U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 2002
or
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number: 333-68570
Cycle Country Accessories Corp.
(Exact Name of Small Business Issuer as Specified in Its Charter)
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Nevada 42-1523809
(State of incorporation) (I.R.S. Employer Identification No.)
2188 Highway 86
Milford, Iowa 51351
(Address of principal executive offices)
Registrant's telephone number: (712) 338-2701
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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 --
--
The number of shares of the registrant's common stock, par value
$0.0001 per share, outstanding as of May 13, 2002 was 3,698,250 and
there were 306 stockholders of record.
1
Cycle Country Accessories Corp. Index to Form 10-QSB
Part 1 Financial Information Page
----
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheet - March 31, 2002........2
Condensed Consolidated Statements of Income - Three Months
and Six Months Ended March 31, 2002 and 2001.................3
Condensed Consolidated Statements of Cash Flows - Six Months
Ended March 31, 2002 and 2001 ...............................5
Notes to Condensed Consolidated Financial Statements.........6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations...................................12
Part II Other Information
Item 6. Exhibits and Reports on Form 8-K............................17
Signatures...........................................................18
2
Part I. Financial Information
Item 1. Financial Statements
Cycle Country Accessories Corp. and Subsidiaries
Condensed Consolidated Balance Sheet
March 31, 2002
(Unaudited)
Assets
Current Assets:
Cash and cash equivalents $ 108,021
Accounts receivable, net 899,579
Inventories 3,099,033
Taxes receivable 100,517
Deferred income taxes 83,843
Prepaid expenses and other 129,618
------------
Total current assets 4,420,611
------------
Property, plant, and equipment, net 2,552,644
Intangible assets, net 260,478
Other assets 79,220
------------
Total assets $ 7,312,953
============
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable $ 437,853
Due to related parties 576,700
Accrued expenses 561,710
Bank line of credit 500,000
Accrued interest payable 3,311
Current portion of bank note payable 854,003
------------
Total current liabilities 2,933,577
------------
Long-Term Liabilities:
Bank note payable, less current portion 3,173,791
Deferred income taxes 28,483
------------
Total long-term liabilities 3,202,274
------------
Total liabilities 6,135,851
------------
Stockholders' Equity:
Preferred stock, $.0001 par value; 20,000,000 shares
authorized; no shares issued or outstanding -
Common stock, $.0001 par value; 100,000,000 shares
authorized; 3,698,250 shares issued and outstanding 370
Additional paid-in capital 994,641
Retained earnings 182,091
------------
Total stockholders' equity 1,177,102
------------
Total liabilities and stockholders' equity $ 7,312,953
============
See accompanying notes to the condensed consolidated financial statements.
Page 2
3
Cycle Country Accessories Corp. and Subsidiaries
Condensed Consolidated Statements of Income
Three Months Ended March 31,
2002 2001
---------- ---------
(Unaudited) (Unaudited)
Revenues:
Net sales $ 2,201,108 $ 3,469,801
Freight income 22,291 31,444
-------------- -----------
Total revenues 2,223,399 3,501,245
-------------- -----------
Cost of goods sold (1,516,030) (2,429,338)
-------------- -----------
Gross profit 707,369 1,071,907
-------------- -----------
Selling, general, and administrative
expenses (717,142) (683,265)
-------------- -----------
Income (loss) from operations (9,773) 388,642
-------------- -----------
Other Income (Expense):
Interest expense (64,172) -
Interest income 2,792 13,839
Miscellaneous 16,532 15,008
-------------- -----------
Total other income (expense) (44,848) 28,847
-------------- -----------
Income (loss) before provision
for income taxes (54,621) 417,489
-------------- -----------
Provision for income taxes as a
C corporation 17,683 -
-------------- -----------
Net income (loss) $ (36,938) $ 417,489
============== ===========
Weighted average shares outstanding:
Basic 3,698,250 3,698,250
============== ===========
Diluted 3,856,938 4,098,250
============== ===========
Earnings per share:
Basic $ (0.01) $ 0.11
============== ===========
Diluted $ (0.01) $ 0.10
============== ===========
Pro forma net income data (1):
Net income reported $ 417,489
Provision for income taxes (150,296)
-----------
Pro forma net income $ 267,193
===========
Pro forma weighted average shares outstanding (1):
Basic 3,698,250
===========
Diluted 4,098,250
===========
Pro forma earnings per share (1):
Basic $ 0.07
===========
Diluted $ 0.07
===========
(1) The pro forma reflects the effect of the transaction in which all
of the outstanding stock of Cycle Country Accessories Corp. (an Iowa
corporation) was purchased by Cycle Country Accessories Corp. (a
Nevada corporation), a C corporation. As a result, Cycle Country
Accessories Corp. (an Iowa corporation) converted from an S
corporation to a C corporation and a provision for income taxes has
been included due to this conversion.
See accompanying notes to the condensed consolidated financial statements.
Page 3
4
Cycle Country Accessories Corp. and Subsidiaries
Condensed Consolidated Statements of Income
Six Months Ended March 31,
2002 2001
-------------- --------------
(Unaudited) (Unaudited)
Revenues:
Net sales $ 6,986,279 $ 7,383,434
Freight income 48,544 64,539
-------------- --------------
Total revenues 7,034,823 7,447,973
-------------- --------------
Cost of goods sold (5,042,051) (5,295,878)
-------------- --------------
Gross profit 1,992,772 2,152,095
-------------- --------------
Selling, general, and administrative
expenses (1,408,768) (1,269,630)
-------------- --------------
Income from operations 584,004 882,465
-------------- --------------
Other Income (Expense):
Interest expense (128,240) (452)
Interest income 4,287 21,976
Miscellaneous 19,213 46,846
-------------- --------------
Total other income (expense) (104,740) 68,370
-------------- --------------
Income before provision for
income taxes 479,264 950,835
-------------- --------------
Provision for income taxes as a
C corporation (174,515) -
-------------- --------------
Net income $ 304,749 $ 950,835
============== ==============
Weighted average shares outstanding:
Basic 3,698,250 3,698,250
============== ==============
Diluted 3,982,839 4,098,250
============== ==============
Earnings per share:
Basic $ 0.08 $ 0.26
============== ==============
Diluted $ 0.08 $ 0.23
============== ==============
Pro forma net income data (1):
Net income reported $ 950,835
Provision for income taxes (342,301)
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Pro forma net income $ 608,534
=============
Pro forma weighted average shares outstanding (1):
Basic 3,698,250
=============
Diluted 4,098,250
=============
Pro forma earnings per share (1):
Basic $ 0.16
=============
Diluted $ 0.15
=============
(1) The pro forma reflects the effect of the transaction in which all
of the outstanding stock of Cycle Country Accessories Corp. (an Iowa
corporation) was purchased by Cycle Country Accessories Corp. (a
Nevada corporation), a C corporation. As a result, Cycle Country
Accessories Corp. (an Iowa corporation) converted from an S
corporation to a C corporation and a provision for income taxes has
been included due to this conversion.
See accompanying notes to the condensed consolidated financial statements.
Page 4
5
Cycle Country Accessories Corp. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
Six Months Ended March 31,
2002 2001
-------------- ------------
(Unaudited) (Unaudited)
Cash Flows from Operating Activities:
Net income $ 304,749 $ 950,835
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation 133,062 112,047
Amortization 1,222 -
Inventory reserve 18,000 -
Gain on sale of equipment (17,010) (8,778)
(Increase) decrease in assets:
Accounts receivable, net 158,704 (53,609)
Inventories (331,254) 182,715
Prepaid expenses and other (54,688) (20,127)
Increase (decrease) in liabilities:
Accounts payable (620,718) (226,610)
Accrued expenses 261,173 231,518
Accrued interest payable (308) (1,230)
-------------- -----------
Net cash provided by (used in)
operating activities (147,068) 1,166,761
-------------- -----------
Cash Flows from Investing Activities:
Purchase of equipment (116,103) (194,033)
Acquisition of net assets - subsidiary (12,065) -
Proceeds from sale of equipment 21,886 22,079
Payment received on notes receivable - 1,000
-------------- -----------
Net cash used in investing activities (106,282) (170,954)
-------------- -----------
Cash Flows from Financing Activities:
Payments on bank note payable (412,718) -
Payments on short-term note payable - (100,000)
Net borrowings from bank line of credit 500,000 -
Distributions paid to stockholders as
an S corporation - (1,005,600)
-------------- ------------
Net cash provided by (used in)
financing activities 87,282 (1,105,600)
-------------- ------------
Net decrease in cash and cash equivalents (166,068) (109,793)
Cash and cash equivalents, beginning of
period 274,089 368,797
-------------- ------------
Cash and Cash Equivalents, end of
period $ 108,021 $ 259,004
============== ============
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 128,548 $ 1,682
============== ============
Income taxes $ 196,970 $ -
============== ============
Supplemental schedule of non-cash
investing and financing activities:
Acquisition of net assets -
subsidiary included in due to
related parties $ 516,700 $ -
============== ============
Increase in prepaid expenses -
included in due to related parties $ 60,000 $ -
============== ============
See accompanying notes to the condensed consolidated financial statements.
Page 5
6
Cycle Country Accessories Corp. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
Six Months Ended March 31, 2002 and 2001
(Unaudited)
1. Basis of Presentation:
The accompanying unaudited condensed consolidated financial
statements for the three and six months ended March 31, 2002 and 2001,
have been prepared in accordance with generally
accepted accounting principles for interim financial information.
Accordingly, they do not include all the information and footnotes
required by generally accepted accounting principles for complete
financial statements. In the opinion of management, the accompanying
unaudited condensed consolidated financial statements contain all
adjustments, consisting only of normal recurring accruals, considered
necessary for a fair presentation of the Company's financial
position, results of operations, and cash flows for the periods
presented.
The results of operations for the interim periods ended March 31,
2002 and 2001 are not necessarily indicative of the results to be
expected for the full year. These interim consolidated financial
statements should be read in conjunction with the September 30, 2001
consolidated financial statements and related notes included in the
Company's Annual Report on Form 10-KSB for the year ended September
30, 2001.
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 certain payments to its customers as a reduction of
sales. The Company previously classified these payments as selling,
general, and administrative expenses in its consolidated statements
of income. Upon adoption of EITF 01-09, $(38,896) and $98,213 as of
the three months ended March 31, 2002 and 2001, respectively, and
$214,152 and $287,630 as of the six months ended March 31, 2002 and
2001, respectively, were reclassified as a reduction (increase)
in revenue. 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.
2. 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. The shares of the Company's common stock
were valued at the market price on the date of acquisition. Perf-
form Products manufactures, sells, and distributes 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 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 approximately $41,700;
however, as discussed in Note 3, this goodwill recorded will not be
amortized as a result of SFAS No. 142 transition provisions.
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 condensed consolidated financial statements from the date
of acquisition.
Page 6
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Cycle Country Accessories Corp. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
Six Months Ended March 31, 2002 and 2001
(Unaudited)
3. 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 2) is not being amortized in
accordance with Statement of Financial Accounting Standards No. 142
(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.
The trademark has been deemed to have an indefinite life and as such
will not be amortized. The covenant not-to-compete agreement is
being amortized over its estimated useful life (5 years) and the
patent is being amortized over its remaining useful life of 11 years.
4. Inventories:
Inventories are valued at the lower of cost or market. Cost is
determined using the first-in, first-out method. The major
components of inventories at March 31, 2002 are summarized as
follows:
Raw materials $ 1,519,383
Work in progress 46,651
Finished goods 1,532,999
-------------
Total inventories $ 3,099,033
=============
5. Accrued Expenses:
The major components of accrued expenses at March 31, 2002 are
summarized as follows:
Distributor rebate payable $ 382,177
Accrued salaries and related benefits 136,869
Accrued warranty expense 32,000
Royalties payable 10,664
-------------
Total accrued expenses $ 561,710
=============
6. Income Taxes:
The Company converted to a C corporation effective August 21, 2001.
Prior to August 21, 2001, the Company had elected to be taxed under
the provisions of Subchapter S of the Internal Revenue Code. 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 has been
included in the Condensed Consolidated Financial Statements prior to
August 21, 2001.
7. 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 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.
Page 7
8
Cycle Country Accessories Corp. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
Six Months Ended March 31, 2002 and 2001
(Unaudited)
7. Earnings Per Share, Continued:
The following is a reconciliation of the numerators and denominators
of the basic and diluted EPS computations for the three months and
six months ended March 31, 2002 and 2001:
For the three months ended For the six months ended
March 31, 2002 March 31, 2002
------------------------------- -----------------------------
Income Shares Per-share Income Shares Per-share
(numerator) (denominator) amount (Numerator) (denominator) amount
------------- ------------- --------- ---------- ------------- ---------
Basic EPS
Income available to common
stockholders $ (36,938) 3,698,250 $ (0.01) $ 304,749 3,698,250 $ 0.08
Effect of Dilutive Securities
Warrants - 158,688 - - 284,589 -
------------- ------------- --------- ---------- ------------- ---------
Diluted EPS
Income available to common
stockholders $ (36,938) 3,856,938 $ (0.01) $ 304,749 3,982,839 $ 0.08
============= ============= ========= ========== ============= =========
For the three months ended For the six months ended
March 31, 2001 March 31, 2001
-------------------------------------- ----------------------------------
Income Shares Per-share Income Shares Per- share
(numerator) (denominator) amount (numerator) (Denominator) amount
------------ ------------- ---------- ----------- ------------- -----------
Basic EPS
Income available to common
stockholders $ 417,849 3,698,250 $ 0.11 $ 950,835 3,698,250 $ 0.26
Effect of Dilutive Securities
Warrants (1) - 400,000 - - 400,000 -
------------ ------------- ---------- ----------- ------------- -----------
Diluted EPS
Income available to common
stockholders $ 417,849 4,098,250 $ 0.10 $ 950,835 4,098,250 $ 0.23
============ ============= ========== =========== ============= ===========
(1) The calculation of the effect of dilutive securities assumes a value of
$5.00 for each share of the Company's common stock until traded on the
open market on February 11, 2002.
Page 8
9
Cycle Country Accessories Corp. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
Six Months Ended March 31, 2002 and 2001
(Unaudited)
8. 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 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, 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 to the Consolidated Financial Statements of the
Company's Annual Report on Form 10-KSB for the year ended September
30, 2001. Sales of snowplow blades comprised approximately 51% and
72% of ATV Accessories revenues during the three months ended March 31,
2002 and 2001, respectively and approximately 76% and 78% of ATV Accessories
revenues during the six months ended March 31, 2002 and 2001, respectively.
In addition, sales of snowplow blades comprised approximately 36% and 62%
of the Company's consolidated total revenues during the three months
ended March 31, 2002 and 2001, respectively and approximately 66% and
69% of the Company's consolidated total revenues during the six months
ended March 31, 2002 and 2001, respectively.
The following is a summary of certain financial information related
to the two segments during the three months and six months ended
March 31, 2002 and 2001:
Three months ended March 31, Six months ended March 31,
2002 2001 2002 2001
------------- --------------- ------------- ------------
Total revenues by segment
ATV Accessories $ 1,569,733 $ 3,007,474 $ 6,102,997 $ 6,616,878
Plastic Wheel Covers 671,155 530,327 1,094,277 947,951
------------- --------------- ------------- -------------
Total revenues by segment 2,240,888 3,537,801 7,197,274 7,564,829
Freight income 22,290 31,444 48,544 64,539
Sales allowances (39,779) (68,000) (210,995) (181,395)
------------- --------------- ------------- -------------
Total revenues $ 2,223,399 $ 3,501,245 $ 7,034,823 $ 7,447,973
============= =============== ============= =============
Operating profit by segment
ATV Accessories $ 655,421 $ 1,078,213 $ 2,252,433 $ 2,349,182
Plastic Wheel Covers 477,284 418,996 765,191 711,950
Freight income 22,290 31,444 48,544 64,539
Sales allowances (39,779) (68,000) (210,995) (181,395)
Factory overhead (407,847) (388,746) (862,401) (792,180)
Selling, general, and
administrative (717,142) (683,265) (1,408,768) (1,269,631)
Interest income (expense),net (61,380) 14,161 (123,953) 21,846
Other income (expense), net 16,532 14,686 19,213 46,524
Provision for income taxes 17,683 - (174,515) -
------------ -------------- --------------- --------------
Net income (loss) $ (36,938) $ 417,489 $ 304,749 $ 950,835
============ ============== =============== ==============
Page 9
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Cycle Country Accessories Corp. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
Six Months Ended March 31, 2002 and 2001
(Unaudited)
8. Segment Information, Continued:
The following is a summary of the Company's revenue in different
geographic areas during the three months and six months ended March
31, 2002 and 2001:
Three months ended March 31, Six months ended March 31,
2002 2001 2002 2001
------------ -------------- ------------- ----------
United States of America $ 1,997,693 $ 3,285,860 $ 6,429,740 $ 7,062,642
Other countries 225,706 215,385 605,083 385,331
------------ -------------- ------------- -----------
Total revenue $ 2,223,399 $ 3,501,245 $ 7,034,823 $ 7,447,973
============ ============== ============= ===========
As of March 31, 2002, all of the Company's long-lived assets are
located in the United States of America.
ATV Accessories sales to major customers, which exceeded 10% of net
revenues, accounted for approximately 24.3% of net
revenues during the three months ended March 31, 2002, and
approximately 19.9%, 13.5%, and 13.5% each of net revenues during the
three months ended March 31, 2001. Plastic Wheel Covers did not have
sales to any individual customer greater than 10% of net revenues
during the three months ended March 31, 2002 or 2001.
ATV Accessories sales to major customers, which exceeded 10% of net
revenues, accounted for approximately 19.8%, 15.1%, and 10% each of
net revenues during the six months ended March 31, 2002, and
approximately 18.6%, 15.6%, 13.1% and 11.2% each of net revenues during the
six months ended March 31, 2001. Plastic Wheel Covers did not have
sales to any individual customer greater than 10% of net revenues
during the six months ended March 31, 2002 or 2001.
9. Contingencies:
Legal Matters
The Company is involved in a claim relating to an allegation of patent
infringement. The 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 outcome
will not have a material adverse effect on the consolidated financial
position or operations of the Company.
Page 10
11
10. New Accounting Standards
As more fully described in Note 1 of the Notes to Condensed
Consolidated Financial Statements, on January 1, 2002, the Company
was required to adopt EITF 01-09. For a discussion of the impact of
this new accounting standard upon the Company, see Note 1.
In June 2001, the FASB issued SFAS No. 141, Business Combinations,
and SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No. 141
requires business combinations initiated after June 30, 2001 to be
accounted for using the purchase method of accounting, and broadens
the criteria for recording intangible assets separate from goodwill.
Recorded goodwill and intangibles will be evaluated against this new
criteria and may result in certain intangibles being subsumed into
goodwill, or alternatively, amounts initially recorded as goodwill
may be separately identified and recognized apart from goodwill.
SFAS No. 142 requires the use of a non-amortization approach to
account for purchased goodwill and certain intangibles. Under a non-
amortization approach, goodwill and certain intangibles will not be
amortized into results of operations, but instead would be reviewed
for impairment and written down and charged to results of operations
only in the periods in which the recorded value of goodwill and
certain intangibles is more than its fair value. The provisions of
each statement which apply to goodwill and intangible assets acquired
prior to June 30, 2001 was adopted by the Company on January 1, 2002.
Accordingly, adoption of these statements had no effect on its
financial position or results of operations.
In August 2001, the FASB issued SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets. SFAS No. 144 addresses
accounting and reporting for the impairment and disposal of long-
lived assets disposed of after December 15, 2001. SFAS No. 144
supersedes SFAS No. 121 and the accounting and reporting provisions
of Accounting Principals Board (APB) Opinion No. 30, and amends
Accounting Research Bulletin (ARB) No. 51 to eliminate the exception
to consolidation for a subsidiary. SFAS No. 144 establishes a single
accounting model for long-lived assets to be disposed of by sale.
The Company does not expect the adoption of this statement to have
material effect on its financial statements.
Page 11
12
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
The following is a discussion and analysis of our results of
operations and our liquidity and capital resources and should be read
in conjunction with the Condensed Consolidated Financial Statements
and the related Notes thereto included elsewhere in this filing. 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" included elsewhere in this filing.
Additional risk factors are also identified in our annual report to
the Securities and Exchange Commission filed on Form 10-KSB and in
other SEC filings.
OVERALL RESULTS OF OPERATIONS - Three Months Ended March 31, 2002 and
2001
Revenues for the three months March 31, 2002 decreased $1,277,846, or
36.5%, to $2,223,399 from $3,501,245 for the three months ended March
31, 2001. Cost of goods sold decreased $913,308, or 37.6%, to
$1,516,030 for the three months ended March 31, 2002 from $2,429,338
for the three months ended March 31, 2001. Additionally, gross
profit as a percentage of revenue was 31.8% for the second quarter
ended March 31, 2002 compared to 30.6% for the second quarter ended
March 31, 2001. The decrease in revenues during the second quarter
ended March 31, 2002 is mainly attributable to a decrease in unit
sales volume of our mainstay product, Snowplow Blades, as compared to
the second quarter of fiscal 2001 which was caused, in part, by a
milder winter and less precipitation this fiscal quarter than the
same quarter of fiscal 2001 across the entire country. The second
quarter of fiscal 2001 also had unusually high sales of blade
products as our distributors ordered late in the quarter to achieve
rebate program goals, which did not occur in the fiscal 2002 second
quarter as the distributors achieved program goals earlier. When
large orders occur at a season-end, such as occurred in the second
quarter fiscal 2001, the inventory that is sold is considered to be
for the following season. Although this effects the quarter sales,
when a late season surge in orders does not occur it means less
inventory must be moved at the retail level and leads to new orders
early at the start of the following season. The decrease was also
attributable to a later than usual start on our mower production and
sales. The slight increase of 1.2% in gross profit is primarily the
result of a lower rebate program expense in the second quarter of
fiscal 2002 as compared to the second quarter of fiscal 2001. These
decreases were offset, somewhat, by a reduction in rent of
approximately $53,000 that is included as part of the overhead
expenses allocated to cost of goods sold.
Selling, general, and administrative expenses increased $33,877, or
5.0%, to $717,142 for the three months ended March 31, 2002 from
$683,265 for the three months ended March 31, 2001. Increases in
operating expenses of approximately $17,000 in advertising,
approximately $48,000 in legal and accounting costs, approximately
$14,900 in research and development costs, and approximately $17,000
in office related expenses were offset by a reduction in insurance of
approximately $12,000, and a reduction in rent expense of
approximately $35,000 due to the Company acquiring its operating
facility (which consisted of land and building) from certain
stockholders that was previously leased under an operating lease
during the fourth quarter of fiscal 2001.
Interest and miscellaneous income decreased approximately $9,500 from
the second quarter of fiscal 2001 to the second quarter of 2002. The
decrease is due to a reduction of $11,047 in interest income earned
during the second quarter of fiscal 2002 versus the second quarter of
fiscal 2001. Interest expense increased 100% to $64,172 for the
three months ended March 31, 2002 from $0 for the first three months
ended March 31, 2001 due to the Company entering into a bank note
payable for $4,500,000 in the fourth quarter of fiscal 2001. As
compared to the second quarter of 2002, interest expense over the
remaining quarters of fiscal 2002 should decrease slightly as the
principal balance is continually reduced on the bank note and
interest rates remain relatively low.
The income tax benefit increased 100% to $17,683 for the second
quarter ended March 31, 2002 from $0 for the second quarter ended
March 31, 2001. The change is due to the Company converting to a C
corporation effective August 21, 2001. This conversion requires the
Company to make the applicable federal and state income tax payments.
Prior to August 21, 2001, the Company had elected to be taxed under
the provisions of Subchapter S of the Internal Revenue Code, which
requires the stockholders to report their proportionate share of the
Company's income on their individual tax returns. Therefore, prior
to August 21, 2001, no provision or liability for federal or state
income taxes has been included in the Company's Condensed
Consolidated Financial Statements.
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OVERALL RESULTS OF OPERATIONS - Six Months Ended March 31, 2002 and 2001
Revenues for the six months March 31, 2002 decreased $413,150, or
5.5%, to $7,034,823 from $7,447,973 for the six months ended March
31, 2001. Cost of goods sold decreased $253,827, or 4.8%, to
$5,042,051 for the six months ended March 31, 2002 from $5,295,878
for the six months ended March 31, 2001. Additionally, gross profit
as a percentage of revenue was 28.3% for the six months ended March
31, 2002 compared to 28.9% for the six months ended March 31, 2001.
The decrease in revenues during the six months ended March 31, 2002
is mainly attributable to a decrease in unit sales volume of our
mainstay product, Snowplow Blades, in the second quarter of fiscal
2002 as compared to the second quarter of fiscal 2001 which was
caused, in part, by a milder winter and less precipitation this
fiscal quarter than the same quarter of fiscal 2001 across the entire
country. The second quarter of fiscal 2001 also had unusually high
sales of blade products as our distributors ordered late in the
quarter to achieve rebate program goals, which did not occur in the
fiscal 2002 second quarter as the distributors achieved program goals
earlier. When large orders occur at a season-end, such as occurred
in the second quarter fiscal 2001, the inventory that is sold is
considered to be for the following season. Although this effects the
quarter sales, when a late season surge in orders does not occur it
means less inventory must be moved at the retail level and leads to
new orders early at the start of the following season. The decrease
was also attributable to a later than usual start on our mower
production and sales. The slight decrease of 0.6% in gross profit is
primarily the result of the establishment of an obsolescence reserve
for the Plastic Wheel Cover business segment and the mix of slightly
more lower-profit products that made up the sales for the six months
ended March 31, 2002 versus the six months ended March 31, 2001.
These factors were offset, somewhat, by a reduction in rent of
approximately $108,000 that is included as part of the overhead
expenses allocated to cost of goods sold.
Selling, general, and administrative expenses increased $139,137, or
11.0%, to $1,408,768 for the six months ended March 31, 2002 from
$1,269,630 for the six months ended March 31, 2001. The increase in
operating expenses is a result of additional spending of
approximately $52,000 in salaries, commissions and other related
benefits, approximately $48,000 in increased advertising,
approximately $50,000 in legal and accounting costs, and
approximately $37,000 in office related expenses. The increases were
offset by a reduction in rent expense of approximately $65,000 due to
the Company acquiring its operating facility (which consisted of land
and building) from certain stockholders that was previously leased
under an operating lease during the fourth quarter of fiscal 2001.
Interest and miscellaneous income decreased approximately $45,320
from the first six months of fiscal 2001 to the first six months of
fiscal 2002. The decrease is primarily due to a one-time consulting
fee of approximately $31,600 that was earned during the first six
months of fiscal 2001 and approximately $17,690 reduction in interest
income earned during the first six months of fiscal 2002 versus the
first six months of fiscal 2001. Interest expense increased $127,788
to $128,240 for the six months ended March 31, 2002 from $452 for the
first six months ended March 31, 2001 due to the Company entering
into a bank note payable for $4,500,000 in the fourth quarter of
fiscal 2001. As compared to the first six months of 2002, interest
expense over the remaining six months of fiscal 2002 should decrease
slightly as the principal balance is continually reduced on the bank
note and interest rates remain relatively low.
The provision for income taxes increased 100% to $174,515 for the six
months ended March 31, 2002 from $0 for the six months ended March
31, 2001. The increase is due to the Company converting to a C
corporation effective August 21, 2001. This conversion requires the
Company to make the applicable federal and state income tax payments.
Prior to August 21, 2001, the Company had elected to be taxed under
the provisions of Subchapter S of the Internal Revenue Code, which
requires the stockholders to report their proportionate share of the
Company's income on their individual tax returns. Therefore, prior
to August 21, 2001, no provision or liability for federal or state
income taxes has been included in the Company's Condensed
Consolidated Financial Statements.
We anticipate our revenues to increase during the third and fourth
quarters of fiscal 2002 as product inventories within the network of
distribution and market channels are relatively low, which
historically leads to increased orders and sales activity. Other
factors contributing to our projection of increased third and fourth
quarter revenues include the successful development and incorporation
of new products, re-engineering of our mainstay products, and the
successful acquisition of Perf-Form and its premium oil products for
motorcycles and ATV's. The seasonality of the ATV accessories market
is a factor that we are continually addressing with increased sales
and marketing efforts to our existing distributors, our focus on new
distributors in untapped geographic locations, and expansion into new
markets, such as lawn and garden. We also foresee selling, general
and administrative expenses remaining consistent or decreasing
slightly as a percent of revenues during the remainder of fiscal 2002
through increased usage of existing manufacturing capacity of our
operating facility from increased production of new and existing
products.
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BUSINESS SEGMENTS
As more fully described in Note 8 to the Condensed Consolidated
Financial Statements included elsewhere in this filing, 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 we are vertically integrated in our Plastic Wheel Cover
segment.
ATV ACCESSORIES - Three Months Ended March 31, 2002 and 2001
Revenues for the three months ended March 31, 2002 decreased
$1,437,741, or 47.8%, to $1,569,733 from $3,007,474 for the three
months ended March 31, 2001. The decrease is mainly attributable to
a decrease in unit volume of our Snowplow Blade and mowers as
discussed above (See OVERALL RESULTS OF OPERATIONS).
Cost of goods sold for the three months ended March 31, 2002
decreased $1,014,949, or 52.6%, to $914,312 from $1,929,261 for the
three months ended March 31, 2001. Gross profit as a percent of
revenues was 41.8% for the three months ended March 31, 2002 compared
to 35.9% for the corresponding period in fiscal 2001. The increase
in gross profit for the three months ended March 31, 2002 as compared
to the corresponding period in fiscal 2001was attributable to a lower
rebate program expense as discussed above (See OVERALL RESULTS OF
OPERATIONS).
PLASTIC WHEEL COVERS - Three Months Ended March 31, 2002 and 2001
Revenues for the three months ended March 31, 2002 increased
$140,828, or 26.5%, to $671,155 from $530,327 for the three months
ended March 31, 2001. The increase is attributable to changes in
current market conditions. Our new product and process will address
the needs of the new market.
Cost of goods sold for the three months ended March 31, 2002
increased $82,540, or 74.1%, to $193,871 from $111,331 for the three
months ended March 31, 2001. Gross profit as a percent of revenue
was 71.1% for the three months ended March 31, 2002 compared to 79.0%
for the corresponding period in fiscal 2001. The increase in cost of
goods and the decrease in gross profit during the three months ended
March 31, 2002 as compared to the corresponding period in fiscal 2001
were directly attributable to an increase in direct labor and factory
overhead caused by increased market demands and changes in production
methods. The development of new production methods and technology of
a higher quality product will position us well for the expanding golf
cart industry.
GEOGRAPHIC REVENUE - Three Months Ended March 31, 2002 and 2001
During the three months ended March 31, 2002, revenue in the United
States of America decreased $1,288,167, or 39.2%, to $1,997,693 from
$3,285,860 for the three months ended March 31, 2001. Revenue from
other countries increased $10,321, or 4.8%, to $225,706 from $215,385
for the three months ended March 31, 2001. The decrease during the
three months ended March 31, 2002 in U.S. revenue is due to a general
decrease across all regions previously serviced in the United States
of America, as discussed previously (See OVERALL RESULTS OF
OPERATIONS). The increase during the three months ended March 31,
2002 in revenue from other countries is due to an increase of sales
in Canada.
ATV ACCESSORIES - Six Months Ended March 31, 2002 and 2001
Revenues for the six months ended March 31, 2002 decreased $513,881,
or 7.8%, to $6,102,997 from $6,616,878 for the six months ended March
31, 2001. The decrease is mainly attributable to a decrease in unit
volume of our Snowplow Blade and our mowers as discussed above (See
OVERALL RESULTS OF OPERATIONS).
Cost of goods sold for the six months ended March 31, 2002 decreased
$417,132, or 9.8%, to $3,850,564 from $4,267,696 for the six months
ended March 31, 2001. Gross profit as a percent of revenues was
36.9% for the six months ended March 31, 2002 compared to 35.5% for
the corresponding period in fiscal 2001. The slight increase in
gross profit for the six months ended March 31, 2002 as compared to
the corresponding period in fiscal 2001was attributable to a decrease
in our rebate program expense, which was offset somewhat by changes
in the mix of products sold as discussed above (See OVERALL RESULTS
OF OPERATIONS).
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PLASTIC WHEEL COVERS - Six Months Ended March 31, 2002 and 2001
Revenues for the six months ended March 31, 2002 increased $146,326,
or 15.4%, to $1,094,277 from $947,951 for the six months ended March
31, 2001. The increase is attributable to changes in current market
conditions. Our new product and process will address the needs of
the new market.
Cost of goods sold for the six months ended March 31, 2002 increased
$93,085, or 39.4%, to $329,086 from $236,001 for the six months ended
March 31, 2001. Gross profit as a percent of revenue was 69.9% for
the six months ended March 31, 2002 compared to 75.1% for the
corresponding period in fiscal 2001. The increase in cost of goods
and the decrease in gross profit during the six months ended March
31, 2002 as compared to the corresponding period in fiscal 2001 were
directly attributable to an increase in our inventory reserve for
some potentially excess and/or obsolete plastic wheel covers and was
offset, somewhat, with operational efficiencies. This potential
excess/obsolescence is due to the development of new production
methods and technology of a higher quality product that will position
us well for the expanding golf cart industry.
GEOGRAPHIC REVENUE - Six Months Ended March 31, 2002 and 2001
During the six months ended March 31, 2002, revenue in the United
States of America decreased $632,902, or 9.0%, to $6,429,740 from
$7,062,642 for the six months ended March 31, 2001. Revenue from
other countries increased $219,752, or 57.0%, to $605,083 from
$385,331 for the six months ended March 31, 2001. The decrease
during the six months ended March 31, 2002 in U.S. revenue is due to
a general decrease across all regions previously serviced in the
United States of America, as discussed previously (See OVERALL
RESULTS OF OPERATIONS). The increase during the six months ended
March 31, 2002 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.
At March 31, 2002, we had $108,021 in cash and cash equivalents,
compared to $274,089 at September 30, 2001. 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 $1,487,034 at March 31, 2002 compared to
$1,995,007 at September 30, 2001. The change in working capital is
primarily due to the following: inventories increased by $460,319, or
17.4%, to $3,099,033 at March 31, 2002 from $2,638,714 at September
30, 2001, accounts receivable decreased by $158,704, or 15.0%, to
$899,579 at March 31, 2002 from $1,058,283 at September 30, 2001,
accounts payable decreased by $620,718, or 58.6%, to $437,853 at
March 31, 2002 from $1,058,571 at September 30, 2001 and the bank
line of credit increased 100% to $500,000 at March 31, 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 included principal and interest at prime
+ 0.75% (6.0% at March 31, 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 shall be applied to any outstanding balance on
the Note or the Line of Credit described below. At March 31, 2002,
$4,027,794 was outstanding on the Note.
Under the terms of the secured credit agreement noted above, the
Company has a Line of Credit for the lesser of $500,000 or 80% of
eligible accounts receivable and 35% of eligible inventory. The Line
of Credit bears interest at prime plus 1.25% (6.0% at March 31,
2002), and is collateralized by all of the Company's assets. The
Line of Credit matures August 25, 2002. At March 31, 2002, $500,000
was outstanding on the Line of Credit.
Consistent with normal practice, management believes that the
Company's operations are not expected to require significant capital
expenditures during the remainder of fiscal 2002. Management
believes that existing cash balances, cash flow to be generated from
operating activities and available borrowing capacity under its Line
of Credit 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.
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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.
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 I, Item 2, 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.
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Part II - Other Information
Item 1. Legal Proceedings
The Company is involved in a claim relating to an allegation of a
patent infringement. The 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
outcome will not have a material adverse effect on the consolidated
financial position or operations of the Company.
THERE ARE NO REPORTABLE EVENTS FOR ITEM 2 THROUGH ITEM 5.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
None.
(b) Reports on Form 8-K
During the second quarter of 2002, the Company filed a report on Form
8-K dated February 20, 2002. The Form 8-K is attached and made a
part of this 10-QSB for the quarterly period ended March 31, 2002.
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Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
CYCLE COUNTRY ACCESSORIES CORP.
Dated: May 15, 2002 By: /s/ Ronald C. Hickman
----------------------
Ronald C. Hickman
Principal Executive Officer,
President and Director
Dated: May 15, 2002 By: /s/ David J. Davis
----------------------
David J. Davis
Principal Finance Officer and
Principal Accounting Officer
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