-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, E6c0D0m0k1b2KaENvyorda+LdxybNn96bMAouPZA2ePxJ+BBTN3Yzswt8PEDiNJQ C7W+7B+GWhwvN0WcJFb+sg== 0001218396-04-000064.txt : 20040422 0001218396-04-000064.hdr.sgml : 20040422 20040422130234 ACCESSION NUMBER: 0001218396-04-000064 CONFORMED SUBMISSION TYPE: SB-2 PUBLIC DOCUMENT COUNT: 6 FILED AS OF DATE: 20040422 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CYCLE COUNTRY ACCESSORIES CORP CENTRAL INDEX KEY: 0001157758 STANDARD INDUSTRIAL CLASSIFICATION: MOTOR VEHICLE PARTS & ACCESSORIES [3714] IRS NUMBER: 421523809 STATE OF INCORPORATION: NV FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: SB-2 SEC ACT: 1933 Act SEC FILE NUMBER: 333-114713 FILM NUMBER: 04747607 BUSINESS ADDRESS: STREET 1: 2188 HWY 86 CITY: MILFORD STATE: IA ZIP: 51351 MAIL ADDRESS: STREET 1: 2188 HWY 86 CITY: MILFORD STATE: IA ZIP: 51351 SB-2 1 atclaurussb2.txt SB-2 Registration No. 333-______ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM SB-2 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 -------------------------- CYCLE COUNTRY ACCESSORIES CORP (Name of Small Business Issuer in its Charter)
NEVADA 3714 42-1523809 - ------------------------------------------------------------------------------- (State of Other Jurisdiction of (Primary Standard Industrial (IRS Employer Incorporation or Organization) Classification Code Number) Identification No.)
2188 Highway 86 Milford, Iowa 51351 (712) 338-2701 (Address and telephone number of principal executive offices and principal place of business) Ronald Hickman 2188 Highway 86 Milford, Iowa 51351 (712) 338-2701 (Name, address and telephone number of agent for service) Copies to: James G. Dodrill II, Esq. James G. Dodrill II, P.A. 5800 Hamilton Way Boca Raton, FL 33496 Tel. (561) 862-0529 Fax: (561) 861-0917 ----------------------- Approximate date of proposed sale to the public: As soon as practicable after the effective date of this registration statement. ------------------------ If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. (X) If this Form is filed to register additional securities for an offering pursuant to Rule 462 (b) under the Securities Act, check the following box and list the Securities Act registration statement number of earlier effective registration statement for the same offering. ( ) If this Form is a post-effective amendment filed pursuant to Rule 462 (c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ( ). If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. ( ).
PROPOSED PROPOSED TITLE OF EACH CLASS MAXIMUM MAXIMUM OF AMOUNT TO OFFERING AGGREGATE AMOUNT OF SHARES TO BE BE PRICE PER OFFERING REGISTRATION REGISTERED REGISTERED SHARE PRICE FEE - ------------------- ---------- --------- --------- ------------ Common Stock, $.0001 par value to be issued to certain selling shareholder in exchange for preferred shares and upon exercise of outstanding warrants 615,000 $5.53 $3,400,950 $431.93 - -------------------------------------------------------------------------------------- TOTAL 615,000 $3,400,950 $431.93 - ---------------------- (1) Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457. - -------------------------------------------
The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the registration statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine. PROPECTUS SUBJECT TO COMPLETION, DATED APRIL 22, 2004 615,000 Shares of Common Stock CYCLE COUNTRY ACCESSORIES CORP. The Offering: We are registering the resale of a total of up to 615,000 shares of our common stock that may be acquired by the selling shareholder listed herein in exchange for our outstanding preferred stock or upon exercise of outstanding warrants. The shares of common stock registered under this Prospectus may be offered by the selling shareholder, from time to time in transactions on the open market, in negotiated transactions, or otherwise at fixed prices or prices that may be changed, at market prices prevailing at the time of the sale, at prices related to market prices prevailing at the time of the sale, or at negotiated prices. Our common stock is quoted on the American Stock Exchange. The last sale price of our shares on April 21, 2004 was $5.53 American Stock Exchange - "ATC" _________________________________ Investing in our stock involves risks. You should carefully consider the Risk Factors beginning on page 8 of this prospectus. We have not authorized anyone else to provide you with different information. The common stock is not being offered in any state where the offer is not permitted. You should not assume that the information in this prospectus or any supplement is accurate as of any date other than the date on the front of those documents. ______________________ Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed upon the adequacy or accuracy of this prospectus. Any representation to the contrary is a criminal offense. _______________________ The prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted. The date of this prospectus is April 22, 2004 TABLE OF CONTENTS Page Prospectus Summary 3 The Offering 4 Summary Financial Information 6 Risk Factors 7 Use of Proceeds 11 Determination of Offering Price 11 Dividend Policy 11 Management's Discussion and Analysis of Financial Condition and Results of Operations 12 Business 25 Management 35 Principal Shareholders 38 Selling Shareholder 39 Certain Transactions 40 Description of Securities 41 Indemnification 44 Plan of Distribution 45 Legal Matters 47 Experts 47 Where You Can Find More Information 48 Index to Financial Statements F-1 PROSPECTUS SUMMARY Because this is a summary, it does not contain all of the information that may be important to you. You should read the entire prospectus. You should consider the information set forth under "Risk Factors" and our financial statements and accompanying notes that appear elsewhere in this prospectus. Cycle Country Accessories Corp. We were incorporated in Iowa in 1983, reincorporated in Nevada in 2001. 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, baskets 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 17 distributors in the United States for the past 22 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. We are also 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. Additionally, we have successfully entered into the lawn and garden industry. 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. Our three largest customers accounted for approximately 42% of our net sales in the year ended September 30, 2003. These three customers have represented a significant amount of our business every year for at least the past 17 years. While the percentage of total net sales these customers represent should continue to 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. For the fiscal year ended September 30, 2003, we achieved revenues of approximately $13,900,000. Our principal office is located at 2188 Highway 86, Milford, Iowa 51351 (Telephone (712) 338-2701, fax (712) 338-2601). Our internet address is www.cyclecountry.com. 3 The Offering Securities Offered We are registering the resale of 615,000 shares of common stock, all of which are issuable upon conversion of our preferred stock or exercise of outstanding warrants; See "Description of Securities" Common Stock Outstanding, before offering 3,956,047 Common Stock Outstanding, after offering (1) 4,571,047 American Stock Exchange Symbol ATC Use of Proceeds We will not receive any of the proceeds from the sale of stock issued upon conversion of any preferred stock. However, upon conversion of all 2,000,000 shares of the outstanding preferred stock, $1,905,015 of previously restricted cash will be made available for our use for general corporate purposes. We will also receive proceeds from any shares of common stock issued upon the exercise of outstanding warrants. We may receive as much as $160,000 from the exercise of these warrants and intend to use any proceeds received for general corporate purposes. See "Use of Proceeds." Dividend Policy We do not intend to pay dividends on our common stock. We plan to retain any earnings for use in the operation of our business and to fund future growth. (1) assumes the sale of all 615,000 shares we are offering. 4 Risk Factors The securities offered by this prospectus are highly speculative and very risky. We have described the material risks that we face below. Before you buy, consider the risk factors described and the rest of this prospectus. This prospectus also contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including the risks faced by us described below and elsewhere in this prospectus. Please refer to "Risks Associated with Forward-looking Statements" on page 11. 5 Summary Financial Information The following is a summary of our Financial Statements, which are included elsewhere in this prospectus. You should read the following data together with the "Management's Discussion and Analysis of Financial Condition and Results of Operations" section of this prospectus as well as with our Financial Statements and the notes thereto.
Year ended Year ended Three months Three months September 30, September 30, ended December ended December 2003 2002 31, 2003 31, 2002 ------------- ------------- (unaudited) (unaudited) -------------- -------------- Statement of Operations Data: Total Revenue $13,891,993 $13,363,552 $5,643,856 $4,414,053 =========== =========== ========== ========== Gross Profit $3,253,467 $3,495,557 $1,399,898 $1,098,780 ========== ========== ========== ========== Net Income $207,307 $308,841 $404,110 $193,280 ======== ======== ======== ======== Net Income Available to Common Stockholders $186,333 $308,841 $381,672 $193,280 ======== ======== ======== ========
As of As of September 30, December 31, 2003 2003 ------------- ------------ (unaudited) Balance Sheet Data Cash and cash equivalents $215,551 $1,058,408 Total current assets $4,548,845 $4,898,821 Total assets $9,703,421 $10,018,629 Total current liabilities $2,356,756 $2,388,331 Total Stockholder' equity $4,103,151 $4,511,712 Total liabilities and stockholder' equity $9,703,421 $10,018,629 6 RISK FACTORS The securities offered are highly speculative. You should purchase them only if you can afford to lose your entire investment in us. You should carefully consider the following risk factors, as well as all other information in this prospectus. Certain important factors may affect our actual results and could cause those results to differ significantly from any forward-looking statements made in this prospectus or otherwise made by us or on our behalf. For this purpose, any statements contained in this prospectus that are not statements of historical fact should be considered to be forward-looking statements. Words such as "may," "expect," "believe," "anticipate," "intend," "could," "estimate," or "continue" or the negatives of those words, identify forward-looking statements. These statements appear in a number of places in this prospectus and include statements as to our intent, belief or expectations. These forward- looking statements are subject to the risks detailed below or elsewhere in this prospectus, or detailed from time to time in our filings with the Securities and Exchange Commission. See "Risks Associated With Forward- Looking Statements" on page 11. Investors should assume that, even if not specifically stated within this document, if any of the following risks actually materialize, our business, financial condition or results of future operations could be materially and adversely affected. In that case, the trading price of our common stock could decline, and you may lose all or part of your investment. Our revenues and earnings could be negatively affected if we cannot anticipate market trends, enhance existing products and achieve market acceptance of new products. - ------------------------------------------------------------------------- Our ability to continue and expand the sales levels that we typically achieved in prior years is largely dependent on our ability to successfully anticipate and respond to changing consumer demands and trends in a timely manner. This includes introducing new or updated products at prices acceptable to customers. Our ability to maintain market acceptance and achieve further acceptance for our products will depend upon our ability to: - maintain a strong and favorable brand image; - maintain a reputation for high quality; and - continue to develop our network of distributors to sell our products both domestically and internationally. We can give you no assurance that the market for our products will continue to develop or that large demand for these products will be sustainable. In addition, we may incur significant costs in our attempt to maintain or increase market acceptance for our products. 7 Our sales are highly dependent on the effectiveness of our distributor networks. - ------------------------------------------------------------------------- Our level of sales depends to a great extent upon the effectiveness of our distributor networks. We can offer no assurance that these distributors will continue to have the success they have historically. Our sales may be impacted by weather conditions. - ------------------------------------------------------------------------ As a manufacturer of accessories for outdoor motorized equipment, our sales may be impacted by weather conditions. For example, lack of snowfall in any year in any particular region of the United States or Canada may adversely affect demand for our snowplows and related products. There is no assurance that certain weather conditions would not have a material adverse effect on our sales. Our officers and directors are not required to continue as shareholders. - ------------------------------------------------------------------------- There is no requirement that any of our officers and/or directors retain any of their shares of our common stock. Accordingly, there is no assurance that all or any of our officers and/or directors will continue to maintain an equity interest in the Company. A large percentage of our sales are made to our three largest customers. - ------------------------------------------------------------------------- Our three largest customers accounted for approximately 42% of our net sales in the year ending September 30, 2003. These three customers have represented a significant amount of our business every year for at least the past 17 years. The loss of any or all of these customers would have a material adverse impact on the results of our operations. We face product liability claims. - ------------------------------------------------------------------------- Product liability claims are made against us from time to time. We currently carry $2 million in product liability insurance. Over the past seven years, we paid an aggregate of less than $30,000 in product liability claims, and the largest single judgment against us has been for $21,000. No assurance can be given that our historical claims record will not change or that material product liability claims against us will not be made in the future. Adverse determination of material product liability claims made against us could have a material adverse effect on our financial condition. Our products could contain defects creating product recalls and warranty claims that could materially adversely affect our future sales and profitability. - ------------------------------------------------------------------------- Our products could contain unforeseen defects. These defects could result in product recalls and warranty claims. A product recall could delay or halt production of the affected product until we are able to address the reasons for any defects. Recalls may also have a materially 8 negative effect on our brand image and public perception of the affected product. This could materially adversely affect our future sales. Recalls or other defects would be costly and could require substantial expenditures. We offer a standard one-year warranty on all products except snow plows, on which we offer a limited lifetime warranty. Although we employ quality control procedures, a product is sometimes distributed which needs repair or replacement. Historically, product recalls have been administered through our distributors and have not had a material effect on our business. However, no assurance can be given that our historical claims record will not change adversely as a result of our growth or otherwise. Unanticipated defects could also result in product liability litigation against us. Given the nature of our products, we have in the past and expect in the future to be subject to potential product liability claims that, in the absence of sufficient insurance coverage, could have a material adverse effect on us. Although we currently maintain liability insurance coverage, this coverage may not be adequate to cover all product liability claims. Any large product liability claim could materially adversely affect our ability to market our products. We face substantial competition. - ------------------------------------------------------------------------- We face competition from various companies in each product line we offer. A number of our competitors are well financed and could develop innovative products that would reduce our market share. Additionally, as we expand our product offerings into new markets and into offering new products we will face additional competition. Competition in foreign markets may also be affected by duties, tariffs, taxes and the effect of various trade agreements, import restrictions and fluctuations in exchange rates. A recession could detrimentally affect our sales. - ------------------------------------------------------------------------- Our sales are partially dependent on discretionary consumer spending, which may be affected by general economic conditions. A recessionary environment could result in a decrease in consumer spending in general, which could result in decreased spending in our markets, directly or in the overall market for ATV's, either of which could have a material adverse effect on our business, operating results and financial condition. Additionally, factors that influence the general economic climate, such as consumer confidence levels, interest rates, employment trends and fuel availability and prices could also result in decreased spending in our markets. Because in the short term most of our operating expenses are relatively fixed, we may be unable to adjust spending sufficiently in a timely manner to compensate in the event of any unexpected sales shortfall. If we fail to make these adjustments quickly, our operating results and financial condition could be materially adversely affected. Our quarterly financial results may fluctuate significantly. - ------------------------------------------------------------------------- Our quarterly operating results will likely fluctuate significantly in the future as a result of a variety of factors, some of which are outside our control. These factors include: 9 * General economic and market conditions; * Pricing changes in the industry; * The amount and timing of orders from retailers; * The timing of shipments and new product introductions; * Manufacturing delays; * Seasonal variations in the sale of our products; * Product mix; and * Pricing changes in our products. Due to these factors, our quarterly operating results may fall below any market expectations that may arise. If this happens, the trading price of our common stock would likely decline, perhaps significantly. There is no assurance of future dividends being paid. - ------------------------------------------------------------------------ At this time we do not anticipate paying dividends in the future, but instead plan to retain any earnings for use in the operation of our business and to fund future growth. We are under no legal or contractual obligation to declare or to pay dividends, and the timing and amount of any future cash dividends and distributions is at the discretion of our Board of Directors and will depend, among other things, on our future after-tax earnings, operations, capital requirements, borrowing capacity, financial condition and general business conditions. Risks associated with forward looking statements. - ------------------------------------------------------------------------- This prospectus contains certain forward-looking statements regarding management's plans and objectives for future operations, including plans and objectives relating to our planned marketing efforts and future economic performance. The forward-looking statements and associated risks set forth in this prospectus include or relate to: (1) our ability to obtain a meaningful degree of consumer acceptance for our products now and in the future, (2) our ability to market our products on a global basis at competitive prices now and in the future, (3) our ability to maintain brand-name recognition for our products now and in the future, (4) our ability to maintain an effective distributors network, (5) our success in forecasting demand for our services now and in the future, (6) our ability to maintain pricing and thereby maintain adequate profit margins, (7) our ability to achieve adequate intellectual property protection and (8) our ability to obtain and retain sufficient capital for future operations. (9) Our ability to absorb and/or pass on to our customers increasing steel prices and surcharges occurring due to the volatility in the steel markets now and in the future. 10 USE OF PROCEEDS We will not receive any proceeds from the resale of the 615,000 shares of common stock being offered by our selling shareholder. However, upon conversion of all 2,000,000 shares of the outstanding preferred stock, $1,905,015 of previously restricted cash will be made available for our use for general corporate purposes. We will also receive proceeds to the extent that any of the shares are acquired by the selling shareholder through the exercise of warrants. We may receive up to a maximum of $160,000 from the exercise of the warrants. Any proceeds we receive will be used for general corporate purposes; however, there can be no assurance that all or any portion of these shares will be sold. We expect to incur expenses of approximately $15,000 in connection with the registration of the 615,000 shares of common stock. DETERMINATION OF OFFERING PRICE The price at which the shares may actually be sold by the selling shareholder will be determined by the market price of our common stock as of the date of sale. DIVIDEND POLICY It is our present policy not to pay cash dividends and to retain future earnings for use in the operations of the business and to fund future growth. Any payment of cash dividends in the future will be dependent upon the amount of funds legally available, our earnings, financial condition, capital requirements and other factors that the Board of Directors may think are relevant. 11 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION 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 (see Note 10 to the Consolidated Financial Statements) entered into with a commercial lender to purchase all of the outstanding common stock of Cycle Country Accessories Corp. (an Iowa corporation). Additionally, any proceeds from the sale of common stock received from the exercise of any of the 2,000,000 outstanding warrants shall be applied to any outstanding balance 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 shareholders. 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. In March 2002, Jim Danbom, director, identified Perf-form Products, Inc. as a potential acquisition. The acquisition was completed on March 11, 2002 for $462,100 in cash and 22,500 shares of the Company's common stock for a total purchase price of approximately $528,800. 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. 12 In June 2002, the Company identified Weekend Warrior, an acquisition which closed in June of 2002. The purchase was made for 10,000 shares of the Company's common stock. 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. The Company's technology and products allow many of the Weekend Warrior products to be immediately useful in the Lawn and Garden applications. 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, baskets 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 manufacture 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 17 distributors in the United States for the past 23 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. We are also 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. Additionally, we have successfully entered into the lawn and garden industry. 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. 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 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. 13 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. Distributor Rebate Payable - the Company records a liability for the expected cost of offering an annual rebate program to certain eligible distributors. The rebate liability is calculated and recognized as eligible ATV accessory products are sold based upon factors surrounding the activity and prior experience of the eligible 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. 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, 2003, 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 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. 14 Results of Operations - Year ended September 30, 2003 vs. Year ended September 30, 2002 - --------------------------------------------------------------------- OVERALL. Revenues for the year ended September 30, 2003 increased $528,441, or 4%, to $13,891,993 from $13,363,552 for the year ended September 30, 2002. Cost of goods sold increased $770,531, or 7.8%, to $10,638,526 for the year ended September 30, 2003 from $9,867,995 for fiscal 2002. Additionally, gross profit as a percentage of revenue was 23.4% for the year ended September 30, 2003 compared to 26.2% for fiscal 2002. The decrease in gross margin during fiscal 2003 of 2.8% is mainly attributable to significant one-time adjustments of the cost of an inventory sub-assembly part and to prepaid royalties, a long-lived asset, related to our electric shift product, an increase in direct labor costs in the Plastic Wheel Cover segment, and a decrease in the gross profit margins of our snowplow blades, mowers, and our OEM business. Selling, general and administrative expenses decreased $19,270, or 1%, to $2,762,626 for the year ended September 30, 2003 from $2,781,896 for fiscal 2002. The decrease in operating expenses is primarily a result of reduced spending of approximately $44,000 in travel and meal expenses, approximately $49,000 in salaries and wages, approximately $20,000 in commissions, approximately $17,000 in show expenses, approximately $16,000 in rent, approximately $14,000 in licenses and fees, and approximately $14,000 in office, shipping supplies and postage. The decreases were offset by increases of approximately $32,000 in depreciation and amortization expense and $109,000 in professional fees. The increase in professional fees is due to a few significant one-time expenses the Company incurred during fiscal 2003 to strengthen and solidify its financial position in the long term. The expenses included an $85,000 closing fee related to the preferred stock financing agreement completed in June, 2003, a $54,000 application and listing fee paid to the American Stock Exchange upon approval of our stock for trading on their Exchange, and approximately $20,000 paid in extra legal and accounting fees related to both of these projects. While impacting current operating income, the benefits realizable to the Company in the long term from the successful completion of both of these projects are significant. Non-operating income (expense) decreased $58,709, or 25.8%, to $(168,708) for the year ended September 30, 2003, from $(227,417) for fiscal 2002. The decrease is primarily due to a decrease of approximately $63,000 of interest expense. BUSINESS SEGMENTS As more fully described on page F-29, the Company operates three reportable business segments: ATV Accessories, Plastic Wheel Covers, and Lawn and Garden. The gross margins are vastly different in our three reportable business segments due to the fact that we assemble our ATV Accessories (i.e. we outsource the ironworks to our main product supplier), we are vertically integrated in our Plastic Wheel Cover segment, and we utilize a single-step distribution method for our Lawn and Garden segment. ATV ACCESSORIES Revenues for the year ended September 30, 2003 increased $518,009, or 4.5%, to $12,112,067 from $11,594,058 for the year ended September 30, 2002. The increase is mainly attributable to increased sales of our core products and OEM products during fiscal 2003 versus fiscal 2002 as evidenced by increased snowplow blade (our mainstay product) sales of approximately $290,000, increased mower unit sales of approximately $71,000, increased basket sales of approximately $109,000, and increased sales of OEM (Original Equipment Manufacturer) products of approximately $201,000. Management has been working closely with the OEMs to develop products that fit their needs and enhance their products. Sales continue to increase with current OEM customers and we are continuing to work with new OEM customers to develop and produce products for them. Deliveries of our snowplow blades to our distributors continued strong throughout the third and fourth quarters as significant late season order deliveries went well into April and significant new season order deliveries began in late May. In fiscal 2002 deliveries for snowplow blades ended in January and significant deliveries did not 15 resume until the fourth quarter of fiscal 2002. Sales of our mowers for fiscal 2003 have exceeded fiscal 2002 levels as new retail price points and redesigned components have re-established our significant share of this market. Our new steel mesh baskets that can easily mount to any ATV rack system and have a multitude of uses account for the increase in our basket sales. Also contributing to the increase in revenues for fiscal 2003 were increased sales of our Perf-form premium oil filter and oil cooler products, which we acquired during the second quarter of fiscal 2002, of approximately $170,000. Decreased sales of winches and winch mounts of approximately $235,000 and electric lift systems of approximately $77,000 offset some of the increases realized above. Cost of goods sold increased $777,996, or 9.8%, to $8,711,962 for the year ended September 30, 2003 from $7,933,966 for fiscal 2002. Gross profit as a percent of revenues was 28.1% for fiscal 2003 compared to 31.6% for the corresponding period in 2002. The decrease in gross profit for the year ended September 30, 2003 as compared to the corresponding period in fiscal 2002 is primarily due to significant one-time adjustments of the cost of an inventory sub-assembly part and to prepaid royalties, a long-lived asset, related to our electric shift product and a decrease in the gross profit margins of our snowplow blades, mowers, and our OEM business. The decrease in the gross profit margin of our snowplow blades and mowers is the result of actions taken by our management team to address market concerns and to strengthen our position as the leader in accessories for the ATV. A new standard snowplow blade configuration was implemented in the first quarter of fiscal 2003 that increases its durability, features, and use but maintains its competitive pricing. In the fourth quarter of fiscal 2003 we realized increased margins on our snowplow blades as planned pricing increases went into effect at the start of the fourth quarter. OEM gross profits went down as a larger proportion of less profitable products were sold in fiscal 2003 as compared to fiscal 2002. As additional OEM products for current and new OEM customers enter into the sales mix, the gross margins are expected to increase going forward. The adjustments to an inventory sub- assembly item and the prepaid royalties asset account caused significant additional expense to be incurred in fiscal 2003 as these two items were determined to have values that were too high given management's assessment of the market for the Company's electric shift product to which both of these assets relate to. PLASTIC WHEEL COVERS Revenues for the year ended September 30, 2003 decreased $255,562, or 12.1%, to $1,849,391 from $2,104,953 for the year ended September 30, 2002. The decrease is attributable to changes in current market conditions as last fiscal year golf cart OEM customers purchased record high numbers of wheel covers while the current fiscal year of 2003 has seen a return to normal ordering levels by our golf cart OEM customers. Our continual research into new products and improved processes, such as the clear coating we now utilize and the metalizing process soon to be implemented, will allow us to continue to address the needs of the markets our products sell in. Cost of goods sold decreased $79,295, or 9%, to $800,911 for the year ended September 30, 2003 from $880,206 for fiscal 2002. Gross profit as a percent of revenue was 56.7% for the year ended September 30, 2003 compared to 58.2% for the corresponding period in fiscal 2002. The decrease in gross profit for the year ended September 30, 2003 was attributable to increased production staffing required to incorporate the protective coating process. However, in the third and fourth quarters of fiscal 2003 gross profit increased over the same periods of fiscal 2002 as improvements in production methods reduced material waste, increased output, and reduced labor hours needed to meet production requirements. Management expects these improved gross margins to continue. 16 GEOGRAPHIC REVENUE During fiscal 2003, revenue in the United States increased $522,260, or 4.3%, to $12,721,018 from $12,198,758 for the year ended September 30, 2002. Revenue from other countries increased $6,181, or 0.5%, to $1,170,975 for fiscal 2003 from $1,164,794 for the year ended September 30, 2002. The increase during the fiscal year 2003 in U.S. revenue is due to a general increase across all regions previously serviced in the United States of America. The slight increase during the fiscal year 2003 in revenue from other countries is due to an increase of sales in Europe that was offset by a decrease of sales in Canada. 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 on page F-29, the Company operated two reportable business segments in fiscal 2002: 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 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. 17 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. OVERALL - Three Months Ended December 31, 2003 and 2002 - ------------------------------------------------------- Revenues for the three months ended December 31, 2003 increased $1,229,803, or 27.9%, to $5,643,856 from $4,414,053 for the three months ended December 31, 2002. Cost of goods sold increased $928,685, or 28.0%, to $4,243,958 for the three months ended December 31, 2003 from $3,315,273 for the three months ended December 31, 2002. Additionally, gross profit as a percentage of revenue was 24.8% for the first quarter ended December 31, 2003 compared to 24.9% for the first quarter ended December 31, 2002. The increase in revenues during the first quarter ended December 31, 2003 is mainly attributable to an increase in sales of our mainstay product, snowplow blades of approximately $1,041,000. Also contributing to the increased revenues were increases in our OEM product sales of approximately $138,000, which consists of sales to John Deere, Land Pride and our other OEM customers, increased sales of our Weekend Warrior lawn and garden products of approximately $102,000, increased sales of our three-point hitch systems of approximately $39,000, and increased sales of our rack mounted cargo boxes and wire mesh baskets of approximately $37,000. These increases in sales were offset by decreased sales of our plastic wheel covers of approximately $33,000 and an increase in the distributor rebate program expense, which is netted against sales, of approximately $68,000. The increase in revenues can be 18 attributed to increased sales among all United States distributors. Sales to our United States distributors during the first quarter of fiscal 2004 were very strong, providing us with one of the best first quarters in recent Company history. The Company's second quarter is shaping up to also produce strong sales results as orders from our U.S. distributors continue to be strong as truckload deliveries are scheduled through the last week in February 2004, and shipments of OEM products are also scheduled to increase. Gross profit remained constant as gross profit was 24.8% for the three months ended December 31, 2003 compared to 24.9% for the three months ended December 31, 2002. Selling, general, and administrative expenses decreased $10,173, or 1.4%, to $733,027 for the three months ended December 31, 2003 from $743,200 for the three months ended December 31, 2002. Decreases in operating expenses were approximately $35,800 in advertising and approximately $22,500 in research and development costs. These decreases were offset by increases in licenses and fees of approximately $12,900, in fuel and fuel taxes of approximately $15,400, and in commissions expense of approximately $12,000. Interest and miscellaneous income increased approximately $2,000 from the first quarter of fiscal 2003 to the first quarter of fiscal 2004. The increase is primarily due to an increase in interest income earned during the first three months of fiscal 2003 versus the first three months of fiscal 2002. Interest expense decreased approximately $16,100 to $43,552 for the three months ended December 31, 2003 from $59,658 for the three months ended December 31, 2002. Interest expense over the remaining quarters of fiscal 2003 should remain constant or decline slightly as the principal balance is continually reduced on the bank notes and interest rates remain relatively stable. We anticipate that our revenues for each of the remaining quarters of fiscal 2004 will exceed the actual results of fiscal 2003. We also anticipate that each quarter's net income will improve over the same respective quarter of fiscal 2003 as management's continuous efforts to address seasonality issues, expand into new markets, increase products produced for OEM's, and strengthen the market-leading positions of our current products continue to provide financial results. Our introduction of new OEM products and continued strong sales of our mainstay winter products, combined with orders for our Rough Cut and Quicksilver mowers that has production quantities scheduled to be one of the largest in recent company history, will account for a majority of the improved quarterly fiscal 2004 revenue levels. Weekend Warrior and Perf-form will also continue to provide the company opportunities for strong sales and profits in quarters that traditionally have been weak due to the seasonality of the ATV accessories market. We are continually addressing the seasonality of the ATV accessories market with our increased sales and marketing efforts to our existing distributors, our focus on new distributors in untapped geographic locations, and continuing to expand our presence in new markets, such as lawn and garden. We foresee selling, general and administrative expenses remaining relatively consistent as a percentage of revenues during the remainder of fiscal 2004 as we maintain our increased usage of existing manufacturing capacity of our operating facility from increased production of new and existing products while maintaining a consistent level of administrative support. BUSINESS SEGMENTS - ----------------- As more fully described on page F-38, the Company operates three reportable business segments: ATV Accessories, Plastic Wheel Covers, and Lawn and Garden. The gross margins are vastly different in our three 19 reportable business segments due to the fact that we assemble our ATV accessories (i.e. we outsource the ironworks to our main product supplier), we are vertically integrated in our Plastic Wheel Cover segment, and we utilize a single-step distribution method for our Lawn and Garden segment. ATV ACCESSORIES - Three Months Ended December 31, 2003 and 2002 - --------------------------------------------------------------- Revenues for the three months ended December 31, 2003 increased $1,217,890, or 29.8%, to $5,301,118 from $4,083,228 for the three months ended December 31, 2002. The increase is mainly attributable to an increase in sales of our snowplow blades, OEM products, and three-point hitch systems as discussed above (See OVERALL RESULTS OF OPERATIONS). Cost of goods sold for the three months ended December 31, 2003 increased $892,198, or 31.2%, to $3,752,491 from $2,860,293 for the three months ended December 31, 2002. Gross profit as a percent of revenues was 29.2% for the three months ended December 31, 2003 compared to 30.0% for the three months ended December 31, 2002. The decrease in gross profit for the three months ended December 31, 2003 as compared to the corresponding period in fiscal 2003 was mainly attributable to a slight increase in material and direct labor costs relative to the prior fiscal year in our snowplow blades as the extremely high demand for our snowplow blades caused us to maximize current vendors' capacities and utilize additional vendors for our steel fabrication and raw material needs and incur the extra expense of overtime put in by our production employees. Projecting that the high demand for our snowplow blades and other winter products will continue in the years ahead, management has entered into discussions with its primary vendors to implement year-round production of snowplow blades to build an inventory level adequate enough to fulfill orders during the peak winter product season without incurring the added expenses of labor overtime and alternate source vendors. Year-round production of our snowplow blades will also allow us to more efficiently incorporate and plan production time and resources for OEM products as we see this market continuing to expand and requiring more of our production capacity year-round as well. PLASTIC WHEEL COVERS - Three Months Ended December 31, 2003 and 2002 - -------------------------------------------------------------------- Revenues for the three months ended December 31, 2003 decreased $33,034, or 7.2%, to $424,957 from $457,991 for the three months ended December 31, 2002. The decrease is attributable to changes in current market conditions as the first quarter of fiscal year 2003 saw golf cart distributors and dealers purchasing higher numbers of wheel covers than during the first quarter of fiscal 2004. The decrease in sales to golf cart distributors and dealers was offset somewhat by sales to OEM golf cart customers that increased during the first quarter of fiscal 2004 as compared to the first quarter of fiscal 2003. We believe sales will increase during the second and third quarters of fiscal 2004 as these quarters are traditionally the prime quarters for the golf industry. Management is working to expand the application and use of its wheel covers beyond the golf markets by working with various OEM's in varying markets to fill a specialized need and to re-establish the Company as a source for quality plastic injection molded products. The initial results of these efforts should be realized during the 3rd and 4th quarters of fiscal 2004. Cost of goods sold for the three months ended December 31, 2003 increased $8,085, or 4.2%, to $200,365 from $192,280 for the three months ended December 31, 2002. Gross profit as a percent of revenue was 52.9% for the three months ended December 31, 2003 compared to 58.0% for the three months ended December 31, 2002. The decrease in gross profit during the three months ended December 31, 2003 as compared to the three months ended December 31, 2002 was attributable to increased material costs as raw plastic costs increased 6% from the first quarter of fiscal 20 2003 to the first quarter of fiscal 2004 and the amount of clear coat compound applied to each wheel was increased to meet higher durability standards set by management. Offsetting some of the increase in material costs was a reduction in direct labor incurred for the three months ended December 31, 2003 compared to the same three months ended December 31, 2002 as procedures for the clear coating process became set and changes to other labor-related procedures increased efficiency. LAWN AND GARDEN - Three Months Ended December 31, 2003 and 2002 - --------------------------------------------------------------- This is a new business segment created during fiscal 2003 by management to monitor and manage the expansion of our products into the lawn and garden industry. This segment contains our Weekend Warrior products which feature pull-behind and 3-point implements designed and built for garden tractors and ATVs. As growth in the lawn and garden industry continues, this will allow the Company to address the seasonality of our ATV accessory products by providing sales in quarters traditionally slow in our main ATV Accessories business segment. Revenues for the three months ended December 31, 2003 were $102,410 against cost of goods sold of $61,314. Gross profit as a percent of revenue was 40.1% for the three months ended December 31, 2003. As this is a new business segment created in the second quarter of fiscal 2003, there was no activity in the first quarter of fiscal 2003 to compare first quarter fiscal 2004 results to. GEOGRAPHIC REVENUE - Three Months Ended December 31, 2003 and 2002 - ------------------------------------------------------------------ During the three months ended December 31, 2003, revenue in the United States of America increased $1,132,939, or 27.8%, to $5,203,737 from $4,070,798 for the three months ended December 31, 2002. Revenue from other countries increased $96,864, or 28.2%, to $440,119 for the three months ended December 31, 2003 from $343,255 for the three months ended December 31, 2002. The increase during the three months ended December 31, 2003 in U.S. revenue is due to a general increase across all regions previously serviced in the United States of America and in other countries is due to an increase of sales in Europe and Asia. 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 December 31, 2003, we had $1,058,408 in cash and cash equivalents, compared to $215,551 at September 30, 2003. 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 $2,510,490 at December 31, 2003 compared to $2,192,089 at September 30, 2003. The change in working capital is primarily due to the following: inventories decreased by $360,936, or 11.9%, to $2,663,797 at December 31, 2003 from $3,024,733 at September 30, 2003, prepaid expenses decreased by $51,356, or 77.7%, to $14,749 at December 31, 2003 from $66,105 at September 30, 2003, accrued expenses increased by $315,313, or 76.9%, to $725,178 at December 31, 2003 from $409,865 at September 30, 2003, accounts payable decreased by $105,615, or 10.1%, to $936,431 at December 31, 2003 from $1,042,046 at September 30, 2003, and the bank line of credit decreased $420,000, or 100%, to $-0- at December 31, 2003 from $420,000 at September 30, 2003. On June 25, 2003, the Company and its commercial lender amended the original secured credit agreement dated August 21, 2001. Under the terms of the amended secured credit agreement, the Company entered into a note 21 payable for $1,500,000 ("Note One") and a second note payable for $2,250,000 ("Note Two") with the commercial lender, replacing the single, original note entered into under the original secured credit agreement. The Notes are collateralized by all of the Company's assets, are payable in monthly installments from July 2003 until June 2018 for Note One and until June 2008 for Note Two, which include principal and interest at prime + 0.25% (4.5% at December 31, 2003) for Note One and principal and interest at prime + 0.625% (4.625% at December 31, 2003) for Note Two, with a final payment upon maturity on June 25, 2018 for Note One and June 25, 2008 for Note Two. The variable interest rate can never exceed 9.5% or be lower than 4.5% for Note One and can never exceed 8.5% or be lower than 4.5% for Note Two. The monthly payment is $11,473 and $42,324 for Note One and Note Two, respectively, 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 Notes or the Line of Credit described below. At December 31, 2003, $1,465,416 and $2,047,466 for Note One and Note Two, respectively, were outstanding on the Notes. At December 31, 2002, $3,385,589 was outstanding on the Note entered into under the original secured credit agreement. Under the terms of the amended secured credit agreement noted above, the Company has a Line of Credit for the lesser of $1,000,000 or 80% of eligible accounts receivable and 35% of eligible inventory. The original secured credit agreement noted above 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 under the original secured credit agreement 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 0.75% (4.75% at December 31, 2003) and is collateralized by all of the Company's assets. The variable interest rate can never exceed 7% or be lower than 4.75%. The Line of Credit matures on December 31, 2004. At December 31, 2003 and 2002, $-0- and $420,000, respectively, was outstanding on the Line of Credit. 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 except as may be required by the preferred shares issued in June of 2003 and discussed below. At December 31, 2003, the Company met all of the required financial ratios. On June 11, 2003, the Company entered into and closed upon a financing agreement whereby the Company's newly authorized preferred stock was issued in exchange for restricted cash. The restricted cash will be made available to the Company for use for general corporate purposes upon the conversion of the preferred stock or with prior written approval of the preferred stockholder (which cannot be unreasonably withheld). The preferred stock is convertible into the Company's common shares based on an annually set conversion price computed as the average of the five lowest closing prices of the common stock for the twenty-two trading days prior to each anniversary date. Upon an event of default, the preferred stock investment may be reclassified as a debt obligation of the Company. This new series of preferred stock is cumulative and convertible with dividends computed on a simple interest per annum basis using the current prime interest rate plus 0.5% (4.5% at December 31, 2003) and are to be paid prior to any dividends being paid or declared on the Company's common stock. The Company has 2,000,000 shares of $0.0001 par value preferred stock authorized and 2,000,000 shares issued and outstanding at December 31, 2003. 22 Consistent with normal practice, management believes that the Company's operations are not expected to require significant capital expenditures during fiscal year 2004. 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 Shareholder. 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 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 May 2003, the Financial Accounting Standards Board ("FASB") issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity", ("FAS 150"). FAS 150 clarifies the accounting for certain financial instruments with characteristics of both liabilities and equity and requires that those instruments be classified as liabilities in statements of financial position. Previously, many of those financial instruments were classified as equity. FAS 150 is effective for financial instruments entered into or modified after May 31, 2003 and otherwise is effective at 23 the beginning of the first interim period beginning after June 15, 2003. As we did not have any of these financial instruments, the adoption of FAS 150 did not have an impact on our consolidated financial statements. In January 2003, the FASB issued FIN No. 46, "Consolidation of Variable Interest Entities", ("FIN 46"). FIN 46 clarifies the application of Accounting Research Bulletin No. 51, "Consolidated Financial Statements," to certain entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. FIN 46 applies immediately to variable interest entities (VIE's) created after January 31, 2003, and to variable interest entities in which an enterprise obtains an interest after that date. It applies in the first fiscal year or interim period beginning after June 15, 2003, to variable interest entities in which an enterprise holds a variable interest that it acquired before February 1, 2003. The Company has not identified any VIE's for which it is the primary beneficiary or has significant involvement. In December 2003, the FASB issued FIN No. 46 (revised December 2003), "Consolidation of Variable Interest Entities" ("FIN 46-R") to address certain FIN 46 implementation issues. The effective dates and impact of FIN 46 and FIN 46-R are as follows: (i) For special purpose entities (SPE's) created prior to February 1, 2003, the Company must apply either the provisions of FIN 46 or early adopt the provisions of FIN 46-R at the end of the first interim or annual reporting period ending after December 15, 2003. (ii) For non-SPE's created prior to February 1, 2003, the Company is required to adopt FIN 46-R at the end of the first interim or annual reporting period ending after March 15, 2004. (iii) For all entities, regardless of whether a SPE, that were created subsequent to January 31, 2003, the provisions of FIN 46 were applicable for variable interests in entities obtained after January 31, 2003. The Company is required to adopt FIN 46-R at the end of the first interim or annual reporting period ending after March 31, 2004. The adoption of the provisions applicable to SPE's and all other variable interests obtained after January 31, 2003 did not have a material impact on the Company's consolidated financial statements. The Company is currently evaluating the impact of adopting FIN 46-R applicable to non-SPE's created prior to February 1, 2003, but does not expect a material impact. In December 2003, the Staff of the Securities and Exchange Commission ("SEC" or "the Staff") issued Staff Accounting Bulletin ("SAB") 104, Revenue Recognition, which superseded SAB 101, Revenue Recognition in Financial Statements. SAB 104's primary purpose is to rescind accounting guidance in SAB 101 related to multiple element revenue arrangements, superseded as a result of the issuance of Emerging Issues Task Force Issue 00-21, Accounting for Revenue Arrangements with Multiple Deliverables which was effective for revenue arrangements entered into in fiscal periods beginning after June 15, 2003. The provisions of SAB 104 did not have a material impact on our consolidated financial statements. 24 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, baskets 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 17 distributors in the United States for the past 23 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. We are also 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. Additionally, we have successfully entered into the lawn and garden industry. 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. Our three largest customers accounted for approximately 42% of our net sales in the year ended September 30, 2003. These three customers have represented a significant amount of our business every year for at least the past 17 years. While the percentage of total net sales these customers represent should continue to 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. 25 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 the Motorcycle Industry Council, in 2002 there were 929,000 ATV's sold worldwide. This represented a 7.1% increase over 2001. In 2000, ATV Magazine reported that of the 800,000 units sold in that year 75% were Utility and 40% were Sport Quads. We consider the Utility Division to be our target market. 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. Lawn and Garden: 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 over the next couple of years. COMPANY HISTORY Cycle Country's market research has been a continued work in process for the past 22 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 2002, approximately 929,000 units were sold 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. 26 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 last 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 last 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 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, 2003, which approximates 80% of total company segment sales: (a) Blades: 63%, (b) Winches and Winch Mounting Kits: 6%, (c) Mowers: 5%, (d) Tillage Equipment: 2%, (e) Sprayers: 3%, (f) Spreaders: 1%. "Other" products comprise the remaining 20% of our sales and comprises some of the following: OEM products (including John Deere and Land Pride): 9%, Perf- form oil filters and oil coolers: 5%, electric blade lift system: 2%, trailers: 2%, plastic cargo boxes and steel mesh baskets: 2%. 27 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. Our standard blade configuration features a universal manual lift or a universal electric lift. The blades can also be lifted with a winch. All of our blades come standard with heavy-duty skids, heavy-duty trip springs, and a limited lifetime warranty. 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. 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, 28 steel mesh baskets, and bed lift kits for select utility vehicles. Through acquisitions last year we have added a branded product line to our ATV accessories segment, Perf-form Products, a line of premium oil filters and oil coolers for motorcycles and ATVs. The Perf-form products have performed well this past year and we believe there still is great growth potential to be realized. 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 13% 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 and metalized options. Lawn and Garden 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. Additionally, through acquisitions last year we have added a branded product line to our lawn and garden segment, Weekend Warrior, a line of heavy-duty garden utility attachments for ATVs and tractors that has allowed us to accelerate our introductions into this market and expand our product offerings. We are pursuing retail outlets as markets for our lawn and garden products as well. We believe that this market will represent significant sales increases each year for the next three years. This segment represents approximately 2% of our total segment sales. Products include a 64" tandem disc, 60" cultivator, and three-point tillage equipment. 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 2003 included: a redesigned 5th wheel trailer, an all-metalized turbine wheel cover, and a variety of private label blades, racks, brush guards, winch mounts, and bed lifts for lawn and garden and utility vehicle original equipment manufacturers (OEM's), such as John Deere and Land Pride. 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. There are no products presently being developed that will require a material investment of our resources. 29 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, the 5th wheel trailer, Perf-form oil filter, and the Weekend Warrior universal tow frame. SUPPLIERS During the year ended September 30, 2003, we purchased approximately $5,113,000 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. Our relationship with Simonsen Iron Works has been a key to the success of our Company as working with this vendor allows us to maintain the highest quality parts at the most economical cost. While we anticipate this vendor will continue to supply a majority of our ironwork, we recognize the need to reduce the possibility of any adverse consequence of this concentration so over the past three years we have begun using additional suppliers where practical. MARKETING - CHANNELS OF DISTRIBUTION: ATV Accessories: Domestic Distribution We distribute our products domestically through 17 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 during fiscal 2003. During the year ended September 30, 2003, domestic accessory sales represent approximately 90% of our total ATV Accessory sales. For 2003, our largest distributor accounted for 24% of our domestic accessory sales and our five largest distributors accounted for 74% of our domestic accessory sales. In cooperation with John Deere and Land Pride, we have developed several products that are now being sold as accessories for John Deere lawn and garden equipment and Land Pride utility vehicles. We intend to expand our associations with John Deere and Land Pride in the future as well as to seek new opportunities with other similar OEM's. International Distribution We distribute our products internationally through 19 distributors that sell our products in 35 countries. This department is in its 8th year of existence and has provided us with a profitable expansion of the 30 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 10% 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. 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. Lawn and Garden: We market our lawn and garden accessories mainly by working with lawn and garden equipment and utility vehicle equipment manufacturers to introduce our accessories into their product lines. We also, through our Weekend Warrior products, sell to national retail outlets and lawn and garden dealers. As this segment is a fairly new market for us we will continue to pursue opportunities with OEM's and direct-to-market distribution opportunities. 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. 31 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. Lawn and Garden We utilize a sales force of three people to market our lawn and garden products. Our primary method of penetrating the market of OEM's is to make direct contact with potential manufacturers or to follow up on leads brought to us through our advertising or current OEM customers. Our sales force also contacts national, regional, and local retail outlets. Each year we produce a catalog of our entire product line and make a new video that demonstrates the applicability of our products. Our retail outlet customers are allowed unlimited quantities of these sales tools. Our sales people exhibit at several regional and national trade shows each year. They also travel to each OEM or retail outlet customer to demonstrate our products and address concerns that may arise. Advertising We advertise our ATV and lawn and garden accessories in national trade magazines, professionally developed videos, annual catalog, magazine and television advertising campaigns. Additionally we have three Internet sites located at: www.cyclecountry.com , www.Perf-form.com, and www.weekend-warrior.com. 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. 32 EMPLOYEES As of March 31, 2004, we have 70 full-time employees, including 45 in production, 5 in sales, 4 in administration, 8 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. DESCRIPTION OF PROPERTY Our principal office facility is a modern 106,000 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 51,000 square foot building expansion. We own this facility and it is used as collateral for our loan with the commercial lender. In February of 2003, construction was completed on a 28,000 square foot building expansion that added needed floor space for our production areas and warehousing needs. The Company relocated the Perf-form operations to the Milford facility in March of 2003. 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. We currently carry two million dollars of product liability insurance. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND/FINANCIAL DISCLOSURE. (a) Dismissal of Independent Accountant. (i) On January 16, 2004, the Board of Directors of Cycle Country Accessories Corp. (the "Company") unanimously dismissed Tedder, James, Worden & Associates, P.A. ("Tedder") as the Company's independent accountant. (ii) The reports of Tedder regarding the Company's financial statements for the fiscal years ended September 30, 2003, 2002 and 2001 did not contain any adverse opinion or disclaimer of opinion and were not modified as to uncertainty, audit scope or accounting principles. (iii) In connection with Tedder's audits of the Company for the fiscal years ended September 30, 2003, 2002 and 2001, and during the period from September 30, 2003 through January 19, 2004 there were no disagreements with Tedder on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, that, if not resolved to the satisfaction of Tedder, would have caused it to make reference thereto in its reports regarding the Company's financial statements for such years. 33 (iv) The Company has requested that Tedder furnish it with a letter addressed to the Securities and Exchange Commission stating whether it agrees with the above statements and, if it does not agree, the respects in which it does not agree. A copy of such letter, dated January 22, 2004, is filed as Exhibit 16 to the Form 8-K dated January 22, 2004. (b) Engagement of Independent Accountant. (i) On January 16, 2004, the Board of Directors of the Company engaged Henjes, Conner, Williams, and Grimsley, L.L.P ("Henjes") as its independent accountant. (ii) During the fiscal years ended September 30, 2003, 2002 and 2001, and during the subsequent interim period prior to such engagement, the Company did not consult Henjes regarding the application of accounting principles to a specific completed or contemplated transaction or regarding the type of audit opinion that might be rendered by Henjes on the Company's financial statements, and Henjes did not provide any written or oral advice that was an important factor considered by the Company in reaching a decision as to any such accounting, auditing or financial reporting issue. We have had no disagreements with our accountants on accounting and financial disclosure. 34 MANAGEMENT Directors and Executive Officers Our directors, executive officers and key employees are as follows: Name Age Position Director Since - ------------------------------------------------------------------------------ Ron Hickman 53 Chief Executive Officer, 2001 President and Director Dave Davis 38 Chief Financial Officer - Marie Matthiesen 41 Vice President of - Manufacturing F.L. (Skip) Miller 63 Director 2001 Jim Danbom 60 Director 2001 L.G. (Bob) Hancher Jr. 50 Director 2001 Rod Simonson 48 Director 2001 Audit Committee - Bob Hancher, Skip Miller, Rod Simonsen Compensation Committee - Ron Hickman, Jim Danbom, Bob Hancher Operations Committee - Ron Hickman, Jim Danbom, Skip Miller Planning Committee - Jim Danbom, Ron Hickman, Rod Simonsen F.L. 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 three-year term, which will end in 2006. 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 2006. 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 2006 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 35 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 three-year term, which will end in 2006. Ron Hickman, who became our President on August 1, 2001, has been a CPA for 27 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 2006. 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 executives 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. Summary Compensation Table The following table sets forth the total compensation paid to or accrued for the fiscal years ended September 30, 2003, 2002, and 2001 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 2003 150,000 12,772 500 0 0 0 7,106 2002 150,000 15,000 500 0 0 0 7,476 2001 104,808 30,000 500 0 0 0 6,469 Jim Danbom Past President 2003 75,000 0 500 0 0 0 8,175 2002 75,000 0 500 0 0 0 8,044 2001 156,817 0 0 0 0 0 1,818 - --------------------------------------------------------------------------------------------------------------------- (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 $1,913 value of personal use of company auto and $5,563 paid for health insurance. (4) Comprised entirely of value of personal use of company auto. (5) Comprised of $2,481 value of personal use of company auto and $5,563 paid for health insurance. (6) Comprised of $1,634 value of personal use of company auto and $5,472 paid for health insurance. (7) Comprised of $2,703 value of personal use of company auto and $5,472 paid for health insurance.
36 Stock Option Grants in the past fiscal year We have not issued any grants of stock options in the past fiscal year. 37 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 prospectus and as adjusted to reflect the issuance of all 615,000 shares which may potentially be [sold/issued] in connection with this registration statement, by (i) those Shareholder 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 Percent Percent Name and Address of Shares Owned Owned Beneficial Owner Owned Before Offering After Offering - ------------------- --------- --------------- -------------- Ron Hickman 272,812 7.06% 6.11% c/o Cycle Country Accessories Corp. 2188 Highway 86 Milford, Iowa 51351 Jim Danbom 741,775 18.78% 16.25% 106 Channel Court Marco Island, FL 34145 Jan Danbom 700,775 17.74% 15.35% 106 Channel Court Marco Island, FL 34145 Commerce Street Venture 360,000 9.12% 7.89% Group 17322 Westfield Park Rd Westfield, IN 46074 All Directors and Officers 1,067,717 27.04% 23.39% as a Group (6 Persons) 38 SELLING SHAREHOLDER On June 11, 2003, the Company entered into and closed upon a financing agreement whereby the Company's newly authorized preferred stock was issued in exchange for restricted cash. The restricted cash will be made available to the Company for use for general corporate purposes upon the conversion of the Preferred Stock or with prior written approval of the preferred stockholder (which cannot be unreasonably withheld). The preferred stock is convertible into the Company's common shares based on an annually set conversion price computed as the average of the five lowest closing prices of the common stock for the twenty-two trading days prior to each anniversary date. The conversion price as of the most recent anniversary date is $3.93 per share. Upon an event of default, the preferred stock may be reclassified as a debt obligation of the Company. The following table sets forth the name of each person who is offering shares of common stock by this prospectus, the number of shares of common stock beneficially owned by each person, the number of shares of common stock that may be sold in this offering and the number of shares of common stock each person will own after the offering, assuming they sell all of the shares offered.
Common Shares Percentage Shares to be Shares owned Percentage Name Shares owned Before Offering Sold in Offering After Offering After Offering - -------------------------------------------------------------------------------------------------------------------- Laurus Master Fund, Ltd.(1) 615,000 (2) 4.99% (2) 615,000 0(3) 0(3)
(1) Laurus Master Fund, Ltd is a Cayman Islands Company. (2) Includes the shares of our common stock issuable to Laurus Master Fund, Ltd, upon conversion of its preferred stock and 40,000 shares issuable upon the exercise of its warrants. This registration statement shall also cover any additional shares of our common stock which become issuable in connection with the shares registered for sale hereby by reason of any stock dividend, stock split, recapitalization or other similar transaction effected without the receipt of consideration which results in an increase in the number of outstanding shares of our common stock. Laurus has contractually agreed to limit its beneficial ownership by restricting the conversion or exercise of all Cycle Country securities held by Laurus. Laurus has agreed that none of the Cycle Country securities held by Laurus may be converted or exercised to the extent that conversion or exercise of those securities would result in Laurus, together with its affiliates, beneficially owning in excess of 4.99% of the number of shares of our common stock outstanding at that time. Laurus may cause this 4.99% limitation to expire by providing us 75 days advance notice of its intention to do so. This 4.99% limitation does not preclude conversion of the Preferred Stock or exercise of the Warrants over time, so long as Laurus' beneficial ownership of our common stock, together with its affiliates, does not exceed the limitation amount at any time. This 4.99% limitation automatically becomes void upon an event of default relating to the Preferred Stock. (3) Assumes the sale of all shares offered hereby. 39 CERTAIN TRANSACTIONS In March 2002, Jim Danbom, director, identified Perf-form, Inc. as a potential acquisition. The acquisition was completed on March 11, 2002 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. Additionally the company purchased inventory of approximately $75,000. 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 the Company's common stock. The Company's technology and products allow many of the Weekend Warrior products to be immediately useful in the Lawn and Garden applications. 40 DESCRIPTION OF SECURITIES General Our authorized capital stock consists of 100,000,000 shares of common stock, par value $0.0001 per share, 20,000,000 shares of preferred stock, par value $0.0001 per share and an additional series of 2,000,000 shares of preferred stock, par value $0.0001 per share.. As of the date of this prospectus, 3,956,047 shares of common stock and 2,000,000 shares of the newly authorized preferred stock were outstanding. The transfer agent for our common stock is Atlas Stock Transfer of Salt Lake City, Utah. Common Stock We are authorized to issue 100,000,000 shares of our common stock, $0.0001 par value, of which 3,956,047 shares are issued and outstanding as of the date of this prospectus. The issued and outstanding shares of common stock are fully paid and non-assessable. Except as provided by law or our certificate of incorporation with respect to voting by class or series, holders of common stock are entitled to one vote on each matter submitted to a vote at a meeting of shareholders. Subject to any prior rights to receive dividends to which the holders of shares of any series of the preferred stock may be entitled, the holders of shares of common stock will be entitled to receive dividends, if and when declared payable from time to time by the board of directors, from funds legally available for payment of dividends. Upon our liquidation or dissolution, holders of shares of common stock will be entitled to share proportionally in all assets available for distribution to such holders. Preferred Stock On June 11, 2003, the Company entered into and closed upon a financing agreement whereby the Company's newly authorized preferred stock was issued in exchange for restricted cash. The restricted cash will be made available to the Company for use for general corporate purposes upon the conversion of the Preferred Stock. The preferred stock is convertible into the Company's common shares based on an annually set conversion price computed as the average of the five lowest closing prices of the common stock for the twenty-two trading days prior to each anniversary date. Upon an event of default, the preferred stock may be reclassified as a debt obligation of the Company. This new series of preferred stock is cumulative and convertible with dividends computed on a simple interest per annum basis using the current prime interest rate plus 0.5% (4.5% at September 30, 2003) and are to be paid prior to any dividends being paid or declared on the Company's common stock. The Company has 2,000,000 shares of $0.0001 par value preferred stock authorized and 2,000,000 shares issued and outstanding at September 30, 2003 and as of the date of this prospectus. Warrants Certain shares of common stock offered by Cycle Country Accessories Corp. (a Nevada corporation) on August 21, 2001 had warrants attached. We presently have 2,000,000 of such warrants outstanding. Each warrant entitles the holder thereof to purchase one share of common stock at a price per share of $4.00 beginning March 28, 2002 and ending on August 21, 2004. Each unexercised warrant is redeemable by us at a redemption 41 price of $0.001 per warrant at any time, upon 30 days written notice to holders thereof, if (a) our common stock is traded on NASDAQ or listed on an exchange and (b) the Market Price (defined as the average closing bid price for twenty (20) consecutive trading days) equals or exceed 120% of the exercise price. On June 9, 2003 the Company issued warrants to purchase 40,000 shares of the Company's common shares. The holder is entitled to purchase the common shares at an exercise price per share of $4.00 ending on June 9, 2010. Pursuant to applicable federal and state securities laws, in the event a current prospectus is not available, the warrant holders may be precluded from exercising the warrants and we would be precluded from redeeming the warrants. There can be no assurance that we will not be prevented by financial or other considerations from maintaining a current prospectus. Any warrant holder who does not exercise prior to the redemption date, as set forth in our notice of redemption, will forfeit the right to purchase the common stock underlying the warrants, and after the redemption date or upon conclusion of the exercise period, any outstanding warrants will become void and be of no further force or effect, unless extended by our Board of Directors. The number of shares of common stock that may be purchased with the warrants is subject to adjustment upon the occurrence of certain events, including a dividend distribution to our Shareholder or a subdivision, combination or reclassification or our outstanding shares of common stock. The warrants do not confer upon holders any voting or any other rights as our Shareholder. We may at any time, and from time to time, extend the exercise period of the warrants, provided that written notice of such extension is given to the warrant holders prior to the expiration date then in effect. Also, we may reduce the exercise price of the warrants for limited periods or through the end of the exercise period if deemed appropriate by the Board of Directors. Any extension of the term and/or reduction of the exercise price of the warrants will be subject to compliance with Rule 13e-4 under the Exchange Act including the filing of a Schedule 14E- 4. Notice of any extension of the exercise period and/or reduction of the exercise price will be given to the warrant holders. We do not presently contemplate any extension of the exercise period or any reduction in the exercise price of the warrants. The warrants are also subject to price adjustment upon the occurrence of certain events including subdivisions or combinations of our common stock. 42 Market for Common Equity and Related Shareholder Matters Our common stock was approved for listing on the American Stock Exchange under the symbol: ATC effective June 19, 2003. Prior to June 19, 2003, our common stock was 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 during the period our stock was on the OTC Bulletin Board 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 2003 Fourth Quarter $5.00 $4.50 Third Quarter $5.00 $3.30 Second Quarter $3.72 $3.05 First Quarter $4.14 $2.12 FY 2002 Fourth Quarter $3.15 $2.20 Third Quarter $4.07 $2.20 Second Quarter $5.75 $2.40 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 April 19, 2004, there were approximately 806 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. 43 INDEMNIFICATION Article 11 of our Articles of Incorporation includes certain provisions permitted by the Nevada Revised Statutes, which provides for indemnification of directors and officers against certain liabilities. Pursuant to our Articles of Incorporation, our officers and directors are indemnified, to the fullest extent available under Nevada Law, against expenses actually and reasonably incurred in connection with threatened, pending or completed proceedings, whether civil, criminal or administrative, to which an officer or director is, was or is threatened to be made a party by reason of the fact that he or she is or was one of our officers, directors, employees or agents. We may advance expenses in connection with defending any such proceeding, provided the indemnity undertakes to repay any such amounts if it is later determined that he or she was not entitled to be indemnified by us. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to our directors, officers and controlling persons pursuant to the foregoing provisions or otherwise, we have been advised that in the opinion of the SEC such indemnification is against public policy as expressed in the Securities Act and is therefore, unenforceable. 44 PLAN OF DISTRIBUTION We are registering shares of our common stock that may be issued upon conversion of some or all of our preferred shares or upon exercise of certain outstanding warrants. The selling shareholder and any of its pledgees, assignees and successors-in-interest may, from time to time, sell any or all of their common shares on any stock exchange, market or trading facility on which the shares are traded or in private transactions. These sales may be at fixed or negotiated prices. The selling shareholder may use any one or more of the following methods when selling shares: * ordinary brokerage transactions and transactions in which the broker-dealer solicits purchasers; * block trades in which the broker-dealer will attempt to sell the shares as agent but may position and resell a portion of the block as principal to facilitate the transaction; * purchases by a broker-dealer as principal and resale by the broker-dealer for its account; * an exchange distribution in accordance with the rules of the applicable exchange; * privately negotiated transactions; * short sales; * broker-dealers may agree with the selling shareholder to sell a specified number of such shares at a stipulated price per share; * a combination of any such methods of sale; and * any other method permitted pursuant to applicable law. The selling shareholder may also engage in short sales against the box, puts and calls and other transactions in our securities or derivatives of our securities and may sell or deliver shares in connection with these trades. The selling shareholder may pledge their shares to their brokers under the margin provisions of customer agreements. If a selling shareholder defaults on a margin loan, the broker may, from time to time, offer and sell the pledged shares. These sales may be effected in transactions: - - on any national securities exchange or quotation service on which the common stock may be listed or quoted at the time of the sale, including the Nasdaq National Market; - - in the over-the-counter market; or - - otherwise than on such exchanges or services or in the over-the- counter market. These transactions may include block transactions or crosses. Crosses are transactions in which the same broker acts as an agent on both sides of the trade. 45 Broker-dealers engaged by the selling shareholder may arrange for other brokers-dealers to participate in sales. Broker-dealers may receive commissions or discounts from the selling shareholder (or, if any broker-dealer acts as agent for the purchaser of shares, from the purchaser) in amounts to be negotiated. The selling shareholder does not expect these commissions and discounts to exceed what is customary in the types of transactions involved. The selling shareholder and any such broker-dealers or agents who participate in the distribution of the common stock may be deemed to be "underwriters." As a result, any profits on the sale of the common stock by the selling shareholder and any discounts, commissions or concessions received by any such broker-dealers or agents might be deemed to be underwriting discounts and commissions under the Securities Act. If the selling shareholder was to be deemed an underwriter, the selling shareholder may be subject to certain statutory liabilities of, including, but not limited to, Sections 11, 12 and 17 of the Securities Act and Rule 10b-5 under the Exchange Act. If the common stock is sold through underwriters or broker-dealers, the selling shareholder will be responsible for underwriting discounts or commissions or agent's commissions. To our knowledge, there are currently no plans, arrangements or understandings between the selling shareholder and any underwriter, broker-dealer or agent regarding the sale of the common stock by the selling shareholder. The selling shareholder might not sell any or all of the common stock offered pursuant to this prospectus. The selling shareholder might instead transfer, devise or gift the common stock by other means not described in this prospectus. In addition, any shares of common stock covered by this prospectus that qualify for sale pursuant to Rule 144 of the Securities Act may be sold under Rule 144 rather than pursuant to this prospectus. The selling shareholder and any other person participating in such distribution will be subject to the Exchange Act. The Exchange Act rules include, without limitation, Regulation M, which may limit the timing of purchases and sales of any of the common stock by the selling shareholder and any other such person. In addition, Regulation M under the Exchange Act may restrict the ability of any person engaged in the distribution of the common stock to engage in market-making activities with respect to the underlying common stock being distributed for a period of up to five business days prior to the commencement of such distribution. This may affect the marketability of the common stock and the ability of any person or entity to engage in market-making activities with respect to the common stock. We agreed with the selling shareholder to keep the registration statement of which this prospectus constitutes a part effective until the earlier of: - - Such time as the selling shareholder may sell all of the shares held by it without registration pursuant to Rule 144 under the Securities Act within a three-month period; or - - Such time as all of the shares have been sold by the selling shareholder. We are required to pay all fees and expenses incident to the registration of the shares, including fees and disbursements of counsel to the selling shareholder. We have agreed to indemnify the selling shareholder against certain losses, claims, damages and liabilities, including liabilities under the Securities Act. 46 LEGAL MATTERS The Law Office of James G. Dodrill, P.A. of Boca Raton, Florida will give an opinion for us regarding the validity of the common stock offered in this prospectus. EXPERTS The financial statements as of September 30, 2003 and for the years ended September 30, 2003 and 2002 included in this prospectus have been so included in reliance on the report of Tedder, James, Worden & Associates, P.A., independent accountants, given on the authority of said firm as experts in auditing and accounting. 47 WHERE YOU CAN FIND MORE INFORMATION We have filed a registration statement under the Securities Act with respect to the securities offered hereby with the Commission, 450 Fifth Street, N.W., Washington, D.C. 20549. This prospectus, which is a part of the registration statement, does not contain all of the information contained in the registration statement and the exhibits and schedules thereto, certain items of which are omitted in accordance with the rules and regulations of the Commission. For further information with respect to Cycle Country Accessories Corp. and the securities offered hereby, reference is made to the registration statement, including all exhibits and schedules thereto, which may be inspected and copied at the public reference facilities maintained by the Commission at 450 Fifth Street, N. W., Room 1024, Washington, D. C. 20549, and at its Regional Office located at Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661 at prescribed rates during regular business hours. You may obtain information on the operation of the public reference facilities by calling the Commission at 1-800-SEC-0330. Also, the SEC maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the Commission at http://www.sec.gov. Statements contained in this prospectus as to the contents of any contract or other document are not necessarily complete, and in each instance reference is made to the copy of such contract or document filed as an exhibit to the registration statement, each such statement being qualified in its entirety by such reference. We will provide, without charge upon oral or written request of any person, a copy of any information incorporated by reference herein. Such request should be directed to us at Cycle Country Accessories Corp., 2188 Highway 86, Milford, Iowa 51351 Attention: Ronald Hickman, President. Following the effectiveness of this registration statement, we will file reports and other information with the Commission. All of such reports and other information may be inspected and copied at the Commission's public reference facilities described above. The Commission maintains a web site that contains reports, proxy and information statements and other information regarding issuers that file electronically with the Commission. The address of such site is http://www.sec.gov. In addition, we intend to make available to our Shareholder annual reports, including audited financial statements, unaudited quarterly reports and such other reports as we may determine. 48 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 Shareholders' Equity F-5 Consolidated Statements of Cash Flows F-6 Notes to Consolidated Financial Statements F-7 Financial Statements (Unaudited) Condensed Consolidated Balance Sheet - December 31, 2003 F-32 Condensed Consolidated Statements of Income - Three Months Ended December 31, 2003 and 2002 F-33 Condensed Consolidated Statements of Cash Flows - Three Months Ended December 31, 2003 and 2002 F-34 Notes to Condensed Consolidated Financial Statements F-35 TEDDER, JAMES, WORDEN & ASSOCIATES, P.A. CERTIFIED PUBLIC ACCOUNTANTS & BUSINESS ADVISORS AN INDEPENDENTLY OWNED MEMBER OF THE RSM MCGLADREY NETWORK Independent Auditors' Report ---------------------------- To the Board of Directors and Stockholders of Cycle Country Accessories Corp. and Subsidiaries: We have audited the accompanying consolidated balance sheets of Cycle Country Accessories Corp. and Subsidiaries (the "Company") as of September 30, 2003 and 2002, and the related consolidated statements of income, stockholders' equity, and cash flows for the years then ended. 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, 2003 and 2002, and the results of their operations and their cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America. /s/ Tedder, James, Worden & Associates, P.A. Orlando, Florida January 13, 2004 CYCLE COUNTRY ACCESSORIES CORP. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS September 30, 2003 and 2002
Assets 2003 2002 ------ ---- ---- Current assets: Cash and cash equivalents $ 215,551 $ 207,162 Accounts receivable - trade, net 1,080,854 1,086,672 Inventories 3,024,733 2,967,285 Taxes receivable 89,507 184,624 Deferred income taxes 72,095 76,251 Prepaid expenses and other 66,105 62,349 ----------- ----------- Total current assets 4,548,845 4,584,343 Property, plant, and equipment, net 2,930,878 2,558,328 Restricted cash 1,901,898 - Intangible assets, net 217,093 233,238 Goodwill 41,700 41,700 Other assets 63,007 79,459 ----------- ----------- Total assets $ 9,703,421 $ 7,497,068 =========== =========== Liabilities and Stockholders' Equity ------------------------------------ Current liabilities: Accounts payable $ 1,042,046 $ 1,108,344 Accrued expenses 409,865 420,811 Bank line of credit 420,000 400,000 Current portion of bank notes payable 484,845 890,580 ---------- ----------- Total current liabilities 2,356,756 2,819,735 Bank note payable, less current portion 3,147,109 2,712,701 Deferred income taxes 96,405 51,788 ---------- ----------- Total liabilities 5,600,270 5,584,224 Stockholders' equity: Preferred stock 200 - Common stock 395 395 Additional paid-in capital 3,730,039 1,726,266 Retained earnings (deficit) 372,517 186,183 ---------- ----------- Total stockholders' equity 4,103,151 1,912,844 ---------- ----------- Total liabilities and stockholders' equity $ 9,703,421 $ 7,497,068 ========== ===========
See accompanying notes to the consolidated financial statements. F-2 CYCLE COUNTRY ACCESSORIES CORP. AND SUBSIDIARIES Consolidated Statements of Income For the years ended September 30, 2003 and 2002
2003 2002 ---- ---- Net sales $13,737,342 $13,257,895 Freight income 154,651 105,657 ----------- ----------- Total revenue 13,891,993 13,363,552 Cost of goods sold (10,638,526) (9,867,995) ----------- ----------- Gross profit 3,253,467 3,495,557 Selling, general and administrative expenses (2,762,626) (2,781,896) ----------- ----------- Income from operations 490,841 713,661 Non-operating income (expense), net (168,708) (227,417) ----------- ----------- Income before provision for income taxes 322,133 486,244 Income tax expense 114,826 177,403 ----------- ----------- Net income $ 207,307 $ 308,841 Dividends on preferred stock 20,974 - ----------- ----------- Net income available to common stockholders $ 186,333 308,841 =========== =========== Weighted average shares of common stock outstanding: Basic 3,951,290 3,757,261 Diluted 4,460,196 3,757,261 Earnings per common share: Basic $ 0.05 0.08 Diluted $ 0.05 0.08 See accompanying notes to the consolidated financial statements.
F-3 CYCLE COUNTRY ACCESSORIES CORP. AND SUBSIDIARIES Consolidated Statements of Stockholders' Equity Years ended September 30, 2003 and 2002
Additional Preferred Common paid-in Retained Stock Stock capital earnings Total -------- -------- ----------- ---------- --------- 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 Net income - - - 207,307 207,307 Issuance of preferred stock 200 - 1,982,800 - 1,983,000 Issuance of common stock for payment of dividends on preferred stock - 1 20,973 (20,974) - Cancellation of common stock previously issued and outstanding - (1) - 1 - --------- ---------- --------- ----------- ------------ Balances at September 30, 2003 $ 200 395 3,730,039 372,517 4,103,151 ========== ========== ========= =========== ============ See accompanying notes to the consolidated financial statements.
F-4 CYCLE COUNTRY ACCESSORIES CORP. AND SUBSIDIARIES Consolidated Statements of Cash Flows For the years ended September 30, 2003 and 2002
2003 2002 ---- ---- Cash flows from operating activities: Net income $ 207,307 308,841 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 307,484 281,753 Non-cash fund management fee 85,000 - Deferred income taxes 48,773 30,897 Amortization 20,813 11,762 Gain on sale of equipment (15,829) (17,010) Inventory reserve (10,000) 41,000 (Increase) decrease in assets: Accounts receivable - trade, net 5,818 (28,389) Inventories (47,448) (219,006) Taxes receivable 95,117 (84,107) Prepaid expenses and other (3,756) 1,461 Other assets 41,452 881 Increase (decrease) in liabilities: Accounts payable (66,298) 49,773 Accrued expenses (10,946) 253,105 --------- --------- Net cash provided by operating activities 657,487 630,961 Cash flows from investing activities: Deposits into restricted cash account (1,901,898) - Purchase of property, plant, and equipment (685,216) (270,478) Payment of patent costs (4,668) - Acquisition of net assets - subsidiary - (12,065) Proceeds from sale of property, plant, and equipment 21,011 21,886 --------- --------- Net cash used in investing activities (2,570,771) (260,657) Cash flows from financing activities: Proceeds from issuance of preferred stock 1,898,000 - Payments on bank notes payable (706,776) (837,231) Net borrowings from bank line of credit 755,439 400,000 Payment of loan costs (25,000) - ----------- ------------ Net cash provided by (used in) financing activities 1,921,673 (437,231) ----------- ------------ Net increase (decrease) in cash and cash equivalents 8,389 (66,927) Cash and cash equivalents - beginning of year 207,162 274,089 ----------- ------------ Cash and cash equivalents - end of year $ 215,551 207,162 =========== ============ See the accompanying notes to the consolidated financial statements.
F-5 CYCLE COUNTRY ACCESSORIES CORP. AND SUBSIDIARIES Consolidated Statements of Cash Flows, Continued For the years ended September 30, 2003 and 2002
2003 2002 ------- ------- Supplemental disclosures of cash flow information: Cash paid during the year for: Interest, net of amounts capitalized $ 193,572 256,419 =========== ========== Income taxes $ 1,900 331,130 =========== ========== Supplemental schedule of non-cash financing and investing activities: Non-cash transaction incurred during the year for: Conversion of bank line of credit to bank notes payable $ 735,439 - =========== ========== Issuance of common stock for payment of dividends on preferred stock $ 20,974 - =========== ========== 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 =========== ========== See accompanying notes to the consolidated financial statements.
F-6 CYCLE COUNTRY ACCESSORIES CORP. AND SUBSIDIARIES Notes to Consolidated Financial Statements September 30, 2003 and 2002 (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)"), Perf-Form, Inc. (an Iowa corporation) ("Perf-Form"), and Cycle Country Accessories Subsidiary Corp. (a Nevada corporation) ("Cycle Country Sub. Corp.") (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 had a second assembly plant located in Big Lake, Minnesota until February 2003, at which time the operations were relocated to the assembly plant in Milford, Iowa. (c) Revenue Recognition The Company ships products to its customers predominantly by its internal fleet and to a lesser extent by third party carriers. The Company recognizes revenues from product sales when title to the products is passed to the distributors, dealers, wholesalers, or other customers and risk of loss transfers to an unrelated third party, which occurs at the point of destination for products shipped by the Company's internal fleet and at the point of shipping for products shipped by third party carriers. 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 $476,000 and $441,000 in fiscal 2003 and 2002, respectively. F-7 CYCLE COUNTRY ACCESSORIES CORP. AND SUBSIDIARIES Notes to Consolidated Financial Statements (1) Summary of Significant Accounting Policies, Continued (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. (e) Allowances The Company provides appropriate provisions for uncollectible accounts and credit for returns based upon numerous factors, including past transaction history with customers, their credit worthiness, and other information. Initially, the Company estimates a provision for uncollectible accounts as a percentage of net sales based on historical bad debt experience and on a quarterly basis, the Company writes-off uncollectible receivables. This estimate is periodically adjusted when the Company becomes aware of a specific customer's inability to meet its financial obligations (e.g. bankruptcy filing) or as a result of changes in the overall aging of accounts receivable. While the Company has a large customer base that is geographically dispersed, a slowdown in markets in which the Company operates may result in higher than expected uncollectible accounts, and therefore, the need to revise estimates for bad debts. To the extent historical experience is not indicative of future performance or other assumptions used by management do not prevail, the provision for uncollectible accounts could differ significantly, resulting in either higher or lower future provisions for uncollectible accounts. In the opinion of management of the Company, no provision is deemed necessary for credit for returns at September 30, 2003 or 2002. The provision for uncollectible accounts of $10,000 at September 30, 2003 and 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. F-8 CYCLE COUNTRY ACCESSORIES CORP. AND SUBSIDIARIES Notes to Consolidated Financial Statements (1) Summary of Significant Accounting Policies, Continued (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) Restricted Cash The Company has approximately $1,902,000 in restricted cash and it serves as collateral for the preferred stock issued by the Company during fiscal 2003 (see Note 12(b)). The restricted cash can be used for general corporate purposes (in the ordinary course of business and consistent with past practices) as approved by the holders of the preferred stock. (i) Inventories Inventories are carried at the lower of cost or market. The cost is determined using the first-in, first-out method. The Company evaluates its inventory value at the end of each quarter to ensure that it is carried at the lower of cost or market. This evaluation includes an analysis of its physical inventory results, a review of potential obsolete and slow-moving stock based on historical product sales and forecasted sales, and an overall consolidated analysis of potential excess inventory. To the extent historical physical inventory results are not indicative of future results and if future events impact, either favorably or unfavorably, the salability of the Company's products or its relationship with certain key vendors, the Company's inventory reserves could differ significantly, resulting in either higher or lower future inventory provisions. During the fourth quarter of fiscal 2003, the Company determined that one of its sub-assembly components had incurred a permanent decline in market value. As a result, the Company wrote-off approximately $84,500 to reflect this decline in market value. (j) 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. Interest costs on borrowings used in connection with the construction of major facilities are capitalized. The capitalized interest is recorded as part of the asset to which it relates and is depreciated over the asset's estimated useful life. F-9 CYCLE COUNTRY ACCESSORIES CORP. AND SUBSIDIARIES Notes to Consolidated Financial Statements (1) Summary of Significant Accounting Policies, Continued (j) Property, Plant, and Equipment, Continued 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. (k) 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, at the date of acquisition. (l) Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of The Company's long-lived assets, including property, plant, and equipment, are reviewed for possible 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 these projected cash flows are less than the carrying amount, an impairment loss is recognized based on the fair value of the asset less any costs of disposition. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. F-10 CYCLE COUNTRY ACCESSORIES CORP. AND SUBSIDIARIES Notes to Consolidated Financial Statements (1) Summary of Significant Accounting Policies, Continued (m) Investment in Golden Rule (Bermuda) Ltd. The investment in Golden Rule (Bermuda) Ltd. stock is recorded at cost due to less than 20% ownership. (n) 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. (o) Income Taxes 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. (p) 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 $490,000 and $408,000 in fiscal 2003 and 2002, respectively and is recorded as a reduction of sales in the accompanying consolidated financial statements. F-11 CYCLE COUNTRY ACCESSORIES CORP. AND SUBSIDIARIES Notes to Consolidated Financial Statements (1) Summary of Significant Accounting Policies, Continued (q) Earnings Per Share Basic earnings per share ("EPS") is calculated by dividing net income available to common stockholders 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 and the preferred stock was converted. Preferred stock dividends are added back to income since these would not be paid if the preferred stock was converted to common stock. (r) Advertising Advertising consists primarily of television, videos, newspaper and magazine advertisements, product brochures and catalogs, and trade shows. All costs are expensed as incurred or when first utilized. Advertising expense totaled approximately $430,000 and $438,000 in fiscal 2003 and 2002, respectively, and is included in selling, general, and administrative expenses in the accompanying consolidated statements of income. (s) Research and Development Costs Research and development costs are expensed as incurred. Research and development costs incurred during fiscal 2003 and 2002 totaled approximately $128,000 and $178,000, respectively, and are included in selling, general, and administrative expenses in the accompanying consolidated statements of income. (t) 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 $244,000 and $202,000 in fiscal 2003 and 2002, respectively, and are included in selling, general, and administrative expenses in the accompanying consolidated statements of income. (u) 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 2003 and 2002 and at September 30, 2003 and 2002, cash balances held at a financial institution were in excess of federally insured limits. F-12 CYCLE COUNTRY ACCESSORIES CORP. AND SUBSIDIARIES Notes to Consolidated Financial Statements (1) Summary of Significant Accounting Policies, Continued (u) Concentration of Credit Risk, Continued The majority of the Company's sales are credit sales which are made primarily to customers whose ability to pay is dependent upon the industry economics prevailing in the areas where they operate; 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. (v) 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 late 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. 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. (w) Fair Value of Financial Instruments The carrying values of cash and cash equivalents, accounts receivable, taxes receivable, accounts payable and accrued expenses approximates their fair values because of the short- term nature of these instruments. The fair value of the Company's bank notes 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 notes payable and line of credit were originally recorded. F-13 CYCLE COUNTRY ACCESSORIES CORP. AND SUBSIDIARIES Notes to Consolidated Financial Statements (1) Summary of Significant Accounting Policies, Continued (x) Recent Accounting Pronouncements In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity. This Statement establishes accounting standards for the classification and measurement of certain financial instruments with characteristics of both liabilities and equity. It requires certain financial instruments that were previously classified as equity to be classified as assets or liabilities. SFAS No. 150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. Adoption of SFAS No. 150 did not have a material effect on the Company's consolidated financial position or results of operation. (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. 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 17). 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). F-14 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 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 12(a)). The Registration Statement on Form SB-2 (Amendment No. 3) was declared effective by the SEC on November 28, 2001, File No. 333-68570. (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. F-15 CYCLE COUNTRY ACCESSORIES CORP. AND SUBSIDIARIES Notes to Consolidated Financial Statements (3) Acquisition of Assets, Continued 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. 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 ================ F-16 CYCLE COUNTRY ACCESSORIES CORP. AND SUBSIDIARIES Notes to Consolidated Financial Statements (3) Acquisition of Assets, Continued 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 would have been approximately as follows: Revenue $ 13,588,000 Net income 344,000 Earnings per share - basic 0.09 Earnings per share - diluted 0.09 (4) Inventories The components of inventories at September 30 are summarized as follows: 2003 2002 -------------- ------------ Raw materials $ 1,596,414 1,362,821 Work in progress 133,513 151,508 Finished goods 1,294,806 1,452,956 -------------- ------------ Total inventories $ 3,024,733 2,967,285 ============== ============ (5) Prepaid Expenses and Other Prepaid expenses and other at September 30 consisted of the following: 2003 2002 -------------- ------------ Prepaid insurance $ 65,405 40,045 Prepaid promotion - 15,000 Prepaid royalty 700 2,000 Prepaid rent - 5,304 -------------- ------------ Total prepaid expenses and other $ 66,105 62,349 ============== ============ F-17 CYCLE COUNTRY ACCESSORIES CORP. AND SUBSIDIARIES Notes to Consolidated Financial Statements (6) Acquired Intangible Assets Acquired intangible assets consist of the following:
As of September 30, 2003 ------------------------ Weighted- average amortization Gross Carrying Accumulated period Amount Amortization -------------- ------------ ------------ Amortized intangible assets: Covenant not-to-compete agreements 5 $ 78,000 24,433 Patents 11.1 62,668 8,142 ----------- ---------- 140,668 32,575 ----------- ---------- Unamortized intangible assets: Trademarks 109,000 ----------- Total acquired intangible assets $ 249,668 ===========
As of September 30, 2002 ------------------------ Weighted- average amortization Gross Carrying Accumulated period Amount Amortization -------------- ------------ ------------ Amortized intangible assets: Covenant not-to-compete agreements 5 $ 78,000 8,833 Patents 11.1 58,000 2,929 ----------- ---------- 136,000 11,762 ----------- ---------- Unamortized intangible assets: Trademarks 109,000 ----------- Total acquired intangible assets $ 245,000 ===========
Amortization expense totaled $20,813 and $11,762 during fiscal 2003 and 2002, respectively. F-18 CYCLE COUNTRY ACCESSORIES CORP. AND SUBSIDIARIES Notes to Consolidated Financial Statements (6) Acquired Intangible Assets, Continued The estimated future amortization expense for each of the five succeeding years is as follows: Year ending September 30, - ------------------------- 2004 $ 20,813 2005 20,813 2006 20,813 2007 11,979 2008 5,213 (7) Property, Plant, and Equipment Property, plant, and equipment, their estimated useful lives, and related accumulated depreciation at September 30 are summarized as follows: Range of lives in years 2003 2002 -------- ---------- ---------- Land - $ 380,000 380,000 Building 15-40 1,717,857 1,133,471 Plant equipment 7 1,523,242 1,353,755 Tooling and dies 7 670,507 662,969 Vehicles 3-7 638,899 640,151 Office equipment 3-7 335,524 466,870 ---------- ---------- 5,266,029 4,637,216 Less accumulated depreciation (2,335,151) (2,200,060) ---------- ---------- 2,930,878 2,437,156 Construction-in-process - 121,172 ---------- ---------- Total property and equipment $2,930,878 2,558,328 ========== ========== Interest costs of approximately $23,000 were capitalized during the year ended September 30, 2003. F-19 CYCLE COUNTRY ACCESSORIES CORP. AND SUBSIDIARIES Notes to Consolidated Financial Statements (8) Other Assets The components of other assets at September 30 are summarized as follows: 2003 2002 ---------- ------------ Prepaid royalty - long-term $ 13,900 $ 54,459 Unamortized loan costs 24,107 - Investment in Golden Rule (Bermuda), Ltd. 25,000 25,000 ---------- ------------ Total other assets $ 63,007 $ 79,459 ========== ============ During the fourth quarter of fiscal 2003, management of the Company determined that the prepaid royalty was not fully recoverable due to less than anticipated sales of a certain product. As a result, approximately $39,500 of the prepaid royalty's carrying value was reduced and is included in royalty expense in the accompanying consolidated statements of income. (9) Accrued Expenses The components of accrued expenses at September 30 are summarized as follows: 2003 2002 -------------- ------------- Distributor rebate payable $ 215,145 193,765 Accrued salaries and related benefits 120,113 142,937 Accrued warranty expense 39,000 54,156 Accrued real estate tax 27,573 27,090 Accrued fund management fees 5,834 - Accrued interest expense 2,200 2,863 -------------- ------------ Total accrued expenses $ 409,865 420,811 ============== ============ F-20 CYCLE COUNTRY ACCESSORIES CORP. AND SUBSIDIARIES Notes to Consolidated Financial Statements (10) Bank Notes Payable On June 25, 2003, the Company and it's commercial lender amended the original secured credit agreement dated August 21, 2001. Under the terms of the amended secured credit agreement, the Company entered into a note payable for $1,500,000 ("Note One") and a second note payable for $2,250,000 ("Note Two") with the commercial lender, replacing the single, original note entered into under the original secured credit agreement. The Notes are collateralized by all of the Company's assets, are payable in monthly installments from July 2003 until June 2018 for Note One and until June 2008 for Note Two, which include principal and interest at prime + 0.25% (4.5% at September 30, 2003) for Note One and principal and interest at prime + 0.625% (4.625% at September 30, 2003) for Note Two, with a final payment upon maturity on June 25, 2018 for Note One and June 25, 2008 for Note Two. The variable interest rate can never exceed 9.5% or be lower than 4.5% for Note One and can never exceed 8.5% or be lower than 4.5% for Note Two. The monthly payment is $11,473 and $42,324 for Note One and Note Two, respectively, 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 Notes or the Line of Credit described below. At September 30, 2003, $1,482,717 and $2,149,237 for Note One and Note Two, respectively, were outstanding on the Notes. At September 30, 2002, $3,603,281 was outstanding on the Note entered into under the original secured credit agreement. Under the terms of the amended secured credit agreement noted above, the Company has a Line of Credit for the lesser of $1,000,000 or 80% of eligible accounts receivable and 35% of eligible inventory. The original secured credit agreement noted above 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 under the original secured credit agreement 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 0.75% (4.75% at September 30, 2003) and is collateralized by all of the Company's assets. The variable interest rate can never exceed 7% or be lower than 4.75%. The Line of Credit matures on December 31, 2004. At September 30, 2003 and 2002, $420,000 and $400,000, respectively, was outstanding on the Line of Credit. As of September 30, 2003, $580,000 is available on the Line of Credit. F-21 CYCLE COUNTRY ACCESSORIES CORP. AND SUBSIDIARIES Notes to Consolidated Financial Statements (10) Bank Notes Payable, Continued Future maturities of long-term debt are as follows: Year ending September 30, - ------------------------- 2004 $ 484,845 2005 508,697 2006 533,723 2007 559,982 2008 459,876 Thereafter 1,084,831 -------------- $ 3,631,954 ============== 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 except as may be required by the preferred stock issued in June of 2003 (see Note 12 (b)). The Company was in noncompliance with the minimum working capital requirement at December 31, 2002 and March 31, 2003, as well as the term debt coverage ratio at March 31, 2003 and September 30, 2003, and has requested and received waivers from the commercial lender for the respective noncompliance in the first, second and fourth quarters of fiscal 2003. F-22 CYCLE COUNTRY ACCESSORIES CORP. AND SUBSIDIARIES Notes to Consolidated Financial Statements (11) Income Taxes The provision for income taxes for the years ended September 30, 2003 and 2002 consists of the following: 2003 2002 Current tax provision Federal $ 62,313 145,302 State 3,740 1,204 ---------- --------- 66,053 146,506 ---------- --------- Deferred tax provision Federal 46,011 29,861 State 2,762 1,036 ---------- --------- 48,773 30,897 ---------- --------- Total income tax benefit $ 114,826 177,403 ========== ========= Deferred tax assets and liabilities at September 30, are comprised of the following: 2003 2002 Deferred tax assets: ---------- -------- Inventory reserve $ 26,843 30,376 Accrued vacation 19,676 19,128 Accrued warranty 13,775 4,218 Accrued bonus 5,318 3,875 Allowance for uncollectable accounts 3,532 3,533 Deferred profit 2,951 15,121 ---------- -------- Total deferred assets 72,095 76,251 ---------- -------- Deferred tax liability: Depreciation (96,405) (51,788) ---------- --------- Net deferred tax asset (liability) $ (24,310) 24,463 ========== ========= F-23 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 under the following captions: 2003 2002 ------------ ---------- Current assets $ 72,095 76,251 Non-current assets (96,405) (51,788) ------------ ---------- Net deferred tax asset (liability) $ (24,310) 24,463 ============ ========== No valuation allowance has been provided for these deferred tax assets at September 30, 2003 or 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 year ended September 30, 2003 and 2002 is as follows: 2003 2002 Federal statutory tax $ 109,526 34.0% 165,323 34.0% Change in effective tax rate (5,792) (1.8) 5,975 1.2 Non deductible expenses 6,801 2.1 4,687 1.0 State and local income taxes, net of federal tax benefit 4,291 1.3 1,418 0.3 ---------- ---- ---------- ------- Total income tax provision (benefit) $ 114,826 35.6 177,403 36.5 ========== ==== ========== ======= (12) Stockholders' Equity (a) Common Stock The Company has 100,000,000 shares of $0.0001 par value common stock authorized and 3,949,337 and 3,953,000 shares issued and outstanding at September 30, 2003 and 2002, respectively. Of the 3,949,337 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. F-24 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, 2003 and 2002, 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 described above 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. On June 11, 2003, the Company entered into and closed upon a financing agreement whereby the Company's newly authorized preferred shares were issued in exchange for restricted cash. The preferred shares are convertible into the Company's common shares based on an annually set conversion price computed as the average of the five lowest closing prices of the common stock for the twenty-two trading days prior to each anniversary date. The restricted cash investment will be made available to the Company for use for general corporate purposes with the approval of the preferred stockholder. Upon an event of default, the investment may be reclassified as a debt obligation of the Company. This new series of preferred shares requires dividends computed on a simple interest per annum basis using the current prime interest rate plus 0.5% (4.5% at September 30, 2003). Such dividends are cumulative, and are payable in cash or the Company's common stock at the holders option and are to be paid prior to any dividends being paid or declared on the Company's common stock. The Company has 2,000,000 shares of $0.0001 par value preferred stock authorized and 2,000,000 shares issued and outstanding at September 30, 2003. (c) Registration Statement 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, 2003, 304,913 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-25 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, 2003 and 2002: For the year ended September 30, 2003 ------------------------------------- Income Shares Per-share (numerator) (denominator) amount ----------- ------------- --------- Basic EPS Income available to common stockholders $ 186,333 3,951,290 $ 0.05 ========= Effect of Dilutive Securities Convertible preferred stock 20,974 508,906 ---------- --------- Diluted EPS Income available to common stockholders and assumed conversions $ 207,307 4,460,196 $ 0.05 ========== ========= ========= 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 ========== ========= ========= F-26 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, 2003 and 2002 consisted of the following: 2003 2002 ------------- ----------- Income: Gain on sale of equipment $ 15,829 17,010 Truck lease - 6,979 Interest 6,296 5,884 Royalties 220 1,560 Other 1,855 20 ------------ ----------- Total income 24,200 31,453 ------------ ----------- Expense: Interest (192,908) (255,663) Other - (3,207) ------------ ---------- Total expense (192,908) (258,870) ------------ ---------- Total non-operating expense, net $ (168,708) (227,417) ============ ========== (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 2003. 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, 2003 or 2002. F-27 CYCLE COUNTRY ACCESSORIES CORP. AND SUBSIDIARIES Notes to Consolidated Financial Statements (16) Business Concentrations At September 30, 2003, customers with the two largest outstanding accounts receivable balances totaled approximately $424,900 or 39% of the gross accounts receivable. At September 30, 2003, the outstanding accounts receivable balances of customers that exceeded 10% of gross accounts receivable are as follows: Percent of gross Customer Accounts receivable accounts receivable - --------- ------------------- ------------------- A $ 247,300 23% B 177,600 16% 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: Percent of gross Customer Accounts receivable accounts 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 18.4% and 14.9% each of net sales in fiscal 2003 and approximately 21.0% and 13.5% each of net sales in fiscal 2002. 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 2003 and 2002, the Company purchased approximately $5,113,000 and $4,691,000, respectively, of raw materials from one vendor, which represented approximately 58% of materials used in products sold during each year. F-28 CYCLE COUNTRY ACCESSORIES CORP. AND SUBSIDIARIES Notes to Consolidated Financial Statements (17) 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 three operating segments which assemble, manufacture, and sell a variety of products: ATV Accessories, Plastic Wheel Covers, and Lawn and Garden. 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 and light-duty trailers. Lawn and Garden is engaged in the design, assembly, and sale of lawn and garden accessories through our Weekend Warrior subsidiary. These lawn and garden accessories include lawnmowers, spreaders, sprayers, and tillage equipment. The significant accounting policies of the operating segments are the same as those described in Note 1. Sales of snowplow blades comprised approximately 63% of ATV Accessories revenues during each year. Sales of snowplow blades comprised approximately 55% of the Company's consolidated total revenues during each year. The following is a summary of certain financial information related to the two segments: 2003 2002 ---------------- ------------- Total revenues by segment ATV Accessories $ 12,112,067 11,594,058 Plastic Wheel Covers 1,849,391 2,104,953 Lawn and Garden 251,576 - ---------------- ------------- Total revenues by segment 14,213,034 13,699,011 Freight income 154,651 105,657 Sales discounts and allowances (475,692) (441,116) ---------------- ------------ Total combined revenue $ 13,891,993 13,363,552 ================ ============ F-29 CYCLE COUNTRY ACCESSORIES CORP. AND SUBSIDIARIES Notes to Consolidated Financial Statements (17) Segment Information, Continued 2003 2002 --------------- ------------ Operating profit by segment ATV Accessories $ 3,400,105 3,660,092 Plastic Wheel Covers 1,048,480 1,224,747 Lawn and Garden 99,206 - Freight income 154,651 105,657 Sales allowances (475,692) (441,116) Factory overhead (973,283) (1,053,823) Selling, general, and administrative (2,762,626) (2,781,896) Interest income (expense), net (186,612) (249,779) Other income (expense), net 17,904 22,362 Income tax (expense) benefit (114,826) (177,403) --------------- ------------ Net income $ 207,307 308,841 =============== ============ Identifiable assets ATV Accessories $ 5,241,099 5,300,596 Plastic Wheel Covers 784,851 824,066 Lawn and Garden 153,166 - --------------- ------------ Total identifiable assets 6,179,116 6,124,662 Corporate and other assets 3,524,305 1,372,406 --------------- ------------ Total assets $ 9,703,421 7,497,068 =============== ============ Depreciation by segment ATV Accessories $ 96,675 93,766 Plastic Wheel Covers 100,029 94,822 Lawn and Garden 1,807 - Corporate and other 108,973 93,165 --------------- ------------ Total depreciation $ 307,484 281,753 =============== ============ Capital expenditures by segment ATV Accessories $ 293,944 156,156 Plastic Wheel Covers 141,025 124,835 Lawn and Garden 11,688 - Corporate and other 317,753 113,690 --------------- ------------ Total capital expenditures $ 764,410 394,681 =============== ============ F-30 CYCLE COUNTRY ACCESSORIES CORP. AND SUBSIDIARIES Notes to Consolidated Financial Statements (17) Segment Information, Continued The following is a summary of the Company's revenue in different geographic areas during the years ended September 30, 2003 and 2002: 2003 2002 ------------ ------------ United States $ 12,721,018 12,198,758 Other countries 1,170,975 1,164,794 ------------ ------------ Total revenue $ 13,891,993 13,363,552 ============ ============ As of September 30, 2003 and 2002, all of the Company's long-lived assets are located in the United States of America. During fiscal 2003 and 2002, 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 2003 and 2002. (18) 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 $99,400 and $179,800 as of September 30, 2003 and 2002, respectively. F-31 Cycle Country Accessories Corp. and Subsidiaries Condensed Consolidated Balance Sheet December 31, 2003 (Unaudited) Assets Current Assets: Cash and cash equivalents $ 1,058,408 Accounts receivable, net 1,089,772 Inventories 2,663,797 Deferred income taxes 72,095 Prepaid expenses and other 14,749 ------------- Total current assets 4,898,821 ------------- Property, plant, and equipment, net 2,896,216 Restricted cash 1,905,015 Intangible assets, net 214,863 Goodwill 41,700 Other assets 62,014 ------------- Total assets $ 10,018,629 ============= Liabilities and Stockholders' Equity Current Liabilities: Accounts payable $ 936,431 Accrued expenses 725,178 Income taxes payable 233,721 Accrued interest payable 2,300 Current portion of bank notes payable 490,701 ------------- Total current liabilities 2,388,331 ------------- Long-Term Liabilities: Bank notes payable, less current portion 3,022,181 Deferred income taxes 96,405 ------------- Total long-term liabilities 3,118,586 ------------- Total liabilities 5,506,917 ------------- Stockholders' Equity: Preferred stock, $.0001 par value; 20,000,000 shares authorized; no shares issued or outstanding - Preferred stock, $.0001 par value; 2,000,000 shares authorized; 2,000,000 shares issued and outstanding 200 Common stock, $.0001 par value; 100,000,000 shares authorized; 3,956,047 shares issued and outstanding 396 Additional paid-in capital 3,756,927 Retained earnings 754,189 ------------- Total stockholders' equity 4,511,712 ------------- Total liabilities and stockholders' equity $ 10,018,629 ============= See accompanying notes to the condensed consolidated financial statements. F-32 Cycle Country Accessories Corp. and Subsidiaries Condensed Consolidated Statements of Income Three Months Ended December 31, 2003 2002 -------------- -------------- (Unaudited) (Unaudited) Revenues: Net sales $ 5,596,235 $ 4,384,927 Freight income 47,621 29,126 -------------- ------------- Total revenues 5,643,856 4,414,053 -------------- ------------- Cost of goods sold (4,243,958) (3,315,273) -------------- ------------- Gross profit 1,399,898 1,098,780 -------------- ------------- Selling, general, and administrative expenses (733,027) (743,200) -------------- ------------- Income from operations 666,871 355,580 -------------- ------------- Other Income (Expense): Interest expense (43,552) (59,658) Interest income 6,450 890 Miscellaneous 1,653 5,188 -------------- ------------- Total other income (expense) (35,449) (53,580) -------------- ------------- Income before provision for income taxes 631,422 302,000 -------------- ------------- Provision for income taxes (227,312) (108,720) -------------- ------------- Net income 404,110 193,280 Dividends on preferred stock 22,438 - -------------- ------------- Net income available to common stockholders $ 381,672 $ 193,280 ============== ============= Weighted average shares of common stock outstanding: Basic 3,955,344 3,953,000 ============== ============= Diluted 4,675,710 3,953,000 ============== ============= Earnings per common share: Basic $ 0.10 $ 0.05 ============== ============= Diluted $ 0.09 $ 0.05 ============== ============= See accompanying notes to the condensed consolidated financial statements. F-33 Cycle Country Accessories Corp. and Subsidiaries Condensed Consolidated Statements of Cash Flows Three Months Ended December 31, 2003 2002 -------------- ----------- (Unaudited) (Unaudited) Cash Flows from Operating Activities: Net income $ 404,110 $ 193,280 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 84,208 73,892 Amortization 5,203 5,504 Inventory reserve (37,340) - Gain on sale of equipment (1,552) (3,652) (Increase) decrease in assets: Accounts receivable, net (8,918) (77,205) Inventories 398,276 59,314 Taxes receivable 89,507 - Prepaid expenses and other 49,376 13,606 Increase (decrease) in liabilities: Accounts payable (105,614) (61,559) Accrued expenses 321,963 207,656 Income taxes payable 233,721 106,820 Accrued interest payable 100 476 -------------- ----------- Net cash provided by operating activities 1,433,040 517,832 -------------- ----------- Cash Flows from Investing Activities: Purchase of equipment (49,546) (358,903) Deposits into restricted cash (3,117) - Proceeds from sale of equipment 1,552 3,652 -------------- ----------- Net cash used in investing activities (51,111) (355,251) -------------- ----------- Cash Flows from Financing Activities: Payments on bank note payable (119,072) (217,692) Net payments on bank line of credit (420,000) - -------------- ----------- Net cash used in financing activities (539,072) (217,692) -------------- ----------- Net increase (decrease) in cash and cash equivalents 842,857 (55,111) Cash and cash equivalents, beginning of period 215,551 207,162 -------------- ----------- Cash and Cash Equivalents, end of period $ 1,058,408 $ 152,051 ============== =========== See accompanying notes to the condensed consolidated financial statements. F-34 Cycle Country Accessories Corp. and Subsidiaries Condensed Consolidated Statements of Cash Flows Three Months Ended December 31, 2003 2002 -------------- ------------ (Unaudited) (Unaudited) Supplemental disclosures of cash flow information: Cash paid during the period for: Interest $ 43,452 $ 59,182 ============== ============= Income taxes $ (95,916) $ 1,900 ============== ============= Supplemental schedule of non-cash financing activities: Issuance of common stock for payment of employee compensation $ 4,450 $ - ============== ============= Issuance of common stock for payment of dividends on preferred stock $ 22,438 $ - ============== ============= See accompanying notes to the condensed consolidated financial statements. F-35 Cycle Country Accessories Corp. and Subsidiaries Notes to Condensed Consolidated Financial Statements Three Months Ended December 31, 2003 and 2002 (Unaudited) 1. Basis of Presentation: The accompanying unaudited condensed consolidated financial statements for the three months ended December 31, 2003 and 2002 have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission for Form 10-QSB. Accordingly, they do not include all the information and footnotes required by accounting principles generally accepted in the United States of America 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 December 31, 2003 and 2002 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, 2003 consolidated financial statements and related notes included in the Company's Annual Report on Form 10-KSB for the year ended September 30, 2003. 2. 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 December 31, 2003 are summarized as follows: Raw materials $ 1,697,514 Work in progress 78,389 Finished goods 887,894 -------------- Total inventories $ 2,663,797 ============== 3. Accrued Expenses: The major components of accrued expenses at December 31, 2003 are summarized as follows: Distributor rebate payable $ 484,967 Accrued salaries and related benefits 161,802 Accrued warranty expense 39,000 Accrued real estate tax 27,573 Royalties payable 11,836 -------------- Total accrued expenses $ 725,178 ============== F-36 Cycle Country Accessories Corp. and Subsidiaries Notes to Condensed Consolidated Financial Statements Three Months Ended December 31, 2003 and 2002 (Unaudited) 4. 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 and the preferred stock was converted. Preferred stock dividends are added back to income since these would not be paid if the preferred stock were converted to common stock. The following is a reconciliation of the numerators and denominators of the basic and diluted EPS computations for the three months ended December 31, 2003 and 2002:
For the three months ended December 31, 2003 -------------------------------------------- Income Shares Per-share (numerator) (denominator) amount --------------- -------------- ------------- Basic EPS Income available to common stockholders $ 381,672 3,955,344 $ 0.10 ============ Effect of Dilutive Securities Convertible preferred stock 22,438 508,906 Warrants - 211,460 --------------- ------------ Diluted EPS Income available to common stockholders $ 404,110 4,675,710 $ 0.09 ============== ============ ============ For the three months ended December 31, 2002 -------------------------------------------- Income Shares Per-share (numerator) (denominator) amount ------------- ------------- ------------- Basic EPS Income available to common stockholders $ 193,280 3,953,000 $ 0.05 ============ Effect of Dilutive Securities Warrants - - ------------- ------------ Diluted EPS Income available to common stockholders $ 193,280 3,953,000 $ 0.05 ============= ============ ============
F-37 Cycle Country Accessories Corp. and Subsidiaries Notes to Condensed Consolidated Financial Statements Three Months Ended December 31, 2003 and 2002 (Unaudited) 5. 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 three operating segments that assemble, manufacture, and sell a variety of products: ATV Accessories, Plastic Wheel Covers, and Lawn and Garden. ATV Accessories is engaged in the design, assembly, and sale of ATV accessories such as snowplow blades, lawnmowers, spreaders, sprayers, tillage equipment, winch mounts, utility boxes, and oil filters. Plastic Wheel Covers manufactures and sells injection-molded plastic wheel covers for vehicles such as golf carts and light-duty trailers. Lawn and Garden is engaged in the design, assembly, and sale of lawn and garden accessories through our Weekend Warrior subsidiary. These lawn and garden accessories include lawnmowers, spreaders, sprayers, and tillage equipment. 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, 2003. Sales of snowplow blades comprised approximately 76% and 73% of ATV Accessories revenues during the three months ended December 31, 2003 and 2002, respectively. In addition, sales of snowplow blades comprised approximately 71% and 67% of the Company's consolidated total revenues during the three months ended December 31, 2003 and 2002, respectively. Sales of Original Equipment Manufacturer (OEM) products, including John Deere and Land Pride, comprised approximately 10% and 10% of ATV accessories revenues during the three months ended December 31, 2003 and 2002, respectively. In addition, sales of Original Equipment Manufacturer (OEM) products, including John Deere and Land Pride, comprised approximately 10% and 9% of consolidated total revenues during the three months ended December 31, 2003 and 2002, respectively. Sales of wheel covers comprised approximately 8% and 10% of consolidated total revenues during the three months ended December 31, 2003 and 2002, respectively. The following is a summary of certain financial information related to the three segments during the three months ended December 31, 2003 and 2002: 2003 2002 ------------ ------------ Total revenues by segment ATV Accessories $ 5,301,118 $ 4,083,228 Plastic Wheel Covers 424,957 457,991 Lawn and Garden 102,410 - ------------ ------------ Total revenues by segment 5,828,485 4,541,219 Freight income 47,621 29,126 Sales allowances (232,250) (156,292) ------------ ------------ Total revenues $ 5,643,856 $ 4,414,053 ============ ============ Operating profit by segment ATV Accessories $ 1,548,627 $ 1,222,935 Plastic Wheel Covers 224,592 265,711 Lawn and Garden 41,096 - Freight income 47,621 29,126 Sales allowances (232,250) (156,292) Factory overhead (229,870) (262,700) Selling, general, and administrative (732,945) (743,200) Interest income (expense), net (37,102) (58,768) Other income (expense), net 1,653 5,188 Provision for income taxes (227,312) (108,720) ------------ ------------ Net income $ 404,110 $ 193,280 ============ ============ F-38 Cycle Country Accessories Corp. and Subsidiaries Notes to Condensed Consolidated Financial Statements Three Months Ended December 31, 2003 and 2002 (Unaudited) 5. Segment Information, Continued: The following is a summary of the Company's revenue in different geographic areas during the three months ended December 31, 2003 and 2002 2003 2002 ------------------ ------------------ United States of America $ 5,203,737 $ 4,070,798 Other countries 440,119 343,255 ------------------ ------------------- Total revenue $ 5,643,856 $ 4,414,053 ================== ================== As of December 31, 2003, 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 total net revenues, accounted for approximately 24.7%, 15.1%, and 10.0% each of total net revenues during the three months ended December 31, 2003, and approximately 18.4%, 16.4%, and 11.8% each of total net revenues during the three months ended December 31, 2002. Plastic Wheel Covers did not have sales to any individual customer greater than 10% of total net revenues during the three months ended December 31, 2003 or 2002. F-39 No dealer, salesman or other person is authorized to give any information or to make any representations not contained in this prospectus in connection with the offer made hereby, and, if given or made, such information or representations must not be relied upon as having been authorized by Cycle Country. This prospectus does not constitute an offer to sell or a solicitation to an offer to buy the securities offered hereby to any person in any state or other jurisdiction in which such offer or solicitation would be unlawful. Neither the delivery of this prospectus nor any sale made hereunder shall, under any circumstances, create any implication that the information contained herein is correct as of any time subsequent to the date hereof. Until _________ __, 2004 (90 days after the date of this prospectus) all dealers that effect transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealer's obligation to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions. TABLE OF CONTENTS Page ---- Prospectus Summary 3 Cycle Country Accessories Corp. The Offering 4 Summary Financial Data 6 Risk Factors 7 Use of Proceeds 11 Determination of Offering Price 11 Dividend Policy 11 615,000 SHARES Management's Discussion and Analysis 12 Business 25 Management 35 Principal Shareholder 38 selling shareholder 39 Certain Transactions 40 Description of Securities 41 Indemnification 44 PROSPECTUS Plan of Distribution 45 Legal Matters 47 Experts 47 Where You Can Find More Information 48 Financial Statements F-1 April 22, 2004 PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS Article 11 of our Articles of Incorporation includes certain provisions permitted by the Nevada Revised Statutes, which provides for indemnification of directors and officers against certain liabilities. Pursuant to our Articles of Incorporation, our officers and directors are indemnified, to the fullest extent available under Nevada Law, against expenses actually and reasonably incurred in connection with threatened, pending or completed proceedings, whether civil, criminal or administrative, to which an officer or director is, was or is threatened to be made a party by reason of the fact that he or she is or was one of our officers, directors, employees or agents. We may advance expenses in connection with defending any such proceeding, provided the indemnitee undertakes to repay any such amounts if it is later determined that he or she was not entitled to be indemnified by us. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to our directors, officers and controlling persons pursuant to the foregoing provisions or otherwise, we have been advised that in the opinion of the SEC such indemnification is against public policy as expressed in the Securities Act and is therefore, unenforceable. ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION We estimate that expenses in connection with this registration statement will be as follows: SEC registration fee $ 432 Legal fees and expenses $ 7,500 Accounting fees and expenses $ 5,000 Miscellaneous* $ 2,068 ----------- Total $ 15,000 *estimate ITEM 26. 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. 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 11, 2003 Laurus Master Fund, Ltd. 2,000,000 preferred $2,000,000 June 26, 2002 Go Company, LLC 155,000 common $450,000* * The shares were issued in lieu of cash for repayment of $450,000 advanced from Go Company in connection with the registrant's acquisition of Perf-form, Inc. ITEM 27. EXHIBITS Exhibit Number Description 3.1 Articles of Incorporation of Cycle Country Accessories Corp.* 3.2 Bylaws of Cycle Country Accessories Corp.* 4.1 Specimen certificate of the Common Stock of Cycle Country Accessories Corp.* 5.1 Opinion of The Law Office of James G. Dodrill II, P.A. as to legality of securities being registered 10.1 Securities Purchase Agreement entered into by and among Cycle Country Accessories Corp., Cycle Country Accessories Corp. Subsidiary and Laurus Master Fund, Ltd. as of June 11, 2003. 10.2 Registration Rights Agreement entered into by and among Cycle Country Accessories Corp and Laurus Master Fund, Ltd. as of June 11, 2003. 10.3 Warrant issued to Laurus Master Fund, Ltd. on June 9, 2003 23.1 Consent of Tedder, James, Worden & Associates, P.A. regarding Cycle Country Accessories Corp. (a Nevada corporation) 23.2 Consent of The Law Office of James G. Dodrill II, P.A. (included in Exhibit 5.1) * previously filed in connection with the Company's registration statement on Form SB-2 (and amendments thereto) filed August 29, 2001 (file number 333-68570). ITEM 28. UNDERTAKINGS Insofar as indemnification for liabilities arising under the Securities Act of 1933 (the "Act") may be permitted to directors, officers and controlling persons of the Company pursuant to the foregoing provisions, or otherwise, the Company has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy and as expressed in the Act and is, therefore, unenforceable. The Company hereby undertakes to: (1) File, during any period in which it offers or sells securities, a post-effective amendment to this registration statement to: i. Include any prospectus required by Section 10(a)(3) of the Securities Act; ii. Reflect in the prospectus any facts or events which, individually or together, represent a fundamental change in the information in the registration statement. iii. Include any additional or changed material information on the plan of distribution. (2) For determining liability under the Securities Act, treat each post-effective amendment as a new registration statement of the securities offered, and the offering of the securities at that time to be the initial bona fide offering. (3) File a post-effective amendment to remove from registration any of the securities that remain unsold at the end of the offering. (4) For determining any liability under the Securities Act, treat the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the Company under Rule 424(b)(1) or (4) or 497(h) under the Securities Act as part of this registration statement as of the time the Commission declared it effective. (5) For determining any liability under the Securities Act, treat each post-effective amendment that contains a form of prospectus as a new registration statement for the securities offered in the registration statement, and that offering of the securities at that time as the initial bona fide offering of those securities. (6) Insofar as indemnification for liabilities arising under the Securities Act of 1933 (the "Act") may be permitted to our directors, officers and controlling persons pursuant to the foregoing provisions, or otherwise, we have been advised by the Securities and Exchange Commission that such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by us of expenses incurred or paid by one of our directors, officers or controlling persons in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, we will, unless in the opinion of our counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by us is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. Signatures In accordance with the requirements of the Securities Act of 1933, the registrant certifies that it has reasonable ground to believe that it meets all of the requirements for filing on Form SB-2 and authorized this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the city of Milford state of Iowa, on April 22, 2004 CYCLE COUNTRY ACCESSORIES CORP. By: /s/ Ron Hickman ----------------------- Ron Hickman Principal Executive Officer, President and Director In accordance with the requirements of the Securities Act of 1933, this registration statement has been signed by the following persons in the capacities indicated on April 22, 2004. By: /s/ Ron Hickman Principal Executive Officer, --------------------- President and Ron Hickman Director By: /s/ David Davis Principal Financial Officer ---------------------- and David Davis Principal Accounting Officer By: /s/ L.G. Hancher Jr. Director ------------------------- L.G. Hancher Jr. By: /s/ Rod Simonson Director ------------------------- Rod Simonson EX-5.1 3 atcjdopin.txt LEGAL OPINION The Law Office of James G. Dodrill II, P.A. 5800 Hamilton Way Boca Raton, Florida 33496 Tel. (561) 862-0529 Fax: (561) 862-0927 Email: jimdodrill@adelphia.net - -------------------------------------------------------------------------- April 22, 2004 Cycle Country Accessories Corp. 2188 Highway 86 Milford, Iowa 51351 Gentlemen and Ladies: At your request, I have acted as counsel for Cycle Country Accessories Corp., a Nevada corporation (the "Company"), in connection with preparation of the Company's Registration Statement on Form SB-2 (the "Registration Statement") under the Securities Act of 1933, as amended, concerning registration of 615,000 shares of the Company's $.0001 par value common stock (the "Common Stock") to be issued by the Company in exchange for preferred stock or upon the exercise of certain outstanding warrants. I have examined the Certificate Of Incorporation, the Bylaws of the Company and such other certificates, agreements, documents and papers, and have made such other inquiries and investigations of law as I have deemed appropriate and necessary in order to express the opinion set forth in this letter. In these examinations, I have assumed the genuineness of all signatures, the authenticity of all documents submitted to us as originals, photostatic, or conformed copies and the authenticity of the originals of all such latter documents. In addition, as to certain matters I have relied upon certificates and advice from various state authorities and public officials, and have assumed the accuracy of the material and the factual matters contained herein. Subject to the foregoing and on the basis of the aforementioned examinations and investigations, it is my opinion that the shares of Common Stock, upon issuance by the company in exchange for the preferred stock or upon the exercise of the warrants will be legally issued and will constitute fully paid and non-assessable shares of the Company's Common Stock. I hereby consent (a) to be named in the Registration Statement and in the prospectus that constitutes a part of the Registration Statement as acting as counsel in connection with the offering, including with respect to the issuance of securities offered in the offering; and (b) to the filing of this opinion as an exhibit to the Registration Statement. This opinion is to be used solely for the purpose of the registration of the Common Stock and may not be used for any other purpose. Sincerely, Law Office of James G. Dodrill II, PA /s/ James G. Dodrill II, Esq. ------------------------------ By: James G. Dodrill II, Esq. EX-10.1 4 atclauruspurchagt.txt PURCHASE AGREEMENT CYCLE COUNTRY ACCESSORIES CORP. CYCLE COUNTRY ACCESSORIES SUBSIDIARY CORP. LAURUS MASTER FUND, LTD. SECURITIES PURCHASE AGREEMENT June 9 , 2003 TABLE OF CONTENTS Page 1. AGREEMENT TO SELL AND PURCHASE 1 2. FEES AND WARRANTS 1 3. CLOSING, DELIVERY AND PAYMENT 2 3.1 Closing 2 3.2 Delivery 2 4. REPRESENTATIONS AND WARRANTIES OF THE COMPANY 2 5. REPRESENTATIONS AND WARRANTIES OF THE PURCHASERS 5 5.1 Requisite Power and Authority 6 6. COVENANTS OF THE COMPANY 6 6.1 Stop-Orders 6 6.2 Listing 6 6.3 Market Regulations 6 6.4 Reporting Requirements 6 6.5 Use of Funds 6 6.6 Access to Facilities 6 6.7 Taxes 7 6.8 Insurance 7 6.9 Intellectual Property 7 6.10 Confidentiality 7 6.11 Corporate Existence 7 6.12 Reissuance of Securities. 8 6.13 Opinion 8 7. COVENANTS OF THE COMPANY AND PURCHASERS REGARDING INDEMNIFICATION 8 7.1 Company Indemnification 8 7.2 Purchaser's Indemnification 8 7.3 Procedures 8 8. RESTRICTIONS ON TRANSFER 9 9. REGISTRATION RIGHTS 9 9.1 Registration Rights Granted 9 9.2 Non-Registration Events 9 9.3 Expenses 9 9.4 Indemnification and Contribution 10 10. OFFERING RESTRICTIONS 12 11. SECURITY INTEREST 12 12. MISCELLANEOUS 12 12.1 Governing Law 12 12.2 Survival 12 12.3 Successors and Assigns 12 12.4 Entire Agreement 13 12.5 Severability 13 12.6 Amendment and Waiver 13 12.7 Delays or Omissions 13 12.8 Notices 13 12.9 Attorneys' Fees 14 12.10 Titles and Subtitles 14 12.11 Counterparts 14 12.12 Broker's Fees 14 12.13 Indemnification 14 12.14 Construction 14 CYCLE COUNTRY ACCESSORIES CORP. SECURITIES PURCHASE AGREEMENT THIS SECURITIES PURCHASE AGREEMENT (the "Agreement") is made and entered into as of June 9, 2003, by and among Cycle Country Accessories Corp. a Nevada corporation ("Parent") Cycle Country Accessories Corp. Subsidiary, a Nevada corporation and wholly owned subsidiary of Parent (the "Company"), and Laurus Master Fund, Ltd., a Cayman Islands company (the "Purchaser"). RECITALS WHEREAS, the Company has authorized the sale of (i) Series A Convertible Preferred Stock, $0.01 par value (the "Preferred Stock") for the aggregate purchase price of TWO MILLION DOLLARS ($2,000,000) convertible into shares of the Parent's common stock, $0.01 par value per share (the "Common Stock") . WHEREAS, the Parent wishes to issues a warrant (the "Warrant") to the Purchaser to purchase shares of the Parent's 's Common Stock in connection with Purchaser's purchase of the Preferred Stock; WHEREAS, Purchaser desires to purchase the Preferred Stock and Warrant on the terms and conditions set forth herein; and WHEREAS, the Company desires to issue and sell the Preferred Stock and Warrant to the Purchaser on the terms and conditions set forth herein. AGREEMENT NOW, THEREFORE, in consideration of the foregoing recitals and the mutual promises, representations, warranties and covenants hereinafter set forth and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: 1. AGREEMENT TO SELL AND PURCHASE. Pursuant to the terms and conditions set forth in this Agreement, on the Closing Date (as defined in Section 3), the Company agrees to sell to the Purchaser, and the Purchaser hereby agrees to purchase from the Company Preferred Stock in the amount of $2,000,000, convertible in accordance with the terms thereof into shares of the Parent's Common Stock. The Preferred Stock purchased on the Closing Date shall be known as the "Offering." The Certificate of Designations for the Preferred Stock (the "Certificate of Designations") is annexed hereto as Exhibit A. Collectively, the Preferred Stock and Warrant (as defined in Section 2) and Common Stock issuable upon conversion of the Preferred Stock and exercise of the Warrant are referred to as the "Securities." 2. FEES AND WARRANT. (a) The Parent will issue and deliver to the Purchaser a Warrant to purchase 40,000 shares of its Common Stock in connection with the Offering (the "Warrant") pursuant to Section 1 hereof. The Warrant must be delivered on the Closing Date. A form of Warrant is annexed hereto as Exhibit B. All the representations, covenants, warranties, undertakings, and indemnification, and other rights made or granted to or for the benefit of the Purchaser by the Parent and the Company are hereby also made and granted in respect of the Warrant and shares of the Parent's Common Stock issuable upon exercise of the Warrant (the "Warrant Shares"). (b) The Parent shall reimburse the Purchaser for its reasonable legal fees for services rendered to the Purchaser in preparation of this Agreement and the Related Agreements. (c) The Company will pay a cash fee in the amount of four and one quarter percent (4.25%) of the aggregate gross purchase price to be paid to the Company from the sale of the Preferred Stock in the Offering (the "Fund Management Fee") to Laurus Capital Management, L.L.C., a Delaware limited liability company. The Fund Management Fee must be paid on the Closing Date. The aforementioned Fund Management Fee and legal fees will be payable at the Closing out of funds held pursuant to a Funds Escrow Agreement to be entered into by the Company, Purchaser and an Escrow Agent. (d) For as long as the Purchaser holds the Preferred Stock, on each anniversary of the date hereof, the Parent shall pay an additional fee to the Purchaser equal to one percent (1%) of the aggregate gross purchase price to be paid to the Company from the sale of the Preferred Stock in the Offering. 3. CLOSING, DELIVERY AND PAYMENT. 3.1 Closing. Subject to the terms and conditions herein, the closing of the transactions contemplated hereby (the "Closing"), which closing is comprised of Purchaser's purchase of the Preferred Stock in the aggregate principal amount of $2,000,000, shall take place on the date hereof or at such other time or place as the Company and Purchaser may mutually agree (such date is hereinafter referred to as the "Closing Date"). 3.2 Delivery. At the Closing, subject to the terms and conditions hereof, the Company will deliver to the Purchaser the Certificate of Designations in the form attached as Exhibit A representing the principal amount of $2,000,000 and a Common Stock Purchase Warrant in the form attached as Exhibit B in the Purchaser's name representing Warrant Shares and the Purchaser will deliver to the Company $2,000,000, less fees and expenses by certified funds or wire transfer made payable to the order of the Company, cancellation of indebtedness or any combination of the foregoing. 4. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. Each of the Parent and the Company hereby jointly and severally represents and warrants, as applicable, to the Purchaser as of the date of this Agreement as set forth below except as disclosed in the Parent's filings under the Securities Exchange Act of 1934 (collectively, the "Exchange Act Filings"), or the Schedules hereto. 4.1 Each of the Parent and the Company is a corporation duly incorporated and validly existing under the laws of the jurisdiction of its incorporation and duly qualified and in good standing in every other state or jurisdiction in which the nature of the Parent's or the Company's business requires such qualification. 4.2 The execution, delivery and performance of this Agreement, the Fund Escrow Agreement, the Stock Pledge Agreement and the Pledge and Security Agreement (the "Related Agreements") (i) have been duly authorized, (ii) are not in contravention of such either the Parent's or the Company's certificate of incorporation, by-laws or of any indenture, agreement or undertaking to which such Parent or Company is a party or by which such Parent or Company is bound and (iii) are within such Parent or Company's corporate powers. 4.3 This Agreement and the Related Agreements executed and delivered by each of the Parent and the Company constitute their legal, valid and binding obligations, enforceable in accordance with their terms, except (a) as limited by applicable bankruptcy, insolvency, reorganization, moratorium or other laws of general application affecting enforcement of creditors' rights, and (b) as limited by general principles of equity that restrict the availability of equitable and legal remedies. 4.4 Based upon the Employee Retirement Income Security Act of 1974 ("ERISA"), and the regulations and published interpretations thereunder each of the the Parent and the Company: (i) have not engaged in any Prohibited Transactions as defined in Section 406 of ERISA and Section 4975 of the Internal Revenue Code, as amended; (ii) have met all applicable minimum funding requirements under Section 302 of ERISA in respect of its plans; (iii do not have any knowledge of any event or occurrence which would cause the Pension Benefit Guaranty Corporation to institute proceedings under Title IV of ERISA to terminate any employee benefit plan(s); (iv) do not have any fiduciary responsibility for investments with respect to any plan existing for the benefit of persons other than Companies' employees; and (v) have not withdrawn, completely or partially, from any multi-employer pension plan so as to incur liability under the Multiemployer Pension Plan Amendments Act of 1980. 4.5 Except as set forth on Schedule 4.5, each of the Parent and the Company is solvent, able to pay its debts as they mature, has capital sufficient to carry on its business and all businesses in which such Parent or the Company is about to engage and the fair saleable value of its assets (calculated on a going concern basis) is in excess of the amount of its liabilities. 4.6 There is no pending or threatened litigation, action or proceeding which is probable of having a Material Adverse Effect. 4.7 All balance sheets and income statements which have been delivered to Laurus fairly, accurately and properly state each of the Parent and the Company's financial condition on a basis consistent with that of previous financial statements and there has been no material adverse change in the either the Parent's or Company's financial condition as reflected in such statements since the date thereof and such statements do not fail to disclose any fact or facts which might have a Material Adverse Effect on the Parent's or the Company's financial condition. 4.8 Each of the Parent and the Company possesses all of the Intellectual Property necessary to conduct its respective business. There has been no assertion or claim of violation or infringement with respect to any Intellectual Property. 4.9 Neither this Agreement, the exhibits and schedules hereto, the Related Agreements nor any other document delivered by the Parent and the Company to Laurus or its attorneys or agents in connection herewith or therewith or with the transactions contemplated hereby or thereby, contain any untrue statement of a material fact nor omit to state a material fact necessary in order to make the statements contained herein or therein, in light of the circumstances in which they are made, not misleading. Any financial projections and other estimates provided to Laurus by the Parent or the Company were based on the such Parent's or Company's experience in the industry and on assumptions of fact and opinion as to future events which the Parent or the Company, at the date of the issuance of such projections or estimates, believed to be reasonable. As of the date hereof no facts have come to the attention of the Company that would, in its opinion, require the Parent or the Company to revise or amplify in any material respect the assumptions underlying such projections and other estimates or the conclusions derived therefrom. 4.10 The offer, sale and issuance of the shares of the Parent's Common Stock issuable upon the conversion of the Preferred Stock and the Warrant will be registered under the Company's Registration Statement on Form SB-2 and filed with the Securities and Exchange Commission. As such, the Preferred Stock, the Warrant and the shares of Common Stock issuable upon conversion of the Preferred Stock will be freely tradeable and the certificates evidencing those securities will not have restrictive legends when such registration statement is declared effective by the SEC.. 4.11 The Common Stock of the Parent is registered pursuant to Section 12(b) or 12(g) of the Exchange Act and the Company has timely filed all proxy statements, reports, schedules, forms, statements and other documents required to be filed by it under the Exchange Act. The Parent has furnished Laurus with copies of (i) its Annual Report on Form 10-K for the fiscal year ended December 31, 2002 and (ii) its Quarterly Reports on Form 10-Q for the fiscal quarters ended March 31, 2003 (collectively, the "SEC Reports"). Each SEC Report was, at the time of its filing, in substantial compliance with the requirements of its respective form and none of the SEC Reports, nor the financial statements (and the notes thereto) included in the SEC Reports, as of their respective filing dates, contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. The financial statements of the Parent included in the SEC Reports comply as to form in all material respects with applicable accounting requirements and the published rules and regulations of the Commission or other applicable rules and regulations with respect thereto. Such financial statements have been prepared in accordance with GAAP applied on a consistent basis during the periods involved (except (i) as may be otherwise indicated in such financial statements or the notes thereto or (ii) in the case of unaudited interim statements, to the extent they may not include footnotes or may be condensed) and fairly present in all material respects the financial position of the Parent as of the dates thereof and the results of operations and cash flows for the periods then ended (subject, in the case of unaudited statements, to normal year-end audit adjustments). 4.12 The Parent's Common Stock is listed for trading on the Over-the-Counter Bulletin Board("OTCBB"). Upon completion of the several transactions with Laurus, the Company's Common Stock will satisfy all requirements for initial listing on the American Stock Exchange . The Company has determined that as of June __, 2003 the Common Stock does not meet all requirements for such listing. 4.13 Upon the SEC declaring the Parent's registration statement registering the Securities on Form SB-2 effective, the Securities will be freely tradeable and the shares evidencing the Common Stock issuable under the Securities will be free of restrictive legends. The Parent will not issue any stop transfer order or other order impeding the sale and delivery of any of the Securities. 4.14 Each of the Parent and the Company understands the nature of the Securities being sold hereby and recognizes that they may have a potential dilutive effect. The Parent specifically acknowledges that its obligation to issue the shares of Common Stock upon conversion of the Preferred Stock and exercise of the Warrant is binding upon the Parent and enforceable regardless of the dilution such issuance may have on the ownership interests of other shareholders of the Parent. 4.15 There is no agreement that has not been filed with the SEC as an exhibit to a registration statement or other applicable form the breach of which could have a material and adverse effect as to the Parent and its subsidiaries, or would prohibit or otherwise interfere with the ability of the Parent or the Company to enter into and perform any of their obligations under this Agreement in any material respect. 5. REPRESENTATIONS AND WARRANTIES OF THE PURCHASER. The Purchaser hereby represents and warrants to each of the Parent and the Company with respect to itself or himself as follows (such representations and warranties do not lessen or obviate the representations and warranties of the Parent or the Company set forth in this Agreement): 5.1 Requisite Power and Authority. Purchaser has all necessary power and authority under all applicable provisions of law to execute and deliver this Agreement and the Related Agreements and to carry out their provisions. All action on Purchaser's part required for the lawful execution and delivery of this Agreement and the Related Agreements have been or will be effectively taken prior to the Closing. Upon their execution and delivery, this Agreement and the Related Agreements will be valid and binding obligations of Purchaser, enforceable in accordance with their terms, except (a) as limited by applicable bankruptcy, insolvency, reorganization, moratorium or other laws of general application affecting enforcement of creditors' rights, and (b) as limited by general principles of equity that restrict the availability of equitable remedies. 5.2 Purchaser Bears Economic Risk. Purchaser has substantial experience in evaluating and investing in private placement transactions of securities in companies similar to the Company so that it is capable of evaluating the merits and risks of its investment in the Company and has the capacity to protect its own interests. 5.3 Purchaser Can Protect Its Interest. Purchaser represents that by reason of its, or of its management's, business or financial experience, Purchaser has the capacity to protect its own interests in connection with the transactions contemplated in this Agreement, and the Related Agreements. Further, Purchaser is aware of no publication of any advertisement in connection with the transactions contemplated in the Agreement. 6. ADDITIONAL COVENANTS. Each of the Parent and the Company jointly and severally covenants and agrees, as applicable, with the Purchaser as follows: 6.1 Stop-Orders. The Parent will advise the Purchaser, promptly after it receives notice of issuance by the Securities and Exchange Commission (the "SEC"), any state securities commission or any other regulatory authority of any stop order or of any order preventing or suspending any offering of any securities of the Parent, or of the suspension of the qualification of the Common Stock of the Parent for offering or sale in any jurisdiction, or the initiation of any proceeding for any such purpose. 6.2 Listing. The Parent will maintain the listing of its Common Stock on theOTCBB or the American Stock Exchange (the "Principal Market"), and will comply in all material respects with the Parent's reporting, filing and other obligations under the bylaws or rules of the Principal Market. The Parent will provide the Purchaser copies of all notices it receives notifying the Parent of the threatened and actual delisting of the Common Stock from any Principal Market. 6.3 Market Regulations. The Parent shall notify the SEC, and any Principal Market and applicable state authorities, in accordance with their requirements, of the transactions contemplated by this Agreement, and shall take all other necessary action and proceedings as may be required and permitted by applicable law, rule and regulation, for the legal and valid issuance of the Securities to Purchaser and promptly provide copies thereof to Purchaser. 6.4 Reporting Requirements. The Parent will timely file with the SEC all reports required to be filed pursuant to the Exchange Act and refrain from terminating its status as an issuer required by the Exchange Act to file reports thereunder even if the Exchange Act or the rules or regulations thereunder would permit such termination. 6.5 Use of Funds. Each of the Parent and the Company agrees that it will use the proceeds of the sale of the Preferred Stock and Warrant for general corporate purposes only, in the ordinary course of its business and consistent with past practice. 6.6 Access to Facilities. Each of the Parent and the Company will permit any representatives designated by the Purchaser (or any transferee of the Purchaser), so long as such person holds any Securities upon reasonable notice and during normal business hours, at such person's expense and accompanied by a representative of the Parent or the Company, to (a) visit and inspect any of the properties of the Parent or the Company, (b) examine the corporate and financial records of the Parent or the Company (unless such examination is not permitted by federal, state or local law or by contract) and make copies thereof or extracts therefrom and (c) discuss the affairs, finances and accounts of any such corporations with the directors, officers and independent accountants of the Parent or the Company. 6.7 Taxes. Each of the Parent and the Company will promptly pay and discharge, or cause to be paid and discharged, when due and payable, all lawful taxes, assessments and governmental charges or levies imposed upon the income, profits, property or business of the Parent and the Company; provided, however, that any such tax, assessment, charge or levy need not be paid if the validity thereof shall currently be contested in good faith by appropriate proceedings and if the Parent or the Company shall have set aside on its books adequate reserves with respect thereto, and provided, further, that the Parent and the Company will pay all such taxes, assessments, charges or levies forthwith upon the commencement of proceedings to foreclose any lien which may have attached as security therefor. 6.8 Insurance. Each of the Parent and the Company will keep its assets which are of an insurable character insured by financially sound and reputable insurers against loss or damage by fire, explosion and other risks customarily insured against by companies in the Parent's or the Company's line of business, in amounts sufficient to prevent the Parent or the Company from becoming a co-insurer and not in any event less than 100% of the insurable value of the property insured; and each of the Parent and the Company will maintain, with financially sound and reputable insurers, insurance against other hazards and risks and liability to persons and property to the extent and in the manner customary for companies in similar businesses similarly situated and to the extent available on commercially reasonable terms. 6.9 Intellectual Property. Each of the Parent and the Company shall maintain in full force and effect its corporate existence, rights and franchises and all licenses and other rights to use Intellectual Property owned or possessed by it and reasonably deemed to be necessary to the conduct of its business. 6.10 Confidentiality. Each of the Parent and the Company agrees that it will not disclose, and will not include in any public announcement, the name of the Purchaser, unless expressly agreed to by the Purchaser or unless and until such disclosure is required by law or applicable regulation, including the federal and state securities laws and then only to the extent of such requirement. 6.11 Corporate Existence. Each of the Parent and the Company shall maintain its corporate existence, and will not liquidate, dissolve or effect a recapitalization, reclassification or reorganization in any form of transaction. In addition, the each of the Parent and the Company shall not sell all or substantially all of the Parent's or the Company's assets, except in the event of a merger or consolidation or sale or transfer of all or substantially all of the Parent's or the Company's assets, where the surviving or successor entity in such transaction (i) assumes the Parent's or the Company's obligations hereunder and the Related Agreements and (ii) is a publicly traded company whose common stock is quoted or listed on a Principal Market. 6.12 Reissuance of Securities. At the Closing and upon the issuance of shares of Common Stock following conversion of the Preferred Stock and exercise of the Warrants, each of the Parent and the Company, as applicable agrees to issue certificates representing the Securities without any restrictive legends. The Parent agrees to cooperate with the Purchaser in connection with all resales of the Securities and provide legal opinions necessary to allow such resales. 6.13 Opinion. On the Closing Date, the Parent will deliver to the Purchaser an legal opinion acceptable to the Purchaser from the Parent's legal counsel in the form annexed hereto as Exhibit C. The Parent will provide, at the Parent's expense, such other legal opinions in the future as are reasonably necessary for the conversion of the Preferred Stock and exercise of the Warrants. 7. COVENANTS OF THE PARENT, COMPANY AND PURCHASER REGARDING INDEMNIFICATION. 7.1 Parent and Company Indemnification. Each of the Parent and the Company jointly and severally agrees to indemnify, hold harmless, reimburse and defend Purchaser, each of Purchaser's officers, directors, agents, affiliates, control persons, and principal shareholders, against any claim, cost, expense, liability, obligation, loss or damage (including reasonable legal fees) of any nature, incurred by or imposed upon the Purchaser which results, arises out of or is based upon (i) any misrepresentation by Parent or the Company or breach of any warranty by the Parent or the Company in this Agreement or in any exhibits or schedules attached hereto or any Related Agreement, or (ii) any breach or default in performance by Parent or the Company of any covenant or undertaking to be performed by the Parent or the Company hereunder, or any other agreement entered into by the Parent, the Company and Purchaser, as applicable, relating hereto. 7.2 Purchaser's Indemnification. Purchaser agrees to indemnify, hold harmless, reimburse and defend each of the Parent and the Company and each of their officers, directors, agents, affiliates, control persons and principal shareholders, at all times against any claim, cost, expense, liability, obligation, loss or damage (including reasonable legal fees) of any nature, incurred by or imposed upon the Parent or the Company which results, arises out of or is based upon (i) any misrepresentation by Purchaser or breach of any warranty by Purchaser in this Agreement or in any exhibits or schedules attached hereto or any Related Agreement; or (ii) any breach or default in performance by Purchaser of any covenant or undertaking to be performed by Purchaser hereunder, or any other agreement entered into by the Parent, the Company and Purchaser, as applicable, relating hereto. 7.3 Procedures. The procedures and limitations set forth in Section 9.6 shall apply to the indemnifications set forth in Sections 7.1 and 7.2 above. 8. INTENTIONALLY OMITTED.. 9. OFFERING RESTRICTIONS. Except as previously disclosed in the SEC Reports or stock or stock options granted to employees or directors of the Company; or equity or debt issued in connection with an acquisition of a business or assets by the Parent or the Company; or the issuance by the Parent or the Company of stock in connection with the establishment of a joint venture partnership or licensing arrangement (these exceptions hereinafter referred to as the "Excepted Issuances"), the neither the Parent nor the Company will issue any securities with a variable/floating conversion feature which are or could be (by conversion or registration) free-trading securities prior to the repayment in full or conversion in full of the Preferred Stock. 10. RESTRICTED CASH ACCOUNT. As a condition of Closing, the Company will place $2,000,000 in a restricted account at a bank reasonably acceptable to the Purchaser, and maintain such amount in the restricted account for as long as the Purchaser shall hold any Preferred Shares. The account shall be pledged to Purchaser as security for the performance of the Parent's obligations hereunder. 11. MISCELLANEOUS. 11.1 Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of New York, without regard to principles of conflicts of laws. Any action brought by either party against the other concerning the transactions contemplated by this Agreement shall be brought only in the state courts of New York or in the federal courts located in the state of New York; provided, however that the Purchaser may choose to waive this provision and bring an action outside the state of New York. Both parties and the individuals executing this Agreement and other agreements on behalf of the Company agree to submit to the jurisdiction of such courts and waive trial by jury. The prevailing party shall be entitled to recover from the other party its reasonable attorney's fees and costs. In the event that any provision of this Agreement or any other agreement delivered in connection herewith is invalid or unenforceable under any applicable statute or rule of law, then such provision shall be deemed inoperative to the extent that it may conflict therewith and shall be deemed modified to conform with such statute or rule of law. Any such provision which may prove invalid or unenforceable under any law shall not affect the validity or enforceability of any other provision of any agreement. 11.2 Survival. The representations, warranties, covenants and agreements made herein shall survive any investigation made by the Purchaser and the closing of the transactions contemplated hereby. All statements as to factual matters contained in any certificate or other instrument delivered by or on behalf of the Company pursuant hereto in connection with the transactions contemplated hereby shall be deemed to be representations and warranties by the Company hereunder solely as of the date of such certificate or instrument. 11.3 Successors and Assigns. Except as otherwise expressly provided herein, the provisions hereof shall inure to the benefit of, and be binding upon, the successors, assigns, heirs, executors and administrators of the parties hereto and shall inure to the benefit of and be enforceable by each person who shall be a holder of the Securities from time to time. 11.4 Entire Agreement. This Agreement, the exhibits and schedules hereto, the Related Agreements and the other documents delivered pursuant hereto constitute the full and entire understanding and agreement between the parties with regard to the subjects hereof and no party shall be liable or bound to any other in any manner by any representations, warranties, covenants and agreements except as specifically set forth herein and therein. 11.5 Severability. In case any provision of the Agreement shall be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby. 11.6 Amendment and Waiver. (a) This Agreement may be amended or modified only upon the written consent of the Company and the Purchaser. (b) The obligations of the Company and the rights of the holders of the Securities under the Agreement may be waived only with the written consent of such holders of Securities. The rights of the holder of Preferred Stock may be waived only with the written consent of such holder. 11.7 Delays or Omissions. It is agreed that no delay or omission to exercise any right, power or remedy accruing to any party, upon any breach, default or noncompliance by another party under this Agreement or the Related Agreements, shall impair any such right, power or remedy, nor shall it be construed to be a waiver of any such breach, default or noncompliance, or any acquiescence therein, or of or in any similar breach, default or noncompliance thereafter occurring. It is further agreed that any waiver, permit, consent or approval of any kind or character on the Purchaser's part of any breach, default or noncompliance under this Agreement, the Preferred Stock or the Related Agreements or any waiver on such party's part of any provisions or conditions of the Agreement, the Certificate of Designations or the Related Agreements must be in writing and shall be effective only to the extent specifically set forth in such writing. All remedies, either under this Agreement, the Preferred Stock or the Related Agreements, by law or otherwise afforded to any party, shall be cumulative and not alternative. 11.8 Notices. All notices required or permitted hereunder shall be in writing and shall be deemed effectively given: (a) upon personal delivery to the party to be notified, (b) when sent by confirmed telex or facsimile if sent during normal business hours of the recipient, if not, then on the next business day, (c) five days after having been sent by registered or certified mail, return receipt requested, postage prepaid, or (d) one day after deposit with a nationally recognized overnight courier, specifying next day delivery, with written verification of receipt. All communications shall be sent to the Company at the address as set forth on the signature page hereof and to the Purchaser at the address set forth on the signature page hereto for such Purchaser, with a copy in the case of the Purchaser to John E. Tucker, Esq., 152 West 57th Street, 4th Floor, New York, NY 10019, facsimile number (212) 541-4434, or at such other address as the Company or the Purchaser may designate by ten days advance written notice to the other parties hereto. 11.9 Attorneys' Fees. In the event that any suit or action is instituted to enforce any provision in this Agreement, the prevailing party in such dispute shall be entitled to recover from the losing party all fees, costs and expenses of enforcing any right of such prevailing party under or with respect to this Agreement, including, without limitation, such reasonable fees and expenses of attorneys and accountants, which shall include, without limitation, all fees, costs and expenses of appeals. 11.10 Titles and Subtitles. The titles of the sections and subsections of the Agreement are for convenience of reference only and are not to be considered in construing this Agreement. 11.11 Counterparts. This Agreement may be executed by facsimile signatures and in any number of counterparts, each of which shall be an original, but all of which together shall constitute one instrument. 11.12 Broker's Fees. Each party hereto represents and warrants that no agent, broker, investment banker, person or firm acting on behalf of or under the authority of such party hereto is or will be entitled to any broker's or finder's fee or any other commission directly or indirectly in connection with the transactions contemplated herein, except as specified herein with respect to the Purchaser. Each party hereto further agrees to indemnify each other party for any claims, losses or expenses incurred by such other party as a result of the representation in this Section 12.12 being untrue. 11.13 Indemnification. The Company shall indemnify the Purchaser for any losses or expenses incurred by the Purchaser in connection with any claims brought against the Purchaser by any third party (including any other stockholder of the Company) as a result of the transactions contemplated by this Agreement, other than for a breach of representation or warranty made by the Purchaser herein. 11.14 Construction. Each party acknowledges that its legal counsel participated in the preparation of this Agreement and, therefore, stipulates that the rule of construction that ambiguities are to be resolved against the drafting party shall not be applied in the interpretation of this Agreement to favor any party against the other. IN WITNESS WHEREOF, the parties hereto have executed the SECURITIES PURCHASE AGREEMENT as of the date set forth in the first paragraph hereof. COMPANY: CYCLE COUNTRY ACCESSORIES CORP. By: Name: Title: Address: PURCHASER: LAURUS MASTER FUND, LTD. By: Name: Address: LAURUS MASTER FUND, LTD. c/o Ironshore Corporate Services Ltd. P.O. Box 1234 G.T., Queensgate House, South Church Street Grand Cayman, Cayman Islands SUBSIDIARY By: Name: Title: Address: LIST OF EXHIBITS Form of Offering Certificate of Designations Exhibit A Form of Warrant Exhibit B Form of Opinion Exhibit C EXHIBIT A CERTIFICATE OF DESIGNATIONS CYCLE COUNTRY ACCESSORIES SUBSIDIARY CORP. CERTIFICATE TO SET FORTH DESIGNATIONS, VOTING POWERS, PREFERENCES, LIMITATIONS, RESTRICTIONS, AND RELATIVE RIGHTS OF SERIES A CONVERTIBLE PREFERRED STOCK, $.0001 PAR VALUE PER SHARE It is hereby certified that: I. The name of the corporation is Cycle Country Accessories Subsidiary (the "Corporation"), a Nevada corporation and wholly owned subsidiary of Cycle Country Accessories Corp. (the "Parent") II. The certificate of incorporation of the Corporation, authorizes the issuance of 2,000,000 shares of Preferred Stock, $.0001 par value per share, and expressly vests in the Board of Directors of the Corporation the authority provided therein to issue all of said shares in one or more Series by resolution or resolutions to establish the designation and number and to fix the relative rights and preferences of each series to be issued. III. The Board of Directors of the Corporation, pursuant to the authority expressly vested in it, has adopted the following resolution creating a class of Series A Convertible Preferred Stock: RESOLVED, that a portion of the authorized shares of Preferred Stock of the Corporation shall be designated as a separate series possessing the rights and preferences set forth below: 1. Designation: Number of Shares. The designation of said series of Preferred Stock shall be Series A Cumulative Convertible Preferred Stock (the "Series A Preferred Stock"). The number of shares of Series A Preferred Stock shall be 2,000,000. Each share of Series A Preferred Stock shall have a stated value equal to $1 (as adjusted for any stock dividends, combinations or splits with respect to such shares) (the "Stated Value"), and $.0001 par value. 2. Ranking. The Series A Preferred Stock shall rank (i) prior to the Corporation's common stock, par value $.0001 per share ("Common Stock"); (ii) prior to any class or series of capital stock of the Corporation hereafter created (unless wheresuch class or series of capital stock specifically, by its terms, ranks senior to or Pari Passu with the Series A Preferred Stock); (iii) on a parity with any class or series of capital stock of the Corporation hereafter created specifically ranking, by its terms, on parity with the Series A Preferred Stock ("Pari Passu Securities"); and (iv) junior to any class or series of capital stock of the Corporation hereafter created specifically ranking, by its terms, senior to the Series A Preferred Stock ("Senior Securities"), in each case as to distribution of assets upon liquidation, dissolution or winding up of the Corporation, whether voluntary or involuntary. 3. Dividends. (a) The Holders of outstanding shares of Series A Preferred Stock shall be entitled to receive preferential dividends in cash out of any funds of the Parent before any dividend or other distribution will be paid or declared and set apart for payment on any shares of any Common Stock, or other class of stock presently authorized or to be authorized (the Common Stock, and such other stock being hereinafter collectively the "Junior Stock") at the "base rate" or the "prime rate" published in the Wall Street Journal from time to time (the "Prime Rate") plus one and a half percent (0.5%) simple interest per annum on the Stated Value per share of Series A Preferred Stock then outstanding (as adjusted pursuant to Section 4 below) (the "Monthly Dividend Amount"). The Parent shall make such payments of the Monthly Dividend Amount commencing July 1, 2003 and on the first business day of each consecutive calendar month thereafter. Dividend payments may be made in cash at the rate of 102% Monthly Dividend Amount, or in fully paid and non assessable registered shares of the Parent's Common Stock at the Conversion Price (as defined herein) then in effect, and as long as the Conversion Price is below the Market Price the issuance of such shares shall constitute full payment of such dividend. The Prime Rate shall be increased or decreased, as the case may be, as such Prime Rate shall fluctuate; each change to be effective on the date of such fluctuation. (b) The dividends on the Series A Preferred Stock at the rates provided above shall be cumulative whether or not earned so that, if at any time full cumulative dividends at the rate aforesaid on all shares of the Series A Preferred Stock then outstanding from the date from and after which dividends thereon are cumulative to the end of the monthly dividend period next preceding such time shall not have been paid or declared and set apart for payment, or if the full dividend on all such outstanding Series A Preferred Stock for the then current dividend period shall not have been paid or declared and set apart for payment, the amount of the deficiency shall be paid or declared and set apart for payment (but without interest thereon) before any sum shall be set apart for or applied by the Parent, the Corporation or a subsidiary of the Corporation to the purchase, redemption or other acquisition of the Series A Preferred Stock or Parri Passu Securities and before any dividend or other distribution shall be paid or declared and set apart for payment on any Junior Stock and before any sum shall be set aside for or applied to the purchase, redemption or other acquisition of Junior Stock. (c) Dividends on all shares of the Series A Preferred Stock shall begin to accrue and be cumulative from and after the date of issuance thereof. A dividend period shall be deemed to commence on the day following a monthly dividend payment date herein specified and to end on the next succeeding monthly dividend payment date herein specified. 4. Liquidation Rights. (a) Upon the dissolution, liquidation or winding-up of the Corporation, whether voluntary or involuntary, the Holders of the Series A Preferred Stock shall be entitled to receive before any payment or distribution shall be made on the Junior Stock, out of the assets of the Corporation available for distribution to stockholders, the Stated Value per share of Series A Preferred Stock then outstanding and all accrued and unpaid dividends to and including the date of payment thereof. Upon the payment in full of all amounts due to Holders of the Series A Preferred Stock, the holders of the Common Stock of the Corporation and any other class of Junior Stock shall receive all remaining assets of the Corporation legally available for distribution. If the assets of the Corporation available for distribution to the holders of the Series A Preferred Stock shall be insufficient to permit payment in full of the amounts payable as aforesaid to the holders of Series A Preferred Stock upon such liquidation, dissolution or winding-up, whether voluntary or involuntary, then all such assets of the Corporation shall be distributed ratably among the holders of the Series A Preferred Stock. (b) Neither the purchase nor the redemption by the Corporation of shares of any class of stock nor the merger or consolidation of the Corporation with or into any other corporation or corporations nor the sale or transfer by the Corporation of all or any part of its assets shall be deemed to be a liquidation, dissolution or winding-up of the Corporation for the purposes of this Section 4. 5. Conversion into Common Stock. Shares of Series A Preferred Stock shall have the following conversion rights and obligations: (a) Subject to the further provisions of this Section 5, each holder of shares of Series A Preferred Stock shall have the right at any time commencing after the issuance of the Series A Preferred Stock to such holder to convert such shares into fully paid and non-assessable shares of the Parent's Common Stock (as defined in Section 5(i) below) at the Conversion Price provided in Section 5(b) below. All issued or accrued but unpaid dividends may be converted at the election of the holder simultaneously with the conversion of the Series A Preferred Stock being converted. Subject to the last sentence of this Section 5(a), no holder of Series A Preferred Stock shall be entitled to convert, nor shall the Corporation require any Holder to accept, pursuant to the terms of this Section 5(a) that amount of the Preferred Stock convertible into that number of shares of Common Stock which would result in the Holder's beneficial ownership (as defined below) of Parent's Common Stock being in excess of 4.99% of the outstanding shares of Parent's Common Stock. For the purposes of the immediately preceding sentence, beneficial ownership shall be determined in accordance with Section 13(d) of the Exchange Act and Regulation 13d-3 thereunder. A Holder of Series A Preferred Stock may void the conversion limitation described in this Section 5(a): (i) upon 75 days prior notice to the Corporation or (ii) upon an Event of Default hereunder. (b) The number of shares of Common Stock issuable upon conversion of each share of Series A Preferred Stock shall equal (i) the sum of (A) the Stated Value per share, as amended pursuant to Section 5 hereof, and (B) at the holder's election, accrued and unpaid dividends on such share, divided by (ii) $3.93 (the "Conversion Price").On each anniversary of the date hereof, the Conversion Price then in effect shall be reset at a price calculated by using the average of the five (5) lowest closing prices of the Parent's Common Stock for the twenty two (22) trading days prior to such anniversary date. Notwithstanding the immediately foregoing, in no event shall the Conversion Price ever be less than three dollars and fifty cents ($3.50). If after the Default Notice Period (as defined below) the Parent has not paid in full the amounts then due hereunder or cured the Event of Default, then the Conversion Price shall be reduced and shall be equal to the lower of (i) the Conversion Price; or (ii) eighty percent (80%) of the average of the three (3) lowest closing prices for the Parent's Common Stock on a whichever Principal Market at the time the principal trading exchange or market for the Parent's Common Stock, or on any securities exchange or other securities market on which the Parent's Common Stock is then being listed or traded, for the thirty (30) trading days prior to but not including the Conversion Date. (c) The holder of any certificate for shares of Series A Preferred Stock desiring to convert any of such shares may give notice of its decision to convert the shares into common stock by delivering, along with the certificate(s) representing the shares of Series A Preferred Stock to be converted if requested by the Corporation, an executed and completed notice of conversion ("Notice of Conversion") to the Corporation or the Corporation's Transfer Agent (the "Conversion Date"). Each date on which a notice of conversion is delivered or telecopied to the Corporation or the Corporation's Transfer Agent in accordance with the provisions hereof shall be deemed a Conversion Date. A form of Notice of Conversion that may be employed by a holder is annexed hereto as Exhibit A. The Corporation will cause the transfer agent to transmit the certificates representing the shares of the Parent's Common Stock issuable upon conversion of the Series A Preferred Stock (and a certificate representing the balance of the Preferred Stock not so converted, if requested by Purchaser) to the holder by crediting the account of the Holder's prime broker with the Depository Trust Corporation ("DTC") through its Deposit Withdrawal Agent Commission ("DWAC") system within three (3) business days after receipt by the Corporation of the Notice of Conversion and the certificate(s) representing the shares of Series A Preferred Stock to be converted (the "Delivery Date"). The Parent is obligated to deliver to the holder simultaneously with the aforedescribed Common Stock, at the election of the Holder, additional shares of the Parent's Common Stock representing the conversion at the Conversion Price, of dividends accrued on the Series A Preferred Stock being converted. The Corporation understands that a delay in the delivery of the Parent's Common Stock in the form required pursuant to this Section beyond the Delivery Date could result in economic loss to the Holder. In the event that the Corporation fails to direct its transfer agent to deliver the Parent's Common Stock to the Holder within the time frame set forth in Section 5 and the Common Stock is not delivered to the Holder by the Delivery Date, as compensation to the Holder for such loss, the Corporation agrees to pay late payments to the Holder for late issuance of the Parent's Common Stock in the form required pursuant to this Section 5 in the amount equal to the greater of (i) $400 per business day after the Delivery Date and (ii) the holder's actual damages from such delayed delivery. The Parent shall pay any payments incurred under this Section in immediately available funds upon demand and, in the case of actual damages, accompanied by reasonable documentation of the amount of such damages. In the case of the exercise of the conversion rights set forth in Section 5(a) the conversion privilege shall be deemed to have been exercised and the shares of Parent's Common Stock issuable upon such conversion shall be deemed to have been issued upon the date of receipt by the Corporation or Transfer Agent of the Notice of Conversion. The person or entity entitled to receive Parent's Common Stock issuable upon such conversion shall, on the date such conversion privilege is deemed to have been exercised and thereafter, be treated for all purposes as the record holder of such Parent's Common Stock and shall on the same date cease to be treated for any purpose as the record holder of such shares of Series A Preferred Stock so converted. Upon the conversion of any shares of Series A Preferred Stock no adjustment or payment shall be made with respect to such converted shares on account of any dividend on the Common Stock, except that the holder of such converted shares shall be entitled to be paid any dividends declared on shares of Common Stock after conversion thereof. The Parent shall not be required, in connection with any conversion of Series A Preferred Stock, and payment of dividends on Series A Preferred Stock to issue a fraction of a share of its Series A Preferred Stock and shall instead deliver a stock certificate representing the next whole number. (d) The Conversion Price determined pursuant to Section 5(b) shall be subject to adjustment from time to time as follows: (i) In case the Corporation shall at any time (A) declare any dividend or distribution on its Common Stock or other securities of the Corporation other than the Series A Preferred Stock, (B) split or subdivide the outstanding Common Stock, (C) combine the outstanding Common Stock into a smaller number of shares, or (D) issue by reclassification of its Common Stock any shares or other securities of the Corporation, then in each such event the Conversion Price shall be adjusted proportionately so that the holders of Series A Preferred Stock shall be entitled to receive the kind and number of shares or other securities of the Corporation which such holders would have owned or have been entitled to receive after the happening of any of the events described above had such shares of Series A Preferred Stock been converted immediately prior to the happening of such event (or any record date with respect thereto). Such adjustment shall be made whenever any of the events listed above shall occur. An adjustment made to the Conversion Price pursuant to this Section 5(d)(i) shall become effective immediately after the effective date of the event for the event. (e) (i) In case of any merger of the Corporation with or into any other corporation (other than a merger in which the Corporation is the surviving or continuing corporation and which does not result in any reclassification, conversion, or change of the outstanding shares of Common Stock) then unless the right to convert shares of Series A Preferred Stock shall have terminated, as part of such merger lawful provision shall be made so that holders of Series A Preferred Stock shall thereafter have the right to convert each share of Series A Preferred Stock into the kind and amount of shares of stock and/or other securities or property receivable upon such merger by a holder of the number of shares of Common Stock into which such shares of Series A Preferred Stock might have been convertible by the holder immediately prior to such consolidation or merger. Such provision shall also provide for adjustments that shall be as nearly equivalent as may be practicable to the adjustments provided for in Section (d) of this Section 5. The foregoing provisions of this Section 5(e) shall similarly apply to successive mergers. (ii) In case of any sale or conveyance to another person or entity of the property of the Corporation as an entirety, or substantially as an entirety, in connection with which shares or other securities or cash or other property shall be issuable, distributable, payable, or deliverable for outstanding shares of Common Stock, then, unless the right to convert such shares shall have terminated, lawful provision shall be made so that the holders of Series A Preferred Stock shall thereafter have the right to convert each share of the Series A Preferred Stock into the kind and amount of shares of stock or other securities or property that shall be issuable, distributable, payable, or deliverable upon such sale or conveyance with respect to each share of Common Stock immediately prior to such conveyance. (f) Whenever the number of shares to be issued upon conversion of the Series A Preferred Stock is required to be adjusted as provided in this Section 5, the Corporation shall forthwith compute the adjusted number of shares to be so issued and prepare a certificate setting forth such adjusted conversion amount and the facts upon which such adjustment is based, and such certificate shall forthwith be filed with the Transfer Agent for the Series A Preferred Stock and the Common Stock; and the Corporation shall mail to each holder of record of Series A Preferred Stock notice of such adjusted conversion price. (g) So long as any shares of Series A Preferred Stock shall remain outstanding and the holders thereof shall have the right to convert the same in accordance with provisions of this Section 6 the Corporation shall at all times reserve from the authorized and unissued shares of its Common Stock a sufficient number of shares to provide for such conversions. (h) Overall Limit on Common Stock Issuable. For so long as the Parent Corporation is subject to the rules of the OTCBB/ American Stock Exchange, the number of shares of Common Stock issuable by the Parent Corporation and acquirable by the Holder under all securities issued by the Company to the Holder, shall not exceed 19.99% of the number of shares of the Parent's Common Stock issued and outstanding on the date hereof , subject to appropriate adjustment for stock splits, stock dividends, or other similar recapitalizations affecting the Parent's Common Stock (the "Maximum Common Stock Issuance"), unless the issuance of shares hereunder in excess of the Maximum Common Stock Issuance shall first be approved by the Corporation's shareholders. If at any point in time and from time to time the number of shares of Parent's Common Stock issued pursuant to conversion of the Preferred Stock, together with the number of shares of Parent's Common Stock that would then be issuable by the Corporation in the event of the conversion or exercise of all other securities issued by the Company of the entire Stated Value of the Preferred Stock, would exceed the Maximum Common Stock Issuance but for this Section, then upon written notice provided by the Holder, which such notice shall not be provided until the Holder has been issued in the aggregate not less than 19.99% of the number of shares of the Parent's Common Stock issued and outstanding on the date hereof , the Corporation shall promptly call a shareholders meeting to obtain shareholder approval for the issuance of the shares of Common Stock hereunder in excess of the Maximum Common Stock Issuance. (j) The Corporation shall pay the amount of any and all issue taxes (but not income taxes) which may be imposed in respect of any issue or delivery of stock upon the conversion of any shares of Series A Preferred Stock, but all transfer taxes and income taxes that may be payable in respect of any change of ownership of Series A Preferred Stock or any rights represented thereby or of stock receivable upon conversion thereof shall be paid by the person or persons surrendering such stock for conversion. 6. Voting Rights. The shares of Series A Preferred Stock shall not have voting rights. 7. Events of Default. The occurrence of any of the following events of default (each, an "Event of Default") shall, after the applicable period to cure the Event of Default, cause the dividend rate described in Section 3 hereof to become twenty percent (20%) from and after the occurrence of such event until the Holder shall no longer hold the any Preferred Stock, and the Holder shall have the option to require the Corporation to redeem the Series A Preferred Stock held by such Holder by the immediate payment to the Holder by the Corporation of a sum of money equal to 120% of the outstanding Stated Value, plus accrued and unpaid dividends: 7.1 Failure to Make Payment. The Corporation fails to pay any payment required to be paid pursuant to the terms of hereof or the failure to timely pay any other sum of money due to the Holder from the Corporation and such failure continues for a period of five (5) business days after written notice to the Corporation from the Holder. 7.2 Breach of Covenant. The Corporation breaches any material covenant or other term or condition of this Certificate of Designations or the Purchase Agreement in any material respect and such breach, if subject to cure, continues for a period of five (5) days after written notice to the Corporation from the Holder. 7.3 Breach of Representations and Warranties. Any material representation or warranty of the Corporation made herein, in the Purchase Agreement, or in any agreement, statement or certificate given in writing pursuant hereto or in connection therewith shall be false or misleading. 7.4 Receiver or Trustee. The Corporation shall make an assignment for the benefit of creditors, or apply for or consent to the appointment of a receiver or trustee for it or for a substantial part of its property or business; or such a receiver or trustee shall otherwise be appointed. 7.5 Judgments. Except for judgments related to obligations of the Parent ., which are reflected on the Corporation's balance sheet, any money judgment, writ or similar final process shall be entered or filed against Corporation or any of its property or other assets for more than $100,000, and shall remain unvacated, unbonded or unstayed for a period of forty-five (45) days. 7.6 Bankruptcy. Bankruptcy, insolvency, reorganization or liquidation proceedings or other proceedings or relief under any bankruptcy law or any law for the relief of debtors shall be instituted by or against the Corporation. 7.7 Stop Trade. An SEC stop trade order or Principal Market trading suspension for a period in excess of five (5) business days. 7.8 Default Under Related Agreement. An Event of Default occurs under and as defined in any one or more of the following agreements which is not cured during any applicable cure or grace period: (i) Securities Purchase Agreement between the Corporation and Laurus Master Fund, Ltd., (iii) Pledge Agreement between the Corporation and Laurus Master Fund, Ltd. and (iv) Pledge and Security Agreement between the Corporation and Laurus Master Fund, Ltd., as each such agreement may be amended, modified and supplemented from time to time. 8.0. Status of Converted or Redeemed Stock. In case any shares of Series A Preferred Stock shall be redeemed or otherwise repurchased or reacquired, the shares so redeemed, converted, or reacquired shall resume the status of authorized but unissued shares of Preferred Stock and shall no longer be designated as Series A Preferred Stock. In witness whereof, Cycle Country Accessories Corp. Subsidiary. has caused this Certificate to be executed by________________________________________, this __ day of June, 2003. CYCLE COUNTRY ACCESSORIES SUBSIDIARY CORP. By:______________________________________ EXHIBIT A NOTICE OF CONVERSION (To Be Executed By the Registered Holder in Order to Convert the Series A Convertible Preferred Stock of Cycle Country Accessories Corp. Subsidiary The undersigned hereby irrevocably elects to convert ______________ shares of Series A Convertible Preferred Stock and $_____________ of the dividend due, into shares of Parent's Common Stock of Cycle Country Accessories Corp. Subsidiary (the "Corporation") according to the conditions hereof, as of the date written below. Date of Conversion:______________________________________________________________ Applicable Conversion Price Per Share:___________________________________ Number of Parent's Common Shares Issuable Upon This Conversion:__________ Signature:_______________________________________________________________ Print Name:___________________________________________________________________ Address:_________________________________________________________________ _________________________________________________________________________ Deliveries Pursuant to this Notice of Conversion Should Be Made to: _________________________________________________________________________ _________________________________________________________________________ _________________________________________________________________________ EXHIBIT B FORM OF WARRANT Right to Purchase 40,000 Shares of Common Stock of Cycle Country Accessories Corp. (subject to adjustment as provided herein) COMMON STOCK PURCHASE WARRANT No. [2003-2] Issue Date: June 9, 2003 Cycle Country Accessories Corp., a corporation organized under the laws of the State of Delaware (the "Company"), hereby certifies that, for value received, LAURUS MASTER FUND, LTD., or assigns (the "Holder"), is entitled, subject to the terms set forth below, to purchase from the Company from and after the Issue Date of this Warrant and at any time or from time to time before 5:00 p.m., New York time, through seven (7) years after such date (the "Expiration Date"), up to 40,000 fully paid and nonassessable shares of Common Stock (as hereinafter defined), $.01 par value per share, of the Company, at the Exercise Price (as defined below). The number and character of such shares of Common Stock and the Exercise Price are subject to adjustment as provided herein. As used herein the following terms, unless the context otherwise requires, have the following respective meanings: (a) The term "Company" shall include Cycle Country Accessories Corp. and any corporation which shall succeed or assume the obligations of Cycle Country Accessories Corp. hereunder. (b) The term "Common Stock" includes (a) the Company's Common Stock, $.01 par value per share, and (b) any other securities into which or for which any of the securities described in (a) may be converted or exchanged pursuant to a plan of recapitalization, reorganization, merger, sale of assets or otherwise. (c) The term "Other Securities" refers to any stock (other than Common Stock) and other securities of the Company or any other person (corporate or otherwise) which the holder of the Warrant at any time shall be entitled to receive, or shall have received, on the exercise of the Warrant, in lieu of or in addition to Common Stock, or which at any time shall be issuable or shall have been issued in exchange for or in replacement of Common Stock or Other Securities pursuant to Section 4 or otherwise. (d) The term "Exercise Price" shall be $4.00 per share; 1. Exercise of Warrant. 1.1 Number of Shares Issuable upon Exercise. From and after the date hereof through and including the Expiration Date, the Holder shall be entitled to receive, upon exercise of this Warrant in whole or in part, by delivery of an original or fax copy of the exercise notice attached hereto as Exhibit A (the "Exercise Notice"), shares of Common Stock of the Company, subject to adjustment pursuant to Section 4. 1.2 Fair Market Value. Fair Market Value of a share of Common Stock as of a particular date (the "Determination Date") shall mean: (a) If the Company's Common Stock is traded on an exchange or is quoted on the NASD OTC Bulletin Board ("OTCBB") or the American Stock Exchange Smallcap ("AMEX"), then the closing or last sale price, respectively, reported for the last business day immediately preceding the Determination Date. (b) If the Company's Common Stock is not traded on an exchange or on the OTCBB or AMEX, then the mean of the average of the closing bid and asked prices reported for the last business day immediately preceding the Determination Date. (c) Except as provided in clause (d) below, if the Company's Common Stock is not publicly traded, then as the Holder and the Company agree or in the absence of agreement by arbitration in accordance with the rules then in effect of the American Arbitration Association, before a single arbitrator to be chosen from a panel of persons qualified by education and training to pass on the matter to be decided. (d) If the Determination Date is the date of a liquidation, dissolution or winding up, or any event deemed to be a liquidation, dissolution or winding up pursuant to the Company's charter, then all amounts to be payable per share to holders of the Common Stock pursuant to the charter in the event of such liquidation, dissolution or winding up, plus all other amounts to be payable per share in respect of the Common Stock in liquidation under the charter, assuming for the purposes of this clause (d) that all of the shares of Common Stock then issuable upon exercise of the Warrant are outstanding at the Determination Date. 2. Procedure for Exercise. 2.1 Delivery of Stock Certificates, etc. on Exercise. The Company agrees that the shares of Common Stock purchased upon exercise of this Warrant shall be deemed to be issued to the Holder as the record owner of such shares as of the close of business on the date on which this Warrant shall have been surrendered and payment made for such shares as aforesaid. As soon as practicable after the exercise of this Warrant in full or in part, and in any event within 3 business days thereafter, the Company at its expense (including the payment by it of any applicable issue taxes) will cause to be issued in the name of and delivered to the Holder, or as such Holder (upon payment by such holder of any applicable transfer taxes) may direct in compliance with applicable securities laws, a certificate or certificates for the number of duly and validly issued, fully paid and nonassessable shares of Common Stock (or Other Securities) to which such Holder shall be entitled on such exercise, plus, in lieu of any fractional share to which such holder would otherwise be entitled, cash equal to such fraction multiplied by the then Fair Market Value of one full share, together with any other stock or other securities and property (including cash, where applicable) to which such Holder is entitled upon such exercise pursuant to Section 1 or otherwise. 2.2 Exercise. (a) Payment may be made by delivery of the Warrant, and/or Common Stock receivable upon exercise of the Warrant in accordance with Section (b) below, for the number of Common Shares specified in such form (as such exercise number shall be adjusted to reflect any adjustment in the total number of shares of Common Stock issuable to the holder per the terms of this Warrant) and the Holder shall thereupon be entitled to receive the number of duly authorized, validly issued, fully-paid and non-assessable shares of Common Stock (or Other Securities) determined as provided herein. (b) Notwithstanding any provisions herein to the contrary, if the Fair Market Value of one share of Common Stock is greater than the Exercise Price (at the date of calculation as set forth below), the Holder may elect to receive shares equal to the value (as determined below) of this Warrant (or the portion thereof being exercised) by surrender of this Warrant at the principal office of the Company together with the properly endorsed Exercise Notice in which event the Company shall issue to the Holder a number of shares of Common Stock computed using the following formula: X=Y (A-B) A Where X= the number of shares of Common Stock to be issued to the Holder Y= the number of shares of Common Stock purchasable under the Warrant or, if only a portion of the Warrant is being exercised, the portion of the Warrant being exercised (at the date of such calculation) A= the Fair Market Value of one share of the Company's Common Stock (at the date of such calculation) B= Exercise Price (as adjusted to the date of such calculation) 3. Effect of Reorganization, etc.; Adjustment of Exercise Price. 3.1 Reorganization, Consolidation, Merger, etc. In case at any time or from time to time, the Company shall (a) effect a reorganization, (b) consolidate with or merge into any other person, or (c) transfer all or substantially all of its properties or assets to any other person under any plan or arrangement contemplating the dissolution of the Company, then, in each such case, as a condition to the consummation of such a transaction, proper and adequate provision shall be made by the Company whereby the Holder of this Warrant, on the exercise hereof as provided in Section 1 at any time after the consummation of such reorganization, consolidation or merger or the effective date of such dissolution, as the case may be, shall receive, in lieu of the Common Stock (or Other Securities) issuable on such exercise prior to such consummation or such effective date, the stock and other securities and property (including cash) to which such Holder would have been entitled upon such consummation or in connection with such dissolution, as the case may be, if such Holder had so exercised this Warrant, immediately prior thereto, all subject to further adjustment thereafter as provided in Section 4. 3.2 Dissolution. In the event of any dissolution of the Company following the transfer of all or substantially all of its properties or assets, the Company, prior to such dissolution, shall at its expense deliver or cause to be delivered the stock and other securities and property (including cash, where applicable) receivable by the Holder of the Warrant after the effective date of such dissolution pursuant to Section 3.1 to a bank or trust company having its principal office in New York, NY, as trustee for the Holder of the Warrant. 3.3 Continuation of Terms. Upon any reorganization, consolidation, merger or transfer (and any dissolution following any transfer) referred to in this Section 3, this Warrant shall continue in full force and effect and the terms hereof shall be applicable to the shares of stock and other securities and property receivable on the exercise of this Warrant after the consummation of such reorganization, consolidation or merger or the effective date of dissolution following any such transfer, as the case may be, and shall be binding upon the issuer of any such stock or other securities, including, in the case of any such transfer, the person acquiring all or substantially all of the properties or assets of the Company, whether or not such person shall have expressly assumed the terms of this Warrant as provided in Section 4. In the event this Warrant does not continue in full force and effect after the consummation of the transactions described in this Section 3, then only in such event will the Company's securities and property (including cash, where applicable) receivable by the holders of the Warrant be delivered to the Trustee as contemplated by Section 3.2. 3.4 Adjustment of Warrant Exercise Price and Number of Shares upon Issuance of Common Stock. Other than (i) pursuant to warrants or options that are outstanding as of the date hereof and warrants and options that may be granted in the future under any option plan of the Company, or any employment agreement, joint venture, credit, leasing or other financing agreement or any joint venture or other strategic arrangement, in each case now or hereinafter entered into by the Company, (ii) pursuant to any securities issued by the Company to the Holder, (iii) pursuant to any agreement entered into by the Company or any of its subsidiaries for the acquisition of another business (whether by stock purchase or asset purchase, merger or otherwise; ((i), (ii) and (iii) above, are hereinafter referred to as the "Excluded Issuances")), if the Company at any time shall issue any shares of Common Stock prior to the complete exercise of this Warrant for a consideration less than the Exercise Price that would be in effect at the time of such issue, then, and thereafter successively upon each such issue, the Exercise Price shall be reduced as follows: (i) the number of shares of Common Stock outstanding immediately prior to such issue shall be multiplied by the Exercise Price in effect at the time of such issue and the product shall be added to the aggregate consideration, if any, received by the Company upon such issue of additional shares of Common Stock; and (ii) the sum so obtained shall be divided by the number of shares of Common Stock outstanding immediately after such issue. The resulting quotient shall be the adjusted Exercise Price. For purposes of this adjustment, the issuance of any security of the Company carrying the right to convert such security into shares of Common Stock or of any warrant, right or option to purchase Common Stock shall result in an adjustment to the Exercise Price upon the issuance of shares of Common Stock upon exercise of such conversion or purchase rights.. 4. Extraordinary Events Regarding Common Stock. In the event that the Company shall (a) issue additional shares of the Common Stock as a dividend or other distribution on outstanding Common Stock, (b) subdivide its outstanding shares of Common Stock, or (c) combine its outstanding shares of the Common Stock into a smaller number of shares of the Common Stock, then, in each such event, the Exercise Price shall, simultaneously with the happening of such event, be adjusted by multiplying the then Exercise Price by a fraction, the numerator of which shall be the number of shares of Common Stock outstanding immediately prior to such event and the denominator of which shall be the number of shares of Common Stock outstanding immediately after such event, and the product so obtained shall thereafter be the Exercise Price then in effect. The Exercise Price, as so adjusted, shall be readjusted in the same manner upon the happening of any successive event or events described herein in this Section 4. The number of shares of Common Stock that the holder of this Warrant shall thereafter, on the exercise hereof as provided in Section 1, be entitled to receive shall be increased to a number determined by multiplying the number of shares of Common Stock that would otherwise (but for the provisions of this Section 4) be issuable on such exercise by a fraction of which (a) the numerator is the Exercise Price that would otherwise (but for the provisions of this Section 4) be in effect, and (b) the denominator is the Exercise Price in effect on the date of such exercise. 5. Certificate as to Adjustments. In each case of any adjustment or readjustment in the shares of Common Stock (or Other Securities) issuable on the exercise of the Warrant, the Company at its expense will promptly cause its Chief Financial Officer or other appropriate designee to compute such adjustment or readjustment in accordance with the terms of the Warrant and prepare a certificate setting forth such adjustment or readjustment and showing in detail the facts upon which such adjustment or readjustment is based, including a statement of (a) the consideration received or receivable by the Company for any additional shares of Common Stock (or Other Securities) issued or sold or deemed to have been issued or sold, (b) the number of shares of Common Stock (or Other Securities) outstanding or deemed to be outstanding, and (c) the Exercise Price and the number of shares of Common Stock to be received upon exercise of this Warrant, in effect immediately prior to such adjustment or readjustment and as adjusted or readjusted as provided in this Warrant. The Company will forthwith mail a copy of each such certificate to the holder of the Warrant and any Warrant agent of the Company (appointed pursuant to Section 11 hereof). 6. Reservation of Stock, etc. Issuable on Exercise of Warrant. The Company will at all times reserve and keep available, solely for issuance and delivery on the exercise of the Warrant, shares of Common Stock (or Other Securities) from time to time issuable on the exercise of the Warrant. 7. Assignment; Exchange of Warrant. Subject to compliance with applicable securities laws, this Warrant, and the rights evidenced hereby, may be transferred by any registered holder hereof (a "Transferor") with respect to any or all of the Shares. On the surrender for exchange of this Warrant, with the Transferor's endorsement in the form of Exhibit B attached hereto (the "Transferor Endorsement Form") and together with evidence reasonably satisfactory to the Company demonstrating compliance with applicable securities laws, which shall include, without limitation, a legal opinion from the Transferor's counsel that such transfer is exempt from the registration requirements of applicable securities laws, the Company at its expense (but with payment by the Transferor of any applicable transfer taxes) will issue and deliver to or on the order of the Transferor thereof a new Warrant of like tenor, in the name of the Transferor and/or the transferee(s) specified in such Transferor Endorsement Form (each a "Transferee"), calling in the aggregate on the face or faces thereof for the number of shares of Common Stock called for on the face or faces of the Warrant so surrendered by the Transferor. 8. Replacement of Warrant. On receipt of evidence reasonably satisfactory to the Company of the loss, theft, destruction or mutilation of this Warrant and, in the case of any such loss, theft or destruction of this Warrant, on delivery of an indemnity agreement or security reasonably satisfactory in form and amount to the Company or, in the case of any such mutilation, on surrender and cancellation of this Warrant, the Company at its expense will execute and deliver, in lieu thereof, a new Warrant of like tenor. 9. Registration Rights. The Holder of this Warrant has been granted certain registration rights by the Company. These registration rights are set forth in a Securities Purchase Agreement entered into by the Company and Purchaser of the Company's Preferred Stock (the "Preferred Stock") at or prior to the issue date of this Warrant. 10. Maximum Exercise. The Holder shall not be entitled to exercise this Warrant on an exercise date, in connection with that number of shares of Common Stock which would result in beneficial ownership by the Holder and its affiliates of more than 4.99% of the shares of Common Stock of the Company on such date. For the purposes of the proviso to the immediately preceding sentence, beneficial ownership shall be determined in accordance with Section 13(d) of the Securities Exchange Act of 1934, as amended, and Regulation 13d-3 thereunder. Subject to the foregoing, the Holder shall not be limited to aggregate exercises which would result in the issuance of more than 4.99%. The restriction described in this paragraph may be revoked upon 75 days prior notice from the Holder to the Company and is automatically null and void upon an Event of Default under the Preferred Stock. 11. Warrant Agent. The Company may, by written notice to the each holder of the Warrant, appoint an agent for the purpose of issuing Common Stock (or Other Securities) on the exercise of this Warrant pursuant to Section 1, exchanging this Warrant pursuant to Section 7, and replacing this Warrant pursuant to Section 8, or any of the foregoing, and thereafter any such issuance, exchange or replacement, as the case may be, shall be made at such office by such agent. 12. Transfer on the Company's Books. Until this Warrant is transferred on the books of the Company, the Company may treat the registered holder hereof as the absolute owner hereof for all purposes, notwithstanding any notice to the contrary. 13. Notices, etc. All notices and other communications from the Company to the Holder of this Warrant shall be mailed by first class registered or certified mail, postage prepaid, at such address as may have been furnished to the Company in writing by such holder or, until any such Holder furnishes to the Company an address, then to, and at the address of, the last Holder of this Warrant who has so furnished an address to the Company. 14. Voluntary Adjustment by the Company. The Company may at any time during the term of this Warrant reduce the then current Exercise Price to any amount and for any period of time deemed appropriate by the Board of Directors of the Company. 15. Miscellaneous. This Warrant and any term hereof may be changed, waived, discharged or terminated only by an instrument in writing signed by the party against which enforcement of such change, waiver, discharge or termination is sought. This Warrant shall be governed by and construed in accordance with the laws of State of New York without regard to principles of conflicts of laws. Any action brought concerning the transactions contemplated by this Warrant shall be brought only in the state courts of New York or in the federal courts located in the state of New York; provided, however, that the Holder may choose to waive this provision and bring an action outside the state of New York. The individuals executing this Warrant on behalf of the Company agree to submit to the jurisdiction of such courts and waive trial by jury. The prevailing party shall be entitled to recover from the other party its reasonable attorney's fees and costs. In the event that any provision of this Warrant is invalid or unenforceable under any applicable statute or rule of law, then such provision shall be deemed inoperative to the extent that it may conflict therewith and shall be deemed modified to conform with such statute or rule of law. Any such provision which may prove invalid or unenforceable under any law shall not affect the validity or enforceability of any other provision of this Warrant. The headings in this Warrant are for purposes of reference only, and shall not limit or otherwise affect any of the terms hereof. The invalidity or unenforceability of any provision hereof shall in no way affect the validity or enforceability of any other provision. The Company acknowledges that legal counsel participated in the preparation of this Warrant and, therefore, stipulates that the rule of construction that ambiguities are to be resolved against the drafting party shall not be applied in the interpretation of this Warrant to favor any party against the other party. [THIS SPACE INTENTIONALLY LEFT BLANK] IN WITNESS WHEREOF, the Company has executed this Warrant under seal as of the date first written above. CYCLE COUNTRY ACCESSORIES CORP. By:_____________________________ Witness: ______________________________ Exhibit A FORM OF SUBSCRIPTION (To be signed only on exercise of Warrant) TO: Cycle Country Accessories Corp. The undersigned, pursuant to the provisions set forth in the attached Warrant (No.____), hereby irrevocably elects to purchase (check applicable box): ___ ________ shares of the Common Stock covered by such Warrant; or ___ the maximum number of shares of Common Stock covered by such Warrant pursuant to the cashless exercise procedure set forth in Section 2. The undersigned herewith makes payment of the full Exercise Price for such shares at the price per share provided for in such Warrant, which is $___________. Such payment takes the form of (check applicable box or boxes): ___ the cancellation of such portion of the attached Warrant as is exercisable for a total of _______ shares of Common Stock (using a Fair Market Value of $_______ per share for purposes of this calculation); and/or ___ the cancellation of such number of shares of Common Stock as is necessary, in accordance with the formula set forth in Section 2, to exercise this Warrant with respect to the maximum number of shares of Common Stock purchaseable pursuant to the cashless exercise procedure set forth in Section 2. The undersigned requests that the certificates for such shares be issued in the name of, and delivered to ____________________ whose address is ___________________________________________________________. The undersigned represents and warrants that all offers and sales by the undersigned of the securities issuable upon exercise of the within Warrant shall be made pursuant to registration of the Common Stock under the Securities Act of 1933, as amended (the "Securities Act") or pursuant to an exemption from registration under the Securities Act. Dated:___________________ ___________________ (Signature must conform to name of holder as specified on the face of the Warrant) _____________________________________ (Address) Exhibit B FORM OF TRANSFEROR ENDORSEMENT (To be signed only on transfer of Warrant) For value received, the undersigned hereby sells, assigns, and transfers unto the person(s) named below under the heading "Transferees" the right represented by the within Warrant to purchase the percentage and number of shares of Common Stock of Cycle Country Accessories Corp. to which the within Warrant relates specified under the headings "Percentage Transferred" and "Number Transferred," respectively, opposite the name(s) of such person(s) and appoints each such person Attorney to transfer its respective right on the books of Cycle Country Accessories Corp. with full power of substitution in the premises. Transferees Percentage Transferred Number Transferrred Dated:___________________ ___________________ (Signature must conform to name of holder as specified on the face of the Warrant) Signed in the presence of: _________________________________ _________________________________ (Name) (address) ACCEPTED AND AGREED: ________________________________________ [TRANSFEREE] (address) _____________________________ (Name) (continued from previous page) EXHIBIT C FORM OF OPINION 1. Each of the Parent and the Company is a corporation validly existing and in good standing under the laws of the State of Delaware and has all requisite corporate power and authority to own, operate and lease its properties and to carry on its business as it is now being conducted. 2. Each of the Parent and the Company has the requisite corporate power and authority to execute, deliver and perform its obligations under the Agreement and Related Agreements. All corporate action on the part of each of the Parent and the Company, their officers, directors and stockholders necessary for (i) the authorization of the Agreement and Related Agreements, and the performance of all obligations of each of the Parent and the Company thereunder at each Closing, and (ii) the authorization, sale, issuance and delivery of the Securities pursuant to the Agreement and the Related Agreements has been taken. The Preferred Stock, the Parent's Common Stock and the Parent's Common Stock underlying the Warrant, when issued pursuant to and in accordance with the terms of the Agreement and upon delivery, shall be validly issued and outstanding, fully paid and non assessable. 3. The execution, delivery and performance of the Agreement, the Preferred Stock or the Related Agreements by the Company and the consummation of the transactions contemplated by any thereof, will not, with or without the giving of notice or the passage of time or both: (a) Violate the provisions of the Articles or bylaws of the Parentor the Company; or (b) To the best of such counsel's knowledge, violate any judgment, decree, order or award of any court binding upon the Parent or the Company. 4. The Agreement and Related Agreements constitute and the Preferred Stock, upon their issuance will constitute, valid and legally binding obligations of the Parent and the Company, and are enforceable against each of the Parent and the Company in accordance with their respective terms. 5. The sale of the Preferred Stock and the subsequent conversion of the Preferred Stock into share s of the Parent's common Stock are not and will not be subject to any preemptive rights or, to such counsel's knowledge, rights of first refusal that have not been properly waived or complied with. The sale of the Warrants and the subsequent exercise of the Warrants for shares of the Parent's Common Stock are not and will not be subject to any preemptive rights or, to such counsel's knowledge, rights of first refusal that have not been properly waived or complied with. 6. Assuming the accuracy of the representations and warranties of the Purchasers contained in the Agreement, the offer, sale and issuance of the Securities will be exempt from the registration requirements of the Securities Act, and will have been registered or qualified (or are exempt from registration and qualification) under the registration, permit or qualification requirements of all applicable state securities laws. To the best of such counsel's knowledge, neither the Parent nor the Company, nor any of their affiliates, nor any person acting on its or their behalf, has directly or indirectly made any offers or sales of any security or solicited any offers to buy and security under circumstances that would cause the offering of the Securities pursuant to this Agreement to be integrated with prior offerings by the Parent or the Company for purposes of the Securities Act which would prevent the Parent or the Company from selling the Securities pursuant to Rule 506 under the Securities Act, or any applicable exchange-related stockholder approval provisions. 7. There is no action, suit, proceeding or investigation pending or, to the best of such counsel's knowledge, currently threatened against the Parent or the Company that questions the validity of the Agreement or the Related Agreements or the right of the Parent or the Company to enter into any of such agreements, or to consummate the transactions contemplated thereby, or which might result, either individually or in the aggregate, in any material adverse change in the assets, condition, affairs or prospects of the Parent or the Company, financially or otherwise, or any change in the current equity ownership of the Parent or the Company. To the best of such counsel's knowledge, neither the Parent nor the Company is a party or subject to the provisions of any order, writ, injunction, judgment or decree of any court or government agency or instrumentality; nor is there any action, suit, proceeding or investigation by the Parent or the Company currently pending or which the Parent or the Company intends to initiate. EX-10.2 5 atcregrtsagt.txt REGISTRATION RIGHTS AGREEMENT REGISTRATION RIGHTS AGREEMENT This Registration Rights Agreement (this "Agreement") is made and entered into as of June 9, 2003, by and between Cycle Country Accessories Corp., a Nevada corporation (the "Company"), and Laurus Master Fund, Ltd., a Cayman Islands company (the "Purchaser"). This Agreement is made pursuant to the Securities Purchase Agreement, dated as of the date hereof, by and among the Purchaser, the Company and Cycle Country Accessories Corp. subsidiary ("Subsidiary") (the "Purchase Agreement"), and pursuant to the Preferred Stock and Warrant. The Company and the Purchaser hereby agree as follows: 1. Definitions. Capitalized terms used and not otherwise defined herein that are defined in the Purchase Agreement shall have the meanings given such terms in the Purchase Agreement. As used in this Agreement, the following terms shall have the following meanings: "Effectiveness Date" means the 120th day following the Closing Date. "Effectiveness Period" shall have the meaning set forth in Section 2(a). "Filing Date" means, with respect to the Registration Statement required to be filed hereunder, the 90th day following the Closing Date. "Holder" or "Holders" means the Purchaser or any of its affiliates or transferees to the extent any of them hold Registrable Securities. "Indemnified Party" shall have the meaning set forth in Section 5(c). "Indemnifying Party" shall have the meaning set forth in Section 5(c). "Losses" shall have the meaning set forth in Section 5(a). "Preferred Stock" means preferred stock of the Subsidiary issued on the date hereof. "Proceeding" means an action, claim, suit, investigation or proceeding (including, without limitation, an investigation or partial proceeding, such as a deposition), whether commenced or threatened. "Prospectus" means the prospectus included in a Registration Statement (including, without limitation, a prospectus that includes any information previously omitted from a prospectus filed as part of an effective registration statement in reliance upon Rule 430A promulgated under the Securities Act), as amended or supplemented by any prospectus supplement, with respect to the terms of the offering of any portion of the Registrable Securities covered by the Registration Statement, and all other amendments and supplements to the Prospectus, including post-effective amendments, and all material incorporated by reference or deemed to be incorporated by reference in such Prospectus. "Registrable Securities" means the shares of Common Stock issued upon the conversion of to the Preferred Stock and issuable upon exercise of the Warrant. "Registration Statement" means the registration statement required to be filed hereunder, including the Prospectus, amendments and supplements to such registration statement or Prospectus, including pre- and post-effective amendments, all exhibits thereto, and all material incorporated by reference or deemed to be incorporated by reference in such registration statement. "Rule 144" means Rule 144 promulgated by the Commission pursuant to the Securities Act, as such Rule may be amended from time to time, or any similar rule or regulation hereafter adopted by the Commission having substantially the same effect as such Rule. "Rule 415" means Rule 415 promulgated by the Commission pursuant to the Securities Act, as such Rule may be amended from time to time, or any similar rule or regulation hereafter adopted by the Commission having substantially the same effect as such Rule. "Rule 424" means Rule 424 promulgated by the Commission pursuant to the Securities Act, as such Rule may be amended from time to time, or any similar rule or regulation hereafter adopted by the Commission having substantially the same effect as such Rule. "Warrant" means the Common Stock purchase warrant issued pursuant to the Purchase Agreement. 2. Registration. (a) On or prior to the Filing Date, the Company shall prepare and file with the Commission a Registration Statement covering the Registrable Securities for an offering to be made on a continuous basis pursuant to Rule 415. The Registration Statement shall be on Form SB-2 (except if the Company is not then eligible to register for resale the Registrable Securities on Form SB-2, in which case such registration shall be on another appropriate form in accordance herewith). The Company shall cause the Registration Statement to become effective and remain effective as provided herein. The Company shall use its reasonable commercial efforts to cause the Registration Statement to be declared effective under the Securities Act as promptly as possible after the filing thereof, but in any event no later than the Effectiveness Date, and shall keep the Registration Statement continuously effective under the Securities Act until the date which is the earlier date of when (i) all Registrable Securities have been sold or (ii) all Registrable Securities may be sold immediately without registration under the Securities Act and without volume restrictions pursuant to Rule 144(k), as determined by the counsel to the Company pursuant to a written opinion letter to such effect, addressed and acceptable to the Company's transfer agent and the affected Holders (the "Effectiveness Period"). (b) If: (i) any Registration Statement is not filed on or prior to the Filing Date; (ii) a Registration Statement filed hereunder is not declared effective by the Commission by the Effectiveness Date; (iii) after a Registration Statement is filed with and declared effective by the Commission, such Registration Statement ceases to be effective (by suspension or otherwise) as to all Registrable Securities to which it is required to relate at any time prior to the expiration of the Effectiveness Period (without being succeeded immediately by an additional registration statement filed and declared effective) for a period of time which shall exceed 30 days in the aggregate per year or more than 20 consecutive calendar days (defined as a period of 365 days commencing on the date the Registration Statement is declared effective); or (iv) the Common Stock is not listed or quoted, or is suspended from trading on any Trading Market for a period of three (3) consecutive Trading Days (provided the Company shall not have been able to cure such trading suspension within 30 days of the notice thereof or list the Common Stock on any of the NASDAQ SmallCap Market, the Nasdaq National Market, or the American Stock Exchange (the "Trading Market"))(any such failure or breach being referred to as an "Event," and for purposes of clause (i), (ii) or (v) the date on which such Event occurs, or for purposes of clause (iii) the date which such 30 day or 20 consecutive day period (as the case may be) is exceeded, or for purposes of clause (iv) the date on which such three (3) Trading Day period is exceeded, being referred to as "Event Date"), then until the applicable Event is cured, the Company shall pay to each Holder an amount in cash, as liquidated damages and not as a penalty, equal to 2.0% for each thirty (30) day period (prorated for partial periods) on a daily basis of the issued and outstanding Preferred Stock. Such liquidation damages shall be paid not less than each thirty (30) days during an Event and within three (3) days following the date on which such Event has been cured by the Company. 3. Registration Procedures. If and whenever the Company is required by the provisions hereof to effect the registration of the Registrable Securities under the Act, the Company will, as expeditiously as possible: (a) prepare and file with the SEC a registration statement with respect to such securities, promptly as possible respond to any comments received from the SEC and use its best efforts to cause such registration statement to become and remain effective for the period of the distribution contemplated thereby (determined as herein provided), and promptly provide to the Purchaser copies of all filings and SEC letters of comment; (b) prepare and file with the SEC such amendments and supplements to such registration statement and the prospectus used in connection therewith as may be necessary to comply with the provisions of the Securities Act with respect to the disposition of all securities covered by the registration statement and to keep such registration statement effective until the earlier of: (i) six months after the latest exercise period of the Warrant; (ii) four years after the Closing Date, or (iii) the date on which the Purchaser has disposed of all of the Registrable Securities covered by such registration statement in accordance with the Purchaser's intended method of disposition set forth in such registration statement for such period; (c) furnish to the Purchaser such number of copies of the registration statement and the prospectus included therein (including each preliminary prospectus) as the Purchaser reasonably may request to facilitate the public sale or disposition of the securities covered by such registration statement; (d) use its commercially reasonable efforts to register or qualify the Purchaser's Registrable Securities covered by such registration statement under the securities or "blue sky" laws of such jurisdictions as the Purchaser, provided, however, that the Company shall not for any such purpose be required to qualify generally to transact business as a foreign corporation in any jurisdiction where it is not so qualified or to consent to general service of process in any such jurisdiction; (e) list the Registrable Securities covered by such registration statement with any securities exchange on which the Common Stock of the Company is then listed; (f) immediately notify the Purchaser at any time when a prospectus relating thereto is required to be delivered under the Securities Act, of the happening of any event of which the Company has knowledge as a result of which the prospectus contained in such registration statement, as then in effect, includes an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein not misleading in light of the circumstances then existing; and (g) make available for inspection by the Purchaser and any attorney, accountant or other agent retained by the Purchaser, all publicly available, non-confidential financial and other records, pertinent corporate documents and properties of the Company, and cause the Company's officers, directors and employees to supply all publicly available, non-confidential information reasonably requested by the attorney, accountant or agent of the Purchaser. 4. Registration Expenses. All expenses relating to the Company's compliance with Sections 2 and 3 hereof, including, without limitation, all registration and filing fees, printing expenses, fees and disbursements of counsel and independent public accountants for the Company, fees and expenses (including reasonable counsel fees) incurred in connection with complying with state securities or "blue sky" laws, fees of the NASD, transfer taxes, fees of transfer agents and registrars, fees of, and disbursements incurred by, one counsel for the Holders, and costs of insurance are called "Registration Expenses". All selling commissions applicable to the sale of Registrable Securities, including any fees and disbursements of any special counsel to the Holders beyond those included in Registration Expenses, are called "Selling Expenses." The Company shall be responsible for all Registration Expenses. 5. Indemnification. (a) In the event of a registration of any Registrable Securities under the Securities Act pursuant to this Agreement, the Company will indemnify and hold harmless the Purchaser, and its officers, directors and each other person, if any, who controls the Purchaser within the meaning of the Securities Act, against any losses, claims, damages or liabilities, joint or several, to which the Purchaser, or such persons may become subject under the Securities Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in any registration statement under which such Registrable Securities were registered under the Securities Act pursuant to this Agreement, any preliminary prospectus or final prospectus contained therein, or any amendment or supplement thereof, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, and will reimburse the Purchaser, and each such person for any reasonable legal or other expenses incurred by them in connection with investigating or defending any such loss, claim, damage, liability or action; provided, however, that the Company will not be liable in any such case if and to the extent that any such loss, claim, damage or liability arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission so made in conformity with information furnished by the Purchaser or any such person in writing specifically for use in any such document. (b) In the event of a registration of the Registrable Securities under the Securities Act pursuant to this Agreement, the Purchaser will indemnify and hold harmless the Company, and its officers, directors and each other person, if any, who controls the Company within the meaning of the Securities Act, against all losses, claims, damages or liabilities, joint or several, to which the Company or such persons may become subject under the Securities Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon any untrue statement or alleged untrue statement of any material fact which was furnished in writing by the Purchaser to the Company expressly for use in (and such information is contained in) the registration statement under which such Registrable Securities were registered under the Securities Act pursuant to this Agreement, any preliminary prospectus or final prospectus contained therein, or any amendment or supplement thereof, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, and will reimburse the Company and each such person for any reasonable legal or other expenses incurred by them in connection with investigating or defending any such loss, claim, damage, liability or action, provided, however, that the Purchaser will be liable in any such case if and only to the extent that any such loss, claim, damage or liability arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission so made in conformity with information furnished in writing to the Company by the Purchaser specifically for use in any such document. Notwithstanding the provisions of this paragraph, the Purchaser shall not be required to indemnify any person or entity in excess of the amount of the aggregate net proceeds received by the Purchaser of Registrable Securities in connection with any such registration under the Securities Act. (c) Promptly after receipt by an indemnified party hereunder of notice of the commencement of any action, such indemnified party shall, if a claim in respect thereof is to be made against the indemnifying party hereunder, notify the indemnifying party in writing thereof, but the omission so to notify the indemnifying party shall not relieve it from any liability which it may have to such indemnified party other than under this Section 5(c) and shall only relieve it from any liability which it may have to such indemnified party under this Section 5(c) if and to the extent the indemnifying party is prejudiced by such omission. In case any such action shall be brought against any indemnified party and it shall notify the indemnifying party of the commencement thereof, the indemnifying party shall be entitled to participate in and, to the extent it shall wish, to assume and undertake the defense thereof with counsel satisfactory to such indemnified party, and, after notice from the indemnifying party to such indemnified party of its election so to assume and undertake the defense thereof, the indemnifying party shall not be liable to such indemnified party under this Section 5(c) for any legal expenses subsequently incurred by such indemnified party in connection with the defense thereof; if the indemnified party retains its own counsel, then the indemnified party shall pay all fees, costs and expenses of such counsel, provided, however, that, if the defendants in any such action include both the indemnified party and the indemnifying party and the indemnified party shall have reasonably concluded that there may be reasonable defenses available to it which are different from or additional to those available to the indemnifying party or if the interests of the indemnified party reasonably may be deemed to conflict with the interests of the indemnifying party, the indemnified parties shall have the right to select one separate counsel and to assume such legal defenses and otherwise to participate in the defense of such action, with the reasonable expenses and fees of such separate counsel and other expenses related to such participation to be reimbursed by the indemnifying party as incurred. (d) In order to provide for just and equitable contribution in the event of joint liability under the Securities Act in any case in which either (i) the Purchaser, or any controlling person of the Purchaser, makes a claim for indemnification pursuant to this Section 5(c) but it is judicially determined (by the entry of a final judgment or decree by a court of competent jurisdiction and the expiration of time to appeal or the denial of the last right of appeal) that such indemnification may not be enforced in such case notwithstanding the fact that this Section 5(c) provides for indemnification in such case, or (ii) contribution under the Securities Act may be required on the part of the Purchaser or controlling person of the Purchaser in circumstances for which indemnification is provided under this Section 5(c); then, and in each such case, the Company and the Purchaser will contribute to the aggregate losses, claims, damages or liabilities to which they may be subject (after contribution from others) in such proportion so that the Purchaser is responsible only for the portion represented by the percentage that the public offering price of its securities offered by the registration statement bears to the public offering price of all securities offered by such registration statement, provided, however, that, in any such case, (A) the Purchaser will not be required to contribute any amount in excess of the public offering price of all such securities offered by it pursuant to such registration statement; and (B) no person or entity guilty of fraudulent misrepresentation (within the meaning of Section 10(f) of the Act) will be entitled to contribution from any person or entity who was not guilty of such fraudulent misrepresentation. 6. Representations and Warranties. (a) The Common Stock of the Company is registered pursuant to Section 12(b) or 12(g) of the Exchange Act and the Company has timely filed all proxy statements, reports, schedules, forms, statements and other documents required to be filed by it under the Exchange Act. The Company has filed (i) its Annual Report on Form 10- K for the fiscal year ended December 31, 2002 and (ii) its Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 2003 (collectively, the "SEC Reports"). The Company is eligible to file with the Commission a registration statement on Form SB-2 pursuant to Instruction I.B.3 thereof. Each SEC Report was, at the time of its filing, in substantial compliance with the requirements of its respective form and none of the SEC Reports, nor the financial statements (and the notes thereto) included in the SEC Reports, as of their respective filing dates, contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. The financial statements of the Company included in the SEC Reports comply as to form in all material respects with applicable accounting requirements and the published rules and regulations of the Commission or other applicable rules and regulations with respect thereto. Such financial statements have been prepared in accordance with generally accepted accounting principles ("GAAP") applied on a consistent basis during the periods involved (except (i) as may be otherwise indicated in such financial statements or the notes thereto or (ii) in the case of unaudited interim statements, to the extent they may not include footnotes or may be condensed) and fairly present in all material respects the financial condition, the results of operations and the cash flows of the Company and its subsidiaries, on a consolidated basis, as of, and for, the periods presented in each such SEC Report. (b) The Company Common Stock is listed for trading on the Nasdaq National Market and satisfies all requirements for the continuation of such listing. The Company has not received any notice that its Common Stock will be delisted from the Nasdaq National Market or that the Common Stock does not meet all requirements for the continuation of such listing. (c) Neither the Company, nor any of its affiliates, nor any person acting on its or their behalf, has directly or indirectly made any offers or sales of any security or solicited any offers to buy any security under circumstances that would cause the offering of the Securities pursuant to this Agreement to be integrated with prior offerings by the Company for purposes of the Securities Act which would prevent the Company from selling the Common Stock pursuant to Rule 506 under the Securities Act, or any applicable exchange-related stockholder approval provisions. Nor will the Company or any of its affiliates or subsidiaries take any action or steps that would cause the offering of the Securities to be integrated with other offerings. (d) The Registrable Securities are restricted securities under the Securities Act as of the date of this Agreement. The Company will not issue any stop transfer order or other order impeding the sale and delivery of any of the Registrable Securities at such time as the Registrable Securities are registered for public sale or an exemption from registration is available, except as required by federal or state securities laws. (e) The Company understands the nature of the Registrable Securities issuable upon the conversion of the Preferred Stock and the exercise of the Warrant and recognizes that the Registrable Securities may have a potential dilutive effect. The Company specifically acknowledges that its obligation to issue the Registrable Securities is binding upon the Company and enforceable regardless of the dilution such issuance may have on the ownership interests of other shareholders of the Company. (f) Except for agreements made in the ordinary course of business, there is no agreement that has not been filed with the SEC as an exhibit to a registration statement or to a form required to be filed by the Company under the Securities Exchange Act the breach of which could have a material and adverse effect on the Company and its subsidiaries, or would prohibit or otherwise interfere with the ability of the Company to enter into and perform any of its obligations under this Agreement in any material respect. (g) The Company will at all times have authorized and reserved a sufficient number of shares of Common Stock for the full conversion of the Preferred Stock and exercise of the Warrant. 7. Miscellaneous. (a) Remedies. In the event of a breach by the Company or by a Holder, of any of their obligations under this Agreement, each Holder or the Company, as the case may be, in addition to being entitled to exercise all rights granted by law and under this Agreement, including recovery of damages, will be entitled to specific performance of its rights under this Agreement. (b) No Piggyback on Registrations. Except as and to the extent specified in Schedule 6(b) hereto, neither the Company nor any of its security holders (other than the Holders in such capacity pursuant hereto) may include securities of the Company in the Registration Statement other than the Registrable Securities, and the Company shall not after the date hereof enter into any agreement providing any such right for inclusion of shares in the Registration Statement to any of its security holders. Except as and to the extent specified in Schedule 6(b) hereto, the Company has not previously entered into any agreement granting any registration rights with respect to any of its securities to any Person that has not been fully satisfied. (c) Compliance. Each Holder covenants and agrees that it will comply with the prospectus delivery requirements of the Securities Act as applicable to it in connection with sales of Registrable Securities pursuant to the Registration Statement. (d) Discontinued Disposition. Each Holder agrees by its acquisition of such Registrable Securities that, upon receipt of a notice from the Company of the occurrence of a Discontinuation Event, such Holder will forthwith discontinue disposition of such Registrable Securities under the Registration Statement until such Holder's receipt of the copies of the supplemented Prospectus and/or amended Registration Statement or until it is advised in writing (the "Advice") by the Company that the use of the applicable Prospectus may be resumed, and, in either case, has received copies of any additional or supplemental filings that are incorporated or deemed to be incorporated by reference in such Prospectus or Registration Statement. The Company may provide appropriate stop orders to enforce the provisions of this paragraph. For purposes of this Section 7(d), a "Discontinuation Event" shall mean when the Commission notifies the Company whether there will be a "review" of such Registration Statement and whenever the Commission comments in writing on such Registration Statement (the Company shall provide true and complete copies thereof and all written responses thereto to each of the Holders); (iii) any request by the Commission or any other Federal or state governmental authority for amendments or supplements to the Registration Statement or Prospectus or for additional information; (iv) the issuance by the Commission of any stop order suspending the effectiveness of the Registration Statement covering any or all of the Registrable Securities or the initiation of any Proceedings for that purpose; (v) the receipt by the Company of any notification with respect to the suspension of the qualification or exemption from qualification of any of the Registrable Securities for sale in any jurisdiction, or the initiation or threatening of any Proceeding for such purpose; and (vi) the occurrence of any event or passage of time that makes the financial statements included in the Registration Statement ineligible for inclusion therein or any statement made in the Registration Statement or Prospectus or any document incorporated or deemed to be incorporated therein by reference untrue in any material respect or that requires any revisions to the Registration Statement, Prospectus or other documents so that, in the case of the Registration Statement or the Prospectus, as the case may be, it will not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. (e) Piggy-Back Registrations. If at any time during the Effectiveness Period there is not an effective Registration Statement covering all of the Registrable Securities and the Company shall determine to prepare and file with the Commission a registration statement relating to an offering for its own account or the account of others under the Securities Act of any of its equity securities, other than on Form S-4 or Form S-8 (each as promulgated under the Securities Act) or their then equivalents relating to equity securities to be issued solely in connection with any acquisition of any entity or business or equity securities issuable in connection with stock option or other employee benefit plans, then the Company shall send to each Holder written notice of such determination and, if within fifteen days after receipt of such notice, any such Holder shall so request in writing, the Company shall include in such registration statement all or any part of such Registrable Securities such holder requests to be registered, subject to customary underwriter cutbacks applicable to all holders of registration rights and subject to the consent of any selling stockholder(s) under such registration statement. (f) Amendments and Waivers. The provisions of this Agreement, including the provisions of this sentence, may not be amended, modified or supplemented, and waivers or consents to departures from the provisions hereof may not be given, unless the same shall be in writing and signed by the Company and the Holders of the then outstanding Registrable Securities. Notwithstanding the foregoing, a waiver or consent to depart from the provisions hereof with respect to a matter that relates exclusively to the rights of certain Holders and that does not directly or indirectly affect the rights of other Holders may be given by Holders of at least a majority of the Registrable Securities to which such waiver or consent relates; provided, however, that the provisions of this sentence may not be amended, modified, or supplemented except in accordance with the provisions of the immediately preceding sentence. (g) Notices. Any notice or request hereunder may be given to the Company or Purchaser at the respective addresses set forth below or as may hereafter be specified in a notice designated as a change of address under this Section 7(g). Any notice or request hereunder shall be given by registered or certified mail, return receipt requested, hand delivery, overnight mail or telecopy (confirmed by mail). Notices and requests shall be, in the case of those by hand delivery, deemed to have been given when delivered to any officer of the party to whom it is addressed, in the case of those by mail or overnight mail, deemed to have been given when deposited in the mail or with the overnight mail carrier, and, in the case of a telecopy, when confirmed. The address for such notices and communications shall be as follows: If to the Company: Cycle Country Accessories Corp. Attention: L. Bob Hancher Facsimile: With a copy to: Van Stillman Esq. Facsimile: If to a Purchaser: To the address set forth under such Purchaser name on the signature pages hereto. If to any other Person who is then the registered Holder: To the address of such Holder as it appears in the stock transfer books of the Company or such other address as may be designated in writing hereafter, in the same manner, by such Person. (h) Successors and Assigns. This Agreement shall inure to the benefit of and be binding upon the successors and permitted assigns of each of the parties and shall inure to the benefit of each Holder. The Company may not assign its rights or obligations hereunder without the prior written consent of each Holder. Each Holder may assign their respective rights hereunder. (i) Execution and Counterparts. This Agreement may be executed in any number of counterparts, each of which when so executed shall be deemed to be an original and, all of which taken together shall constitute one and the same Agreement. In the event that any signature is delivered by facsimile transmission, such signature shall create a valid binding obligation of the party executing (or on whose behalf such signature is executed) the same with the same force and effect as if such facsimile signature were the original thereof. (j) Governing Law. All questions concerning the construction, validity, enforcement and interpretation of this Agreement shall be governed by and construed and enforced in accordance with the internal laws of the State of New York, without regard to the principles of conflicts of law thereof. Each party agrees that all Proceedings concerning the interpretations, enforcement and defense of the transactions contemplated by this Agreement shall be commenced exclusively in the state and federal courts sitting in the City of New York, Borough of Manhattan. Each party hereto hereby irrevocably submits to the exclusive jurisdiction of the state and federal courts sitting in the City of New York, Borough of Manhattan for the adjudication of any dispute hereunder or in connection herewith or with any transaction contemplated hereby or discussed herein, and hereby irrevocably waives, and agrees not to assert in any Proceeding, any claim that it is not personally subject to the jurisdiction of any such court, that such Proceeding is improper. Each party hereto hereby irrevocably waives personal service of process and consents to process being served in any such Proceeding by mailing a copy thereof via registered or certified mail or overnight delivery (with evidence of delivery) to such party at the address in effect for notices to it under this Agreement and agrees that such service shall constitute good and sufficient service of process and notice thereof. Nothing contained herein shall be deemed to limit in any way any right to serve process in any manner permitted by law. Each party hereto hereby irrevocably waives, to the fullest extent permitted by applicable law, any and all right to trial by jury in any legal proceeding arising out of or relating to this Agreement or the transactions contemplated hereby. If either party shall commence a Proceeding to enforce any provisions of a Transaction Document, then the prevailing party in such Proceeding shall be reimbursed by the other party for its reasonable attorneys fees and other costs and expenses incurred with the investigation, preparation and prosecution of such Proceeding. (k) Cumulative Remedies. The remedies provided herein are cumulative and not exclusive of any remedies provided by law. (l) Severability. If any term, provision, covenant or restriction of this Agreement is held by a court of competent jurisdiction to be invalid, illegal, void or unenforceable, the remainder of the terms, provisions, covenants and restrictions set forth herein shall remain in full force and effect and shall in no way be affected, impaired or invalidated, and the parties hereto shall use their reasonable efforts to find and employ an alternative means to achieve the same or substantially the same result as that contemplated by such term, provision, covenant or restriction. It is hereby stipulated and declared to be the intention of the parties that they would have executed the remaining terms, provisions, covenants and restrictions without including any of such that may be hereafter declared invalid, illegal, void or unenforceable. (m) Headings. The headings in this Agreement are for convenience of reference only and shall not limit or otherwise affect the meaning hereof. IN WITNESS WHEREOF, the parties have executed this Registration Rights Agreement as of the date first written above. CYCLE COUNTRY ACCESSORIES CORP. By: Name: Title: [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK SIGNATURE PAGES OF PURCHASER TO FOLLOW] IN WITNESS WHEREOF, the parties have executed this Registration Rights Agreement as of the date first written above. LAURUS MASTER FUND, LTD. By: Name: Title: Address for Notice: c/o Laurus Capital Management, LLC 152 West 57th Street, 4th Floor New York, New York 10019 Attention: David Grin EX-10.3 6 atclauruswarnt.txt WARRANT Right to Purchase 40,000 Shares of Common Stock of Cycle Country Accessories Corp. (subject to adjustment as provided herein) COMMON STOCK PURCHASE WARRANT No. [2003-2] Issue Date: June 9, 2003 Cycle Country Accessories Corp., a corporation organized under the laws of the State of Delaware (the "Company"), hereby certifies that, for value received, LAURUS MASTER FUND, LTD., or assigns (the "Holder"), is entitled, subject to the terms set forth below, to purchase from the Company from and after the Issue Date of this Warrant and at any time or from time to time before 5:00 p.m., New York time, through seven (7) years after such date (the "Expiration Date"), up to 40,000 fully paid and nonassessable shares of Common Stock (as hereinafter defined), $.01 par value per share, of the Company, at the Exercise Price (as defined below). The number and character of such shares of Common Stock and the Exercise Price are subject to adjustment as provided herein. As used herein the following terms, unless the context otherwise requires, have the following respective meanings: (a) The term "Company" shall include Cycle Country Accessories Corp. and any corporation which shall succeed or assume the obligations of Cycle Country Accessories Corp. hereunder. (b) The term "Common Stock" includes (a) the Company's Common Stock, $.01 par value per share, and (b) any other securities into which or for which any of the securities described in (a) may be converted or exchanged pursuant to a plan of recapitalization, reorganization, merger, sale of assets or otherwise. (c) The term "Other Securities" refers to any stock (other than Common Stock) and other securities of the Company or any other person (corporate or otherwise) which the holder of the Warrant at any time shall be entitled to receive, or shall have received, on the exercise of the Warrant, in lieu of or in addition to Common Stock, or which at any time shall be issuable or shall have been issued in exchange for or in replacement of Common Stock or Other Securities pursuant to Section 4 or otherwise. (d) The term "Exercise Price" shall be $4.00 per share; 1. Exercise of Warrant. 1.1 Number of Shares Issuable upon Exercise. From and after the date hereof through and including the Expiration Date, the Holder shall be entitled to receive, upon exercise of this Warrant in whole or in part, by delivery of an original or fax copy of the exercise notice attached hereto as Exhibit A (the "Exercise Notice"), shares of Common Stock of the Company, subject to adjustment pursuant to Section 4. 1.2 Fair Market Value. Fair Market Value of a share of Common Stock as of a particular date (the "Determination Date") shall mean: (a) If the Company's Common Stock is traded on an exchange or is quoted on the NASD OTC Bulletin Board ("OTCBB") or the American Stock Exchange Smallcap ("AMEX"), then the closing or last sale price, respectively, reported for the last business day immediately preceding the Determination Date. (b) If the Company's Common Stock is not traded on an exchange or on the OTCBB or AMEX, then the mean of the average of the closing bid and asked prices reported for the last business day immediately preceding the Determination Date. (c) Except as provided in clause (d) below, if the Company's Common Stock is not publicly traded, then as the Holder and the Company agree or in the absence of agreement by arbitration in accordance with the rules then in effect of the American Arbitration Association, before a single arbitrator to be chosen from a panel of persons qualified by education and training to pass on the matter to be decided. (d) If the Determination Date is the date of a liquidation, dissolution or winding up, or any event deemed to be a liquidation, dissolution or winding up pursuant to the Company's charter, then all amounts to be payable per share to holders of the Common Stock pursuant to the charter in the event of such liquidation, dissolution or winding up, plus all other amounts to be payable per share in respect of the Common Stock in liquidation under the charter, assuming for the purposes of this clause (d) that all of the shares of Common Stock then issuable upon exercise of the Warrant are outstanding at the Determination Date. 2. Procedure for Exercise. 2.1 Delivery of Stock Certificates, etc. on Exercise. The Company agrees that the shares of Common Stock purchased upon exercise of this Warrant shall be deemed to be issued to the Holder as the record owner of such shares as of the close of business on the date on which this Warrant shall have been surrendered and payment made for such shares as aforesaid. As soon as practicable after the exercise of this Warrant in full or in part, and in any event within 3 business days thereafter, the Company at its expense (including the payment by it of any applicable issue taxes) will cause to be issued in the name of and delivered to the Holder, or as such Holder (upon payment by such holder of any applicable transfer taxes) may direct in compliance with applicable securities laws, a certificate or certificates for the number of duly and validly issued, fully paid and nonassessable shares of Common Stock (or Other Securities) to which such Holder shall be entitled on such exercise, plus, in lieu of any fractional share to which such holder would otherwise be entitled, cash equal to such fraction multiplied by the then Fair Market Value of one full share, together with any other stock or other securities and property (including cash, where applicable) to which such Holder is entitled upon such exercise pursuant to Section 1 or otherwise. 2.2 Exercise. (a) Payment may be made by delivery of the Warrant, and/or Common Stock receivable upon exercise of the Warrant in accordance with Section (b) below, for the number of Common Shares specified in such form (as such exercise number shall be adjusted to reflect any adjustment in the total number of shares of Common Stock issuable to the holder per the terms of this Warrant) and the Holder shall thereupon be entitled to receive the number of duly authorized, validly issued, fully-paid and non-assessable shares of Common Stock (or Other Securities) determined as provided herein. (b) Notwithstanding any provisions herein to the contrary, if the Fair Market Value of one share of Common Stock is greater than the Exercise Price (at the date of calculation as set forth below), the Holder may elect to receive shares equal to the value (as determined below) of this Warrant (or the portion thereof being exercised) by surrender of this Warrant at the principal office of the Company together with the properly endorsed Exercise Notice in which event the Company shall issue to the Holder a number of shares of Common Stock computed using the following formula: X=Y (A-B) A Where X= the number of shares of Common Stock to be issued to the Holder Y= the number of shares of Common Stock purchasable under the Warrant or, if only a portion of the Warrant is being exercised, the portion of the Warrant being exercised (at the date of such calculation) A= the Fair Market Value of one share of the Company's Common Stock (at the date of such calculation) B= Exercise Price (as adjusted to the date of such calculation) 3. Effect of Reorganization, etc.; Adjustment of Exercise Price. 3.1 Reorganization, Consolidation, Merger, etc. In case at any time or from time to time, the Company shall (a) effect a reorganization, (b) consolidate with or merge into any other person, or (c) transfer all or substantially all of its properties or assets to any other person under any plan or arrangement contemplating the dissolution of the Company, then, in each such case, as a condition to the consummation of such a transaction, proper and adequate provision shall be made by the Company whereby the Holder of this Warrant, on the exercise hereof as provided in Section 1 at any time after the consummation of such reorganization, consolidation or merger or the effective date of such dissolution, as the case may be, shall receive, in lieu of the Common Stock (or Other Securities) issuable on such exercise prior to such consummation or such effective date, the stock and other securities and property (including cash) to which such Holder would have been entitled upon such consummation or in connection with such dissolution, as the case may be, if such Holder had so exercised this Warrant, immediately prior thereto, all subject to further adjustment thereafter as provided in Section 4. 3.2 Dissolution. In the event of any dissolution of the Company following the transfer of all or substantially all of its properties or assets, the Company, prior to such dissolution, shall at its expense deliver or cause to be delivered the stock and other securities and property (including cash, where applicable) receivable by the Holder of the Warrant after the effective date of such dissolution pursuant to Section 3.1 to a bank or trust company having its principal office in New York, NY, as trustee for the Holder of the Warrant. 3.3 Continuation of Terms. Upon any reorganization, consolidation, merger or transfer (and any dissolution following any transfer) referred to in this Section 3, this Warrant shall continue in full force and effect and the terms hereof shall be applicable to the shares of stock and other securities and property receivable on the exercise of this Warrant after the consummation of such reorganization, consolidation or merger or the effective date of dissolution following any such transfer, as the case may be, and shall be binding upon the issuer of any such stock or other securities, including, in the case of any such transfer, the person acquiring all or substantially all of the properties or assets of the Company, whether or not such person shall have expressly assumed the terms of this Warrant as provided in Section 4. In the event this Warrant does not continue in full force and effect after the consummation of the transactions described in this Section 3, then only in such event will the Company's securities and property (including cash, where applicable) receivable by the holders of the Warrant be delivered to the Trustee as contemplated by Section 3.2. 3.4 Adjustment of Warrant Exercise Price and Number of Shares upon Issuance of Common Stock. Other than (i) pursuant to warrants or options that are outstanding as of the date hereof and warrants and options that may be granted in the future under any option plan of the Company, or any employment agreement, joint venture, credit, leasing or other financing agreement or any joint venture or other strategic arrangement, in each case now or hereinafter entered into by the Company, (ii) pursuant to any securities issued by the Company to the Holder, (iii) pursuant to any agreement entered into by the Company or any of its subsidiaries for the acquisition of another business (whether by stock purchase or asset purchase, merger or otherwise; ((i), (ii) and (iii) above, are hereinafter referred to as the "Excluded Issuances")), if the Company at any time shall issue any shares of Common Stock prior to the complete exercise of this Warrant for a consideration less than the Exercise Price that would be in effect at the time of such issue, then, and thereafter successively upon each such issue, the Exercise Price shall be reduced as follows: (i) the number of shares of Common Stock outstanding immediately prior to such issue shall be multiplied by the Exercise Price in effect at the time of such issue and the product shall be added to the aggregate consideration, if any, received by the Company upon such issue of additional shares of Common Stock; and (ii) the sum so obtained shall be divided by the number of shares of Common Stock outstanding immediately after such issue. The resulting quotient shall be the adjusted Exercise Price. For purposes of this adjustment, the issuance of any security of the Company carrying the right to convert such security into shares of Common Stock or of any warrant, right or option to purchase Common Stock shall result in an adjustment to the Exercise Price upon the issuance of shares of Common Stock upon exercise of such conversion or purchase rights.. 4. Extraordinary Events Regarding Common Stock. In the event that the Company shall (a) issue additional shares of the Common Stock as a dividend or other distribution on outstanding Common Stock, (b) subdivide its outstanding shares of Common Stock, or (c) combine its outstanding shares of the Common Stock into a smaller number of shares of the Common Stock, then, in each such event, the Exercise Price shall, simultaneously with the happening of such event, be adjusted by multiplying the then Exercise Price by a fraction, the numerator of which shall be the number of shares of Common Stock outstanding immediately prior to such event and the denominator of which shall be the number of shares of Common Stock outstanding immediately after such event, and the product so obtained shall thereafter be the Exercise Price then in effect. The Exercise Price, as so adjusted, shall be readjusted in the same manner upon the happening of any successive event or events described herein in this Section 4. The number of shares of Common Stock that the holder of this Warrant shall thereafter, on the exercise hereof as provided in Section 1, be entitled to receive shall be increased to a number determined by multiplying the number of shares of Common Stock that would otherwise (but for the provisions of this Section 4) be issuable on such exercise by a fraction of which (a) the numerator is the Exercise Price that would otherwise (but for the provisions of this Section 4) be in effect, and (b) the denominator is the Exercise Price in effect on the date of such exercise. 5. Certificate as to Adjustments. In each case of any adjustment or readjustment in the shares of Common Stock (or Other Securities) issuable on the exercise of the Warrant, the Company at its expense will promptly cause its Chief Financial Officer or other appropriate designee to compute such adjustment or readjustment in accordance with the terms of the Warrant and prepare a certificate setting forth such adjustment or readjustment and showing in detail the facts upon which such adjustment or readjustment is based, including a statement of (a) the consideration received or receivable by the Company for any additional shares of Common Stock (or Other Securities) issued or sold or deemed to have been issued or sold, (b) the number of shares of Common Stock (or Other Securities) outstanding or deemed to be outstanding, and (c) the Exercise Price and the number of shares of Common Stock to be received upon exercise of this Warrant, in effect immediately prior to such adjustment or readjustment and as adjusted or readjusted as provided in this Warrant. The Company will forthwith mail a copy of each such certificate to the holder of the Warrant and any Warrant agent of the Company (appointed pursuant to Section 11 hereof). 6. Reservation of Stock, etc. Issuable on Exercise of Warrant. The Company will at all times reserve and keep available, solely for issuance and delivery on the exercise of the Warrant, shares of Common Stock (or Other Securities) from time to time issuable on the exercise of the Warrant. 7. Assignment; Exchange of Warrant. Subject to compliance with applicable securities laws, this Warrant, and the rights evidenced hereby, may be transferred by any registered holder hereof (a "Transferor") with respect to any or all of the Shares. On the surrender for exchange of this Warrant, with the Transferor's endorsement in the form of Exhibit B attached hereto (the "Transferor Endorsement Form") and together with evidence reasonably satisfactory to the Company demonstrating compliance with applicable securities laws, which shall include, without limitation, a legal opinion from the Transferor's counsel that such transfer is exempt from the registration requirements of applicable securities laws, the Company at its expense (but with payment by the Transferor of any applicable transfer taxes) will issue and deliver to or on the order of the Transferor thereof a new Warrant of like tenor, in the name of the Transferor and/or the transferee(s) specified in such Transferor Endorsement Form (each a "Transferee"), calling in the aggregate on the face or faces thereof for the number of shares of Common Stock called for on the face or faces of the Warrant so surrendered by the Transferor. 8. Replacement of Warrant. On receipt of evidence reasonably satisfactory to the Company of the loss, theft, destruction or mutilation of this Warrant and, in the case of any such loss, theft or destruction of this Warrant, on delivery of an indemnity agreement or security reasonably satisfactory in form and amount to the Company or, in the case of any such mutilation, on surrender and cancellation of this Warrant, the Company at its expense will execute and deliver, in lieu thereof, a new Warrant of like tenor. 9. Registration Rights. The Holder of this Warrant has been granted certain registration rights by the Company. These registration rights are set forth in a Securities Purchase Agreement entered into by the Company and Purchaser of the Company's Preferred Stock (the "Preferred Stock") at or prior to the issue date of this Warrant. 10. Maximum Exercise. The Holder shall not be entitled to exercise this Warrant on an exercise date, in connection with that number of shares of Common Stock which would result in beneficial ownership by the Holder and its affiliates of more than 4.99% of the shares of Common Stock of the Company on such date. For the purposes of the proviso to the immediately preceding sentence, beneficial ownership shall be determined in accordance with Section 13(d) of the Securities Exchange Act of 1934, as amended, and Regulation 13d-3 thereunder. Subject to the foregoing, the Holder shall not be limited to aggregate exercises which would result in the issuance of more than 4.99%. The restriction described in this paragraph may be revoked upon 75 days prior notice from the Holder to the Company and is automatically null and void upon an Event of Default under the Preferred Stock. 11. Warrant Agent. The Company may, by written notice to the each holder of the Warrant, appoint an agent for the purpose of issuing Common Stock (or Other Securities) on the exercise of this Warrant pursuant to Section 1, exchanging this Warrant pursuant to Section 7, and replacing this Warrant pursuant to Section 8, or any of the foregoing, and thereafter any such issuance, exchange or replacement, as the case may be, shall be made at such office by such agent. 12. Transfer on the Company's Books. Until this Warrant is transferred on the books of the Company, the Company may treat the registered holder hereof as the absolute owner hereof for all purposes, notwithstanding any notice to the contrary. 13. Notices, etc. All notices and other communications from the Company to the Holder of this Warrant shall be mailed by first class registered or certified mail, postage prepaid, at such address as may have been furnished to the Company in writing by such holder or, until any such Holder furnishes to the Company an address, then to, and at the address of, the last Holder of this Warrant who has so furnished an address to the Company. 14. Voluntary Adjustment by the Company. The Company may at any time during the term of this Warrant reduce the then current Exercise Price to any amount and for any period of time deemed appropriate by the Board of Directors of the Company. 15. Miscellaneous. This Warrant and any term hereof may be changed, waived, discharged or terminated only by an instrument in writing signed by the party against which enforcement of such change, waiver, discharge or termination is sought. This Warrant shall be governed by and construed in accordance with the laws of State of New York without regard to principles of conflicts of laws. Any action brought concerning the transactions contemplated by this Warrant shall be brought only in the state courts of New York or in the federal courts located in the state of New York; provided, however, that the Holder may choose to waive this provision and bring an action outside the state of New York. The individuals executing this Warrant on behalf of the Company agree to submit to the jurisdiction of such courts and waive trial by jury. The prevailing party shall be entitled to recover from the other party its reasonable attorney's fees and costs. In the event that any provision of this Warrant is invalid or unenforceable under any applicable statute or rule of law, then such provision shall be deemed inoperative to the extent that it may conflict therewith and shall be deemed modified to conform with such statute or rule of law. Any such provision which may prove invalid or unenforceable under any law shall not affect the validity or enforceability of any other provision of this Warrant. The headings in this Warrant are for purposes of reference only, and shall not limit or otherwise affect any of the terms hereof. The invalidity or unenforceability of any provision hereof shall in no way affect the validity or enforceability of any other provision. The Company acknowledges that legal counsel participated in the preparation of this Warrant and, therefore, stipulates that the rule of construction that ambiguities are to be resolved against the drafting party shall not be applied in the interpretation of this Warrant to favor any party against the other party. [THIS SPACE INTENTIONALLY LEFT BLANK] IN WITNESS WHEREOF, the Company has executed this Warrant under seal as of the date first written above. CYCLE COUNTRY ACCESSORIES CORP. By:_____________________________ Witness: ______________________________ Exhibit A FORM OF SUBSCRIPTION (To be signed only on exercise of Warrant) TO: Cycle Country Accessories Corp. The undersigned, pursuant to the provisions set forth in the attached Warrant (No.____), hereby irrevocably elects to purchase (check applicable box): ___ ________ shares of the Common Stock covered by such Warrant; or ___ the maximum number of shares of Common Stock covered by such Warrant pursuant to the cashless exercise procedure set forth in Section 2. The undersigned herewith makes payment of the full Exercise Price for such shares at the price per share provided for in such Warrant, which is $___________. Such payment takes the form of (check applicable box or boxes): ___ the cancellation of such portion of the attached Warrant as is exercisable for a total of _______ shares of Common Stock (using a Fair Market Value of $_______ per share for purposes of this calculation); and/or ___ the cancellation of such number of shares of Common Stock as is necessary, in accordance with the formula set forth in Section 2, to exercise this Warrant with respect to the maximum number of shares of Common Stock purchaseable pursuant to the cashless exercise procedure set forth in Section 2. The undersigned requests that the certificates for such shares be issued in the name of, and delivered to ____________________ whose address is ___________________________________________________________. The undersigned represents and warrants that all offers and sales by the undersigned of the securities issuable upon exercise of the within Warrant shall be made pursuant to registration of the Common Stock under the Securities Act of 1933, as amended (the "Securities Act") or pursuant to an exemption from registration under the Securities Act. Dated:___________________ ___________________ (Signature must conform to name of holder as specified on the face of the Warrant) _____________________________________ (Address) Exhibit B FORM OF TRANSFEROR ENDORSEMENT (To be signed only on transfer of Warrant) For value received, the undersigned hereby sells, assigns, and transfers unto the person(s) named below under the heading "Transferees" the right represented by the within Warrant to purchase the percentage and number of shares of Common Stock of Cycle Country Accessories Corp. to which the within Warrant relates specified under the headings "Percentage Transferred" and "Number Transferred," respectively, opposite the name(s) of such person(s) and appoints each such person Attorney to transfer its respective right on the books of Cycle Country Accessories Corp. with full power of substitution in the premises. Transferees Percentage Transferred Number Transferrred Dated:___________________ ___________________ (Signature must conform to name of holder as specified on the face of the Warrant) Signed in the presence of: _________________________________ _________________________________ (Name) (address) ACCEPTED AND AGREED: ________________________________________ [TRANSFEREE] (address) _____________________________ (Name) (continued from previous page) EX-23.1 7 atcaudconsentlaurs.txt AUDITORS' CONSENT Consent of Independent Accountants We consent to the use in this Registration Statement of Cycle Country Accessories Corp on Form SB-2 (No 333-______) of our report dated January 31, 2004, appearing in the Prospectus, which is part of this Registration Statement. We also consent to the reference to our Firm under the caption "Experts" in such Prospectus. /s/ TEDDER, JAMES, WORDEN & ASSOCIATES, P.A. - -------------------------------------------- Orlando, Florida April 22, 2004 -----END PRIVACY-ENHANCED MESSAGE-----