and light duty trailers. This segment
represents approximately 15% of our total segment sales. Wheel
cover products include 6", 8" and 10" sizes offered in a variety
of color options in both hot-stamped or metalized options.
6
PRODUCT DEVELOPMENT
We have remained competitive and grown over the past years
by designing and marketing new products continually. We employ
an experienced staff of four product design professionals that
work with CAD/CAM technology in the design of new products.
This R&D group serves two primary functions: product
retrofitting and new product design. Retrofitting of existing
products accounts for roughly 50 percent of the engineers' time.
Management considers the engineering group a critical factor to
the company's future and current success.
New products introduced in 2002 included: front and rear
steel mesh baskets, a rear drop steel mesh basket, the Rester
and Relaxer plastic cargo boxes with a back rest and full seat,
respectively, the Hovel cab enclosure, heated hand grips, a
category one three-point hitch, and a 2000 pound winch. New
products introduced in 2001 included: the Work Power 1500
winch, universal 3 point frame, and a 72" heavy duty blade for
utility vehicles. Management feels that adding new products for
the ATV accessory market is a key to continued growth.
There are no products presently being developed that will
require a material investment of our resources.
PATENTS AND TRADEMARKS
We maintain trademarks for all of our product names. In
addition, we maintain patents for wheel covers, 3-point hitches,
Snowmobile Chariot, rack utility boxes, work power lift system,
rub block on work power lift, grablight and the 5th wheel
trailer.
SUPPLIERS
During the year ended September 30, 2002, we purchased
approximately $4,691,000 of goods from Simonsen Iron Works,
Inc., our largest supplier who does the majority of our
ironworks. This represented approximately 58% of our raw goods
purchases during that year. In order to reduce the possibility
of any adverse consequence of this concentration, over the past
three years we have begun using additional suppliers.
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MARKETING - CHANNELS OF DISTRIBUTION:
ATV Accessories:
Domestic Distribution
We distribute our products domestically through 16
distributors that specialize in motorcycle and ATV accessories.
These distributors are either regional or national. We believe
that virtually every ATV dealer in the United States is served
by at least two of these distributors. Because of this overlap
we believe that we would experience a minimal decline in sales
if any one of our distributors decided to stop selling our
products. Most of these distributors have been customers of
Cycle Country since we first began selling ATV accessories. Our
most recent distributor was added approximately five years ago.
During the year ended September 30, 2002, Domestic
accessory sales represent approximately 91% of our total ATV
Accessory sales. For 2002, our largest distributor accounted
for 25% of our domestic accessory sales and our five largest
distributors accounted for 70% of our domestic accessory sales.
In cooperation with John Deere, we have developed several
products that are now being sold as accessories for John Deere
lawn and garden equipment. We intend to expand this association
with John Deere in the future. We are also working with other
Lawn and Garden equipment manufacturers to introduce our lawn
and garden accessories into their product lines. We are
currently negotiating with national retail outlets for
distribution of our accessories as well.
International Distribution
We are rapidly expanding our international distributor
network. There are currently 19 distributors that sell our
products in 35 countries. This department is in its 6th year of
existence and has provided us with a profitable expansion of the
ATV Accessory segment of business. We were recognized as the
Iowa Small Business Exporter of the year in 1997 and received
the Governor's Export Award in that same year.
International accessory sales represent approximately 9%
of our total ATV Accessory sales. We believe that the
international market will be a significant contributor to our
long-term sales growth.
Wheel Covers:
We market wheel covers to virtually all golf car
manufacturers. We estimate we provide approximately 90% of all
wheel covers sold to these golf car manufacturers. Sales to
these golf car OEM's are made directly by our sales force.
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We also market our wheel covers to golf courses and golf
car dealers through an extensive network of golf equipment
distributors. Management estimates that this distributor
network allows us to achieve an 80% market share of the golf car
after market wheel cover sales.
Sales and Promotion
ATV Accessories:
We employ a sales force of five people to market our ATV
products. Our primary method of penetrating the market of ATV
dealers is to leverage the sales work to the representatives
employed by our distributors. These representatives call on
every ATV dealer in the United States and each of the 35
countries represented by our distributors. We view our job as
educating these representatives so they can effectively sell our
product line.
Each year we produce a catalog of our entire product line
and make a new video that demonstrates the applicability of our
products. Distributors are allowed unlimited quantities of
these sales tools. Sales programs such as an early order
program that allows for a discount off of distributor price and
an annual rebate incentive based on achievement of predefined
sales targets are utilized to promote the product line
throughout the year.
Our representatives exhibit at several international trade
shows each year in conjunction with our distributors. These
representatives also travel to each of our domestic distributors
each year to demonstrate new products and address concerns that
may arise. In addition, we attend the Dealernews International
Powersports Dealer Expo to demonstrate our new products to our
distributors as well as ATV dealers.
Golf Market:
The primary means we use to sell our wheel covers is to
attend semi-annual golf industry trade shows and produce a
brochure for distribution to interested parties. Distributor
representatives assist in after market sales.
Advertising
We advertise our ATV Accessories in national trade
magazines, professionally developed videos, annual catalog,
magazine and television advertising campaigns. Additionally we
have an Internet site located at: www.cyclecountry.com.
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COMPETITION
We are one of the largest ATV accessory manufacturers in
the world. Management estimates that we maintain a 50% market
share in the domestic ATV accessories market, with the next
largest manufacturer, Cambridge Metal and Plastics having an
estimated 20% share of the domestic market. Management also
estimates that we control approximately 50% of the international
ATV market in the countries in which we distribute.
Additionally, management estimates that we control 90% market
share of the OEM golf car hubcap market and 80% of the golf car
hubcap aftermarket.
As with any industry we are faced with competition.
However, due to our aggressive marketing and innovative product
line, we maintain the largest market share in the ATV Utility
Accessory Market as well as the wheel cover market. With our
recent entry into the lawn & garden market, our goal is to
achieve a leading market share in that market.
However, the markets for all of our products are
competitive. We expect the markets for our products to become
even more competitive if and when more companies enter them and
offer competition in price, support, additional value added
services, and quality, among other factors.
EMPLOYEES
As of September 30, 2002, we have 69 full-time employees,
including 42 in production, 5 in sales, 4 in administration, 10
general office, 5 in research and development and 3 drivers. We
presently have no labor union contract between any union and us
and we do not anticipate unionization of our personnel in the
foreseeable future. We believe our relationship with our
employees is good. From time to time, we hire part time
employees, ranging from a minimum of 1 to a maximum of 6.
Item 2. DESCRIPTION OF PROPERTIES
Our principal office facility is a modern 78,000 square
foot facility located at 2188 Highway 86, Milford, Iowa, which
is located on 10 acres at the intersection of two major highways
which allows for easy entry and exit for truck traffic. This
property is zoned light industrial and will support an
additional 74,000 square foot building expansion. We own this
facility and it is used as collateral for our Bank Midwest loan.
In late September of 2002 construction began on a 28,000 square
foot building expansion that will add needed floor space for our
production areas and warehousing needs. Additionally, we lease
one storage building in Sioux Rapids, Iowa, which is 35 miles
from our principal facility on a month-to-month lease at $500.00
per month. We also lease an 11,000 square foot facility located
in Big Lake, Minnesota where our Perf-Form products are
currently manufactured on a month-to-month lease at $4,600 per
month. The Company plans to relocate the Perf-Form operations
to the Milford facility upon completion of the new building
expansion.
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Item 3. LEGAL PROCEEDINGS
At times we are involved in lawsuits in the ordinary
course of business. These lawsuits primarily involve claims for
damages arising out of the use of our products. As of the date
of this filing, we are not a party to any material legal
proceedings, other than one product liability case, which
involves a failed winch switch. We currently carry two million
dollars of product liability insurance. Our attorneys have
informed us that they do not anticipate any judgment exceeding
our insurance coverage.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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PART II.
Item 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
Market Information
Our common stock is approved for quotation on the National
Association of Securities Dealers OTC Bulletin Board under the
symbol: CYCY. The table below sets forth the reported high and
low bid prices for the periods indicated. The bid prices shown
reflect quotations between dealers, without adjustment for
markups, markdowns or commissions, and may not represent actual
transactions in the Company's securities.
High Low
FY 2002
Fourth Quarter $3.15 $2.20
Third Quarter $4.07 $2.20
Second Quarter $5.75 $2.40
First Quarter See (a)
FY 2001
Fourth Quarter See (a)
Third Quarter See (a)
Second Quarter See (a)
First Quarter See (a)
(a) The Company consummated an initial public offering of
its Common Stock, par value $0.0001 per share pursuant to a
registration statement declared effective by the Commission on
November 28, 2001, File No. 333-68570 ("Registration
Statement"). The stock commenced trading on the OTC Bulletin
Board on February 5, 2002.
As of December 12, 2002, there were approximately 650
holders of record of Common Stock inclusive of those brokerage
firms and/or clearing houses holding the Company's Common Stock
in street name for their clientele (with each such brokerage
house and/or clearing house being considered as one holder).
The Company has never paid a dividend on its common stock.
It is the Company's present policy to retain all earnings to
provide funds for the future growth of the Company.
Recent Sales Of Unregistered Securities
The following information is furnished with regard to all
securities sold by Cycle Country Accessories Corp. within the past
three years that were not registered under the Securities Act.
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The issuances described hereunder were made in reliance upon the
exemptions from registration set forth in Section 4(2) of the
Securities Act relating to sales by an issuer not involving any
public offering. None of the foregoing transactions involved a
distribution or public offering.
Date Name # of Shares Total Price
June 26, 2002 Go Company, LLC 155,000 $450,000*
* The shares were issued in lieu of cash for repayment of
$450,000 advanced from Go Company in connection with the
Company's acquisition of Perf-Form Products, Inc.
Item 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION
The following is a discussion of our results of operations
and our liquidity and capital resources. To the extent that our
analysis contains statements that are not of a historical
nature, these statements are forward-looking statements, which
involve risks and uncertainties. See "Special Note Regarding
Forward-Looking Statements". The following should be read in
conjunction with our Consolidated Financial Statements and the
related Notes included elsewhere in this filing.
Overview
Cycle Country Accessories Corp. (a Nevada corporation) was
incorporated in the State of Nevada on August 15, 2001 as a C
corporation. The initial capitalization consisted of 3,625,000
shares of common stock. On August 21, 2001, we entered into an
agreement to purchase all of the outstanding common stock of
Cycle Country Accessories Corp. (an Iowa corporation) for
$4,500,000 in cash and 1,375,000 shares of our common stock.
Cycle Country Accessories Corp. (an Iowa corporation) was
originally incorporated on August 8, 1983 and is headquartered
in Milford, Iowa. Since both Companies are under common control
by virtue of majority ownership and common management by the
same three individuals, this transaction was accounted for in a
manner similar to a pooling of interests. We used the proceeds
from a $4,500,000 term note (the "Note") entered into with a
commercial lender to purchase all of the outstanding common
stock of Cycle Country Accessories Corp. (an Iowa corporation).
The Note is collateralized by all of the Companies assets, is
payable in monthly installments from September 2001 to July
2006, which includes principal and interest at prime + 0.75% (6%
at September 30, 2002), with a final payment upon maturity on
July 25, 2006. The variable interest rate can never exceed 9%
or be lower than 6%. The monthly payment is $90,155 and is
applied to interest first based on the interest rate in effect,
with the balance applied to principal. The interest rate is
adjusted daily. Additionally, any proceeds from the sale of
stock received from the exercise of any of the 2,000,000
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outstanding warrants shall be applied to any outstanding balance
on the Note. At September 30, 2002 and 2001, $3,603,281 and
$4,440,512, respectively, was outstanding on the Note.
On August 21, 2001, Cycle Country Accessories Corp. (an
Iowa corporation) acquired its operating facility, which
consisted of land and building with a fair value of $1,500,000,
from certain stockholders. The consideration given was
comprised of $300,000 in cash and 390,000 shares of common stock
of Cycle Country Accessories Corp. (a Nevada corporation). On
August 14, 2001, Cycle Country Accessories Corp. (an Iowa
corporation) merged with Okoboji Industries Corporation. Since
both Companies were owned and managed by the same three
individuals, this transaction was also accounted for in a manner
similar to a pooling of interests.
As a result of the transactions described above, we are
the Successor Company to the business activities of the
aforementioned companies.
We are one of the world's largest manufacturers of
accessories for all terrain vehicles ("ATVs"). We manufacture a
complete line of branded products, including snowplow blades,
lawnmowers, spreaders, sprayers, tillage equipment, winch
mounts, utility boxes, wheel covers and an assortment of other
ATV accessory products. These products custom fit essentially
all ATV models from Honda, Yamaha, Kawasaki, Suzuki, Polaris,
Arctic Cat and Bombardier. We design, engineer and assemble all
accessory products at our headquarters and subcontract the
manufacturer of many original equipment components.
We are recognized as a leader in the manufacturing of high
quality ATV accessory products. This reputation has enabled us
to develop key, long-term relationships with ATV manufacturers
and distributors. We have sold our products to 16 distributors
in the United States for the past 21 years. The distributors
call on and sell Cycle Country products to virtually every ATV
dealer in North America. Similar strategic arrangements have
also been developed internationally. We currently have 19
international distributors distributing our products to 35
countries.
Additionally, we are the largest manufacturer of golf car
hubcaps in the world. We estimate that we maintain 90% of the
Original Equipment Manufacturer hubcap business. We have always
sold directly to golf car manufacturers and we believe that we
have an excellent distribution network that reaches the after
market throughout the United States, Europe and Asia.
Critical Accounting Policies and Estimates
The Company's discussion and analysis of its financial
condition and results of operations are based upon its
Consolidated Financial Statements, which have been prepared in
accordance with accounting principles generally accepted in the
United States of America. The preparation of these financial
statements requires the Company to make estimates and judgments
that affect the reported amounts of assets, liabilities,
revenues and expenses, and related disclosure of contingent
assets and liabilities. On an on-going basis, the Company
14
evaluates the estimates including those related to bad debts and
inventories. The Company bases its estimates on historical
experiences and on various other assumptions that are believed
to be 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.
The Company believes the following critical accounting
policies affect the more significant judgments and estimates
used in the preparation of the Consolidated Financial
Statements:
Allowance for Doubtful Accounts - the Company maintains an
allowance for doubtful accounts for estimated losses resulting
from the inability of its customers to make required payments.
If the financial condition of the Company's customers were to
deteriorate, resulting in an impairment of their ability to make
payments, additional allowance may be required.
Reserve for Inventory - the Company records valuation reserves
on its inventory for estimated excess and obsolete inventory
equal to the difference between the cost of inventory and the
estimated market value based upon assumptions about future
product demand and market conditions. If future product demand
or market conditions are less favorable than those projected by
management, additional inventory reserves may be required.
Depreciation of Long-Lived Assets - the Company assigns useful
lives for long-lived assets based on periodic studies of actual
asset lives and the intended use for those assets. Any change
in those assets lives would be reported in the statement of
operations as soon as any change in estimate is determined.
Accrued Warranty Costs - the Company records a liability for
the expected cost of warranty-related claims as its products are
sold. The Company provides a one-year warranty on all of its
products except the snowplow blade, which has a limited lifetime
warranty. The amount of the warranty liability accrued reflects
the Company's estimate of the expected future costs of honoring
its obligations under the warranty plan. The estimate is based
on historical experiences and known current events. If future
estimates of expected costs were to be less favorable, an
increase in the amount of the warranty liability accrued may be
required.
Accounting for Income Taxes - the Company is required to
estimate income taxes in each of the jurisdictions in which it
operates. This process involves estimating actual current tax
exposure for the Company together with assessing temporary
differences resulting from differing treatment of items, such as
property, plant and equipment depreciation, for tax and
accounting purposes. Actual income taxes could vary from these
estimates due to future changes in income tax law or results
from final tax exam reviews. At September 30, 2002, the Company
assessed the need for a valuation allowance on its deferred tax
assets. A valuation allowance is provided when it is more
likely than not that some portion or all of the deferred tax
assets will not be realized. Based upon the historical
15
operating profits and the near certainty regarding sufficient
near term taxable income, management believes that there is no
need to establish a valuation allowance. Should the Company
determine that it would not be able to realize all or part of
its net deferred tax assets in the future, a valuation allowance
may be required.
Results of Operations - Year ended September 30, 2002 vs Year
ended September 30, 2001
OVERALL. Revenues for the year ended September 30, 2002
increased $505,382, or 3.9%, to $13,363,552 from $12,858,170 for
the year ended September 30, 2001. Cost of goods sold increased
$610,452, or 6.6%, to $9,867,995 for the year ended September
30, 2002 from $9,257,543 for fiscal 2001. Additionally, gross
profit as a percentage of revenue was 26.2% for the year ended
September 30, 2002 compared to 28.0% for fiscal 2001. The
decrease in gross margin during fiscal 2002 of 1.8% is mainly
attributable to an increase in direct labor costs and material
costs due to the addition of a new coating process in the
Plastic Wheel Cover segment, which was offset by a slight
increase in the ATV Accessory segment gross margin as new sales
from our Perf-Form oil filter and oil cooler products improved
this margin. Selling, general and administrative expenses
increased $258,711, or 10.3%, to $2,781,896 for the year ended
September 30, 2002 from $2,523,185 for fiscal 2001. The
increase in operating expenses is primarily a result of
additional spending of approximately $56,000 in professional
fees, approximately $72,000 in advertising and promotions,
approximately $21,000 in insurance, approximately $47,000 in
depreciation and amortization, approximately $25,000 in office
and shipping supplies and postage, approximately $24,000 in
wages, payroll taxes and related benefits, approximately $14,000
in shop supplies, approximately $42,000 in commissions, and
approximately $20,000 in warranty costs coupled with a decrease
of approximately $10,000 in repairs and maintenance costs and
$77,000 in building rent. Non-operating income (expense)
decreased $268,616 to $(227,417) for the year ended September
30, 2002, from $41,199 for fiscal 2001. The decrease is
primarily due to an increase of approximately $221,000 of
interest expense, a decrease of approximately $26,000 of
interest income and approximately $32,000 decrease due to a one-
time consulting fee that was earned during fiscal 2001. These
decreases were offset by an increase of approximately $16,000 in
gains on sale of equipment and approximately $7,000 in truck
lease income during the year ended September 30, 2002.
BUSINESS SEGMENTS As more fully described in Note 18 to
the Consolidated Financial Statements, the Company operates two
reportable business segments: ATV Accessories and Plastic Wheel
Covers. The gross margins are vastly different in our two
reportable business segments due to the fact that we assemble
our ATV Accessories (i.e. we outsource the ironworks to our main
product supplier) and are vertically integrated in our Plastic
Wheel Cover segment.
ATV ACCESSORIES Revenues for the year ended September 30,
2002 increased $457,667, or 4.1%, to $11,594,058 from
$11,136,391 for the year ended September 30, 2001. The increase
is attributable to an increase in unit volume of our winches and
15
winch mounts of approximately $295,000, electric blade lift
systems of approximately $113,000, and products for John Deere
of approximately $176,000. These unit volume increases were
offset by decreases in unit volume of our snowplow blades of
approximately $95,000 and our mowers of approximately $456,000.
Also contributing to the increase in revenues for fiscal 2002
were new sales of our Perf-Form premium oil filter and oil
cooler products, which we acquired during the second quarter of
fiscal 2002, of approximately $439,000.
Cost of goods sold increased $32,184, or 0.4%, to
$7,933,966 for the year ended September 30, 2002 from $7,901,782
for fiscal 2001. The slight increase is due to a change in the
mix of products sold in fiscal 2002 as compared to fiscal 2001
as described above. Gross profit as a percent of revenues was
31.6% for fiscal 2002 compared to 29.0% for the corresponding
period in 2001. The increase in gross profit for the year ended
September 30, 2002 was attributable to the increase in new sales
of our Perf-Form products which have a higher margin and
ironwork material costs which were generally held to fiscal 2001
costs or slightly reduced on a majority of our ATV Accessory
products for fiscal 2002.
PLASTIC WHEEL COVERS Revenues for the year ended
September 30, 2002 increased $120,947, or 6.1%, to $2,104,953
from $1,984,006 for the year ended September 30, 2001. The
increase in revenue was attributable to changes in current
market conditions as sales to Original Equipment Manufacturers
increased significantly in fiscal 2002. Another factor that
contributed to the increase was the implementation of a new
coating method, similar to the coating method used for
automotive paint, which improves the wheel cover's durability
and useful life. For fiscal 2003 our planned new product
introductions and improvements will continue to address the
needs of this market.
Cost of goods sold increased $236,181, or 36.7%, to
$880,206 for the year ended September 30, 2002 from $644,025 for
fiscal 2001. Gross profit as a percent of revenue was 58.2% for
the year ended September 30, 2002 compared to 67.5% for the
corresponding period in fiscal 2001. The decrease in gross
profit for the year ended September 30, 2002 was attributable to
increases in production labor and the implementation of the new
protective coating process as described above.
GEOGRAPHIC REVENUE During fiscal 2002, revenue in the
United States increased $177,566, or 1.5%, to $12,198,758 from
$12,021,192 for the year ended September 30, 2001. Revenue from
other countries increased $327,816, or 39.2%, to $1,164,794 from
$836,978 for the year ended September 30, 2001. The increase
during the fiscal year 2002 in U.S. revenue is due to a general
increase across all regions previously serviced in the United
States of America. The increase during the fiscal year 2002 in
revenue from other countries is due to an increase of sales in
Canada and Europe.
16
Results of Operations - Year ended September 30, 2001 vs Year
ended September 30, 2000
OVERALL. Revenues for the year ended September 30, 2001
increased $444,944, or 3.6%, to $12,858,170 from $12,413,226
for the year ended September 30, 2000. Cost of goods sold
increased $119,381, or 1.3%, to $9,257,543 for the year ended
September 30, 2001 from $9,138,162 for fiscal 2000.
Additionally, gross profit as a percentage of revenue was 28.0%
for the year ended September 30, 2001 compared to 26.4% for
fiscal 2000. The increase in gross margin during fiscal 2001 of
1.6% is mainly attributable to an increase in unit sales volume
of our most profitable product, Snowplow Blades, as well as
operational labor efficiencies in our Plastic Wheel Cover
segment and a slight decrease of manufacturing overhead costs as
a percentage of sales (8.5% of sales in fiscal 2001 versus 8.6%
of sales in fiscal 2000). Selling, general and administrative
expenses increased $243,099, or 10.7%, to $2,523,185 for the
year ended September 30, 2001 from $2,280,086 for fiscal 2000.
The increase in operating expenses is primarily a result of
additional spending of approximately $79,000 in professional
fees, approximately $67,000 in advertising and promotions,
approximately $38,000 in insurance, approximately $25,000 in
travel costs, approximately $21,000 each in vehicle repairs and
depreciation, and approximately $15,000 in research and
development costs coupled with a decrease of approximately
$18,000 in freight costs and $15,000 in building rent. Non-
operating income increased $15,401, or 59.7%, to $41,199 for
the year ended September 30, 2001, from $25,798 for fiscal 2000.
The increase is primarily due to increases of approximately
$10,000 of interest income, approximately $32,000 of consulting
income earned and approximately $34,000 of interest expense
coupled with a decrease of approximately $14,000 in royalty
income and approximately $10,000 in gains on sale of equipment
during the year ended September 30, 2001 and the write-off of an
investment of the Company of approximately $28,000 during fiscal
2000.
BUSINESS SEGMENTS As more fully described in Note 18 to
the Consolidated Financial Statements, the Company operates two
reportable business segments: ATV Accessories and Plastic Wheel
Covers. The gross margins are vastly different in our two
reportable business segments due to the fact that we assemble
our ATV Accessories (i.e. we outsource the ironworks to our main
product supplier) and are vertically integrated in our Plastic
Wheel Cover segment.
ATV ACCESSORIES Revenues for the year ended September 30,
2001 increased $480,314, or 4.5%, to $11,136,391 from
$10,656,077 for the year ended September 30, 2000. The increase
is attributable to an increase in unit volume of our Snowplow
Blades.
Cost of goods sold increased $136,887, or 1.8%, to
$7,901,782 for the year ended September 30, 2001 from $7,764,895
for fiscal 2000. The increase is due to an increase in material
costs during fiscal 2001 as compared to fiscal 2000. Gross
profit as a percent of revenues was 29.1% for fiscal 2001
compared to 27.1% for the corresponding period in 2000. The
increase in gross profit for the year ended September 30, 2001
was attributable to the increase in unit sales volume of our
most profitable product, the Snowplow Blade as discussed above.
PLASTIC WHEEL COVERS Revenues for the year ended
September 30, 2001 remained relatively constant, increasing
17
$5,699, or 0.3%, to $1,984,006 from $1,978,307 for the year
ended September 30, 2000. The slight increase in revenue was
attributable to changes in current market conditions. Our new
product will address the needs of the new market.
Cost of goods sold decreased $258,131, or 28.6%, to
$644,026 for the year ended September 30, 2001 from $902,157 for
fiscal 2000. Gross profit as a percent of revenue was 67.5% for
the year ended September 30, 2001 compared to 54.4% for the
corresponding period in fiscal 2000. The increase in gross
profit for the year ended September 30, 2001 was attributable to
raw material price savings and labor efficiencies obtained in
the production process.
GEOGRAPHIC REVENUE During fiscal 2001, revenue in the
United States increased $398,406, or 3.4%, to $12,021,192 from
$11,622,786 for the year ended September 30, 2000. Revenue from
other countries increased $46,538, or 5.9%, to $836,978 from
$790,440 for the year ended September 30, 2000. The increase
during the fiscal year 2001 in U.S. revenue is due to a general
increase across all regions previously serviced in the United
States of America. The increase during the fiscal year 2001 in
revenue from other countries is due to an increase of sales in
Canada and Europe.
Liquidity and Capital Resources
Our primary source of liquidity has been cash generated by
our operations and borrowings under our bank line of credit.
Cash and cash equivalents were $207,162 at September 30,
2002 compared to $274,089 as of September 30, 2000. Until
required for operations, our policy is to invest any excess cash
reserves in bank deposits, money market funds, and certificates
of deposit. Net working capital was $ 1,764,608 at September
30, 2002 compared to $1,995,007 at September 30, 2001. The
change in working capital is primarily due to the following:
Inventories increased by $328,571, or 12.5%, to $2,967,285 at
September 30, 2002 from $2,638,714 at September 30, 2001,
accounts receivable increased by $28,389, or 2.7%, to $1,086,672
at September 30, 2002 from $1,058,283 at September 30, 2001,
accounts payable increased $49,773, or 4.7%, to $1,108,344 at
September 30, 2002 from $1,058,571 at September 30, 2001,
accrued expenses increased $116,655, or 38.4%, to $420,811 at
September 30, 2002 from $304,156 at September 30, 2001, and the
bank line of credit increased 100% to $400,000 at September 30,
2002 from $0 at September 30, 2001.
On August 21, 2001, under the terms of a secured credit
agreement, the Company entered into a note payable for
$4,500,000 (the "Note") with a commercial lender. The Note is
collateralized by all of the Company's assets, is payable in
monthly installments from September 2001 until July 2006, which
includes principal and interest at prime + 0.75% (6% at
September 30, 2002), with a final payment upon maturity on July
25, 2006. The monthly payment is $90,115 and is applied to
interest first based on the interest rate in effect, with the
balance applied to principal. The interest rate is adjusted
daily. Additionally, any proceeds from the sale of stock
18
received from the exercise of warrants shall be applied to any
outstanding balance on the Note or the Line of Credit described
below. At September 30, 2002 and 2001, $3,603,281 and
$4,440,512, respectively, was outstanding on the Note.
Under the terms of the secured credit agreement noted
above, the Company had a Line of Credit for the lesser of
$500,000 or 80% of eligible accounts receivable and 35% of
eligible inventory. In the fourth quarter of fiscal 2002, the
Line of Credit was increased to the lesser of $1,000,000 or 80%
of eligible accounts receivable and 35% of eligible inventory.
The Line of Credit bears interest at prime plus 1.25% (6% at
September 30, 2002) and is collateralized by all of the
Company's assets. The Line of Credit matures on September 1,
2003. At September 30, 2002 and 2001, $400,000 and $-0-,
respectively, was outstanding on the Line of Credit.
In addition, the secured credit agreement contains
conditions and covenants that prevent or restrict the Company
from engaging in certain transactions without the consent of the
commercial lender and require the Company to maintain certain
financial ratios, including term debt coverage and maximum
leverage. In addition, the Company is required to maintain a
minimum working capital and shall not declare or pay any
dividends or any other distributions. At September 30, 2002,
the Company did not attain the minimum level required of two of
the covenants, term debt coverage and working capital. However,
the Company did obtain a waiver of compliance from the
commercial lender for both of these covenants. Management
plans to work with the commercial lender to revise the secured
credit agreement in order that covenants can be met in the future.
Consistent with normal practice, management believes that
the Company's operations are not expected to require significant
capital expenditures during fiscal year 2003. Management
believes that existing cash balances, cash flow to be generated
from operating activities and available borrowing capacity under
its line of credit agreement will be sufficient to fund
operations, and capital expenditure requirements for at least
the next twelve months. At this time management is not aware of
any factors that would have a materially adverse impact on cash
flow during this period.
Special Note Regarding Forward-Looking Statements
The Private Securities Litigation Reform Act of 1995 (the
"Reform Act") provides a safe harbor for forward-looking
statements made by or on behalf of the Company. The Company and
its representatives may, from time to time, make written or
verbal forward-looking statements, including statements
contained in the Company's filings with the Securities and
Exchange Commission and in its reports to stockholders.
Generally, the inclusion of the words "believe", "expect",
"intend", "estimate", "anticipate", "will", and similar
expressions identify statements that constitute "forward-looking
statements" within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of
1934 and that are intended to come within the safe harbor
protection provided by those sections.
19
All statements addressing operating performance, events, or
developments that the Company expects or anticipates will occur
in the future, including statements relating to sales growth,
earnings or earnings per share growth, and market share, as well
as statements expressing optimism or pessimism about future
operating results (in particular, statements under Part II, Item
6, Management's Discussion and Analysis of Financial Condition
and Results of Operations), contain forward-looking statements
within the meaning of the Reform Act. The forward-looking
statements are and will be based upon management's then-current
views and assumptions regarding future events and operating
performance, and are applicable only as of the dates of such
statements but there can be no assurance that the statement of
expectation or belief will result or be achieved or
accomplished. In addition, the Company undertakes no obligation
to update or revise any forward-looking statements, whether as a
result of new information, future events, or otherwise.
By their nature, all forward-looking statements involve risk and
uncertainties. Actual results may differ materially from those
contemplated by the forward-looking statements for a number of
reasons, including but not limited: competitive prices pressures
at both the wholesale and retail levels, changes in market
demand, changing interest rates, adverse weather conditions that
reduce sales at distributors, the risk of assembly and
manufacturing plant shutdowns due to storms or other factors,
the impact of marketing and cost-management programs, and
general economic, financial and business conditions.
Recent Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board
("FASB") issued Statement of Financial Accounting Standards
("SFAS") No. 141, "Business Combinations", and SFAS No. 142,
"Goodwill and Intangible Assets". SFAS No. 141 requires that
the purchase method of accounting be used for all business
combinations completed after June 30, 2001, SFAS No. 141 also
specifies the types of acquired intangible assets that are
required to be recognized and reported separately from goodwill
and those acquired intangible assets that are required to be
included in goodwill. SFAS No. 142 requires that goodwill no
longer be amortized, but instead be tested for impairment at
least annually. SFAS No. 142 also requires recognized
intangible assets determined to have a finite useful life be
amortized over their respective estimated useful lives and
reviewed for impairment in accordance with SFAS No. 144,
"Accounting for the Impairment or Disposal of Long-Lived
Assets". Any recognized intangible asset determined to have an
indefinite useful life will not be amortized, but instead tested
for impairment in accordance with SFAS No. 142 until its life is
determined to no longer be indefinite.
The Company adopted the provisions of SFAS No. 141 and 142
on October 2001, with the exception of the immediate requirement
to use the purchase method of accounting for all future business
combinations completed after June 30, 2001. However, any
20
goodwill and any intangible asset determined to have an
indefinite useful life that is acquired in a business
combination completed after June 30, 2001 will not be amortized.
SFAS No. 141 requires the Company to evaluate its existing
intangible assets and goodwill and to make any necessary
reclassifications in order to conform with the new separation
requirements at the date of adoption.
In August 2001, the FASB issued SFAS No. 143, "Accounting
for Asset Retirement Obligations." SFAS No. 143 addresses
financial accounting and reporting for obligations associated
with the retirement of tangible long-lived assets and the
associated asset retirement costs. It applies to (a) all
entities and (b) legal obligations associated with the
retirement of long-lived assets that result from the
acquisition, construction, development and/or normal operation
of long-lived assets, except for certain obligations of lessees.
SFAS No. 143 is effective for financial statements issued for
fiscal years beginning after June 15, 2002. The Company does
not believe the adoption of this statement will have a material
impact on our financial position or results of operations.
Also in August 2001, the FASB issued SFAS No. 144,
"Accounting for the Impairment or Disposal of Long-Lived
Assets," which established one accounting model to be used for
long-lived assets to be disposed of by sale and broadens the
presentation of discontinued operations to include more disposal
transactions. SFAS No. 144 supersedes SFAS No. 121, "Accounting
for the Impairment or Disposal of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of" and the accounting and
reporting provisions of APB Opinion No. 30, "Reporting the
Results of Operations-reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions" for the disposal
of a segment of a business (as previously defined in that
Opinion). The provisions of SFAS No. 144 are effective for
financial statements issued for fiscal years beginning after
December 15, 2001. The adoption of SFAS No. 144 had no impact
on the Company's financial position or results of operations.
In April 2002, the FASB issued SFAS No. 145, "Rescission
of FASB Statements No. 4, 44, and 64, Amendment of FASB
Statement No. 13, and Technical Corrections," which rescinds
SFAS No. 4, "Reporting Gains and Losses from Extinguishment of
Debt" and an amendment of that Statement, and SFAS No. 64,
"Extinguishments of Debt Made to Satisfy Sinking-Fund
Requirements." SFAS No. 145 also rescinds SFAS No. 44,
"Accounting for Intangible Assets for Motor Carriers." SFAS No.
145 amends SFAS No. 13, "Accounting for Leases," to eliminate an
inconsistency between the required accounting for sale-leaseback
transactions and the required accounting for certain lease
modifications that have economic effects that are similar to
sale-leaseback transactions. SFAS No. 145 also amends other
existing authoritative pronouncements to make various technical
corrections, clarify meanings, or describe their applicability
under changed conditions. SFAS No. 145 is effective for fiscal
years beginning after May 15, 2002. The Company does not expect
the adoption of SFAS No. 145 will have a material impact on its
results of operations or financial position.
21
In June 2002, the FASB issues SFAS No. 146, "Accounting
for Costs Associated with Exit or Disposal Activities," which
addresses significant issues regarding the recognition,
measurement, and reporting of costs associated with exit and
disposal activities, including restructuring activities. SFAS
No. 146 requires that costs associated with exit or disposal
activities be recognized when they are incurred rather than at
the date of a commitment to an exit or disposal plan. SFAS No.
146 is effective for all exit or disposal activities initiated
after December 31, 2002. The Company does not expect the
adoption of SFAS No. 146 to have a material impact on our
results of operations or financial position.
Item 7. FINANCIAL STATEMENTS
The Financial Statements are included with this report
commencing on page F-1.
Item 8. CHANGES IN ACCOUNTANTS AND DISAGREEMENTS WITH
ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
22
PART III.
Item 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
PERSONS; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
Directors and Executive Officers
Our directors, executive officers and key employees are as
follows:
Name Age Position Director Since
---- --- -------- --------------
Ron Hickman 52 Chief Executive Officer, President
and Director 2001
Dave Davis 37 Chief Financial Officer -
Marie Matthieson 40 Vice President of Manufacturing -
Ken Horner 55 Vice President of Marketing -
Skip Miller 62 Director 2001
Jim Danbom 59 Director 2001
L.G. Bob Hancher Jr. 49 Director 2001
Rod Simonson 47 Director 2001
Skip Miller was President of Armstrong Wheels from 1970 until
1998. Then in 1999 from his Chief Executive Officer position,
Mr. Miller consummated the company's highly lucrative buy-out
from the international conglomerate GKN Wheels. The selling of
Armstrong Wheels for an impressive premium price was largely
based on his ability to build the company with consistent
double-digit annual growth. Mr. Miller participates on the Audit
and Operations committees of the board. Mr. Miller is currently
serving a two year term, which will end in 2003.
Jim Danbom was our founder and served as our president from 1981
to 2001. Mr. Danbom will lead the Operations and Planning
committees of the board. He has successfully created numerous
businesses in his 26 year career. Having successfully created
our products at Cycle Country, Mr. Danbom will now focus on
acquisitions and new product development while serving on the
Operations and Planning committees. Mr. Danbom is currently
serving a three-year term, which will end in 2004.
L.G. Bob Hancher Jr. has served as Chief Financial Officer of
Commerce Street Venture Group since 2000. Mr. Hancher graduated
from Iowa University in 1974. He served as Field Auditor and
Territory Manager of Shell Oil Co from 1974 to 1978 and the
Director of Marketing of Raynor Garage from 1978 to 1988. In
1993, Mr. Hancher co-founded, and is now a past President of
International Sports Management, leaving in 2000 to co-found
Commerce Street Venture Group. Mr. Hancher participates on the
Planning and Audit committees of the board. Mr. Hancher is
currently serving a three-year term, which will end in 2004
23
Rod Simonson became a franchisee for Piccadilly Circus Pizza,
Inc. in 1980 by owning and operating 1 of the 5 restaurants
under the company's umbrella. Shortly thereafter, Mr. Simonson
purchased the parent company and became President of Piccadilly.
By 1987, the company became Land Mark Products, Inc., the
licensing company for Piccadilly Circus Pizza. Under his
leadership, the company evolved from several sit-down pizzerias
to a complete turnkey operational partner in convenience stores,
malls, hotels, amusement parks and video stores. Today, there
are over 800 locations primarily in convenience stores
throughout 42 states in the Continental U.S. Mr. Simonson is
serving on the Planning and Audit committees of the board. Mr.
Simonson is currently serving a two year term, which will end in
2003.
Ron Hickman, who became our President on August 1, 2001, has
been a CPA for 26 years, and was our accountant from our
inception until he took a position as General Manager for us in
1996. Mr. Hickman is on the Operations and Planning committees
of the company. Mr. Hickman is currently serving a three-year
term, which will end in 2004.
Directors' Remuneration
Our directors are presently not compensated for serving on
the board of directors.
Executive Compensation
Employment Agreements
We have entered into employment agreements with certain of
our key executive as follows:
We entered into an employment agreement with Ron Hickman,
our President, effective August 1, 2001 for a period of five
years under which we have hired him to continue as our
President. The agreement calls for Mr. Hickman to receive an
annual income of $150,000 per year plus a bonus equal to three
percent (3%) of our net income before taxes. The agreement also
provides for Mr. Hickman to receive standard benefits such as
health insurance coverage, sick and vacation time and use of an
automobile.
We entered into an employment agreement with Jim Danbom,
our former President, effective August 1, 2001 for a period of a
minimum of three years under which we have hired him to continue
as a consultant on an "as needed" basis. The agreement calls
for Mr. Danbom to receive an annual income of $75,000 per year
and to receive standard benefits such as health insurance
coverage, sick and vacation time and use of an automobile.
24
Section 16(a) Beneficial Ownership Reporting Compliance
The Company is not aware of any director, officer or
beneficial owner of more than ten percent of the Company's
Common Stock that, during fiscal year 2002, failed to file on a
timely basis reports required by Section 16(a) of the Securities
Exchange Act of 1934.
Item 10. EXECUTIVE COMPENSATION
Summary Compensation Table
The following table sets forth the total compensation paid
to or accrued for the fiscal years ended September 30, 2002,
2001 and 2000 to our Chief Executive Officer and our other most
highly compensated executive officers who were serving as
executive officers at the end of our last fiscal year.
Annual Compensation
Other Restricted Securities All
Name and Fiscal Annual Stock Underlying LTIP Other
Principal Position Year Salary Bonus Compensation Awards Options Payouts Compensation
------------------ ------ ------ ----- ------------ ---------- ---------- ------- ------------
Ronald Hickman,
President 2002 150,000 15,000 500(F1) 0 0 0 7,476 (F4)
2001 104,808 30,000 500(F1) 0 0 0 6,469 (F2)
2000 100,000 130,500 0 0 0 0 5,958 (F3)
Jim Danbom,
Past President 2002 75,000 0 500(F1) 0 0 0 8,044 (F6)
2001 156,817 0 0 0 0 0 1,818 (F5)
2000 165,467 0 0 0 0 0 2,293 (F5)
(1) Christmas bonus.
(2) Comprised of $1,444 value of personal use of company auto
and $5,025 paid for health insurance.
(3) Comprised of $1,510 value of personal use of company auto
and $4,448 paid for health insurance.
(4) Comprised of $1,913 value of personal use of company auto
and $5,563 paid for health insurance.
(5) Comprised entirely of value of personal use of company auto.
Comprised of $2,481 value of personal use of company auto and
$5,563 paid for health insurance.
Stock Option Grants in the past fiscal year
We have not issued any grants of stock options in the past
fiscal year.
25
Employment Agreements
We have entered into employment agreements with certain of
our key executive as follows:
We entered into an employment agreement with Ron Hickman,
our President, effective August 1, 2001 for a period of five
years under which we have hired him to continue as our
President. The agreement calls for Mr. Hickman to receive an
annual income of $150,000 per year plus a bonus equal to three
percent (3%) of our net income before taxes. The agreement also
provides for Mr. Hickman to receive standard benefits such as
health insurance coverage, sick and vacation time and use of an
automobile.
We entered into an employment agreement with Jim Danbom,
our former President, effective August 1, 2001 for a period of a
minimum of three years under which we have hired him to continue
as a consultant on an "as needed" basis. The agreement calls
for Mr. Danbom to receive an annual income of $75,000 per year
and to receive standard benefits such as health insurance
coverage, sick and vacation time and use of an automobile.
Item 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The following table sets forth information regarding
beneficial ownership of our common stock as of the date of this
report, by (i) those shareholders known to be the beneficial
owners of more than five percent of the voting power of our
outstanding capital stock, (ii) each director, and (iii) all
executive officers and directors as a group:
Number of
Name and Address of Shares Percent
Beneficial Owner Owned Owned
---------------- ----- -----
Ron Hickman 281,000 7.48%
C/o Cycle Country Accessories Corp.
2188 Highway 86
Milford, Iowa 51351
Jim Danbom 853,750 22.72%
106 Channel Court
Marco Island, FL 34145
Jan Danbom 813,750 21.65%
106 Channel Court
Marco Island, FL 34145
26
Commerce Street Venture Group 351,250 9.35%
10401 North Meridian St., Suite 300
Indianapolis, IN 46290
All Directors and Officersas a Group 1,216,758 32.38%
(8 Persons)
27
Item 12. CERTAIN TRANSACTIONS
In August 2000, we entered into a $100,000 note payable
agreement with Land Mark Leasing, Inc., which is wholly owned
by stockholders of Cycle Country and is controlled by Jim
Danbom, our former President. This note accrued interest at
6.6% and was repaid with interest within 90 days. During the
year ended September 30, 2001 consulting fees of approximately
$31,600 were paid to the Company by Land Mark Products, Inc.,
which was previously owned 10% by certain stockholders of Cycle
Country.
We previously leased certain facilities from Jim Danbom,
our former President and Jan Danbom, his wife under operating
lease agreements, which obligated us for monthly lease payments
of $25,320 per month through October 31, 2006 and $4,000 per
month through September 30, 2004. Total payments under these
leases for the period October 1, 2000 through August 20, 2001
was approximately $313,000. We purchased the land and building
that these leases pertained to on August 21, 2001 and cancelled
the remaining term of these leases. No penalties were incurred
by the Company in connection with the cancellation of the
operating leases.
In March of 2002, Jim Danbom, director, identified Perf-
Form Products, Inc. as a potential acquisition. The company was
purchased on March, 11, 2002 for $462,100 in cash and 22,500
shares of stock for a total purchase price of approximately
$528,800.
In June of 2002, the company identified Weekend Warrior,
an acquisition which closed in June of 2002. The purchase was
made for 10,000 shares of stock. The company's technology and
products allow many of the Weekend Warrior products to be
immediately useful in the Lawn and Garden applications.
In August of 2002, Bob Hancher, director, purchased 35,000
shares of the Company's common stock at $2.61 per share on the
open market.
In August of 2002, Jim Danbom, director, purchased 10,000
shares of the Company's common stock at $2.40 per share on the
open market.
In August of 2002, Rod Simonson, director, purchased
13,400 shares of the Company's common stock at $2.60 per share
on the open market.
28
Item 13. EXHIBITS AND REPORTS ON FORM 8-K
No Reports on Form 8-K were filed during the last
quarter of the period covered by this report.
Item 14. CONTROLS AND PROCEDURES
The Company maintains disclosure controls and procedures
that are designed to ensure that information required to be
disclosed in the Company's Securities Exchange Act reports is
recorded, processed, summarized and reported within the time
periods specified in the SEC's rules and forms, and that such
information is accumulated and communicated to the Company's
management, including its Chief Executive Officer and Chief
Financial Officer, as appropriate, to allow timely decisions
regarding required disclosure. In designing and evaluating the
disclosure controls and procedures, management recognized that
any controls and procedures, no matter how well designed and
operated, can provide only reasonable assurance of achieving the
desired control objectives, and management necessarily was
required to apply its judgment in evaluating the cost-benefit
relationship of possible controls and procedures.
During the 90 day period prior to the date of this report,
an evaluation was performed under the supervision and with the
participation of our Company's management, including the Chief
Executive Officer and the Chief Financial Officer, of the
effectiveness of the design and operation of the Company's
disclosure controls and procedures. Based upon that evaluation,
the Chief Executive Officer and the Chief Financial Officer
concluded that the Company's disclosure controls and procedures
were effective. Subsequent to the date of this evaluation,
there have been no significant changes in the Company's internal
controls or in other factors that could significantly affect
these controls, and no corrective actions taken with regard to
significant deficiencies or material weaknesses in such
controls.
29
Signatures
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, on December 31, 2002.
CYCLE COUNTRY ACCESSORIES CORP.
By: /s/ Ron Hickman
----------------
Ron Hickman
Principal Executive Officer,
President and Director
In accordance with the requirements of the Exchange Act, this
report has been signed by the following persons on behalf of the
registrant and in the capacities indicated on December 31, 2002.
By: /s/ Ron Hickman Principal Executive Officer,
------------------- President and
Ron Hickman Director
By: /s/ David Davis Principal Financial Officer and
------------------ Principal Accounting Officer
David Davis
By: /s/ Skip Miller Director
------------------
Skip Miller
By: /s/ Jim Danbom Director
------------------
Jim Danbom
By: /s/ L.G. Hancher Jr. Director
--------------------
L.G. Hancher Jr.
By: /s/ Rod Simonson Director
--------------------
Rod Simonson
30
CYCLE COUNTRY ACCESSORIES CORP.
AND SUBSIDIARIES
Table of Contents
-----------------
Independent Auditors' Report................................. F-2
Consolidated Financial Statements:
Consolidated Balance Sheet............................... F-3
Consolidated Statements of Income........................ F-4
Consolidated Statements of Stockholders' Equity.......... F-5
Consolidated Statements of Cash Flows.................... F-6
Notes to Consolidated Financial Statements................... F-8
F-1
31
Independent Auditors' Report
To the Board of Directors and Stockholders of
Cycle Country Accessories Corp. and Subsidiaries:
We have audited the accompanying consolidated balance sheet of Cycle
Country Accessories Corp. and Subsidiaries (the "Company") as of
September 30, 2002, and the related consolidated statements of income,
stockholders' equity, and cash flows for the years ended September 30,
2002 and 2001. 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 auditing standards generally
accepted in the United States of America. Those standards require that
we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements. An audit also
includes 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 Cycle
Country Accessories Corp. and Subsidiaries as of September 30, 2002, and
the results of their operations and their cash flows for the years ended
September 30, 2002 and 2001 in conformity with accounting principles
generally accepted in the United States of America.
Orlando, Florida
December 7, 2002
F-2
32
CYCLE COUNTRY ACCESSORIES CORP. AND SUBSIDIARIES
Consolidated Balance Sheet
September 30, 2002
Assets 2002
------ ----
Current assets:
Cash and cash equivalents $ 207,162
Accounts receivable - trade, net 1,086,672
Inventories 2,967,285
Taxes receivable 184,624
Deferred income taxes 76,251
Prepaid expenses and other 62,349
-----------
Total current assets 4,584,343
Property, plant, and equipment, net 2,558,328
Intangible assets, net 233,238
Goodwill 41,700
Other assets 79,459
-----------
Total assets $ 7,493,193
===========
Liabilities and Stockholders' Equity
------------------------------------
Current liabilities:
Accounts payable $ 1,108,344
Accrued expenses 420,811
Bank line of credit 400,000
Current portion of bank note payable 890,580
----------
Total current liabilities 2,819,735
Bank note payable, less current portion 2,712,701
Deferred income taxes 51,788
----------
Total liabilities 5,584,224
Stockholders' equity:
Common stock 395
Additional paid-in capital 1,726,266
Retained earnings (deficit) 186,183
----------
Total stockholders' equity 1,912,844
----------
Total liabilities and stockholders' equity $ 7,497,068
==========
See accompanying notes to the consolidated financial statements.
F-3
33
CYCLE COUNTRY ACCESSORIES CORP. AND SUBSIDIARIES
Consolidated Statements of Income
For the years ended September 30, 2002 and 2001
2002 2001
---- ----
Net sales $13,257,895 12,748,793
Freight income 105,657 109,377
----------- -----------
Total revenue 13,363,552 12,858,170
Cost of goods sold (9,867,995) (9,257,543)
----------- -----------
Gross profit 3,495,557 3,600,627
Selling, general and administrative expenses (2,781,896) (2,523,185)
----------- -----------
Income from operations 713,661 1,077,442
Non-operating income (expense), net (227,417) 41,199
----------- -----------
Income before provision for income taxes 486,244 1,118,641
Income tax expense (benefit) 177,403 (55,360)
----------- -----------
Net income $ 308,841 1,174,001
=========== ===========
Weighted average shares outstanding:
Basic 3,757,261 3,625,000
Diluted 3,757,261 4,025,000
Earnings per share:
Basic $ 0.08 0.32
Diluted $ 0.08 0.29
See accompanying notes to the consolidated financial statements.
F-4
34
CYCLE COUNTRY ACCESSORIES CORP. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
Years ended September 30,2002 and 2001
Additional
Common paid-in Retained
Stock capital earnings Total
-------- -------- ----------- ----------
Balances at September 30, 2000 $ 363 - (256,059) (255,696)
Net income - - 1,174,001 1,174,001
Distributions paid as an
S Corporation - - (1,040,600) (1,040,600)
Value assigned in acquistion
of land and building - 994,641 - 994,641
--------- -------- ------------ ------------
Balances at September 30, 2001 363 994,641 (122,658) 872,346
Net income - - 308,841 308,841
Issuance of common stock for repayment
of due to related parties 19 566,681 - 566,700
Issuance of common stock to employees
for compensation 12 136,445 - 136,457
Issuance of common stock for acquisition
of net assets of Weekend Warrior 1 28,499 - 28,500
---------- ------- ------------ ------------
Balances at September 30, 2002 $ 395 1,726,266 186,183 1,912,844
========== ========= ============ ============ =========== ===========
See accompanying notes to the consolidated financial statements.
F-5
35
CYCLE COUNTRY ACCESSORIES CORP. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the years ended September 30, 2002 and 2001
2002 2001
---- ----
Cash flows from operating activities:
Net income $ 308,841 1,174,001
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 281,753 227,820
Inventory reserve 41,000 45,000
Deferred income taxes 30,897 (55,360)
Amortization 11,762 -
Gain on sale of equipment (17,010) (974)
Provision for uncollectible accounts - 10,000
(Increase) decrease in assets:
Accounts receivable - trade, net (28,389) (290,616)
Inventories (219,006) 107,603
Taxes receivable (84,107) (100,517) -
Prepaid expenses and other 1,461 29,701
Other assets 881 95,253
Increase (decrease) in liabilities:
Accounts payable 49,773 428,519
Accrued expenses 253,105 42,706
--------- --------
Net cash provided by operating activities 630,961 1,713,136
Cash flows from investing activities:
Purchase of property, plant, and equipment (270,478) (696,335)
Acquisition of net assets - subsidiary (12,065) -
Proceeds from sale of property, plant, and equipment 21,886 42,579
Payments received on notes receivable - 46,000
--------- --------
Net cash used in investing activities (260,657) (607,756)
Cash flows from financing activities:
Payments on bank note payable (837,231) (59,488)
Net borrowings from bank line of credit 400,000 -
Payments on short-term note payable - (100,000)
Distributions paid to stockholders as an S corporation - (1,040,600)
----------- -----------
Net cash used in financing activities (437,231) (1,200,088)
Net decrease in cash and cash equivalents (66,927) (94,708)
Cash and cash equivalents - beginning of year 274,089 368,797
----------- ---------
Cash and cash equivalents - end of year $ 207,162 274,089
=========== =========
See the accompanying notes to the consolidated financial statements.
F-6
36
CYCLE COUNTRY ACCESSORIES CORP. AND SUBSIDIARIES
Consolidated Statements of Cash Flows, Continued
2002 2001
------- -------
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 256,419 32,349
=========== ==========
Income taxes $ 331,130 -
=========== ==========
Supplemental schedule of non-cash financing and investing
activities:
Non-cash transaction incurred during the year for:
Issuance of common stock for repayment of due to
related parties $ 566,700 -
=========== ==========
Acquisition of net assets - subsidiary with funds
advanced by related parties $ 516,700 -
=========== ==========
Issuance of common stock for payment of
employee compensation $ 106,457 -
=========== ==========
Increase in prepaid expenses advanced by related party $ 50,000 -
=========== ==========
Issuance of common stock for payment of accrued officer
bonus $ 30,000 -
=========== ==========
Issuance of common stock for acquisition of net assets
of Weekend Warrior $ 28,500 -
=========== ==========
Purchase of all of the outstanding stock of
Cycle Country - Iowa $ - 4,500,000
=========== ==========
Value assigned in acquisition of land and building $ - 994,641
=========== ==========
See accompanying notes to the consolidated financial statements.
F-7
37
CYCLE COUNTRY ACCESSORIES CORP.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30,2002 and 2001
(1) Summary of Significant Accounting Policies
(a) Reporting Entity and Principles of Consolidation
The consolidated financial statements include the accounts of
Cycle Country Accessories Corp. (a Nevada corporation) ("Cycle
Country (Nevada)") and its wholly-owned subsidiaries, Cycle
Country Accessories Corp. (an Iowa corporation) ("Cycle Country
(Iowa)") and Perf-Form, Inc. ("Perf-Form") (collectively, the
"Company"). All significant intercompany accounts and
transactions have been eliminated in consolidation.
(b) Nature of Business
The Company is primarily engaged in the design, assembly, sale
and distribution of accessories for all terrain vehicles ("ATVs")
to various distributors, dealers and wholesalers throughout the
United States of America, Canada, Mexico, South America, Europe,
and the Pacific area. Additionally, the Company manufactures,
sells, and distributes injection-molded plastic wheel covers for
vehicles such as golf carts, lawn mowers, and light-duty
trailers. The Company's headquarters and assembly plant are
located in Milford, Iowa. The Company has a second assembly
plant located in Big Lake, Minnesota.
(c) Revenue Recognition
Revenue is recognized when the product is shipped to
distributors, dealers, wholesalers, or other customers and risk
of loss transfers to an unrelated third party. Certain costs
associated with the shipping and handling of products to
customers are billed to the customer and included as freight
income in the accompanying consolidated statements of income.
Royalty income earned in connection with the rights to sell a
product developed by the Company is recognized as earned and
included in non-operating income in the accompanying consolidated
statements of income. Sales were recorded net of sales discounts
and allowances of approximately $441,000 and $372,000 in fiscal
2002 and 2001, respectively.
(d) Cost of Goods Sold
The components of cost of goods sold in the accompanying
consolidated statements of income include all direct materials
and direct labor associated with the assembly and/or
manufacturing of the Company's products. In addition, an
allocation of factory overhead costs is included in cost of goods
sold.
F-8
38
CYCLE COUNTRY ACCESSORIES CORP.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(1) Summary of Significant Accounting Policies, Continued
(e) Allowances
The Company provides appropriate provisions for uncollectible
accounts and credit for returns based upon factors surrounding
the credit risk and activity of specific customers, historical
trends, and other information. In the opinion of management of
the Company, no provision is deemed necessary for credit for
returns at September 30, 2002. The provision for uncollectible
accounts of $10,000 at September 30, 2002 reflects management's
best estimate of future uncollectible accounts.
(f) Use of Estimates
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions
that affect the 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.
(g) Cash and Cash Equivalents
The Company considers cash on hand, deposits in banks, and short-
term investments with an original maturity of three months or
less when purchased to be cash and cash equivalents.
(h) Inventories
Inventories are valued at the lower of cost or market. Cost is
determined using the first-in, first-out method.
(i) Property, Plant, and Equipment
Property, plant, and equipment are carried at cost less
accumulated depreciation. Depreciation is provided over the
estimated useful lives of the assets by using the straight-line
and accelerated methods. Routine maintenance and repairs are
charged to expense as incurred. Major replacements and
improvements are capitalized. When assets are sold or retired,
the related cost and accumulated depreciation are removed from
the accounts and gains or losses from dispositions are credited
or charged to income.
F-9
39
CYCLE COUNTRY ACCESSORIES CORP.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(1) Summary of Significant Accounting Policies, Continued
(j) Goodwill and Other Intangible Assets
Goodwill represents the excess of the purchase price over the
fair value of assets acquired. Goodwill arising from the
Company's March 11, 2002 acquisition (see Note 3) is not being
amortized in accordance with Statement of Financial Accounting
Standards ("SFAS") No. 142, "Goodwill and Other Intangible
Assets". SFAS No. 142 requires the use of a nonamortization
approach to account for purchased goodwill and certain
intangibles. Under a nonamortization approach, goodwill and
certain intangibles would not be amortized into results of
operations, but instead would be reviewed for impairment at least
annually and written down and charged to results of operations in
the periods in which the recorded value of goodwill and certain
intangibles are determined to be greater than their fair value.
Other intangible assets are stated at cost and consist of
trademarks, covenant not-to-compete agreements, and patents.
The trademarks arising from the Company's March 11, 2002 and June
13, 2002 acquisitions (see Note 3) have been deemed to have an
indefinite life and as such will not be amortized. The covenant
not-to-compete agreements are being amortized over their
estimated useful lives (5 years for both) and the patents are
being amortized over their remaining useful lives of 11 years and
12 years, respectively.
(k) Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of
The Company's long-lived assets and certain identifiable
intangibles are reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an
asset may not be recoverable. Recoverability of assets to be
held and used is measured by a comparison of the carrying amount
of an asset to future net cash flows (undiscounted and without
interest charges) expected to be generated by the asset. If such
assets are considered to be impaired, the impairment to be
recognized is measured by the amount by which the carrying amount
of the assets exceeds the fair value of the assets. Assets to be
disposed of are reported at the lower of the carrying amount or
fair value less costs to sell.
(l) Investment in Golden Rule (Bermuda) Ltd.
The investment in Golden Rule (Bermuda) Ltd. stock is recorded at
cost due to less than 20% ownership.
F-10
40
CYCLE COUNTRY ACCESSORIES CORP.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(1) Summary of Significant Accounting Policies, Continued
(m) Warranty Costs
Estimated future costs related to product warranties are accrued
as products are sold based on prior experience and known current
events and are included in accrued expenses in the accompanying
consolidated balance sheets. Accrued warranty costs have
historically been sufficient to cover actual costs incurred.
(n) Income Taxes
Effective August 21, 2001, the Company accounts for income taxes
utilizing the asset and liability method. This approach requires
the recognition of deferred tax assets and liabilities for the
expected future tax consequences attributable to temporary
differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases
and operating loss and tax credit carryforwards. Deferred tax
assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled.
The effect on deferred tax assets and liabilities of a change in
tax rates is recognized in income in the period that includes the
enacted date.
Prior to August 21, 2001, Cycle Country had elected to be taxed
under the provisions of Subchapter S of the Internal Revenue Code
("IRC"). Under these provisions, the stockholders reported their
proportionate share of the Company's income on their individual
tax returns. Therefore, no provision or liability for federal or
state income taxes had been included in the consolidated
financial statements prior to August 21, 2001. An S corporation
may elect to use a fiscal tax year. However, due to this
election, the Company must make "required payments" to reflect
the estimated tax deferral the stockholders receive through the
use of a fiscal tax year. The S corporation tax deposit
represents the "required payments" paid by the Company to
compensate the U.S. government for the taxes the stockholders
would have paid had the Company used a calendar year-end.
Effective August 21, 2001, the Company's S corporation tax status
was terminated (see Note 2). After the Company's final S
corporation tax return was filed, the Company received a refund
of the "required payments" tax deposit of $100,517.
F-11
41
CYCLE COUNTRY ACCESSORIES CORP.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(1) Summary of Significant Accounting Policies, Continued
(o) Distributor Rebate Payable
The Company offers an annual rebate program (the "Program") for
its ATV accessory distributors. The Program provides for a 7%
rebate on purchases of certain eligible products during the
Program period if certain pre-determined cumulative purchase
levels are obtained. The Program rebate is provided to the
applicable distributors as a credit against future purchases of
the Company's products. The Program rebate liability is
calculated and recognized as eligible products are sold based
upon factors surrounding the activity and prior experience of
specific distributors and is included in accrued expenses in the
accompanying consolidated balance sheets. The distributor rebate
expense totaled approximately $408,000 and $456,000 in fiscal
2002 and 2001, respectively.
In November 2001, the Emerging Issues Task Force released Issue
No. 01-09, Accounting for Consideration Given by a Vendor to a
Customer (Including a Reseller of the Vendor's Products) (EITF
01-09). Upon adoption of EITF 01-09 on January 1, 2002, the
Company was required to classify the distributor rebate expense
as a reduction of sales. The Company previously classified this
expense as a selling, general, and administrative expense in its
consolidated statements of income. Upon adoption of EITF 01-09,
approximately $408,000 and $456,000 for the fiscal years ended
September 30, 2002 and 2001, respectively, were reclassified as a
reduction of sales. Because adoption of EITF 01-09 solely
resulted in reclassification within the consolidated statements
of income, there is no impact on the Company's financial
condition, operating income, or net income.
(p) Earnings Per Share
Basic earnings per share ("EPS") is calculated by dividing net
income by the weighted-average number of common shares
outstanding during the reporting period. Diluted EPS is computed
in a manner consistent with that of basic EPS while giving effect
to the potential dilution that could occur if warrants to issue
common stock were exercised.
(q) Advertising
Advertising consists primarily of television, videos, newspaper
and magazine advertisements, product brochures and catalogs, and
trade shows. All costs are expensed as incurred. Advertising
expense totaled approximately $438,000 and $366,000 in fiscal
2002 and 2001, respectively, and is included in selling, general,
and administrative expenses in the accompanying consolidated
statements of income.
F-12
42
CYCLE COUNTRY ACCESSORIES CORP.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(1) Summary of Significant Accounting Policies, Continued
(r) Research and Development Costs
Research and development costs are expensed as incurred.
Research and development costs incurred during fiscal 2002 and
2001 totaled approximately $178,000 and $137,000, respectively,
and are included in selling, general, and administrative expenses
in the accompanying consolidated statements of income.
(s) Shipping and Handling Costs
Shipping and handling costs represent costs associated with
shipping products to customers and handling finished goods.
Shipping and handling costs incurred totaled approximately
$202,000 and $206,000 in fiscal 2002 and 2001, respectively, and
are included in selling, general, and administrative expenses in
the accompanying consolidated statements of income.
(t) Concentration of Credit Risk
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of cash and
trade accounts receivable. The Company places its cash with high
credit quality financial institutions. At various times
throughout fiscal 2002 and 2001 and at September 30, 2002, cash
balances held at some financial institutions were in excess of
federally insured limits.
Almost all of the Company's sales are credit sales which are
primarily to customers whose ability to pay is dependent upon the
industry economics prevailing in these areas; however,
concentrations of credit risk with respect to trade accounts
receivables is limited due to generally short payment terms. The
Company also performs ongoing credit evaluations of its customers
to help further reduce credit risk.
(u) Seasonality and Weather
The ATV accessories market is seasonal as retail sales of
snowplow equipment are generally higher in the fall and winter,
and sales of farm and garden equipment are generally higher in
the spring and summer. Accordingly, demand for the Company's
snowplow equipment is generally higher in the summer and fall
(the Company's fourth and first fiscal quarters) as distributors
and dealers build inventories in anticipation of the winter
season, and demand for the Company's farm and garden and golf
equipment is generally highest in the late winter and spring (the
Company's second and third fiscal quarters) as distributors and
dealers build inventories in anticipation of the spring season.
F-13
43
CYCLE COUNTRY ACCESSORIES CORP.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(1) Summary of Significant Accounting Policies, Continued
(u) Seasonality and Weather, Continued
Demand for snowplow, farm and garden and golf equipment is
significantly affected by weather conditions. Unusually cold
winters or hot summers increase demand for these aforementioned
products. Mild winters and cool summers usually have the
opposite effect.
(v) Fair Value of Financial Instruments
The carrying amount of cash and cash equivalents, accounts
receivable, taxes receivable, accounts payable and accrued
expenses approximates fair value because of the short maturity of
those instruments. The fair value of the bank note payable and
line of credit are assumed to approximate the recorded value
because there have not been any significant changes in specific
circumstances since the note and line were originally recorded.
(w) Reclassifications
Certain prior periods' balances have been reclassified to conform
with the current year financial statement presentation. These
reclassifications had no impact on previously reported results of
operations or stockholders' equity.
(x) Recent Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("SFAS") No.
141, "Business Combinations", and
SFAS No. 142, "Goodwill and Other Intangible Assets". SFAS No.
141 requires that the purchase method of accounting be used for
all business combinations completed after June 30, 2001, SFAS No.
141 also specifies the types of acquired intangible assets that
are required to be recognized and reported separately from
goodwill and those acquired intangible assets that are required
to be included in goodwill. SFAS No. 142 requires that goodwill
no longer be amortized, but instead be tested for impairment at
least annually. SFAS No. 142 also requires recognized intangible
assets determined to have a finite useful life be amortized over
their respective estimated useful lives and reviewed for
impairment in accordance with SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets". Any recognized
intangible asset determined to have an indefinite useful life
will not be amortized, but instead tested for impairment in
accordance with SFAS No. 142 until its life is determined to no
longer be indefinite.
F-14
44
CYCLE COUNTRY ACCESSORIES CORP.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(1) Summary of Significant Accounting Policies, Continued
(x) Recent Accounting Pronouncements, Continued
The Company adopted the provisions of SFAS No. 141 and No. 142 on
October 2001, with the exception of the immediate requirement to
use the purchase method of accounting for all future business
combinations completed after June 30, 2001. However, any
goodwill and any intangible asset determined to have an
indefinite useful life that is acquired in a business combination
completed after June 30, 2001 will not be amortized.
SFAS No. 141 requires the Company to evaluate its existing
intangible assets and goodwill and to make any necessary
reclassifications in order to conform with the new separation
requirements at the date of adoption.
In August 2001, the FASB issued SFAS No. 143, "Accounting for
Asset Retirement Obligations". SFAS No. 143 addresses financial
accounting and reporting for obligations associated with the
retirement of tangible long-lived assets and the associated asset
retirement costs. SFAS No. 143 applies to (a) all entities and
(b) legal obligations associated with the retirement of long-
lived assets that result from the acquisition, construction,
development and/or the normal operation of long-lived assets,
except for certain obligations of lessees. SFAS No. 143 is
effective for financial statements issued for fiscal years
beginning after June 15, 2002. The Company does not believe the
adoption of SFAS No. 143 will have a material impact on our
financial position or results of operations.
Also in August 2001, the FASB issued SFAS No. 144, "Accounting
for the Impairment or Disposal of Long-Lived Assets," which
established one accounting model to be used for long-lived assets
to be disposed of by sale and broadens the presentation of
discontinued operations to include more disposal transactions.
SFAS No. 144 supersedes SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of" and the accounting and reporting provisions of APB
Opinion No. 30, "Reporting the Results of Operations-Reporting
the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and
Transactions" for the disposal of a segment of a business (as
previously defined in that Opinion). SFAS No. 144 also amends
ARB No. 51, "Consolidated Financial Statements", to eliminate the
exception to consolidation of a subsidiary for which control is
likely to be temporary. The provisions of SFAS No. 144 are
effective for financial statements issued for fiscal years
beginning after December 15, 2001, with early application
encouraged. The adoption of SFAS No. 144 had no impact on the
Company's financial position or results of operations.
F-15
45
CYCLE COUNTRY ACCESSORIES CORP.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(1) Summary of Significant Accounting Policies, Continued
(x) Recent Accounting Pronouncements, Continued
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and
Technical Corrections," which rescinds SFAS No. 4, "Reporting
Gains and Losses from Extinguishment of Debt" and an amendment of
that Statement, and SFAS No. 64, "Extinguishments of Debt Made to
Satisfy Sinking-Fund Requirements." SFAS No. 145 also rescinds
SFAS No. 44, "Accounting for Intangible Assets for Motor
Carriers." SFAS No. 145 amends
SFAS No. 13, "Accounting for Leases," to eliminate an
inconsistency between the required accounting for sale-leaseback
transactions and the required accounting for certain lease
modifications that have economic effects that are similar to
sale-leaseback transactions. SFAS No. 145 also amends other
existing authoritative pronouncements to make various technical
corrections, clarify meanings, or describe their applicability
under changed conditions. SFAS No. 145 is effective for fiscal
years beginning after May 15, 2002. The Company does not expect
the adoption of SFAS No. 145 will have a material impact on its
results of operations or financial position.
In June 2002, the FASB issues SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities," which addresses
significant issues regarding the recognition, measurement, and
reporting of costs associated with exit and disposal activities,
including restructuring activities. SFAS No. 146 requires that
costs associated with exit or disposal activities be recognized
when they are incurred rather than at the date of a commitment to
an exit or disposal plan. SFAS No. 146 is effective for all exit
or disposal activities initiated after December 31, 2002. The
Company does not expect the adoption of SFAS No. 146 to have a
material impact on our results of operations or financial
position.
(2) Organization, Merger, Acquisitions of Common Stock of Cycle Country
(Iowa) and Operating Facility and Initial Public Offering
Cycle Country (Iowa) was incorporated in the State of Iowa in 1983
and operated as a Subchapter S corporation until August 21, 2001.
Okoboji Industries Corp. ("Okoboji Industries"), an entity owned and
managed by the same individuals as Cycle Country (Iowa) (i.e. under
common control), was incorporated in the State of Iowa in 1987 and
operated as a Subchapter S corporation until August 14, 2001.
F-16
46
CYCLE COUNTRY ACCESSORIES CORP.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(2) Organization, Merger, Acquisitions of Common Stock of Cycle Country
(Iowa) and Operating Facility and Initial Public Offering, Continued
On August 14, 2001, Cycle Country (Iowa) and Okoboji Industries
merged. Okoboji Industries manufactured the plastic wheel covers for
what is considered the Company's Plastic Wheel Cover segment (see
Note 18). Since both Cycle Country (Iowa) and Okoboji Industries
were entities under common control, this transaction has been
accounted for in a manner similar to a pooling of interests.
Cycle Country (Nevada) was incorporated in the State of Nevada on
August 15, 2001 as a C corporation. On August 21, 2001, Cycle
Country (Nevada) acquired all of the outstanding common stock of
Cycle Country (Iowa) for $4,500,000 in cash and 1,375,000 shares of
common stock of Cycle Country (Nevada). Since both Cycle Country
(Nevada) and Cycle Country (Iowa) were under common control by virtue
of majority ownership and common management by the same three
individuals, this transaction has been accounted for in a manner
similar to a pooling of interests. Prior to August 21, 2001, Cycle
Country (Nevada) did not engage in any activities other than those
incidental to its formation, acquiring debt financing and the pending
acquisition of all of the outstanding common stock of Cycle Country
(Iowa).
Also on August 21, 2001, the Company acquired its operating facility,
which consisted of land and building with an appraised value of
$1,500,000, from certain stockholders. The operating facility was
previously leased from those stockholders. The consideration given
was comprised of $300,000 in cash and 390,000 shares of common stock
of Cycle Country (Nevada). The land and building were recorded at
their fair value of $1,500,000 which included leasehold improvements
with a net book value of approximately $205,000 which were previously
purchased and capitalized by Cycle Country (Iowa).
As a result of the transactions described above, Cycle Country
(Nevada) is the Successor Company to the business activities of Cycle
Country (Iowa) and Okoboji Industries and, effective August 21, 2001,
the S corporation tax status of Cycle Country (Iowa) was terminated.
On August 29, 2001, the Company filed a Registration Statement on
Form SB-2 with the Securities and Exchange Commission ("SEC") to
register a total of 5,625,000 shares of common stock, 2,000,000
shares of which relate to warrants (see Note 12a). The Registration
Statement on Form SB-2 (Amendment No. 3) was declared effective by
the SEC on November 28, 2001, File No. 333-68570.
F-17
47
CYCLE COUNTRY ACCESSORIES CORP.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(3) Acquisition of Assets
On March 11, 2002, the Company entered into an asset purchase
agreement to purchase certain assets from Perf-form Products, Inc.
("Perf-form Products") for approximately $462,100 in cash and 22,500
shares of the Company's common stock for a total purchase price of
approximately $528,800. One of the Company's stockholders paid
$450,000 of the cash consideration and another stockholder provided
the 22,500 shares of the Company's common stock used in the
acquisition. Both of these stockholders were subsequently reimbursed
with shares of the Company's common stock. The shares of the
Company's common stock issued both to effect the acquisition and
reimburse the stockholders were valued at the market price on the
date of acquisition. Perf-form Products manufactured, sold, and
distributed premium oil filters and related products for the
motorcycle and ATV industries. As a result of the acquisition, the
Company expects to be able to provide Perf-form Products a much
larger distribution channel through it's existing distributor network
in the United States and abroad; thereby, allowing Perf-form Products
to accelerate its sales growth.
The acquisition was accounted for under the purchase method of
accounting; accordingly, the purchase price has been allocated to
reflect the fair value of assets acquired at the date of acquisition.
The acquisition resulted in goodwill of $41,700; however, this
goodwill recorded will not be amortized as a result of the adoption
of SFAS No. 142.
The following table summarizes the estimated fair values of the
assets acquired at the date of acquisition:
At March 11, 2002
Inventory $ 147,065
Property and equipment 120,000
Trademark 100,000
Covenant not-to-compete agreement 70,000
Patent 50,000
----------
Total assets acquired $ 487,065
==========
The results of operations of the acquired business have been included
in the accompanying consolidated financial statements from the date
of acquisition.
F-18
48
CYCLE COUNTRY ACCESSORIES CORP.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(3) Acquisition of Assets, Continued
On June 13, 2002, the Company entered into an asset purchase
agreement to purchase certain assets from Weekend Warrior, Inc.
("Weekend Warrior") for 10,000 shares of the Company's common stock
for a total purchase price of approximately $28,500. The shares of
the Company's common stock were valued at the market price on the
date of acquisition. Weekend Warrior manufactured, sold, and
distributed a full line of heavy-duty agricultural equipment for the
Lawn and Garden and ATV industries; however, Weekend Warrior was
inactive for approximately two years preceding the acquisition. As a
result of the acquisition, the Company expects to be able to
accelerate it's new product introductions for the Lawn & Garden
industry.
The acquisition was accounted for under the purchase method of
accounting; accordingly, the purchase price has been allocated to
reflect the fair value of assets acquired at the date of acquisition.
The following table summarizes the estimated fair values of the
assets acquired at the date of acquisition:
At June 13, 2002
Trademark $ 9,000
Covenant not-to-compete agreement 8,000
Patent 8,000
Inventory 3,500
----------
Total assets acquired $ 28,500
==========
The results of operations of the acquired business have been included
in the accompanying consolidated financial statements from the date
of acquisition.
Assuming the fiscal 2002 acquisitions of Perf-form Products and
Weekend Warrior had occurred on October 1, 2000, the consolidated
results of operations on a pro forma basis for fiscal 2002 and 2001
would have been approximately as follows:
2002 2001
------------ ------------
Revenue $ 13,588,000 13,323,000
Net income 344,000 1,249,000
Earnings per share - basic 0.09 0.34
Earnings per share - diluted 0.09 0.31
F-19
49
CYCLE COUNTRY ACCESSORIES CORP.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(4) Inventories
The major components of inventories at September 30, 2002 are
summarized as follows:
Raw materials $ 1,362,821
Work in progress 151,508
Finished goods 1,452,956
------------
Total inventories $ 2,967,285
============
(5) Prepaid Expenses and Other
Prepaid expenses and other at September 30, 2002 consisted of the
following:
Prepaid insurance $ 40,045
Prepaid promotion 15,000
Prepaid royalty 2,000
Prepaid rent 5,304
-----------
Total prepaid expenses and other $ 62,349
===========
(6) Acquired Intangible Assets
Acquired intangible assets at September 30, 2002 consist of the
following:
Gross Carrying Accumulated
Amount Amortization
-------------- ------------
Amortized intangible assets:
Covenant not-to-compete agreements $ 78,000 (8,833)
Patents 58,000 (2,929)
----------- ----------
136,000 (11,762)
----------- ----------
Unamortized intangible assets:
Trademarks 109,000
-----------
Total acquired intangible assets $ 245,000
===========
F-20
50
CYCLE COUNTRY ACCESSORIES CORP.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(6) Acquired Intangible Assets, Continued
Amortization expense totaled $11,762 during fiscal 2002.
The estimated future amortization expense for each of the five
succeeding years are as follows:
Year ending September 30,
-------------------------
2003 $ 20,812
2004 20,812
2005 20,812
2006 20,812
2007 11,979
(7) Property, Plant, and Equipment
Property, plant, and equipment, their estimated useful lives, and
related accumulated depreciation at September 30, 2002 are summarized
as follows:
Range
of
lives
in
years
-----
Land - $ 380,000
Building 30 1,133,471
Shop equipment 7 1,353,755
Tooling and dies 7 662,969
Vehicles 3 - 7 640,151
Office equipment 3 - 7 466,870
------------
4,637,216
Less accumulated depreciation (2,200,060)
------------
2,437,156
Construction-in-process 121,172
------------
Total property and equipment $ 2,558,328
============
During fiscal 2001, the Company acquired its operating facility which
consisted of land and building from certain stockholders that was
previously leased under operating leases
(see Notes 2 and 16).
F-21
51
CYCLE COUNTRY ACCESSORIES CORP.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(8) Other Assets
The major components of other assets at September 30, 2002 are
summarized as follows:
Prepaid royalty - long-term $ 54,459
Investment in Golden Rule
(Bermuda), Ltd. 25,000
------------
Total other assets $ 79,459
============
(9) Accrued Expenses
The major components of accrued expenses at September 30, 2002 are
summarized as follows:
Distributor rebate payable $ 193,765
Accrued salaries and related benefits 142,937
Accrued warranty expense 54,156
Accrued real estate tax 27,090
Accrued interest expense 2,863
-----------
Total accrued expenses $ 420,811
===========
(10) Bank Note Payable
On August 21, 2001, under the terms of a secured credit agreement,
the Company entered into a note payable for $4,500,000 (the "Note")
with a commercial lender. The Note is collateralized by all of the
Company's assets, is payable in monthly installments from September
2001 until July 2006, which includes principal and interest at prime
+ 0.75% (6% at September 30, 2002), with a final payment upon
maturity on July 25, 2006. The variable interest rate can never
exceed 9% or be lower than 6%. The monthly payment is $90,155 and is
applied to interest first based on the interest rate in effect, with
the balance applied to principal. The interest rate is adjusted
daily. Additionally, any proceeds from the sale of stock received
from the exercise of warrants (see Note 12a) shall be applied to any
outstanding balance on the Note or the Line of Credit described
below. At September 30, 2002, $3,603,281 was outstanding on the
Note.
F-22
52
CYCLE COUNTRY ACCESSORIES CORP.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(10) Bank Note Payable, Continued
Under the terms of the secured credit agreement noted above, the
Company had a Line of Credit for the lesser of $500,000 or 80% of
eligible accounts receivable and 35% of eligible inventory. In the
fourth quarter of fiscal 2002, the Line of Credit was increased to
the lesser of $1,000,000 or 80% of eligible accounts receivable and
35% of eligible inventory. The Line of Credit bears interest at
prime plus 1.25% (6% at September 30, 2002) and is collateralized by
all of the Company's assets. The Line of Credit matures on September
1, 2003. At September 30, 2002, $400,000 was outstanding on the Line
of Credit. As of September 30, 2002, $600,000 is available on the
Line of Credit.
Future maturities of long-term debt are as follows:
Year ending September 30,
-------------------------
2003 $ 890,580
2004 944,489
2005 1,003,138
2006 765,074
---------------
$ 3,603,281
===============
The secured credit agreement contains conditions and covenants that
prevent or restrict the Company from engaging in certain transactions
without the consent of the commercial lender and require the Company
to maintain certain financial ratios, including term debt coverage
and maximum leverage. In addition, the Company is required to
maintain a minimum working capital and shall not declare or pay any
dividends or any other distributions. The Company was in
noncompliance with the minimum working capital requirement at March
31, 2002 and September 30, 2002, as well as the term debt coverage
ratio at September 30, 2002, and has requested and received waivers
from the commercial lender for the respective noncompliance in the
second and fourth quarters of fiscal 2002.
(11) Income Taxes
For the period from October 1, 2000 to August 21, 2001, the Company
had elected to be taxed as an S corporation (see Note 1n).
Therefore, no provision or liability for federal or state income
taxes has been included in the accompanying consolidated financial
statements for the period October 1, 2000 to August 20, 2001.
Effective August 21, 2001, the Company's S corporation tax status was
terminated (see Note 2).
F-23
53
CYCLE COUNTRY ACCESSORIES CORP.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(11) Income Taxes, Continued
The provision (benefit) for income taxes for the years ended
September 30, 2002 and 2001 consists of the following:
2002 2001
Current tax provision
Federal $ 145,302 $ -
State 1,204 -
---------- ---------
146,506 -
---------- ---------
Deferred tax provision (benefit)
Federal 29,861 (44,085)
State 1,036 (11,275)
---------- ---------
30,897 (55,360)
---------- ---------
Total income tax benefit $ 177,403 $(55,360)
========== =========
Deferred tax assets and liabilities at September 30, 2002 are
comprised of the following:
Deferred tax assets:
Inventory reserve $ 30,376
Accrued warranty 19,128
Accrued vacation 15,121
Deferred profit 4,218
Allowance for uncollectable accounts 3,533
Accrued bonus 3,875
Net operating loss -
---------
Total deferred assets 76,251
---------
Deferred tax liability:
Depreciation (51,788)
---------
Net deferred tax asset $ 24,463
=========
F-24
54
CYCLE COUNTRY ACCESSORIES CORP.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(11) Income Taxes, Continued
These amounts are included in the accompanying consolidated balance
sheets at September 30, 2002 under the following captions:
Current assets $ 76,251
Non-current liabilities (51,788)
---------
Net deferred tax asset $ 24,463
=========
No valuation allowance has been provided for these deferred tax
assets at September 30, 2002 as full realization of these assets is
more likely than not.
A reconciliation of the income tax provision (benefit) computed by
applying the federal statutory rate for the years ended September 30,
2002 and 2001 is as follows:
2002 2001
Federal statutory tax $ 165,323 34.0% $ 380,338 34.0%
Change in effective tax rate 5,975 1.2 - -
Non deductible expenses 4,687 1.0 968 0.1
State and local income taxes, net of
federal tax benefit 1,418 0.3 3,475 0.3
Tax on income as S corp. - - (392,201) (35.1)
Cumulative prior year deferred tax
liability - - (47,940) (4.3)
---------- ---- ---------- -------
Total income tax provision (benefit) $ 177,403 36.5 $ (55,360) (5.0)%
========== ==== ========== =======
(12) Stockholders' Equity
(a) Common Stock
The Company has 100,000,000 shares of $0.0001 par value common
stock authorized and 3,953,000 and 3,625,000 shares issued and
outstanding at September 30, 2002 and 2001, respectively. Of the
3,953,000 shares of common stock outstanding, 2,000,000 of these
shares of common stock have warrants attached which entitles the
holder to purchase one share of common stock per warrant at $4.00
per share beginning March 28, 2002 and ending August 21, 2004.
The Company has the right, under certain circumstances, to redeem
any unexercised warrants at $0.0001 per share. Cycle Country
(Nevada) was organized and incorporated during fiscal 2001 as
further described in Note 2.
F-25
55
CYCLE COUNTRY ACCESSORIES CORP.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(12) Stockholders' Equity, Continued
(b) Preferred Stock
The Company has 20,000,000 shares of $0.0001 par value preferred
stock authorized and no shares issued and outstanding at
September 30, 2002 and 2001, respectively. The Board of
Directors is authorized to adopt resolutions providing for the
issuance of preferred shares and the establishment of preferences
and rights pertaining to the shares being issued, including
dividend rates.
In the event of any dissolution or liquidation of the Company,
whether voluntary or involuntary, the holders of shares of
preferred stock shall be paid the full amounts of which they
shall be entitled to receive before any holders of common stock
shall be entitled to receive, pro rata, any remaining assets of
the Company available for distribution to its stockholders.
(c) Registration Statement
On June 28, 2002, the Company filed a Registration Statement on
Form S-8 with the Securities and Exchange Commission ("SEC") to
register a total of 65,000 shares of common stock. These shares
are to be issued to third party consultants and employees in
exchange for services provided. The Registration Statement on
Form S-8 was declared effective by the SEC on June 28, 2002.
On July 3, 2002, the Company filed a Registration Statement on
Form SB-2 with the SEC to register a total of 500,000 shares of
common stock, 155,000 shares of which were offered by a selling
stockholder and 345,000 shares of which were offered by the
Company. As of September 30, 2002, 310,250 of the 345,000 shares of
common stock offered by the Company are not issued nor outstanding.
The Registration Statement on Form SB-2 (Amendment No. 1) was
declared effective by the SEC on July 25, 2002, File No. 333-
92002.
F-26
56
CYCLE COUNTRY ACCESSORIES CORP.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(13) Earnings Per Share
The following is a reconciliation of the numerators and denominators
of the basic and diluted EPS computations for the years ended
September 30, 2002 and 2001:
For the year ended September 30, 2002
-------------------------------------
Income Shares Per-share
(numerator) (denominator) amount
----------- ------------- ---------
Basic EPS
Income available to common
stockholders $ 308,841 3,757,261 $ 0.08
Effect of Dilutive Securities
Warrants - - -
---------- --------- ---------
Diluted EPS
Income available to common
stockholders $ 308,841 3,757,261 $ 0.08
========== ========= =========
For the year ended September 30, 2001
-------------------------------------
Income Shares Per-share
(numerator) (denominator) amount
----------- ------------- ---------
Basic EPS
Income available to common
stockholders $1,174,001 3,625,000 $ 0.32
Effect of Dilutive Securities
Warrants - 400,000 -
---------- --------- ---------
Diluted EPS
Income available to common
stockholders $1,174,001 4,025,000 $ 0.29
========== ========= =========
F-27
57
CYCLE COUNTRY ACCESSORIES CORP.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(14) Non-Operating Income (Expense)
Non-operating income (expense) for the years ended September 30, 2002
and 2001 consisted of the following:
2002 2001
---------- ----------
Income:
Gain on sale of equipment $ 17,010 974
Truck lease 6,979 -
Interest 5,884 32,204
Royalties 1,560 9,670
Consulting fees - 31,559
Other 20 1,530
----------- --------
Total income 31,453 75,937
Expense:
Interest (255,663) (34,738)
Other (3,207) -
------------ --------
Total expense (258,870) (34,738)
------------ --------
Total non-operating
income, net $ (227,417) 41,199
=========== ========
(15) Pension and Profit Sharing Plan
The Company had a qualified defined contribution profit sharing plan
(the "Plan") covering all eligible employees with a specific period
of service which was terminated during fiscal 2002. The
contributions were discretionary with the Board of Directors. There
were no contributions to the Plan by the Company during the years
ended September 30, 2002 or 2001.
(16) Operating Leases
Cycle Country had committed to a non-cancelable operating lease on
its operating facilities with rent of $25,320 per month which was to
expire October 31, 2006. In addition, Okoboji Industries had
committed to a non-cancelable operating lease on its operating
facilities with rent of $4,000 per month which was to expire
September 30, 2004. Total lease expense amounted to approximately $
-0- and $313,000 during fiscal 2002 and 2001, respectively.
F-28
58
CYCLE COUNTRY ACCESSORIES CORP.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(16) Operating Leases, Continued
During fiscal 2001, the Company acquired the above-mentioned
operating facilities and cancelled the remaining term of the
operating leases (see Note 2). No penalties were incurred by the
Company in connection with the cancellation of the operating leases
relating to the acquired land and building.
(17) Business Concentrations
At September 30, 2002, customers with the two largest outstanding
accounts receivable balances totaled approximately $322,000 or 29% of
the gross accounts receivable. At September 30, 2002, the
outstanding accounts receivable balances of customers that exceeded
10% of gross accounts receivable are as follows:
% of Gross
Accounts Accounts
Customer Receivable Receivable
-------- ------------ ------------
A $ 173,400 16%
B 148,500 13%
Sales to the Company's major customers, which exceeded 10% of net
sales, accounted for approximately 21.0% and 13.5% each of net sales
in fiscal 2002, and approximately 18.4%, 16.3%, and 12.4% each of net
sales in fiscal 2001.
The Company believes it has adequate sources for the supply of raw
materials and components for its production requirements. The
Company's suppliers are located primarily in the state of Iowa. The
Company has a policy of strengthening its supplier relationships by
concentrating its purchases for particular parts over a limited
number of suppliers in order to maintain quality and cost control and
to increase the suppliers' commitment to the Company. The Company
relies upon, and expects to continue to rely upon, several single
source suppliers for critical components. During fiscal 2002 and
2001, the Company purchased approximately $4,691,000 and $4,839,000,
respectively, of raw materials from one vendor, which represented
approximately 58% and 63% of materials used in products sold during
the respective years.
F-29
59
CYCLE COUNTRY ACCESSORIES CORP.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(18) Segment Information
Segment information has been presented on a basis consistent with how
business activities are reported internally to management.
Management solely evaluates operating profit by segment by direct
costs of manufacturing its products without an allocation of indirect
costs. In determining the total revenues by segment, freight income
and sales discounts and allowances are not allocated to each of the
segments for internal reporting purposes. The Company has two
operating segments which assemble, manufacture, and sell a variety of
products: ATV Accessories and Plastic Wheel Covers. ATV Accessories
is engaged in the design, assembly, and sale of ATV accessories such
as snowplow blades, lawnmowers, oil filters, spreaders, sprayers,
tillage equipment, winch mounts, and utility boxes. Plastic Wheel
Covers manufactures and sells injection-molded plastic wheel covers
for vehicles such as golf carts, lawnmowers, and light-duty trailers.
The significant accounting policies of the operating segments are the
same as those described in Note 1. Sales of snowplow blades
comprised approximately 63% and 74% of ATV Accessories revenues in
fiscal 2002 and 2001, respectively. Sales of snowplow blades
comprised approximately 55% and 64% of the Company's consolidated
total revenues in fiscal 2002 and 2001, respectively.
The following is a summary of certain financial information related
to the two segments:
2002 2001
------------ ----------
Total revenues by segment
-------------------------
ATV Accessories $ 11,594,058 11,136,391
Plastic Wheel Covers 2,104,953 1,984,006
------------- ------------
Total revenues by segment 13,699,011 13,120,397
Freight income 105,657 109,377
Sales discounts and allowances (441,116) (371,604)
------------- ------------
Total combined revenue $ 13,363,552 12,858,170
============= ============
Operating profit by segment
----------------------------
ATV Accessories $ 3,660,092 3,234,609
Plastic Wheel Covers 1,224,747 1,339,981
Freight income 105,657 109,377
Sales allowances (441,116) (371,604)
Factory overhead (1,053,824) (711,736)
Selling, general, and administrative (2,781,896) (2,523,185)
Interest income (expense), net (249,779) (2,534)
Other income (expense), net 22,362 43,733
Income tax (expense) benefit (177,403) 55,360
------------ -----------
Net income $ 308,841 1,174,001
============ ===========
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60
CYCLE COUNTRY ACCESSORIES CORP.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(18) Segment Information, Continued
2002 2001
------------ ------------
Identifiable assets
-------------------
ATV Accessories $ 5,300,596 4,585,656
Plastic Wheel Covers 824,066 825,130
------------ -----------
Total identifiable assets 6,124,662 5,410,786
Corporate and other assets 1,372,406 1,293,282
------------ -----------
Total assets $ 7,497,068 6,704,068
============ ===========
Depreciation by segment
-----------------------
ATV Accessories $ 93,766 65,775
Plastic Wheel Covers 94,822 92,578
Corporate and other 93,165 69,467
------------ -----------
Total depreciation $ 281,753 227,820
============ ===========
Capital expenditures by segment
-------------------------------
ATV Accessories $ 156,156 857,385
Plastic Wheel Covers 124,835 247,371
Corporate and other 113,690 586,220
------------ -----------
Total capital expenditures $ 394,681 1,690,976
============ ===========
The following is a summary of the Company's revenue in different
geographic areas during the years ended September 30, 2002 and 2001:
2002 2001
------------ -----------
United States $ 12,198,758 12,021,192
Other countries 1,164,794 836,978
------------ -----------
Total revenue $ 13,363,552 12,858,170
As of September 30, 2002 and 2001, all of the Company's long-lived
assets are located in the United States of America. During fiscal
2002 and 2001, ATV Accessories had sales to individual customers
which exceeded 10% of total revenues as described in Note 17.
Plastic Wheel Covers did not have sales to any individual customer
greater than 10% of total revenues during fiscal 2002 and 2001.
F-31
61
CYCLE COUNTRY ACCESSORIES CORP.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(19) Related Party Transactions
The Company was owed $46,000 at September 30, 2000 on a note
receivable by a stockholder of the Company. The note receivable was
repaid to the Company during fiscal 2001.
Land Mark Leasing, Inc., which the Company owed $100,000 at September
30, 2000 under a short-term note payable, is wholly owned by certain
stockholders of the Company. The short-term note payable was repaid
by the Company during fiscal 2001.
During the year ended September 30, 2001, consulting fees of
approximately $31,600 were paid to the Company by Land Mark Products,
Inc. During fiscal 2002 and 2001, Land Mark Products, Inc. was owned
10% by certain stockholders of Cycle Country.
Through August 20, 2001, the Company leased certain facilities from
two of its stockholders under operating lease agreements, which
obligated the Company for monthly lease payments of $25,320 per month
through October 31, 2006 and $4,000 per month through September 30,
2004 (see Note 16).
(20) Commitments and Contingencies
(a) Letters of Credit
Letters of credit are purchase guarantees that ensure the
Company's payment to third parties in accordance with specified
terms and conditions which amounted to approximately $179,800 as
of September 30, 2002.
(b) Legal Matters
The Company is involved in one claim relating to an allegation of
patent infringement and one claim relating to alleged product
liability. Subsequent to September 30, 2002, both parties to the
alleged patent infringement claim have agreed to dismiss the
claim, pending approval by the court. The product liability
claim is in the preliminary phases. The amount of liability, if
any, from the claim cannot be determined with certainty; however,
management is of the opinion that the outcomes will not have a
material adverse effect on the consolidated financial position or
operations of the Company.
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62