Table ofContents

 

 

 

**ANNUALREPORT FOR CYCLE COUNTRY ACCESSORIES CORP.**

 

**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

**FORM 10-K**

 

**(Mark one)**

 
| **x**                                                                                                                                    | **ANNUAL  REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE  ACT OF 1934.** |
|------------------------------------------------------------------------------------------------------------------------------------------|--------------------------------------------------------------------------------------------------------|
| ** **                                                                                                                               | ** **                                                                                             |
| **For the fiscal year ended September 30,  2009**                                                                                   |
|                                                                                                                                     |
| **OR**                                                                                                                                   |
|                                                                                                                                     |                                                                                                   |
| **o**                                                                                                                                    | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE EXCHANGE ACT OF  1934.**        |
| ** **                                                                                                                               | ** **                                                                                             |
| **For the transition period from                    to** |

 

**Commissionfile number: 001-31715**

 

**CycleCountry Accessories Corp.**

(Exact name of registrant as specified inits charter)

 

**Nevada**

(State or other jurisdiction ofincorporation or organization)

 

**42-1523809**

(IRS Employer Identification No.)

 

**1701 38th Ave W, Spencer, Iowa51301**

(Address of principal executive offices)

 

**P:(712) 262-4191**

**F: (712) 262-0248**

**www.cyclecountry.com**

(Registrant’s telephone number, facsimilenumber, and Corporate Website)

 

Securitiesregistered pursuant to Section 12(b) of the Act:  **None.**

 

Securitiesregistered pursuant to Section 12(g) of the Act:

 

| **Title  of Each Class**                   | ** ** | **Name  of Each Exchange on Which Registered** |
|--------------------------------------------|------------|------------------------------------------------|
| Common Stock,  par value $0.0001 per share |       | NYSE Amex                                      |

 

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

 

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

 

Check whether the issuer (1) has filed allreports required to be filed by Section 13 or 15(d) of the  Securities Exchange  Act during the past 12 months (or for suchshorter period that the registrant was required to file such reports),  and (2) has been subject to such filingrequirements for the past 90 days. o  Yes  No  x

 

Indicate by check mark whether the registranthas submitted electronically and posted on its corporate Web site, if any,every Interactive Data File required to be submitted and posted pursuant to Rule 405of Regulation S-T (Section 232.405 of this chapter) during the preceding12 months (or such shorter period that the registrant was required to submitand post such files). Yes  x  No o

 

Indicate by check mark if disclosure ofdelinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of thischapter) is not contained herein, and will not be contained, to the best ofregistrant’s knowledge, in definitive proxy or information statementsincorporated by reference in Part III of this Form 10-K or anyamendment to this Form 10-K. o

 

Indicate by check mark whether the registrant isa large accelerated filer, an accelerated filer, a non-accelerated filer, or asmaller reporting company. See definition of “large accelerated filer” and “acceleratedfiler” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

(Check one):

| Large accelerated filer o |   | Accelerated filer o         |
|---------------------------|--------|-----------------------------|
|                      |   |                        |
| Non-accelerated filer o   |   | Smaller reporting company x |

 

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

 

The aggregate market value of the common stockheld by non-affiliates of the registrant as of March 31, 2009, the lastbusiness day of the registrant’s most recently completed second quarter wasapproximately $944,705 based upon the closing price of the common stock on theNYSE Amex (formerly the “American Stock Exchange” “AMEX”) on that date.

 

The number of shares ofthe registrant’s common stock, par value $0.0001 per share, outstanding as of May 19,2010 was 5,876,891.

 

 

 

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**TABLE OFCONTENTS**

 
| ** ** | ** **                                                                                                          | **Page**   |
|------------|---------------------------------------------------------------------------------------------------------------------|------------|
| ** ** | **PART I**                                                                                                     | ** ** |
| ** ** | ** **                                                                                                          | ** ** |
| Item 1     | Business                                                                                                            | 3          |
| Item 1A    | Risk Factors                                                                                                        | 6          |
| Item 1B    | Unresolved Staff Comments                                                                                           | 9          |
| Item 2     | Properties                                                                                                          | 9          |
| Item 3     | Legal Proceedings                                                                                                   | 9          |
| Item 4     | Submission  of Matters to a Vote of Security Holders                                                                | 10         |
|       |                                                                                                                |       |
| ** ** | **PART ll**                                                                                                    |       |
| ** ** | ** **                                                                                                          |       |
| Item 5     | Market for  Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases  of Equity Securities | 10         |
| Item 6     | Selected  Consolidated Financial Data                                                                               | 12         |
| Item 7     | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                         | 14         |
| Item 8     | Financial Statements and  Supplementary Data                                                                        | 23         |
| Item 9     | Changes in and Disagreements  with Accountants on Accounting and Financial Disclosure                               | 23         |
| Item 9A(T) | Controls and  Procedures                                                                                            | 23         |
| Item 9B    | Other Information                                                                                                   | 24         |
|       |                                                                                                                |       |
| ** ** | **PART III**                                                                                                   |       |
| ** ** | ** **                                                                                                          |       |
| Item 10    | Directors, and Executive  Officers and Corporate Governance                                                         | 24         |
| Item 11    | Executive Compensation                                                                                              | 26         |
| Item 12    | Security Ownership of Certain  Beneficial Owners and Management and Related Stockholder Matters                     | 27         |
| Item 13    | Certain  Relationships and Related Transactions, and Director Independence                                          | 28         |
| Item 14    | Principal Accountant Fees and  Services                                                                             | 29         |
|       |                                                                                                                |       |
| ** ** | **PART lV**                                                                                                    |       |
| ** ** | ** **                                                                                                          |       |
| Item 15    | Exhibits and Financial  Statement Schedules                                                                         | 29         |
|       | Signatures                                                                                                          | 31         |
|       | Exhibit Index                                                                                                  | 32         |
|       | Consolidated Financial Statements                                                                                   | F-1        |

 

**CautionaryNote About Forward Looking Statements.**

 

Certainmatters discussed in this Form 10-K are “forward-looking statements,” andthe Company intends these forward-looking statements to be covered by the safeharbor provisions for forward-looking statements contained in the PrivateSecurities Litigation Reform Act of 1995 and is including this statement forpurposes of those safe harbor provisions. These forward-looking statements cangenerally be identified as such because they include phrases such as theCompany “expects,” “believes,” “anticipates” or other words of similar meaning.Similarly, statements that describe the Company’s future plans, objectives orgoals are also forward-looking statements. Such forward-looking statements aresubject to certain risks and uncertainties which could cause actual results oroutcomes to differ materially from those currently anticipated. Factors thatcould affect actual results or outcomes include the matters described under thecaption “Risk Factors” in Item 1A of this report and thefollowing:  changes in consumer spending patterns; the Company’ssuccess in implementing its strategic plan, including its focus on innovationand on cost-cutting and revenue enhancement 

initiatives;actions of and disputes with companies that compete with the Company; theCompany’s success in managing inventory; the risk that the Company’s lendersmay be unwilling to provide a waiver or amendment if the Company is inviolation of its financial covenants and the cost to the Company of obtainingany waiver or amendment the lenders would be willing to provide; the risk offuture write-down’s of goodwill or other intangible assets; movements inforeign currencies or interest rates; fluctuations in the prices of rawmaterials or the availability of raw materials; the Company’s success inrestructuring certain of its operations; the success of suppliers andcustomers; the ability of the Company to deploy its capital successfully;unanticipated outcomes related to outsourcing certain manufacturing processes;unanticipated outcomes related to potential litigation matters; and adverseweather conditions. Shareholders, potential investors and other readers areurged to consider these factors in evaluating the forward-looking statementsand are cautioned not to place undue reliance on such forward-looking statements.The forward-looking statements included herein are only made as of the date ofthis filing. The Company assumes no obligation, and disclaims any obligation,to update such forward-looking statements to reflect subsequent events orcircumstances.

 

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**PART I**

 

**ITEM1.     BUSINESS**

 

Cycle Country AccessoriesCorp., a Nevada corporation, was incorporated in Nevada in 2001 as anaggregation of various businesses.  The Company’s operations are heldin a wholly-owned subsidiary incorporated in Iowa, Cycle Country AccessoriesCorp. (“Cycle Country — Iowa”).  CycleCountry - Iowa has an unused, wholly-owned subsidiary with no assets,incorporated in Nevada, (“Cycle Country — Sub”).  The entities are collectively referred to asthe “Company”, “we”, “our”, or “Cycle Country.”

 

Cycle Country is aleading manufacturer and marketer of branded outdoor recreational andpowersports products for the outdoor enthusiast.  The Company’s growing portfolio ofwell-regarded brands has attained leading market positions in their respectivecategories due to uncompromising product quality and performance, as well asthe Company’s nearly 30 years of outstanding customer service.

 

The Company’s strategicinitiatives are rooted in our desire to serve the needs of our customers byleveraging the experiences of our entrepreneurial leadership to further aculture that communicate the needs of the customers, while promoting creative,proactive best practices that advance the Company’s strategic vision set byexecutive management as overseen by the Board of Directors.

 

The Company has fourdistinct divisions as reportable segments, with three of them engaged in thedesign, manufacture, sale and distribution of branded, proprietary products;the fourth division, Imdyne, engages in contract manufacturing.

 

·                  **Cycle Country ATV Accessories**

 

Weare one of the largest manufacturers of accessories for all terrain vehicles(ATVs) and utility vehicles (UTVs).  Wedesign, manufacture and sell a popular selection of branded accessories forvehicles in the outdoor recreational and powersports industry which are sold tovarious wholesale distributors and retail dealers throughout the United Statesof America, Canada, Mexico, South America, Europe, and Asia.  This line of branded products includessnowplow blades, lawnmowers, spreaders, sprayers, tillage equipment, winchmounts, utility boxes, baskets and an assortment of other ATV/UTV accessoryproducts.  These products custom fitessentially all ATV/UTV models.  Ourreputation as the recognized leader in our category has enabled us to developkey, long-term relationships with all of the leading ATV/UTV manufacturers anddistributors.

 

Wesell our products to all of the leading distributors in the United States, mostof which have sold our products continuously for the past 29 years.  These distributors sell to virtually everyATV/UTV dealer in North America.  Similarstrategic arrangements have also been developed internationally where our currentinternational distributors make our products available in eighteen other countries.

 

Ourproducts enhance the functionality and versatility of the ATV/UTV.  The ATV was initially designed as arecreational vehicle but is rapidly becoming a multi-purpose vehicle servingboth recreational and utility functions. Because of this, the market has reacted by developing a wide array ofutility and sport utility products (UTVs). Our products help ATV/UTV ownersperform many of their utility needs.

 

·                  **Plazco**

 

Plazcodesigns, manufactures, markets, and distributes injection-molded plasticproducts for vehicles such as golf cars, lawn mowers, and low-speed vehicles(LSVs).  We believe that we are thelargest manufacturer of golf car wheel covers in the world, estimating that wecontrol between 50% and 70% of the original equipment manufacturer (“OEM”) golfcar wheel cover business.  We have alwayssold directly to golf car manufacturers and we also have an excellentdistribution network that reaches the aftermarket throughout the United States,Europe and Asia.

 

·                  **Perf-Form**

 

Perf-Form manufactures,sells, and distributes oil filters for the powersports industry.   Our filters and coolers fit various modelsof Harley-Davidson, Ducati, Honda, and Yamaha. Our oil filters are sold through the same distribution channels that ourother powersports products are sold through. In addition to developing newproducts as models change, we also specialize is hard to find, legacy parts forout of production powersports products.

 

·                  **Imdyne** is engaged in the manufacture and assemblyof a wide array of parts, components, and other products for non-competing OEMand other customers.  Our capabilitiesinclude most forms of metal fabrication and plastic injection moldingprocesses.

 

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**Competition**

 

The Company believes itsproducts compete favorably on the basis of product innovation, productperformance, customer service and marketing support and price.

 

·                  **Cycle Country ATVAccessories:** The Company’s main competitors in the ATV/UTV accessories business arewholesale distributors who have sourced private label products primarily frommanufacturers in Asia, as well as a few large companies for which this categoryis a very small part of their business.  We are one of very fewAmerican manufacturers in our industry, and the only one for whom theseproducts are a primary focus.  The maincompetitors in the ATV/UTV accessories market are Polaris, Arctic Cat, Warn,John Deere, Swisher,  Moose, and AmericanEagle.

 

·                  **Plazco:**  The Company’s competitors in theplastic wheel covers and other golf car accessories market are Nivel, Inc., and Fore-Par Group, whichlicenses and markets the popular Cragar-branded wheel covers.

 

·                  **Perf-Form:**  The Company primarily competes inthe specialty oil filter and oil cooler market with Fram, WIX, Amsoil, K&N,and Purolator.  They are all larger thanPerf-Form, though we compete well with them in legacy engines for which thesesales are small and old technologies are appropriate.

 

·                  **Imdyne:**  There are many high quality,competitively priced metal fabricators and plastic injection-molding businessesin our market territory.  We have aslight competitive advantage over many of them in that our branded productscover some of the overhead of the Company. As a result, we can be competitively priced because the overhead isshared, creating cost efficiencies.

 

Competition in thisbusiness primarily focuses on product price, product innovation, and quality.Some of our competitors have longer operating histories, stronger brandrecognition and greater financial, technical, marketing and other resourcesthan we do. In addition, we may face competition from new participants in ourmarkets because the outdoor recreational products and powersports industrieshave limited barriers to entry. We experience price competition for ourproducts and competition for shelf space at retailers, both of which mayincrease in the future.

 

**FinancialInformation for Business Segments**

 

As noted above, theCompany has four reportable business segments. See Note 13 to the condensedconsolidated financial statements included elsewhere in this report forfinancial information concerning each business segment.

 

**InternationalOperations**

 

See Note 13 to thecondensed consolidated financial statements included elsewhere in this reportfor financial information regarding the Company’s domestic and internationaloperations.

 

**Researchand Development**

 

The Company’s competitiveposition is supported by designing and marketing new products continually.  We employ an experienced staff of productdesign and engineering professionals for the design of new products.  This innovation and engineering group servestwo primary functions: new product development and modifying existing productsto fit other manufacturers’ new and legacy powersports equipment.    The Company expenses research anddevelopment costs as incurred.  Theamounts expensed by the Company in connection with research and developmentactivities for each of the last two fiscal years are set forth in Note 1 to theCompany’s consolidated financial statements included elsewhere in this report.

 

**Employees**

 

The Company had 72regular, full-time employees at September 30, 2009 and 104 at September 30,2008. The Company considers its employee relations to be excellent. Temporaryemployees are utilized primarily to manage peaks in the seasonal manufacturingof products.

 

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**Backlog**

 

Unfilled orders forfuture delivery of products totaled approximately $2.6 million at September 30,2009. The data for the period ended September 30, 2008 is not available.No orders that were unfilled at September 30, 2009 will not be filled infiscal year 2010. For the majority of its products, the Company’s businesses donot receive significant orders in advance of expected shipment dates.

 

**Patents,Trademarks and Proprietary Rights**

 

The Company owns nosingle patent that is material to its business as a whole. However, the Companyholds various patents and regularly files applications for patents. The Companyhas numerous trademarks and trade names which it considers important to itsbusiness.  The Company has the followingtrademarks, which are used in this report: Cycle Country®, Weekend WarriorTM, State Plow®, Work Hard Play Hard®, ImdyneTM, Perf-FormTM, and PlazcoTM.  The Company owns patents on its wheel coverdesigns which have been infringed upon and successfully defended.

 

**SupplyChain and Sourcing of Materials**

 

The Company manufacturessome products that use materials that have long order lead times or that areonly available in a cost effective manner from a single vendor.  TheCompany mitigates product availability and supply chain risks through safetystocks and forecast-based purchase committments, and, to a lesser extent, withjust in time inventory deliveries.  The Company strives to balancethe imperative of holding adequate inventories with the need to maintainflexibility by building inventories to forecast for high-volume products,utilizing build to order strategies wherever possible, and by having someproducts delivered to customers directly from suppliers.

 

The Company has nomaterial dependence on any one vendor for materials whose interruption or lossin the availability of these materials is believed to present a materialadverse impact on the sales and operating results of the Company.  Most of the Company’s products are made usingmaterials that are generally in adequate supply and are available from avariety of third-party suppliers.

 

**Seasonality**

 

The Company’s productsare outdoor recreational and powersports-related which results in seasonalvariations in sales and profitability. This seasonal variability is due tocustomers’ increasing their inventories in the quarters ending September andDecember, the primary selling season for the Company’s outdoor recreational andpowersports products, with lower inventory volumes during the quarters ending March andJune.

 

**AvailableInformation**

 

The Company maintains a websiteat www.cyclecountry.com. On its website, the Company makes available, free ofcharge, its Annual Report on Form 10-K, and quarterly reports on Form 10-Qand amendments to those reports, as soon as reasonably practical after thereports have been electronically filed or furnished to the Securities andExchange Commission. Copies of any materials we file with the SEC are alsoavailable at the SEC’s Public Reference Room at 100 F Street, N.E.Washington, D.C. 20549. Information on the operation of the Public Reference Room maybe obtained by calling the SEC at 1-800-SEC-0330. In addition, the SECmaintains a Web site that contains reports, proxy and information statements,and other information regarding issuers that file electronically with the SECat www.sec.gov.

 

In addition, the Companymakes available on its website its Standards of Conduct and its Code of Ethics.The Company is not including the information contained on or available throughits website as a part of, or incorporating such information by reference into,this Annual Report on Form 10-K. This report includes all materialinformation about the Company that is included on the Company’s website and isotherwise required to be included in this report.

 

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**ITEM1A.      RISK FACTORS**

 

The risks described beloware not the only risks we face. Additional risks that we do not yet know of orthat we currently think are not material may also impair our future businessoperations. If any of the events or circumstances described in the followingrisks actually occurs, our business, financial condition or results ofoperations could be materially adversely affected. In such cases, the tradingprice of our common stock could decline.

 

**Our netsales and profitability depend on our ability to continue to conceive, designand market products that appeal to our consumers.**

 

The introduction of newproducts is critical in our industry and to our growth strategy. Our businessdepends on our ability to continue to conceive, design, manufacture and marketnew products and upon continued market acceptance of our product offerings.Rapidly changing consumer preferences and trends make it difficult to predicthow long consumer demand for our existing products will continue or what newproducts will be successful. Our current products may not continue to bepopular or new products that we may introduce may not achieve adequate consumeracceptance for us to recover development, manufacturing, marketing and othercosts. A decline in consumer demand for our products, our failure to developnew products on a timely basis in anticipation of changing consumer preferencesor the failure of our new products to achieve and sustain consumer acceptancecould reduce our net sales and profitability.

 

**Competitionin our markets could reduce our net sales and profitability.**

 

Competition in thisbusiness primarily focuses on product price, product innovation, and quality.Some of our competitors have longer operating histories, stronger brandrecognition and greater financial, technical, marketing and other resourcesthan we do. In addition, we may face competition from new participants in ourmarkets because the outdoor recreational products and powersports industrieshave limited barriers to entry. We experience price competition for ourproducts and competition for shelf space at retailers, both of which mayincrease in the future. If we cannot compete successfully in the future, ournet sales and profitability will likely decline.

 

**Purchasesof Company products are discretionary spending and general economic conditionssignificantly affect the Company’s results of operations.**

 

Our products are generallyviewed as discretionary spending by consumers. In times of economic uncertainty, consumers tend to defer expendituresfor discretionary items, which affects demand for our products.  Ourrevenues are affected by economic conditions and consumer confidence worldwide,but especially in the United States and Europe.  Moreover, ourbusinesses are cyclical in nature, and their success is dependent uponfavorable economic conditions, the overall level of consumer confidence anddiscretionary income and spending levels.  Any substantialdeterioration in general economic conditions that diminish consumer confidenceor discretionary income or spending can reduce our sales and adversely affectour financial results.  The impact of weak consumer credit markets, corporaterestructurings, layoffs, declines in the value of investments and residentialreal estate, higher fuel prices and increases in federal and state taxation allcan negatively affect our operating results.

 

**Weare dependent upon certain key members of management.**

 

Our success will dependto a significant degree on the abilities and efforts of our senior management.Moreover, our success depends on our ability to attract, retain and motivatequalified management, marketing, technical and sales personnel. These peopleare in high demand and often have competing employment opportunities. The labormarket for skilled employees is competitive and we may lose key employees or beforced to increase their compensation to retain these people. Employee turnovercould significantly increase our training and other related employee costs. Theloss of key personnel, or the failure to attract qualified personnel, couldhave a material adverse effect on our business, financial condition or resultsof operations.

 

**Sourcesof and fluctuations in market prices of raw materials can affect our operatingresults.**

 

The primary raw materialswe use are metals, resins and packaging materials. These materials aregenerally available from a number of suppliers for each commodity or purchasedcomponent. We believe our sources of raw materials are reliable and adequatefor our needs. However, the development of future sourcing issues related tothe availability of these materials as well as significant fluctuations in themarket prices of these materials may have an adverse affect on our financialresults.

 

**We rely on our credit facility to provide us with sufficientworking capital to operate our business.**

 

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Historically, we haverelied upon our existing credit facilities to provide us with adequate workingcapital to operate our business.  The availability of borrowingamounts under our credit facilities are dependent upon our compliance with thedebt covenants set forth in the facilities.  Violation of thosecovenants, whether as a result of incurring operating losses or otherwise,could result in our lenders restricting or terminating our borrowing abilityunder our credit facilities.  The availability of borrowing amountsunder our revolving credit facility is dependent upon the amount and quality ofthe accounts receivable and inventory collateralizing the revolving creditfacility.  The bankruptcy of a major customer could have asignificant negative impact on the availability of borrowing amounts under ourrevolving credit facility.  If our lenders reduce or terminate ouraccess to amounts under our credit facilities, we may not have sufficientcapital to fund our working capital needs and/or we may need to secureadditional capital or financing to fund our working capital requirements or torepay outstanding debt under our credit facilities.  We can make noassurance that we will be successful in ensuring our availability to amountsunder our credit facilities or in connection with raising additional capitaland that any amount, if raised, will be sufficient to meet our cashrequirements.  If we are not able to maintain our borrowing availabilityunder our credit facilities and/or raise additional capital when needed, we maybe forced to sharply curtail our efforts to manufacture and promote the sale ofour products or to curtail our operations.  Ultimately, we may beforced to cease operations.

 

**Salesof our products are seasonal, which causes our operating results to vary fromquarter to quarter.**

 

Sales of our products areseasonal. Historically, our net sales and profitability have peaked in thefirst and fourth fiscal quarters due to the buying patterns of our customers.Seasonal variations in operating results may cause our results to fluctuatesignificantly in the second and third quarters and may depress our stock priceduring the first and fourth quarters.

 

**Impairmentcharges could reduce our profitability.**

 

We test our intangibleassets with indefinite useful lives for impairment on an annual basis duringthe fourth quarter of our fiscal year, or on an interim basis if an eventoccurs that might reduce the fair value of the reporting unit below itscarrying value. Various uncertainties, including changes in consumerpreferences, deterioration in the political environment, continued adverseconditions in the capital markets or changes in general economic conditionscould impact the expected cash flows to be generated by an intangible asset orgroup of intangible assets, and may result in an impairment of thoseassets.  Although any such impairment charge would be a non-cashexpense, any impairment of our intangible assets could materially increase ourexpenses and reduce our profitability.

 

During the third quarterof 2009, the Company determined that indicators of potential impairment existedbecause the Company had experienced a decrease in the Company’s marketcapitalization for a sustained period of time and had sustained two quarters ofcontinued net losses.   In accordancewith ASC 360, the Company evaluated its long-lived assets and other intangibleassets, using an undiscounted cash flow analysis prior to evaluatinggoodwill.  This analysis supported thecarrying value of the long-lived assets and other intangible assets, but couldnot support  the carrying value ofgoodwill.  Therefore, management determinedthat no impairment was necessary of the long-lived assets and other intangibleassets.

 

In evaluating goodwill,the Company evaluated the market capitalization at June 30, 2009 andperformed an evaluation based on multiples of earnings and discounted cash flowanalysis as evidence of the fair value of the entity.  It was determined that the fair value did notexceed the carrying amount of goodwill, and accordingly, the Company took animpairment charge of approximately $4,890,000.

 

The Company’s analysisuses significant estimates in the evaluation of long-lived assets, other intangibles,and goodwill, such as estimated cash flows from continuing operations,estimated future revenues, cost of goods sold and gross margin.  It is reasonably possible that our estimatesand assumptions could change in the near future, which could lead to furtherimpairment of long-lived assets and other intangibles.

 

**Wecould be delisted by the NYSE Amex Stock Exchange.**

** **

The Company has received a Notice ofdelisting from NYSE Amex which is discussed in Item 7, Management Discussion& Analysis, as well as in Note 20 to the consolidated financial statements.

** **

**Wemay experience difficulties in integrating strategic acquisitions.**

 

As part of our growthstrategy, we intend to pursue acquisitions that are consistent with our missionand that will enable us to leverage our competitive strengths. Risks associatedwith integrating strategic acquisitions include:

 

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| · | the acquired business  may experience losses which could adversely affect our profitability;                                            |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------|
| · | unanticipated costs  relating to the integration of acquired businesses may increase our expenses;                                      |
| · | possible failure to  obtain any necessary consents to the transfer of licenses or other agreements  of the acquired company;            |
| · | possible failure to  maintain customer, licensor and other relationships after the closing of the  transaction of the acquired company; |
| · | difficulties in  achieving planned cost-savings and synergies may increase our expenses;                                                |
| · | diversion of our  management’s attention could impair their ability to effectively manage our  other business operations; and      |
| · | unanticipated  management or operational problems or liabilities may adversely affect our  profitability and financial condition.       |

 

**Currencyexchange rate fluctuations could increase our expenses.**

 

We currently do not havesignificant foreign operations, but our growth plan depends somewhat on growthin foreign operations for which the functional currencies are often denominatedin Euros, Swiss Francs, Japanese Yen, Chinese Yuan, Taiwan Dollars and CanadianDollars. As the values of the currencies of the foreign countries in which wehave operations increase or decrease relative to the U.S. dollar, the sales,expenses, profits, losses, assets and liabilities of our foreign operations, asreported in our condensed consolidated financial statements, increase ordecrease, accordingly. None of our revenues for the year ended September 30,2009 or 2008 were denominated in currencies other than the U.S. dollar.

 

**Anylitigation we undertake to collect amounts due to us could be unsuccessful andthe costs could reduce our profitability.**

 

TheCompany is involved in the collection of funds in connection with the misappropriationof funds discussed more fully in Item 3. We may not be successful in our efforts. Even if we are successful in the litigation, we may not receive an awardsufficient to remedy the damages, there may not be sufficient assets to collectany judgment awarded and some or all of the costs incurred in connection withany such litigation or collection efforts may not be fully recovered.  It is not possible, at this time, to estimatewhat those costs may be.

 

**Trademarkinfringement or other intellectual property claims relating to our productscould increase our costs.**

 

We could be either aplaintiff or defendant in trademark and patent infringement claims and claimsof breach of license from time to time. The prosecution or defense ofintellectual property litigation is both costly and disruptive of the time andresources of our management even if the claim or defense against us is withoutmerit. We could also be required to pay substantial damages or settlement coststo resolve intellectual property litigation.

 

We also rely on tradesecret law to protect certain of our technologies and proprietary informationthat we cannot or have chosen not to patent. Trade secrets, however, aredifficult to protect. Although we attempt to maintain protection throughconfidentiality agreements with key personnel, contractors and consultants, wecannot guarantee that such contracts will not be breached.  In the event of a breach of a confidentialityagreement or divulgence of proprietary information, we may not have adequatelegal remedies to maintain our trade secret protection. Litigation to determinethe scope of intellectual property rights, even if ultimately successful, couldbe costly and could divert management’s attention away from business and maynot adequately compensate for the damages suffered..

 

**Weare subject to environmental and safety regulations.**

 

We are subject tofederal, state, and local laws and other legal requirements related to thegeneration, storage, transport, treatment and disposal of materials as a resultof our manufacturing and assembly operations. We believe that our existingenvironmental management system is adequate and we have no current plans forsubstantial capital expenditures in the environmental area. We do not currentlyanticipate any material adverse impact on our results of operations, financialcondition or competitive position as a result of compliance with federal,state, local and foreign environmental laws or other legal requirements.However, risk of environmental liability and changes associated withmaintaining compliance with environmental laws is inherent in the nature of ourbusiness and there is no assurance that material liabilities or changes wouldnot arise.

 

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**Ourshares of common stock are thinly traded and our stock price may be morevolatile.**

 

Because our common stockis thinly traded, its market price may fluctuate significantly more than thestock market in general or the stock prices of similar companies, which areexchanged, listed or quoted on the NYSE Amex. Thus, our common stock will be less liquid than the stock of companieswith broader public ownership, and as a result, the trading prices for ourshares of common stock may be more volatile. Among other things, trading of arelatively small volume of our common stock may have a greater impact on thetrading price for our stock than would be the case if our public float werelarger.

 

**ITEM1B.     UNRESOLVED STAFF COMMENTS**

 

On September 30, theCompany received a comment letter from the Securities and Exchange Commission(the “Commission”) regarding the Form 10-KSB for the year ended September 30,2008 and the Form 10-Q for the quarterly period ended June 30,2009.  The Company responded on November 6,2009 to all of the concerns addressed by the Commission’s comment letter.  The Company addressed some of the concerns ofthe Commission by filing an amendment to its Form 10-KSB for its fiscalyear ended September 30, 2008.  Inaddition, the Company believes that the remaining concerns of the Commissionare addressed in the filing of this Form 10-K for the year ended September 30,2009.

 

**ITEM2.     PROPERTIES**

 

The Company maintainsboth leased and owned manufacturing, warehousing, distribution and officefacilities. The Company believes that its facilities are well maintained andhave capacity adequate to meet its reasonably foreseeable needs.  The Company has approximately 260,000 squarefeet of modern manufacturing facilities in Spencer, IA and Milford, IA.

 

The Company’s corporateheadquarters is located in its owned facility in Spencer, Iowa.

 

As of September 30,2009, the Company operated in the following manufacturing, distribution andoffice locations:

 

·                  Spencer, Iowa

·                  Milford, Iowa

·                  Minnetonka, Minnesota

 

See Note 12 to thecondensed consolidated financial statements included elsewhere in this reportfor a discussion of the Company’s lease obligations.

 

**ITEM3.  LEGAL PROCEEDINGS**

 

The Company is subject tolegal proceedings and claims which arise in the ordinary course of itsbusiness.  There is presently only onesuch claim known to management, which is more fully discussed in Item 7,Management’s Discussion and Analysis, as well as in Notes 19 and 20 to theconsolidated financial statements, and is related to Company’s claims inconnection with the misappropriation of funds by the former Chairman of theBoard of Directors.

 

The Company intends to pursueall appropriate action to recover amounts due to it as a result of theseevents, which may include litigation proceedings if necessary.   In the second quarter of 2010, the Companyreceived 195,416 shares of the Company shares related to the recovery from thismisappropriation.  In addition, the Company continues to cooperate withthe various regulatory authorities involved.

 

While the ultimateoutcome of these matters is not presently determinable, it is in the opinion ofmanagement that the resolution of outstanding claims will not have a materialadverse effect on the financial position or results of operations of theCompany.  Due to the uncertainties in thesettlement process, it is at least reasonably possible that management’s viewof outcomes will change in the near term.

 

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**ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS**

 

On August 24, 2009, CycleCountry Accessories Corp. filed a definitive proxy statement pursuant to Section 14(a) ofthe Securities Exchange Act of 1934 to solicit the consent of itsstockholders.  The following matters weresubmitted to a vote of stockholders during the fourth quarter of the fiscalyear ended September 30, 2009:

 

·                  tore-elect two directors for a term which will expire at the 2012 annual meeting;

·                  toratify the appointment of Boulay, Heutmaker, Zibell & Co. P.L.L.P. asthe independent registered public accounting firm for our fiscal year ending September 30,2009; and

·                  totransact such other business as properly came before the annual meeting or anyadjournment or postponement thereof.

 

The stockholders approved by proxyor in person the re-election of the two directors as follows:

 
| **Nominees**   | ** ** | **Votes For** | ** ** | **Votes Against** | ** ** | **Abstain** | ** ** |
|----------------|------------|---------------|------------|-------------------|------------|-------------|------------|
| Robert Davis   |       | 3,173,531     |       | 143,361           |       | 50,082      |       |
| Daniel Thralow |       | 3,316,692     |       | 200               |       | 50,082      |       |

 

The shareholders approved theratification of the appointment of the audit firm as follows:

 
| **Votes For** | ** ** | **Votes Against** | ** ** | **Abstain** |
|---------------|------------|-------------------|------------|-------------|
| 3,329,967     |       | 11,512            |       | 25,495      |

 

There were no other matters broughtto a vote of security holders during the fourth quarter of the fiscal yearended September 30, 2009.  Thedirectors continuing in office and not up for reelection were:  Jeffrey M. Tetzlaff, Alan Bailey and L.G.Hancher, Jr.  Mssrs. Bailey and Hancherhave since resigned from the Board and Paul DeShaw has been elected by theBoard to fill one of the vacancies.  Mr. DeShawwill stand for election by the shareholders at the next annual meeting.

 

**PART II**

 

**ITEM 5.  MARKET FOR REGISTRANT’S COMMON EQUITY,RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES**

 

Certain information with respect tothis item is included in Note 9 to the Company’s consolidated financialstatements included elsewhere in this report. The Company has only one class ofcommon stock and it is traded on the NYSE Amex under the symbol: ATC.  As of September 30 2009, the Company had 43holders of record of its common stock.

 

A summary of the high and low sales pricesfor the Company’s common stock during each quarter of the years ended September 30,2009 and September 30, 2008 is as follows:

 
| ** **    | ** ** | **First Quarter** | ** ** | **Second Quarter** | ** ** | **Third Quarter** | ** ** | **Fourth Quarter** | ** ** |
|---------------|------------|-------------------|------------|--------------------|------------|-------------------|------------|--------------------|------------|
| ** **    | ** ** | **2009**          | ** ** | **2008**           | ** ** | **2009**          | ** ** | **2008**           | ** ** | **2009** | ** ** | **2008** | ** ** | **2009** | ** ** | **2008** | ** ** |
| Stock prices: |       |              |       |               |       |              |       |               |       |   |   |   |   |   |   |   |   |
| High          |       | $                 | 1.0837     |               | $          | 1.98              |       | $                  | 0.55       |   | $ | 2.45 |   | $ | 0.56 |   | $ | 1.85 |   | $ | 0.62 |   | $ | 1.82 |   |
| Low           |       | $                 | 0.39       |               | $          | 1.43              |       | $                  | 0.15       |   | $ | 1.52 |   | $ | 0.23 |   | $ | 1.30 |   | $ | 0.23 |   | $ | 0.76 |   |

 

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In fiscal 2009, the Company declaredno dividends.  The Company intends toretain earnings for investment in its operations and does not intend to paydividends in the foreseeable future.  Thefollowing limitations apply to the ability of the Company to pay dividends:

 

*Pursuant to the Company’s revolving credit and security agreement,originally dated August 21, 2001, and which is further described in Note 7to the Company’s condensed consolidated financial statements included elsewherein this report, by and among the Company and its lender, the Company isrestricted in its ability to make restricted payments (primarily dividends andrepurchases of common stock). The Company may not declare or pay dividendswithout the consent of its lender.*

 

**Equity CompensationPlan**

 

The following table sets forth unexercised options held by the namedexecutive officers as of the 2009 fiscal year-end.

 

Outstanding Equity Awards at September 30,2009

 

**EquityCompensation Plan Information**

 
| **Plan  category**                                          | ** ** | **Number of securities to   be issued upon exercise   of outstanding options,  warrants and rights   (a)** | ** ** | **Weighted-average   exercise price of  outstanding options,  warrants and rights   (b)** | ** ** | **Number of securities remaining   available for future issuance under   equity compensation plans   (excluding securities reflected in   column (a))  (c)** | ** ** |
|-------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| Equity compensation plans approved by security  holders     |       | None                                                                                                       |       | —                                                                                    |       | —                                                                                                                                                       |       |
| Equity compensation plans not approved by security  holders |       | 500,000                                                                                                    |       | $                                                                                         | 1.68       |                                                                                                                                                         | —     | (1) |
| Total                                                       |       | 500,000                                                                                                    |       | 1.68                                                                                      |       | —                                                                                                                                                       |       |
|                                                             |            |                                                                                                            |            |                                                                                           |            |                                                                                                                                                              |            |  |

 

----

(1) Representsa three year option issued to Jeffrey M. Tetzlaff, Chief Executive Officer,dated May 16, 2008 at an exercise price of $1.68 per share, whichrepresents the closing price on the date his employment commenced.

 

**TotalShareholder Return**

 

The graph below compares on acumulative basis the yearly change since September 30, 2004 in the totalreturn (assuming that dividends were not reinvested) to shareholders on thecommon stock with (a) the total return (assuming that dividends were notreinvested) on the S&P 500 Composite Index; (b) the total return (assumingthat dividends were not reinvested) on the Russell 2000 Index; and (c) thetotal return (assuming that dividends were not reinvested) on aself-constructed peer group index. The peer group consists of Arctic Cat Inc.,Polaris Industries Inc., and Deere & Co.  The graph assumes $100 was invested on September 30,2004 in the Company’s common stock, the S&P 500 Composite Index, theRussell 2000 Index and the peer group indices.

 

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* $100 invested on September 30,2004 in stock or the applicable index or peer group, not includingreinvestment of dividends.

 

The information in this sectiontitled “Total Shareholder Return” shall not be deemed to be “solicitingmaterial” or “filed” with the Securities and Exchange Commission or subject toRegulation 14A or 14C promulgated by the Securities and Exchange Commission orsubject to the liabilities of section 18 of the Securities Exchange Act of1934, as amended, and this information shall not be deemed to be incorporatedby reference into any filing under the Securities Act of 1933, as amended, orthe Securities Exchange Act of 1934, as amended.

 

**ITEM6.     SELECTED CONSOLIDATED FINANCIAL DATA**

 

The following table presentsselected consolidated financial data, which should be read along with theCompany’s consolidated financial statements and the notes to those statementsand with “Item 7 — Management’s Discussion and Analysis of Financial Conditionand Results of Operations” included elsewhere in this report. The consolidatedstatements of operations for the years ended September 30, 2009 and September 30,2008, and the consolidated balance sheet data as of September 30, 2009 andSeptember 30, 2008 are derived from the Company’s audited consolidatedfinancial statements included elsewhere herein.

 

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SELECTEDCONSOLIDATED FINANCIAL DATA

 
| ** **                                            | ** ** | **September 30** | ** ** | **September 30** | ** ** |
|-------------------------------------------------------|------------|------------------|------------|------------------|------------|
| ** **                                            | ** ** | **2009**         | ** ** | **2008**         | ** ** |
| INCOME STATEMENT:                                     |       |             |       |             |       |
| Sales                                                 |       | $                | 10,281,726 |             | $          | 17,513,941 |   |
| Cost of Goods Sold                                    |       | 8,360,912        |       | 13,215,382       |       |
| Inventory Adjustments (1)                             |       | 474,000          |       | —           |       |
| Gross Profit                                          |       | 1,446,814        |       | 4,298,559        |       |
| Sales, General & Admin  (2)                  |       | 4,037,309        |       | 4,763,859        |       |
| Goodwill Impairment (3)                               |       | 4,890,146        |       | —           |       |
| Fraud Expense (4)                                     |       | 620,000          |       | —           |       |
| Gain on Sale of Assets                                |       | (164,590         | )          | (361,462         | )          |
| Operating Expense                                     |       | $                | 9,382,865  |             | $          | 4,402,397 |   |
| Other income (Expense)                                |       | $                | (323,742   | )                | $          | (284,681 | ) |
| Net Profit (Loss) Pre Tax                             |       | $                | (8,259,793 | )                | $          | (388,519 | ) |
| Net Profit (Loss)                                     |       | $                | (6,798,793 | )                | $          | (358,262 | ) |
| Cash Dividends                                        |       | $                | 0          |             | $          | 0 |   |
|                                                  |       |             |       |             |       |
| BALANCE SHEET:                                        |       |             |       |             |       |
| Total Current Assets                                  |       | $                | 6,958,732  |             | $          | 8,811,039 |   |
| Net Fixed Assets                                      |       | 10,803,308       |       | 11,449,369       |       |
| Other Assets                                          |       | 218,935          |       | 5,116,321        |       |
| Total Assets                                          |       | $                | 17,980,975 |             | $          | 25,376,729 |   |
|                                                  |       |             |       |             |       |
| Total Current Liabilities                             |       | 3,808,053        |       | 3,279,937        |       |
| Long Term Liabilities                                 |       | 5,281,537        |       | 6,526,615        |       |
| Total Liabilities                                     |       | 9,089,590        |       | 9,806,552        |       |
| Net Worth                                             |       | $                | 8,891,385  |             | $          | 15,570,177 |   |
|                                                  |       |             |       |             |       |
| EQUITY                                                |       |             |       |             |       |
| Weighted Average Shares of Common  Stock Outstanding: |       |             |       |             |       |
| Basic                                                 |       | 6,059,854        |       | 6,169,659        |       |
| Diluted                                               |       | 6,059,854        |       | 6,169,659        |       |
| Earnings (Loss) Per Common Share                      |       |             |       |             |       |
| Basic                                                 |       | $                | (1.12      | )                | $          | (0.06 | ) |
| Diluted                                               |       | $                | (1.12      | )                | $          | (0.06 | ) |

 

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(1)          Theyear ended September 30, 2009 includes a charge for excess and obsoleteinventory of approximately $283,000 and a charge for inventory shrink ofapproximately $191,000 included in the cost of sales.

(2)          The year 2008 includes a charge of $117,000for the buyout of the employment agreements of the former CEO and CFO who wereterminated.

(3)          Theyear ended September 30, 2009 includes a goodwill impairment charge of$4,890,146.

(4)          Theyear ended September 30, 2009 includes a fraud expense of $620,000.

 

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**ITEM 7.    MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

**ExecutiveOverview**

 

The Company designs, manufacturesand markets top-quality outdoor recreational and powersports products for theoutdoor enthusiast. Through a combination of innovative products, strongmarketing, a talented and passionate workforce, and excellent customer service,the Company has set itself apart from the competition for nearly 30 years. OurCompany strives each day to accelerate our creative, entrepreneurial culture, followingthe strategic vision set by executive management and overseen by the Company’sBoard of Directors.

 

**RecentDevelopments**

 

**Misappropriationof Funds by Former Board Chairman**

 

TheCompany previously reported the acquisition by the Company of 747,250 shares ofits own stock at an average cost of $0.72 per share price (the “Stock Buyback”)for a total cost of $570,000 in cash during the first fiscal quarter ending December 31,2008 of fiscal 2009.  In the process of completing the audit of itsconsolidated financial statements for the fiscal year ended September 30,2009, the Company was unable to obtain satisfactory documentation confirmingthe Stock Buyback.

 

Mr. L.G.(Bob) Hancher, Jr., the then-Chairman of the Company’s Board of Directorsand Audit Committee, had recommended the Stock Buyback and had undertaken tocomplete it on the Company’s behalf.  Mr. Hancher had previouslyreported to the Company and its auditors that he had completed the StockBuyback on the terms disclosed in the Company’s filings.

 

Inthe process of investigating matters relating to the Stock Buyback, a number ofirregularities surrounding the purported transactions surfaced.  Inresponse to ongoing inquiries from management for appropriate documentation onthe use of $570,000 in cash provided by the Company to complete the StockBuyback, on January 6, 2010, the Company received a letter from Mr. Hancherthat stated $400,000 of the funds advanced to him by the Company were not usedto purchase shares of Company stock.

 

Thefunds reported as used for the Stock Buyback have been re-characterized asfraud expense.  Also, as a result of the misappropriation, the number ofoutstanding shares was incorrectly reported in each of the Company’s quarterlyreports on Form 10-Q for fiscal 2009, including the Original Filing andhave been corrected.

 

Inaddition, during the quarter ended March 31, 2009, as part of thispurported Stock Buyback transaction, Mr. Hancher directed the Company topay $50,000 to a consulting brokerage firm.  These funds were originallyrecorded as a pre-paid expense, and were to be used to pay future legal andother advisory costs.  As a result of the Company’s investigation of thisentire matter, management has determined the $50,000 in prepaid expenses alsoshould be treated as fraud expense.

 

Furthermore,the Company is reclassifying some stock-based compensation to its outsidedirectors.  Mr. Hancher was responsible for issuing stock-basedcompensation to the other directors in accordance with the Company’s approvedplan.  However, as part of the investigation, it was discovered that someof the shares that Mr. Hancher was to issue were not in fact issued.

 

TheCompany continues to work to recover all of the amounts misappropriated, butany such recoveries will impact subsequent periods and will be reported for theperiods in which such recoveries occur. In the second quarter of fiscal 2010, the Company recovered 195,416shares of its stock.

 

**DelistingNotice for Company Shares from NYSE Amex.**

 

Upondiscovery of the misappropriation of funds noted above, the Company’s external,independent auditors and attorneys were engaged to launch an internalinvestigation into this matter.  Themisappropriation and subsequent investigation created significant delays, whichcaused the Company to be unable to timely file its annual report on Form 10-Kfor the year ended September 30, 2009, as well as its Form 10-Q forthe fiscal quarter ending December 31, 2009.

 

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OnJanuary 8, 2010, the Company notified the Securities and ExchangeCommission and the NYSE Amex compliance authorities of the discovery of themisappropriation of funds and announced its expected delay in filing its Form 10-K.  On January 14, 2010, the Companyreceived a notice (the “Notice”) from NYSE Amex LLC (“Exchange”) that theCompany was not in compliance with some of the Exchange’s continued listingstandards.  On February 17, 2010, the Company received an additionalnotice from the Exchange that determined the Company is out of compliance withthe Exchange’s continued listing requirements for its failure to timely fileits Form 10-Q for its first fiscal quarter ended December 31, 2009.

 

TheCompany filed a Plan of Compliance (the “Plan”) with the Exchange on January 28,2010.  On March 1, 2010, the Companyreceived a letter from the Exchange that it has accepted the Company’s Planand, pursuant to such Plan, the Exchange granted the Company an extension untilApril 14, 2010 to regain compliance with its continued listing standardsin order to maintain its listing on the Exchange.  The Companysubsequently requested and was granted an additional extension until May 17,2010 to file its delinquent reports.

 

TheExchange has acknowledged that through the Company’s recently announcedaddition of a new independent member to its Board of Directors and AuditCommittee, the Company has regained compliance with the relevant sections of theCompany Guide identified in the Notice.

 

TheCompany believes it will be back into compliance with the remainingdeficiencies identified by the Exchange with the filing of this Form 10-Kand the filing of its Form 10-Q for its first fiscal quarter ending December 31,2009, which is also being filed on or about the time of the filing of thisreport.

 

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**Results ofOperations**

 

The Company’s sales and operatingprofit (loss) by business segment are summarized as follows:

 
| ** **                             | ** ** | **2009**   | ** ** | **2008**   | ** ** | **$ Change** | ** ** | **% Change** | ** ** |
|----------------------------------------|------------|------------|------------|------------|------------|-------------------|------------|--------------|------------|
|                                   |       |       |       |       |       |              |       |         |       |
| Total Revenue by Segment               |       |       |       |       |       |              |       |         |       |
| CCAC ATV                               |       | $          | 8,649,967  |       | $          | 14,759,198        |       | $            | (6,109,231 | ) | (41.39 | )% |
| Plazco                                 |       | 689,792    |       | 1,500,730  |       | (810,938          | )          | (54.04       | )%         |
| Perf-Form                              |       | 254,197    |       | 219,862    |       | 34,335            |       | 15.62        | %          |
| Imdyne                                 |       | 1,425,997  |       | 2,144,978  |       | (718,981          | )          | (33.52       | )%         |
|                                   |       |       |       |       |       | —            |       |         |       |
| Total Revenue by Segment               |       | 11,019,953 |       | 18,624,768 |       | (7,604,815        | )          | (40.83       | )%         |
|                                   |       |       |       |       |       | —            |       |         |       |
| Freight Income                         |       | 92,842     |       | 69,299     |       | 23,543            |       | 33.97        | %          |
| Sales Discounts &  Allowances |       | (831,069   | )          | (1,180,126 | )          | 349,057           |       | 29.58        | %          |
|                                   |       |       |       |       |       |              |       |         |       |
| Total Consolidated Revenue             |       | 10,281,726 |       | 17,513,941 |       | (7,232,215        | )          | (41.29       | )%         |
|                                   |       |       |       |       |       |              |       |         |       |
| Operating profit by Segment            |       |       |       |       |       |              |       |         |       |
| CCAC ATV                               |       | 4,181,220  |       | 6,734,377  |       | (2,553,157        | )          | (37.91       | )%         |
| Plazco                                 |       | 404,367    |       | 845,572    |       | (441,205          | )          | (52.18       | )%         |
| Perf-Form                              |       | 78,069     |       | 72,670     |       | 5,399             |       | 7.43         | %          |
| Imdyne                                 |       | 407,016    |       | 783,092    |       | (376,076          | )          | (48.02       | )%         |
|                                   |       |       |       |       |       |              |       |         |       |
| Total Profit By Segment                |       | 5,070,672  |       | 8,435,711  |       | (3,365,039        | )          | (39.89       | )%         |
|                                   |       |       |       |       |       |              |       |         |       |
| Freight Income                         |       | 92,842     |       | 69,299     |       | 23,543            |       | 33.97        | %          |
| Sales Disc. & Allow.          |       | (831,069   | )          | (1,180,126 | )          | 349,057           |       | 29.58        | %          |
| Factory Overhead                       |       | (2,885,631 | )          | (3,026,325 | )          | 140,694           |       | 4.65         | %          |
|                                   |       |       |       |       |       |              |       |         |       |
| Gross Profit                           |       | $          | 1,446,814  |       | $          | 4,298,559         |       | $            | (2,851,745 | ) | (66.34 | )% |

 

See Note 13 in the notes to the consolidatedfinancial statements included elsewhere in this report for the definition ofsegment net sales and operating profit.

 

***Fiscal 2009 vs. Fiscal 2008***

 

**Net Sales**

 

With the exception of Perf-Form,which showed a slight increase in sales, the Company’s business segments wereadversely impacted in 2009 by the state of the domestic and global economies.  Duringthe 2009 fiscal year, sales were negatively affected by a weak retailenvironment which the Company believes is due to a number of factors including,but not limited to, continued weakness in the domestic and global economies,high unemployment, volatile capital markets, depressed housing prices and tightconsumer lending practices, all of which drove consumer confidence down to, ornear, historical lows and resulted in considerable negative pressure onspending by individual consumers.  The Company is continuing to adjust itsinfrastructure to match its sales volumes as it works through these difficult times.  Netsales totaled $10,281,726 in 2009 compared to $17,513,941 in 2008, a decreaseof 41.3% or $7,232,215.

 

Net sales for the Cycle Country ATVAccessories business segment decreased approximately $6.1 million or 41.4%during 2009.  The decline was primarily the result of generaleconomic conditions and weakness in the sales of new units by the manufacturersof ATV/UTV powersports which reduced demand for all aftermarket accessories inthese product lines.

 

Plazco’s net sales declined approximately$811,000 in 2009, or 54.0%, primarily due to the decline in sales to the golfindustry.  Golf car accessories were down from the prior year due tosoftness in the U.S. economy driving cautious spending by that industry.

 

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Net sales for the Perf-Form oilfilter business segment increased slightly by approximately $34,000 or 15.6%,primarily as a result of improvement in the Company’s on-going supply chainissues with components necessary for manufacturing the products.

 

Imdyne, our contract manufacturing businesssegment saw a decline in sales of approximately $719,000, or 33.5%, due largelyto weak economic conditions in the Midwest among the customers for whom wegenerally fabricate products.

 

**Cost of Goods Sold**

 

Cost of Goods Sold for the fiscalyear was impacted adversely in the first quarter and fourth quarter of fiscal2009 due to the Company having recorded two inventory write-offs totalingapproximately $474,000 for the year.  Thefirst write-off, in the amount of approximately $191,000, occurring in thesecond quarter, was due to a a shortage discovered during a physical inventorycount at the end of January 2009. The Company also recorded an inventory write-off of $283,000 as a resultof the completion of the inventory evaluation started in the third fiscalquarter.  In that period, the Company hadincreased its reserve by approximately $610,000 as an estimate of the excessand obsolete inventory on hand.  However,in the fourth quarter, the Company continued to evaluate the inventory andfound that the total amount was only $283,000

 

Productionefficiencies and aggressive material and parts purchasing led to lower costs ofgoods sold across all of the segments of the Company.

 

**Gross Profit**

 

Gross profit of approximately $1.4million was 14.1% of net sales on a consolidated basis for the year ended September 30,2009 compared to approximately $4.3 million or 24.5% of net sales in the prioryear.  The gross profit decline of $2.9 million was primarilyattributable to the 41.5% decline in sales volume during 2009 as compared to2008.  As a result of reduced sales, and in order to reduceinventories, our manufacturing facilities were operated at reduced capacity atcertain points during the year. This resulted in higher unabsorbed costs in ourmanufacturing plants, which were expensed during the period.

 

Operating profit in the CycleCountry ATV Accessories business segment declined approximately $2.5 million fromthe prior year due to a decline in volume, but improved as a percent of salesfrom 45.6% in 2008 to 48.3% in the current year.

 

Operating profit in the Plazcobusiness segment declined approximately $441,000 from 2008, but improved as apercent of sales from 56.3% in the prior year to 58.6% in 2009.

 

Operating profit in the Perf-Form oilfilter segment was 30.7% of sales in 2009 and was $5,000 higher than 2008levels, which were equal to 33.1% of sales.  The slight increase ingross profit was due primarily to increased volume while the decrease inoperating profit percentage is due to related operating inefficiencies.

 

Operating profit for the Imdynecontract manufacturing segment decreased by approximately $376,000 from 36.5%of sales in 2008 to 28.5% of sales in 2009 primarily as a result of operatinginefficiencies due to lower volumes.

 

**Selling,General and Administrative Expenses**

 

Selling, general and administrative expensesdecreased from the prior year by $727,000.  The decrease was due, inpart, to a decrease in wages of approximately $457,000.  During fiscal 2008, the Company paid $117,000due to the departure of the former CEO and CFO. Advertising expenses were down approximately $352,000 due to advertisinginitiatives in 2008 not continued in fiscal 2009 such as television ads, brochuresand videos.

 

**Impairment Charges**

 

Duringthe third quarter of 2009, the Company determined that indicators of potentialimpairment existed because the Company had experienced a decrease in theCompany’s market capitalization for a sustained period of time and hadsustained two quarters of continued net losses. In accordance with ASC 360, the Company evaluated its long-lived assetsand other intangible assets, using an undiscounted cash flow analysis prior toevaluating goodwill.  This analysissupported the carrying value of the long-lived assets and 

 

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otherintangible assets, but could not support the carrying value t of goodwill.  Therefore, management determined that noimpairment was necessary of the long-lived assets and other intangible assets.

 

Inevaluating goodwill, the Company evaluated the market capitalization at June 30,2009 and performed an evaluation based on multiples of earnings and discountedcash flow analysis as evidence of the fair value of the entity.  It was determined that the fair value did notexceed the carrying amount of goodwill, and accordingly, the Company took animpairment charge of approximately $4,890,000.

 

The Company’s analysis uses significant estimates in the evaluation ofother intangibles such as estimated cash flows from continuing operations,estimated future revenues, cost of goods sold and gross margin.  It is reasonably possible that the Company’sestimates and assumptions could change in the near future, which could lead tofurther impairment of long-lived assets and other intangibles.

 

**OperatingResults**

 

The Company recognized an operatingloss of $7.9 million in fiscal 2009 compared to an operating loss of $104,000in fiscal 2008.  Primary factors drivingthe decrease in operating profit margins were the goodwill impairment lossrecognized in the current year with significantly lower production volumes in2009.

 

**InterestExpense**

 

Interestexpense continues to decrease in correlation with the decrease of debt carriedby the company.  During fiscal year 2009,interest expense decreased by approximately $3,000 dollars as compared tofiscal year 2008.

 

**Other Incomeand Expenses**

 

Other income and expense includesinterest income and lease income.   Otherexpense increased approximately $39,000 for the year ended September 30,2009 as compared to the year ended September 30, 2008.

 

**PretaxIncome (Loss) and Income Taxes**

 

The Company recognized a pretax lossof $8.26 million in fiscal 2009, compared to a pretax loss of $389,000 infiscal 2008. The Company recorded an income tax benefit of $1.46 million, aneffective benefit of 17.7%, compared to $30,000 of income tax benefit in fiscal2008, an effective benefit rate of 7.8%.

 

**Net Loss**

 

The Company recognized a net loss of$6.8 million in fiscal 2009, or $1.12 per diluted share, compared to a net lossof $358,000 in fiscal 2008, or $0.06 per diluted share.

 

**Financial Condition, Liquidity and Capital Resources**

 

The Company’s cash flow fromoperating, investing and financing activities, as reflected in the consolidatedstatements of cash flows, is summarized in the following table:

 
| ** **                                        | ** ** | **2009** | ** ** | **2008**   | ** ** |
|---------------------------------------------------|------------|----------|------------|------------|------------|
| Cash provided by (used for):                      |       |     |       |       |       |
| Operating activities                              |       | $        | 364,292    |       | $          | (49,473 | ) |
| Investing activities                              |       | (192,379 | )          | (1,275,920 | )          |
| Financing activities                              |       | (338,999 | )          | 1,065,121  |       |
| Increase (decrease) in cash and cash  equivalents |       | $        | (167,086   | )          | $          | (260,272 | ) |

 

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The Company generated approximately $364,000in positive cash flow from operating activities, a change from negative cashflow last year in the amount of approximately ($50,000).  The Company’s seasonal line of credit,positive cash flow, and strong balance sheet will continue to fund theCompany’s ability to meet existing and likely future cash requirements.  

 

The Company violated one of the technicalcovenants in its loan agreements with its lender.  The Company has asked for and received awaiver from the lender for this technical violation.  Continuation of these covenant violations couldultimately have a negative impact on the Company, as it may affect the Company’sability to negotiate new credit facilities with this lender.  Further, these violations carry a penaltypayment due to the lender, and though the penalty is small, the continuation ofthese violations could impact the Company’s operations.

 

The Company’s business is seasonal and theyear-end falls during one of our busiest times of year.  At September 30, 2009, and September 30,2008, our lines of credit had been fully utilized, but the Company hadsignificant accounts receivable and inventory. Consistent with its historical experience, the Company expects tocollect sufficient receivables to repay the line of credit.  The Company expects the existing cashbalances, the cash flow to be generated from operating activities, and theavailable borrowing capacity under our credit line agreement to be sufficientto fund normal operations..

 

**Operating Activities**

 

The following table sets forth the Company’sworking capital position at the end of each of the past two years:

 
| ** **          | ** ** | **2009**  | ** ** | **2008**  | ** ** |
|---------------------|------------|-----------|------------|-----------|------------|
| Current assets      |       | $         | 6,958,732  |      | $          | 8,811,039 |   |
| Current liabilities |       | 3,808,053 |       | 3,279,937 |       |
| Working capital     |       | $         | 3,150,679  |      | $          | 5,531,102 |   |
| Current ratio       |       | 1.83      |       | 2.69      |       |

 

Cash flows provided by (used for) operationstotaled $364,300, and $(49,500) in fiscal 2009 and 2008, respectively. The mostsignificant driver in the increase in cash flows from operations in fiscal 2009was a $1.5 million decrease in inventory levels; a $1.1 million decrease inaccounts receivable offset by an increased net loss and an increase in deferredtaxes receivable.

 

Depreciation and amortization charges were$836,000 in fiscal 2009 and $813,000 in fiscal 2008.

 

**Investing Activities**

 

Cash flows used for investing activities wereapproximately $192,000 and $1,300,000 in fiscal 2009 and 2008, respectively.Expenditures for property, plant and equipment were $221,000 and $1,280,000 infiscal 2009 and 2008, respectively.  Ingeneral, the Company’s ongoing capital expenditures are primarily related totooling and equipment for new products, lean manufacturing initiatives, andinformation systems improvements.

 

**Financing Activities**

 

The following table sets forth the Company’sdebt and capital structure at the end of the past two fiscal years:

 
| ** **                         | ** ** | **2009**  | ** ** | **2008**   | ** ** |
|------------------------------------|------------|-----------|------------|------------|------------|
| Current debt                       |       | $         | 863,160    |       | $          | 811,053 |   |
| Long-term debt                     |       | 3,111,783 |       | 3,971,525  |       |
| Total debt                         |       | 3,974,943 |       | 4,782,578  |       |
| Shareholders’ equity          |       | 8,891,385 |       | 15,570,177 |       |
| Total capitalization               |       | $         | 12,866,328 |       | $          | 20,352,755 |   |
| Total debt to total capitalization |       | 30.9      | %          | 23.5       | %          |

 

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Payments on long-termdebt were approximately $685,000 and $808,000 for fiscal years 2008 and 2009respectively.

 

**ContractualObligations and Off-Balance-Sheet Arrangements**

 

The Company hascontractual obligations and commitments to make future payments under itsexisting credit facility, including principal, interest and operating leases.See Note 7 in the consolidated financial statements included elsewhere in thisreport for financial information regarding the significant terms and scheduleof payments on debt obligations, and Note 12 regarding lease obligations.

 

As part of the investmentin Golden Rule (Bermuda) Ltd, a captive insurance company in which the Companyhas invested and formerly secured some of its insurance protection, the Companyis required to provide a letter of credit primarily as security for the paymentof future claims under its workers compensation insurance. Letters of creditoutstanding at September 30, 2009 were approximately $195,000 compared to$207,000 at September 30, 2008.  Thedecline was caused by the Company moving its workers compensation insurance toa new company.

 

The Company has nooff-balance-sheet arrangements.

 

**MarketRisk Management**

 

The Company is exposed tomarket risk stemming from changes in commodity prices such as steel, plasticresins, and packaging materials, and to a lesser extent to foreign currencyexchange rates and interest rates. Changes in these factors could causefluctuations in earnings and cash flows. The Company may reduce exposure tocertain of these market risks by entering into supply agreements and purchasecontracts for materials.   The Companydoes not currently use hedging transactions as part of its risk managementstrategy.

 

**ForeignCurrency**

 

The Company currently hasa limited amount of foreign sales or off-shore product sourcing for which thefunctional currencies would commonly be denominated in Euros, Swiss Francs,Japanese Yen, Chinese Yuan, Taiwan Dollars, and Canadian dollars. As the valuesof the currencies of the foreign countries in which the Company has sales oroff-shore product sourcing increase or decrease relative to the U.S. dollar,the sales, expenses, profits, losses, assets and liabilities of the Company’sforeign operations, as reported in the Company’s condensed consolidatedfinancial statements, increase or decrease, accordingly. None of the Company’srevenues for the years ended September 30, 2009 and 2008 were denominatedin currencies other than the U.S. dollar.

 

**InterestRates**

 

The Company’s long-termcapital needs are largely funded with fixed rate debt and seasonal workingcapital needs are funded with floating rate debt. The Company’s primaryexposure is to U.S. interest rates.

 

**Commodities**

 

Certain components usedin the Company’s products are exposed to commodity price changes. The Companymanages this risk through instruments such as purchase orders andnon-cancelable supply contracts. Primary commodity price exposures includecosts associated with metals, resins and packaging materials.

 

**Sensitivityto Changes in Value**

 

The estimated maximumpotential loss from a 100 basis point movement in interest rates on the Company’sterm loan and short term borrowings outstanding at September 30, 2009 isapproximately $50,000 in in annual income before income taxes.  Theseestimates are intended to measure the maximum potential earnings the Companycould lose in one year from adverse changes in market interestrates.  The calculations are not intended to represent actual lossesin fair value or earnings that the Company expects to incur.  Theestimates do not consider favorable changes in market rates or the effect ofinterest rate floors.

 

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**OtherFactors**

 

The Company anticipatesthat changing costs of basic raw materials may impact future operating costsand, accordingly, the prices of its products. The Company is involved incontinuing programs to mitigate the impact of cost increases through changes inproduct design and identification of sourcing and manufacturing efficiencies.Price increases and, in certain situations, price decreases are implemented forindividual products, when appropriate.

 

**CriticalAccounting Policies and Estimates**

 

The Company’s managementdiscussion and analysis of its financial condition and results of operationsare based upon the Company’s consolidated financial statements, which have beenprepared in accordance with accounting principles generally accepted in theU.S.  The preparation of these financial statements requires theCompany to make estimates and judgments that affect the reported amounts of itsassets, liabilities, sales and expenses, and related footnotedisclosures.  On an on-going basis, the Company evaluates itsestimates for product returns, bad debts, inventories, intangible assets,income taxes, warranty obligations, pensions and other post-retirementbenefits, and litigation.  The Company bases its estimates onhistorical experience and on various other assumptions that are believed to bereasonable under the circumstances, the results of which form the basis formaking judgments about the carrying values of assets and liabilities that arenot readily apparent from other sources.  Actual results may differfrom these estimates under different assumptions or conditions.

 

The Company believes thefollowing critical accounting policies affect its more significant judgmentsand estimates used in the preparation of its consolidated financialstatements.  Management has discussed these policies with the AuditCommittee of the Company’s Board of Directors.

 

**Allowancefor Doubtful Accounts**

 

The Company recognizesrevenue when title and risk of ownership have passed to thebuyer.  Allowances for doubtful accounts are estimated by theindividual operating companies based on estimates of losses related to customeraccounts receivable balances.  Estimates are developed by usingstandard quantitative measures based on historical losses, adjusting forcurrent economic conditions and, in some cases, evaluating specific customeraccounts for risk of loss. The establishment of reserves requires the use ofjudgment and assumptions regarding the potential for losses on receivablebalances. Though the Company considers these balances adequate and proper,changes in economic conditions in specific markets in which the Companyoperates and any specific customer collection issues the Company identifiescould have a favorable or unfavorable effect on required reserve balances.

 

**Inventories**

 

Inventories are stated atthe lower of cost or market using the weighted average method. Cost includesmaterials, labor, and manufacturing overhead related to the purchase andproduction of inventories. Management regularly reviews inventory quantities onhand, future product demand and the estimated utility of inventory. If thereview indicates a reduction in utility below carrying value, management wouldreduce the Company’s inventory to a new cost basis through a charge to cost ofgoods sold.

 

During the third quarter of 2009, while undergoing lean manufacturing process improvements and upgrades to the ERP software used to manage the Company, management spent significant time evaluating the inventory processes, inventory quantities on hand, future product demand and the estimated utility inventory.  During this review, management made the determination that some inventory on-hand was obsolete or needed to be written down to the current market values. Accordingly, the Company increased the reserve by $610,000 to approximately $772,000 during third quarter, until management could complete the review.

 

The Company completed the process improvements and upgrades during the fourth quarter of 2009.  As a result of management review, process improvements and upgrades, management ultimately determined the Company had approximately $283,000 of obsolete inventory, which was applied against the inventory reserve upon disposal.  Adjustments to the inventory reserve for write downs due to lower of cost or market were immaterial.  Management evaluated the Company’s remaining inventory reserve based on the Company’s historical experience and current economic conditions and determined that an inventory reserve of approximately $150,000 at September 30, 2009 was appropriate.  It is reasonably possible the inventory reserve will change in the near future.

 

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**DeferredTaxes**

 

The Company records avaluation allowance to reduce its deferred tax assets to the amount that ismore likely than not to be realized. While the Company has considered futuretaxable income and ongoing prudent and feasible tax planning strategies inassessing the need for the valuation allowance, in the event the Company wereto determine that it would not be able to realize all or part of its net deferredtax assets in the future, an adjustment to the deferred tax assets would becharged to income in the period such determination was made. Likewise, shouldthe Company determine that it would be able to realize its deferred tax assetsin the future in excess of its net recorded amount, an adjustment to thedeferred tax assets would increase income in the period such determination wasmade.

 

**Goodwilland Other Intangible Assets Impairment**

 

Goodwilland intangible assets are reviewed and assessed for impairment at leastannually or when indicators of potential impairment exist, using a fair-valuebased approach.  Fair value is estimated using adiscounted cash flow analysis.  If the fair value of a reporting unitexceeds its net book value, no impairment exists. When fair value is less thanthe carrying value of the net assets and related goodwill, an impairment testis performed to measure and recognize the amount of the impairment loss, ifany.  The estimate of fair value was calculated using a discountedcash flow analysis, which requires a number of key estimates andassumptions.  We estimated the future cash flows of the otherintangible assets based on historical and forecasted revenues and operatingcosts.  We applied a discount rate to the estimated future cash flowsfor purposes of the valuation.  This discount rate is based on theestimated weighted average cost of capital, which includes certain assumptionssuch as market capital structure, market betas, risk-fee rate of return and estimatedcosts of borrowing.  Changes in these key estimates and assumptions,or in other assumptions used in this process, could materially affect ourimpairment analysis in a given year.

 

Intangibleassets with estimable useful lives are amortized over their respectiveestimated useful lives.

 

Duringthe third quarter of 2009, the Company determined that indicators of potentialimpairment existed because the Company had experienced a decrease in theCompany’s market capitalization for a sustained period of time and hadsustained two quarters of continued net losses. In accordance with ASC 350, the Company evaluated its other intangibleassets using an undiscounted cash flow analysis prior to evaluating goodwill.  This analysis supported the carrying value ofthe other intangible assets, but would only support a minimal amount ofgoodwill.  Therefore, managementdetermined that no impairment was necessary of the other intangible assets.

 

Inevaluating goodwill, the Company evaluated the market capitalization at June 30,2009 valuation based on multiples of earnings and discounted cash flow analysisas evidence of the fair value of the entity. It was determined that the fair value did not exceed the carrying amountof goodwill, and accordingly, the Company took an impairment charge for thefull amount of the goodwill of approximately $4,890,000.

 

TheCompany’s analysis uses significant estimates in the evaluation of otherintangibles and goodwill, such as estimated cash flows from continuingoperations, estimated future revenues, cost of goods sold and grossmargin.  It is reasonably possible thatthe Company’s estimates and assumptions could change in the near future, whichcould lead to further impairment of long-lived assets and other intangibles.

 

Otherintangible assets are stated at cost and consist of trademarks, andpatents.  All trademarks acquired by theCompany’s acquisitions have been deemed to have an indefinite life and as suchwill not be amortized.  Patents are beingamortized over their estimated useful lives of 15 years.

 

**Warranties**

 

The Company accrues awarranty reserve for estimated costs to provide warranty services. Warrantyreserves are estimated by the Company using standard quantitative measuresbased on criteria established by the Company. Estimates of costs to service itswarranty obligations are based on historical experience, expectation of futureconditions and known product issues. To the extent the Company experiencesincreased warranty claim activity or increased costs associated with servicingthose claims, revisions to the estimated warranty reserve would be required.The Company engages in product quality programs and processes, includingmonitoring and evaluating the quality of its suppliers, to help minimizewarranty obligations.

 

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**NewAccounting Pronouncements**

 

On October 1,2008, the Company adopted ASC 820 “Fair Value Measurements” which defines fairvalue, outlines a framework for measuring fair value (although it does notexpand the required use of fair value) and details the required disclosuresabout fair value measurements.  At thepresent time, the Company does not have any financial or nonfinancial assets orliabilities that would require fair value recognition or disclosures under ASC820.

 

The carrying valueof cash and cash equivalents, accounts receivable, prepaid expenses, accountspayable, accrued liabilities and debt approximates fair value.  The Company estimates that the fair value ofall financial instruments at September 30, 2009 approximates theircarrying values in the accompanying consolidated balance sheet included in theCompany’s consolidated financial statements. The estimated fair value amounts have been determined by the Companyusing appropriate valuation methodologies.

 

**ITEM8.     FINANCIALSTATEMENTS AND SUPPLEMENTARY DATA**

 

Information with respectto this item is included in the Company’s consolidated financial statementsattached to this report on pages F-1 to F-40.

 

**ITEM9.     CHANGES INAND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE**

 

Henjes Conner &Williams P.C., Certified Public Accountants (“Henjes”), acted as the Company’saccountants from January, 2004. Henjes’ reports on the company’s September 30,2008 audited financial statements did not contain an adverse disclaimer ormodification. Cycle Country Accessories Corp.’s decision to use Boulay,Heutmaker, Zibell & Co., P.L.L.P. to audit Cycle Country’s September 30,2009 financial statement was approved by the Company’s Board of Directors andratified by the shareholders. There are no disagreements with Henjes on anymatter of accounting principles or practices, financial statement disclosure,auditing scope or procedure, which, if not resolved to Henjes’ satisfaction,would have caused it to make reference to the subject matter of thedisagreement(s) in connection with its report. A copy of this disclosurehas been provided to Henjes and we have not received a response disagreeingwith the terms of this disclosure. Boulay, Heutmaker, Zibell & Co.,P.L.L.P., Certified Public Accountants, has been the Company’s independentregistered public accounting firm since May 20, 2009

 

**ITEM9A(T).  CONTROLS AND PROCEDURES**

 

**A.****   ****Evaluation of DisclosureControls and Procedures**

 

Based on management’sevaluation (with the participation of our Chief Executive Officer and InterimChief Financial Officer) as of the end of the period covered by this report,our Chief Executive Officer and Interim Chief Financial Officer have concludedthat the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and15d-15(e) under the Securities Exchange Act of 1934, as amended (theExchanged Act), are ineffective, due to the material weakness in our internalcontrol over financial reporting as discussed below, to provide reasonableassurance that the information to be disclosed by the Company in reports thatwe file or submit under the Exchange Act is recorded, processed, summarized,and reported within the time periods specified in SEC rules and forms, andis accumulated  and communicated tomanagement, including our principal executive officer and principal financialofficer as appropriate to allow timely decisions regarding requireddisclosures.

 

**B.****   **C**hangesin Internal Control over Financial Reporting**

 

There was no change inthe Company’s internal control over financial reporting (as defined in Rules 13a-15(f) and15d-15(f) under the Securities Exchange Act of 1934, as amended) duringperiod covered by this report that has materially affected, or is reasonablylikely to materially affect, the Company’s internal control over financialreporting.

 

C.    **Management’s Report on**** Internal Control over Financial Reporting**

 

CycleCountry’s management is responsible for establishing and maintaining adequateinternal control over financial reporting, as such term is defined in Rule 13a-15(f) orRule 15d-15(f) under the Securities Exchange Act of 1934, as amended.Internal control over financial reporting is a process designed by, or underthe supervision of, Cycle Country’s Chief Executive Officer and Chief FinancialOfficer, and effected by our management and other personnel, to providereasonable assurance regarding the reliability of financial reporting and thepreparation and fair presentation of financial statements for external purposesin accordance with generally accepted accounting principles, and includes thosepolicies and procedures that:

 

·   Pertain to the maintenance of records that,in reasonable detail, accurately and fairly reflect the transactions anddispositions of the assets of the Company;

 

·   Provide reasonable assurance thattransactions are recorded as necessary to permit preparation of financialstatements in accordance with generally accepted accounting principles, andthat receipts and expenditures of the Company are being made only in accordancewith authorization of management and directors of the Company; and

 

·   Provide reasonable assurance regardingprevention or timely detection of unauthorized acquisition, use or dispositionof the Company’s assets that could have a material effect on the financialstatements.

 

Internalcontrol over financial reporting cannot provide absolute assurance of achievingfinancial reporting objectives because of its inherent limitations. Internalcontrol over financial reporting is a process that involves human diligence andcompliance is subject to lapses in judgment and breakdowns resulting from humanfailures. Internal control over financial reporting also can be circumvented bycollusion or improper 

 

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managementoverride. Because of such limitations, there is a risk that materialmisstatements may not be prevented or detected on a timely basis by internalcontrol over financial reporting. However, these inherent limitations are knownfeatures of the financial reporting process. Therefore, it is possible todesign into the process safeguards to reduce, though not eliminate, this risk.

 

Under the supervision andwith the participation of the Company’s management, including its ChiefExecutive Officer and Interim Chief Financial Officer, Cycle Country hasassessed as of September 30, 2009, the effectiveness of its internalcontrol over financial reporting.  Basedon its evaluation as of September 30, 2009, management concluded that ourinternal controls over financial reporting were ineffective as of September 30,2009 and that there is a material weakness in our internal control overfinancial reporting as of September 30, 2009. A material weakness is adeficiency, or a combination of control deficiencies, in internal control overfinancial reporting such that there is a reasonable possibility that a materialmisstatement of the Company’s annual or interim financial statements will notbe prevented or detected on a timely basis.

 

Thematerial weakness relates to the Company’s loss of a permanent Chief FinancialOfficer during the fourth quarter of fiscal year 2008, which carried into thefirst quarter of fiscal year 2009.  Thisloss left a lack of sufficient personnel with the appropriate level ofknowledge, experience and training in the application of accounting operationsof our company during the period of our Stock Buyback program in the firstquarter of fiscal year 2009. This weakness caused us to not fully identify andresolve accounting and disclosure issues that led to a failure to performtimely internal control and reviews, especially in relation to the StockBuyback program, caused us to have to restate our financial reports of thethree quarters of fiscal year 2009.

 

In order to remedy theweaknesses identified in this assessment, the Company has contracted with aninterim Chief Financial Officer, whose work uncovered the details of themisappropriation of funds.  We arecurrently negotiating with this person to become our full-time Chief FinancialOfficer and to develop and implement the necessary internal control procedures.

 

This Annual Report on Form 10-Kdoes not include an attestation report of the Company’s registered publicaccounting firm regarding internal control over financial reporting. Management’sreport regarding internal control over financial reporting was not subject toattestation by the Company’s registered public accounting firm pursuant totemporary rules of the Securities and Exchange Commission that permit theCompany to provide only management’s report in this Annual Report on Form 10-K.In addition, this report by management regarding internal control overfinancial reporting is specifically not incorporated by reference into thisAnnual Report on Form 10-K or into any other filing by the Company underthe Securities Act of 1933, as amended, or the Securities Exchange Act of 1934,as amended.

 

**ITEM9B.      OTHER INFORMATION**

 

None.

 

**PART III**

 

**ITEM10.     DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE**

 

Rules ofThe American Stock Exchange (“Amex”) require that a majority of the Board ofDirectors be “independent,” as defined in American Stock Exchange Company GuideSection 121(f). Under the Amex rules, the Board of Directors must make anaffirmative determination that a director is independent by determining thatthe director has no relationships that, in the opinion of the Board 

 

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ofDirectors, would interfere with the exercise of independent judgment incarrying out the responsibilities of a director. The Board of Directors hasreviewed the independence of its directors under the Amex rules. During thisreview, the Board of Directors considered transactions and relationshipsbetween each director or any member of his family and the Company.

 

TheBoard of Directors has determined that Messrs. DeShaw and Thralow areindependent under Amex Rule Section 121(f).

 

The Audit Committee ofthe Company’s Board of Directors is an “audit committee” for purposes of Section 3(a)(58)(A) ofthe Securities Exchange Act of 1934. The members of the Audit Committee are Mr. PaulDeShaw (Chairman) and Mr. Daniel Thralow.

 

The Board of Directorshas reviewed the qualifications of each member of the Audit Committee for thepurpose of determining whether any director serving on the Audit Committeewould qualify as an “audit committee financial expert” as that term is definedunder the rules of the Securities and Exchange Commission.  Based upon that review, it was determinedthat, Mr. Paul DeShaw qualifies as an audit committee financial expert.

 

**Section 16(a) BeneficialOwnership Reporting Compliance**

 

For the fiscal yearending September 30, 2009, Robert Davis and Daniel Thralow, who eachbecame subject to the Section 16 reporting requirements during the year,each filed their respective Form 3 late. Based on a review of prior filings and reported share ownership, itappears L.G. Hancher, Jr., the former Chairman of the Board and AuditCommittee, who resigned January 6, 2010, there may be unreportedtransactions by Mr. Hancher that occurred during the fiscal year ending September 30,2009 and prior fiscal years, but the Company does not have sufficientinformation to determine what transactions occurred and what reporting shouldhave been completed.

 

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**ITEM11.     EXECUTIVECOMPENSATION**

 

Thefollowing table sets forth the total compensation earned over the fiscal yearsended September 30, 2009 and 2008 by (1) each person who served asthe principal executive officer of the Company during fiscal year 2009, (2) theCompany’s two most highly compensated executive officers as of September 30,2009 with compensation during fiscal year 2009 of $100,000 or more; and (3) upto two additional individuals, if any, who would have otherwise been includedunder clause (2) above but for the fact that they were not serving as anexecutive officer as of September 30, 2009 (the “named executive officers”).

 
| ** **                                     | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Other**  | ** ** | **Restricted** | ** ** | **Securities** | ** ** | ** **  | ** ** | **All**   | ** ** |
|------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|----------------|------------|----------------|------------|-------------|------------|-----------|------------|
| **Name and**                                   | ** ** | **Fiscal** | ** ** | ** ** | ** ** | ** ** | ** ** | **Annual** | ** ** | **Stock**      | ** ** | **Underlying** | ** ** | **LTIP**    | ** ** | **Other** | ** ** |
| **Principal Position**                         | ** ** | **Year**   | ** ** | **Salary** | ** ** | **Bonus**  | ** ** | **Comp**   | ** ** | **Awards**     | ** ** | **Options**    | ** ** | **Payouts** | ** ** | **Comp**  | ** ** |
| Jeffrey Tetzlaff, President                    |       | 2009       |       | 150,000    |       | 0          |       | 0          |       | 0              |       | 0              |       | 0           |       | 3,659     | (11)       |
|                                           |       | 2008       |       | 150,000    |       | 25,000     | (2)        | 0          |       | 0              |       | 0              |       | 0           |       | 1,464     | (6)        |
|                                           |       |       |       |       |       |       |       |       |       |           |       |           |       |        |       |      |       |
| Robert Davis, Interim Chief Financial  Officer |       | 2009       |       | 0          |       | 0          |       | 0          |       | 0              |       | 0              |       | 0           |       | 116,876   | (9)        |
|                                           |       |       |       |       |       |       |       |       |       |           |       |           |       |        |       |      |       |
| (7) Randy Kempf, President                |       | 2009       |       | 187,500    |       | 0          |       | 0          |       | 25,000         | (5)        | 0              |       | 0           |       | 10,432    | (12)       |
|                                           |       | 2008       |       | 208,515    |       | 25,370     |       | 121        | (1)        | 25,000         | (5)        | 0              |       | 0           |       | 6,979     | (3)        |
|                                           |       |       |       |       |       |       |       |       |       |           |       |           |       |        |       |      |       |
| Alan Bailey, Vice President (8)                |       | 2009       |       | 125,000    |       | 0          |       | 500        | (1)        | 0              |       | 0              |       | 0           |       | 18,842    | (10)       |
|                                           |       | 2008       |       | 100,000    |       | 9,272      |       | 500        | (1)        | 0              |       | 0              |       | 0           |       | 15,495    | (4)        |

 

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(1)    Christmas bonus

(2)    Signing bonus

(3)    Comprised of $6,979 for health insurance

(4)    Comprised of $4,911 value of personal use of company auto and $10,584paid for health insurance

(5)    Comprised of the last two issances for a total of $100,000 inrestricted company common stock

(6)    Comprised of $1,464 of health insurance

(7)    Employment terminated April 2008

(8)    Retired effective April 30, 2010.

(9)    Other compensation represents amounts paid to consulting firm of BeneMerenti LLC

(10)  Comprised of $6,180 value of personal use of company auto and $12,662paid for health insurance

(11)  Comprised of $3,659 of health insurance

(12)  Comprised of $10,432 of health insurance

(13)  Comprised of $1,599 remaining vacation

 

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

 

Thefollowing table sets forth information regarding the beneficial ownership ofour Common Stock as of August 6, 2009 by each stockholder known by us toown beneficially more than 5% of our Common Stock.

 

Asof March 31, 2010, we had 5,876,891 shares of Common Stock outstanding and43 stockholders of record.  Beneficialownership is determined in accordance with the rules of the Securities andExchange Commission. In computing the number of shares beneficially owned by aperson and the percentage ownership of that person, shares of Common Stocksubject to options or warrants held by that person that are currentlyexercisable or will become exercisable within 60 days after March 31, 2010are deemed outstanding, while such shares are not deemed outstanding forpurposes of computing the ownership percentage of any other person. Unlessotherwise indicated in the footnotes below, the persons and entities named inthe table have sole voting and investment power with respect to all sharesbeneficially owned, subject to community property laws where applicable.

 
| ** **                    | ** ** | **Amount and**           | ** ** | ** **        | ** ** |
|-------------------------------|------------|--------------------------|------------|-------------------|------------|
| **Name and Address of**       | ** ** | **Nature of**            | ** ** | **Percentage of** | ** ** |
| **Beneficial Owner**          | ** ** | **Beneficial Ownership** | ** ** | **Class**         | ** ** |
|                          |       |                     |       |              |       |
| Joan Bailey                   |       | 599,296                  | (direct)   | 10.20             | %          |
| 24160 Kelleys  Beach Drive    |       |                     |       |              |       |
| Spirit Lake, IA  51360        |       |                     |       |              |       |
|                          |       |                     |       |              |       |
| Alan D Bailey                 |       | 510,779                  | (direct)   | 8.69              | %          |
| 24160 Kelleys  Beach Drive    |       |                     |       |              |       |
| Spirit Lake, IA  51360        |       |                     |       |              |       |
|                          |       |                     |       |              |       |
| David Bailey  Estate          |       | 456,296                  | (direct)   | 7.76              | %          |
| 1209 Country Club  Lane       |       |                     |       |              |       |
| Spencer, IA 51301             |       |                     |       |              |       |
|                          |       |                     |       |              |       |
| Lisa Bailey                   |       | 326,889                  | (direct)   | 5.56              | %          |
| 24160 Kelley’s  Beach Dr |       |                     |       |              |       |
| Spirit Lake, IA  51360        |       |                     |       |              |       |
|                          |       |                     |       |              |       |
| Paul DeShaw                   |       | 341,300                  | (direct)   | 5.81              | %          |
| 1701 38th Ave West            |       | 8,700                    | (indirect) | 0.15              | %          |
| Spencer, IA 51301             |       |                     |       |              |       |

 

Underregulations of the Securities and Exchange Commission, persons who have powerto vote or to dispose of our shares, either alone or jointly with others, aredeemed to be beneficial owners of those shares. The following table sets forth,as of April 30, 2010, the beneficial ownership of the outstanding CommonStock of each current director (including the nominees for election asdirectors), each of the Named Executive Officers named in the SummaryCompensation Table set forth herein and the executive officers and directors asa group.

 
| ** **                                        | ** ** | **Amount and**           | ** ** | ** **        | ** ** |
|---------------------------------------------------|------------|--------------------------|------------|-------------------|------------|
| **Name and Address of**                           | ** ** | **Nature of**            | ** ** | **Percentage of** | ** ** |
| **Beneficial Owner**                              | ** ** | **Beneficial Ownership** | ** ** | **Class**         | ** ** |
| ** **                                        | ** ** | ** **               | ** ** | ** **        | ** ** |
| Jeffrey M.  Tetzlaff, President and CEO, (1)      |       |                     |       |              |       |
| Director (2008)                                   |       | 10,000                   |       | 0.17              | %          |
| c/o Cycle Country  Accessories Corp.              |       |                     |       |              |       |
| 1701 38th Ave West                                |       |                     |       |              |       |
| Spencer, IA 51301                                 |       |                     |       |              |       |
|                                              |       |                     |       |              |       |
| Robert Davis,  Interim CFO, Corporate Secretary,  |       |                     |       |              |       |
| Treasurer, and  Director (2009)                   |       | 0                        |       | 0.00              | %          |
| c/o Cycle Country  Accessories Corp.              |       |                     |       |              |       |
| 1701 38th Ave West                                |       |                     |       |              |       |
| Spencer, IA 51301                                 |       |                     |       |              |       |
|                                              |       |                     |       |              |       |
| Daniel Thralow,  Director (2009)                  |       | 0                        |       | 0.00              | %          |
| c/o Cycle Country  Accessories Corp.              |       |                     |       |              |       |
| 1701 38th Ave West                                |       |                     |       |              |       |
| Spencer, IA 51301                                 |       |                     |       |              |       |
|                                              |       |                     |       |              |       |
| Paul DeShaw,  Director (2010)                     |       |                     |       |              |       |
| c/o Cycle Country  Accessories Corp.              |       | 341,300                  | (direct)   | 5.81              | %          |
| 1701 38th Ave West                                |       | 8,700                    | (indirect) | 0.15              | %          |
| Spencer, IA 51301                                 |       |                     |       |              |       |
|                                              |       |                     |       |              |       |
| All Officers and Directors as a Group (4 persons) |       | 360,000                  |       | 6.13              | %          |

 

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**ITEM13.     CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS ANDDIRECTOR INDEPENDENCE**

 

Fromtime to time, the Company has engaged in various transactions with certain ofits directors, executive officers and other affiliated parties. The followingparagraphs summarize certain information concerning certain transactions andrelationships that have occurred during the past fiscal year or are currentlyproposed.

 

Infiscal 2009 and 2008, we provided contract manufacturing services to AERO RaceWheels, Inc. which generated approximately $208,000 and 293,000 inrevenue, respectively.  There wasapproximately $8,000 and $45,000 in accounts receivable at September 30, 2009and 2008.  AERO Race Wheels is owned byF.L. Miller who was one of our directors. He resigned his position as adirector in fiscal year 2009.

 

Itis our policy that all future transactions between the Company and itsofficers, directors, principal shareholders and affiliates must be approved bya majority of the independent and disinterested outside directors.

 

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**ITEM14.     PRINCIPALACCOUNTANT FEES AND SERVICES**

 

The following table sets forth the fees billed to the Company for thefiscal years ended September 30, 2009 by Boulay, Heutmaker, Zibell & Co.P.L.L.P.

 
| ** **              | ** ** | **Fiscal** | ** ** |
|-------------------------|------------|------------|------------|
| ** **              | ** ** | **2009**   | ** ** |
|                    |       |       |       |
| Audit Fees              |       | $          | 116,260    |   |
| Audit-Related Fees |       | 39,515     |       |
| Tax Fees                |       | 17,056     |       |
| All Other Fees          |       | 72,329     |       |
|                    |       |       |       |
| Total Fees              |       | $          | 245,160    |   |

 

***Audit Fees***—Includes audit of the Company’s annual financial statements, review ofthe Company’s quarterly reports on Form 10-Q, and consents and assistancewith and review of registration statements filed with the SEC.  .

 

***Audit-Related Fees***—Includes accounting consultations related to GAAP and the application ofGAAP and includes time and research provided to the Company including workrelated to the misappropriations of funds discussed elsewhere in this report.

 

***Tax Fees***—Includes tax compliance and consulting.

 

***All Other Fees***—Includes time and research related provided to the Company includingwork related to the misappropriations of funds discussed elsewhere in thisreport.

 

The Audit Committee of the Company pre-approved all fees discussedabove.

 

**PART IV**

 

**ITEM15.     EXHIBITS ANDFINANCIAL STATEMENT SCHEDULES**

 

The following documents are filed as a part of this report:

 

**FinancialStatements**

 

Included in Item 8 of Part II of this report are the following:

 
| · |   | Report of Independent Registered Public Accounting  Firm.                                                            |
|--------|--------|----------------------------------------------------------------------------------------------------------------------|
| · |   | Report of Prior Independent Registered Public  Accounting Firm.                                                      |
| · |   | Consolidated Balance Sheets – September 30, 2009 and  September 30, 2008.                                       |
| · |   | Consolidated Statements of Operations – Years ended  September 30, 2009 and September 30, 2008.                 |
| · |   | Consolidated Statements of Shareholders’ Equity – Years  ended September 30, 2009 and September 30, 2008.. |
| · |   | Consolidated Statements of Cash Flows – Years ended  September 30, 2009 and September 30, 2008.                 |
| · |   | Notes to the Consolidated Financial Statements.                                                                      |

 

29

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**FinancialStatement Schedules**

 

All schedules are omitted because they are not applicable, are notrequired or the required information has been included in the consolidatedfinancial statements or notes thereto.

 

**Exhibits**

 

A list of the exhibits filed or incorporated by reference as part ofthis Annual Report on Form 10-K is set forth in the Index to Exhibits whichimmediately precedes such exhibits and is incorporated herein by thisreference.

 

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**SIGNATURES**

 

In accordance withSection 13 or 15(d) of the Exchange Act, the registrant caused thisreport to be signed on its behalf by the undersigned, thereunto dulyauthorized, on May 20, 2010.

 

 

**CYCLECOUNTRY ACCESSORIES CORP.**

(Registrant)

 
| By     | /s/ Jeffrey M. Tetzlaff              |   |
|--------|--------------------------------------|--------|
|   | Jeffrey M. Tetzlaff                  |   |
|   | Chairman and Chief Executive Officer |   |

 

 

In accordance with the requirements of theExchange Act, this report has been signed by the following persons on behalf ofthe registrant and in the capacities indicated.

 
| **Name and Signature**   | ** ** | **Title**                                                  | ** ** | **Date**     |
|--------------------------|------------|------------------------------------------------------------|------------|--------------|
|                     |       |                                                       |       |         |
|                     |       |                                                       |       |         |
| /s/ Jeffrey M.  Tetzlaff |       | Chairman of the Board, Chief Executive Officer and         |       | May 20, 2010 |
| Jeffrey M.  Tetzlaff     |       | Director (principal executive officer)                     |       |         |
|                     |       |                                                       |       |         |
|                     |       |                                                       |       |         |
| /s/ Robert Davis         |       | Interim Chief Financial Officer, Treasurer,  Secretary and |       | May 20, 2010 |
| Robert Davis             |       | Director (principal financial and accounting  officer)     |       |         |
|                     |       |                                                       |       |         |
|                     |       |                                                       |       |         |
| /s/ Paul DeShaw          |       | Director                                                   |       | May 20, 2010 |
| Paul DeShaw              |       |                                                       |       |         |
|                     |       |                                                       |       |         |
|                     |       |                                                       |       |         |
| /s/ Daniel  Thralow      |       | Director                                                   |       | May 20, 2010 |
| Daniel Thralow           |       |                                                       |       |         |

 

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CYCLE COUNTRY ACCESSORIES CORP. AND SUBSIDIARIES

 

CONSOLIDATED FINANCIALSTATEMENTS

 

SEPTEMBER 30, 2009 AND 2008

 
| ** **                                               | ** ** | **Page** |
|----------------------------------------------------------|------------|----------|
|                                                     |       |     |
| Report  of Independent Registered Public Accounting Firm |       | F-2      |
|                                                     |       |     |
| Consolidated  Financial Statements Financial Statements  |       |     |
|                                                     |       |     |
| Consolidated  Balance Sheet                              |       | F-3      |
|                                                     |       |     |
| Consolidated  Statements of Operations.                  |       | F-5      |
|                                                     |       |     |
| Consolidated Statements of Stockholder Equity            |       | F-6      |
|                                                     |       |     |
| Consolidated Statements of Cash Flows                    |       | F-7      |
|                                                     |       |     |
| Notes to Consolidated Financial Statements               |       | F-9      |

 

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REPORT OF INDEPENDENT REGISTERED PUBLICACCOUNTING FIRM

 

Tothe Board of Directors andStockholders of Cycle Country Accessories Corp. and Subsidiaries

 

Wehave audited the accompanying consolidated balance sheet of Cycle CountryAccessories Corp. and Subsidiaries as of September 30, 2009, and therelated consolidated statement of operations, stockholders’ equity, and cashflow for the year then ended. Cycle Country Accessories Corp. and Subsidiariesmanagement is responsible for these financial statements. Our responsibility isto express an opinion on these financial statements based on our audit. Theconsolidated financial statements of Cycle Country Accessories Corp. andSubsidiaries as of September 30, 2008 were audited by other auditors whosereport dated January 13, 2009, expressed an unqualified opinion on thosestatements.

 

Weconducted our audit in accordance with the standards of the Public CompanyAccounting Oversight Board (United States). Those standards require that weplan and perform the audit to obtain reasonable assurance about whether thefinancial statements are free of material misstatement. The company is notrequired to have, nor were we engaged to perform, an audit of its internalcontrol over financial reporting. Our audit included consideration of internalcontrol over financial reporting as a basis for designing audit procedures thatare appropriate in the circumstances, but not for the purpose of expressing anopinion on the effectiveness of the company’s internal control over financialreporting. Accordingly, we express no such opinion. An audit also includesexamining, on a test basis, evidence supporting the amounts and disclosures inthe financial statements, assessing the accounting principles used andsignificant estimates made by management, as well as evaluating the overallfinancial statement presentation. We believe that our audit provides areasonable basis for our opinion.

 

Inour opinion, the consolidated financial statements referred to above presentfairly, in all material respects, the financial position of Cycle CountryAccessories Corp. and Subsidiaries as of September 30, 2009, and theresults of its operations and its cash flows for the year then ended inconformity with accounting principles generally accepted in the United Statesof America.

 

 
|   | /s/ Boulay, Heutmaker, Zibell & Co. P.L.L.P. |
|--------|-------------------------------------------------------|
|   | Certified  Public Accountants                         |

 

 

Minneapolis,MN

May 20,2010

 

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Table of Contents

 

CYCLE COUNTRY ACCESSORIES CORP. ANDSUBSIDIARIES

CONSOLIDATEDBALANCE SHEETS

FOR THE YEARS ENDED SEPTEMBER 30, 2009 AND2008

 
| ** **                         | ** ** | **2009**   | ** ** | **2008**   | ** ** |
|------------------------------------|------------|------------|------------|------------|------------|
|                               |       |       |       |       |       |
| ASSETS                             |
|                               |       |       |       |       |       |
| CURRENT ASSETS                     |       |       |       |       |       |
|                               |       |       |       |       |       |
| Cash and Cash Equivalents          |       | $          | 27,490     |       | $          | 194,576 |   |
| Accounts Receivable, net           |       | 1,819,552  |       | 2,935,647  |       |
| Inventories                        |       | 3,588,880  |       | 5,110,499  |       |
| Income Tax Receivable              |       | 997,413    |       | 14,780     |       |
| Deferred Income Taxes              |       | 448,000    |       | 345,920    |       |
| Prepaid Expenses and Other         |       | 77,397     |       | 209,617    |       |
|                               |       |       |       |       |       |
| Total Current Assets               |       | 6,958,732  |       | 8,811,039  |       |
|                               |       |       |       |       |       |
| PROPERTY, PLANT AND EQUIPMENT, net |       | 10,803,308 |       | 11,449,369 |       |
|                               |       |       |       |       |       |
| OTHER ASSETS                       |       |       |       |       |       |
|                               |       |       |       |       |       |
| Intangible Assets, net             |       | 178,547    |       | 177,812    |       |
| Goodwill                           |       | —     |       | 4,890,146  |       |
| Other Assets                       |       | 40,388     |       | 48,363     |       |
|                               |       |       |       |       |       |
| Total Other Assets                 |       | 218,935    |       | 5,116,321  |       |
|                               |       |       |       |       |       |
| Total Assets                       |       | $          | 17,980,975 |       | $          | 25,376,729 |   |

 

See Accompanying Notes to ConsolidatedFinancial Statements

 

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CYCLE COUNTRY ACCESSORIES CORP. ANDSUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

FOR THE YEARS ENDED SEPTEMBER 30, 2009 AND2008

 
| ** **                                                                                                                                                  | ** ** | **2009**   | ** ** | **2008**   | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------|------------|------------|------------|
|                                                                                                                                                        |       |       |       |       |       |
| LIABILITIES AND STOCKHOLDERS’ EQUITY                                                                                                                   |
|                                                                                                                                                        |       |       |       |       |       |
| CURRENT  LIABILITIES                                                                                                                                        |       |       |       |       |       |
|                                                                                                                                                        |       |       |       |       |       |
| Disbursements  in Excess of Bank Balance                                                                                                                    |       | $          | 438,636    |       | $          | — |   |
| Accounts  Payable                                                                                                                                           |       | 562,689    |       | 577,278    |       |
| Accrued  Expenses                                                                                                                                           |       | 747,044    |       | 725,082    |       |
| Bank  Line of Credit                                                                                                                                        |       | 1,030,000  |       | 1,000,000  |       |
| Current  Portion of Bank Notes Payable                                                                                                                      |       | 863,160    |       | 811,053    |       |
| Deferred  Gain on Sale, current portion                                                                                                                     |       | 166,524    |       | 166,524    |       |
|                                                                                                                                                        |       |       |       |       |       |
| Total  Current Liabilities                                                                                                                                  |       | 3,808,053  |       | 3,279,937  |       |
|                                                                                                                                                        |       |       |       |       |       |
| LONG-TERM  LIABILITIES                                                                                                                                      |       |       |       |       |       |
|                                                                                                                                                        |       |       |       |       |       |
| Bank  Notes Payable, less current portion                                                                                                                   |       | 3,111,783  |       | 3,971,525  |       |
| Deferred  Gain on Sale, less current portion                                                                                                                |       | 27,754     |       | 194,278    |       |
| Deferred  Income Taxes                                                                                                                                      |       | 2,142,000  |       | 2,360,812  |       |
|                                                                                                                                                        |       |       |       |       |       |
| Total  Long-Term Liabilities                                                                                                                                |       | 5,281,537  |       | 6,526,615  |       |
|                                                                                                                                                        |       |       |       |       |       |
| TOTAL  LIABILITIES                                                                                                                                          |       | 9,089,590  |       | 9,806,552  |       |
|                                                                                                                                                        |       |       |       |       |       |
| STOCKHOLDERS’  EQUITY                                                                                                                                  |       |       |       |       |       |
|                                                                                                                                                        |       |       |       |       |       |
| Common  stock, $.0001 par value; 100,000,000 shares authorized; 7,482,677 and 7,433,037  shares issued 6,072,307 and 6,022,307 and outstanding respectively |       | 748        |       | 743        |       |
| Additional  Paid in Capital                                                                                                                                 |       | 14,849,334 |       | 14,729,338 |       |
| Treasury  Stock                                                                                                                                             |       | (2,581,636 | )          | (2,581,636 | )          |
| Retained  Earnings (Deficit)                                                                                                                                |       | (3,377,061 | )          | 3,421,732  |       |
|                                                                                                                                                        |       |       |       |       |       |
| Total  Stockholders’ Equity                                                                                                                            |       | 8,891,385  |       | 15,570,177 |       |
|                                                                                                                                                        |       |       |       |       |       |
| Total  Liabilities and Stockholders’ Equity                                                                                                            |       | $          | 17,980,975 |       | $          | 25,376,729 |   |

 

SeeAccompanying Notes to Consolidated Financial Statements

 

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Table ofContents

 

CYCLE COUNTRY ACCESSORIES CORP. ANDSUBSIDIARIES

CONSOLIDATEDSTATEMENTS OF OPERATIONS

FOR THE YEARS ENDED SEPTEMBER 30, 2009 AND2008

 
| ** **                                            | ** ** | **2009**   | ** ** | **2008**   | ** ** |
|-------------------------------------------------------|------------|------------|------------|------------|------------|
|                                                  |       |       |       |       |       |
| Revenue                                               |       |       |       |       |       |
|                                                  |       |       |       |       |       |
| Net  Sales                                            |       | $          | 10,188,884 |       | $          | 17,444,642 |   |
| Freight  Income                                       |       | 92,842     |       | 69,299     |       |
|                                                  |       |       |       |       |       |
| Total  Revenue                                        |       | 10,281,726 |       | 17,513,941 |       |
|                                                  |       |       |       |       |       |
| Cost  of Sales                                        |       |       |       |       |       |
|                                                  |       |       |       |       |       |
| Cost  of Goods Sold                                   |       | 8,834,912  |       | 13,215,382 |       |
|                                                  |       |       |       |       |       |
| Gross  Profit                                         |       | 1,446,814  |       | 4,298,559  |       |
|                                                  |       |       |       |       |       |
|                                                  |       |       |       |       |       |
| Selling,  General, and Administrative Expenses        |       | 4,037,309  |       | 4,763,859  |       |
| Goodwill  Impairment                                  |       | 4,890,146  |       | —     |       |
| Fraud  Expense (Notes 9 and 20)                       |       | 620,000    |       | —     |       |
| Gain  on Sale of Assets                               |       | (164,590   | )          | (361,462   | )          |
|                                                  |       |       |       |       |       |
| Total  Operating Expenses                             |       | 9,382,865  |       | 4,402,397  |       |
|                                                  |       |       |       |       |       |
| Loss  from Operations                                 |       | (7,936,051 | )          | (103,838   | )          |
|                                                  |       |       |       |       |       |
| Other  Income (Expense)                               |       |       |       |       |       |
|                                                  |       |       |       |       |       |
| Interest  Expense                                     |       | (336,461   | )          | (339,787   | )          |
| Interest  Income                                      |       | 1,720      |       | 19,665     |       |
| Miscellaneous                                         |       | 10,999     |       | 35,441     |       |
|                                                  |       |       |       |       |       |
| Total  Other Income (Expense), net                    |       | (323,742   | )          | (284,681   | )          |
|                                                  |       |       |       |       |       |
| Loss  Before Taxes                                    |       | (8,259,793 | )          | (388,519   | )          |
|                                                  |       |       |       |       |       |
| Benefit  for Income Taxes                             |       | (1,461,000 | )          | (30,257    | )          |
|                                                  |       |       |       |       |       |
| Net  Income (Loss)                                    |       | $          | (6,798,793 | )          | $          | (358,262 | ) |
|                                                  |       |       |       |       |       |
|                                                  |       |       |       |       |       |
| Weighted  Average Shares of Common Stock Outstanding: |       |       |       |       |       |
| Basic                                                 |       | 6,059,854  |       | 6,169,659  |       |
| Diluted                                               |       | 6,059,854  |       | 6,169,659  |       |
|                                                  |       |       |       |       |       |
| Net  Loss Per Common Share:                           |       |       |       |       |       |
| Basic                                                 |       | $          | (1.12      | )          | $          | (0.06 | ) |
| Diluted                                               |       | $          | (1.12      | )          | $          | (0.06 | ) |

 

SeeAccompanying Notes to Consolidated Financial Statements

 

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CYCLE COUNTRY ACCESSORIESCORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTSOF STOCKHOLDER EQUITY

FOR THE YEARS ENDEDSEPTEMBER 30, 2009 AND 2008

 
| ** **                                                                  | ** ** | **Common  Stock** | ** ** | **Additional  Paid-  In Capital** | ** ** | **Retained  Earnings** | ** ** | **Treasury  Stock** | ** ** | **Total  Stockholder  Equity** | ** ** |
|-----------------------------------------------------------------------------|------------|-------------------|------------|-----------------------------------|------------|------------------------|------------|---------------------|------------|--------------------------------|------------|
|                                                                        |       |              |       |                              |       |                   |       |                |       |                           |       |
| Balances at  September 30, 2007                                        |       | $                 | 735        |                              | $          | 14,495,035             |       | $                   | 3,779,994  |                           | $          | — |   | $ | 18,275,764 |   |
| Net Income (Loss)                                                           |       |              |       |                              |       | (358,262               | )          |                |       | (358,262                       | )          |
| Issuance of Common Stock  for Directors Fees                                |       |              |       |                              |       |                   |       |                |       | —                         |       |
| 4,637 shares at $2.33  per share:                                           |       | —            |       | 11,000                            |       |                   |       |                |       | 11,000                         |       |
| 3,392 shares at $1.10  per share:                                           |       | —            |       | 3,561                             |       |                   |       |                |       | 3,561                          |       |
| Issuance of Common  Stock - Compensation Fees                               |       |              |       |                              |       |                   |       |                |       | —                         |       |
| 37,500 shares at $2.00  per share:                                          |       | 3                 |       | 74,997                            |       |                   |       |                |       | 75,000                         |       |
| $53,250 six months  accrual of signing bonus                                |       |              |       | 53,250                            |       |                   |       |                |       | 53,250                         |       |
| Issuance of Common  Stock - Consulting Fees                                 |       |              |       |                              |       |                   |       |                |       | —                         |       |
| 50,000 shares at $1.83  per share                                           |       | 5                 |       | 91,495                            |       |                   |       |                |       | 91,500                         |       |
| Treasury Stock -  Exchange of common stock for Property Plant and Equipment |       |              |       |                              |       |                   |       |                |       |                           |       |
| 1,410,730 shares at  $1.83 per share:                                       |       | —            |       | —                            |       | —                 |       | (2,581,636          | )          | (2,581,636                     | )          |
| Balances at  September 30, 2008                                        |       | 743               |       | 14,729,338                        |       | 3,421,732              |       | (2,581,636          | )          | 15,570,177                     |       |
| Net Income (Loss)                                                           |       |              |       |                              |       | (6,798,793             | )          |                |       | (6,798,793                     | )          |
| Issuance of Common Stock  - Compensation Fees                               |       |              |       |                              |       |                   |       |                |       |                           |       |
| $97,500 yearly accrual  of signing bonus                                    |       | —            |       | 97,500                            |       |                   |       |                |       | 97,500                         |       |
| Issuance of Common  Stock - Consulting Fees                                 |       |              |       |                              |       |                   |       |                |       |                           |       |
| 50,000 shares at $0.45  per share                                           |       | 5                 |       | 22,496                            |       |                   |       |                |       | 22,501                         |       |
| Balances at  September 30, 2009                                        |       | $                 | 748        |                              | $          | 14,849,334             |       | $                   | (3,377,061 | )                              | $          | (2,581,636 | ) | $ | 8,891,385 |   |

 

See Accompanying Notes toConsolidated Financial Statements

 

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Table of Contents

 

CYCLE COUNTRY ACCESSORIESCORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTSOF CASH FLOWS

FOR THE YEARS ENDEDSEPTEMBER 30, 2009 AND 2008

 
| ** **                                                                                        | ** ** | **2009**   | ** ** | **2008**   | ** ** |
|---------------------------------------------------------------------------------------------------|------------|------------|------------|------------|------------|
| CASH FLOWS PROVIDED BY  (USED FOR) OPERATING ACTIVITIES                                           | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net Income (Loss)                                                                                 |       | $          | (6,798,793 | )          | $          | (358,262 | ) |
| Adjustments to  Reconcile Net Income (Loss) to Net Cash Provided (Used) by Operating  Activities: |       |       |       |       |       |
| Depreciation                                                                                      |       | 829,870    |       | 807,083    |       |
| Amortization                                                                                      |       | 5,901      |       | 5,857      |       |
| Share-Based  Compensation                                                                         |       | 120,000    |       | 234,311    |       |
| (Gain) on  Sale & Disposal of Assets                                                     |       | (164,590   | )          | (729,168   | )          |
| Deferred Income Tax                                                                               |       | (320,892   | )          | (313,542   | )          |
| Goodwill Impairment                                                                               |       | 4,890,146  |       | —     |       |
| Inventory Reserve                                                                                 |       | 14,766     |       | 36,000     |       |
| Changes in:                                                                                       |       |       |       |       |       |
| Accounts Receivable,  Net                                                                         |       | 1,116,096  |       | (699,791   | )          |
| Inventories                                                                                       |       | 1,506,852  |       | 124,145    |       |
| Income Taxes  Receivable, Net                                                                     |       | (982,633   | )          | (14,780    | )          |
| Prepaid Expenses and  Other                                                                       |       | 132,220    |       | 17,820     |       |
| Other Assets                                                                                      |       | 7,975      |       | (9,942     | )          |
| Accounts Payable                                                                                  |       | (14,589    | )          | 381,779    |       |
| Accrued Expenses                                                                                  |       | 21,963     |       | 136,872    |       |
| Deferred Gain on Sale                                                                             |       | —     |       | 360,802    |       |
| Taxes Payable                                                                                     |       | —     |       | (28,657    | )          |
| Net Cash Used by  Operating Activities                                                            |       | 364,292    |       | (49,473    | )          |
|                                                                                              |       |       |       |       |       |
| CASH FLOWS FROM  INVESTING ACTIVITIES                                                             |       |       |       |       |       |
| Purchase of Property  and Equipment                                                               |       | (221,200   | )          | (1,280,108 | )          |
| Purchase of Intangible  Assets                                                                    |       | (6,637     | )          | (15,141    | )          |
| Proceeds from Sale of  Property, Plant and Equipment                                              |       | 35,458     |       | 19,329     |       |
| Net Cash (Used) by  Investing Activities                                                          |       | (192,379   | )          | (1,275,920 | )          |
|                                                                                              |       |       |       |       |       |
| CASH FLOWS FROM  FINANCING ACTIVITIES                                                             |       |       |       |       |       |
| Disbursements of  Property and Equipment                                                          |       | 438,636    |       | —     |       |
| Payments on Bank Notes  Payable                                                                   |       | (807,635   | )          | (684,879   | )          |
| Proceeds from Bank  Notes Payable                                                                 |       | —     |       | 750,000    |       |
| Proceeds from Line of  Credit, net                                                                |       | 30,000     |       | 1,000,000  |       |
| Net Cash Provided  (Used) by Financing Activities                                                 |       | (338,999   | )          | 1,065,121  |       |
|                                                                                              |       |       |       |       |       |
| Net Decrease in Cash  and Cash Equivalents                                                        |       | (167,086   | )          | (260,272   | )          |
| Cash and Cash  Equivalents- Beginning of Year                                                     |       | 194,576    |       | 454,848    |       |
| Cash and Cash  Equivalents- End of Year                                                           |       | $          | 27,490     |       | $          | 194,576 |   |

 

See Accompanying Notes to Consolidated Financial Statements

 

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Table of Contents

 

CYCLE COUNTRY ACCESSORIESCORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTSOF CASH FLOWS

FOR THE YEARS ENDED SEPTEMBER 30, 2009 AND 2008

 
| ** **                                                           | ** ** | **2009** | ** ** | **2008** | ** ** |
|----------------------------------------------------------------------|------------|----------|------------|----------|------------|
| SUPPLEMENTAL DISCLOSURES  OF CASH FLOW                               |       |     |       |     |       |
| Cash paid during the  year for:                                      |       |     |       |     |       |
| Interest                                                             |       | $        | 336,950    |     | $          | 260,686 |   |
| Income Taxes Paid, Net  of Refunds                                   |       | $        | (159,380   | )        | $          | 326,722 |   |
|                                                                 |       |     |       |     |       |   |   |
| SUPPLEMENTAL SCHEDULE OF NON-CASH FINANCING AND INVESTING ACTIVITIES |       |     |       |     |       |
| Issuance of Common Stock  for Payment of Consultant Fees             |       | $        | 22,501     |     | $          | 91,495 |   |
| Issuance of Common  Stock for Payment of Former CEO Bonus            |       | $        | 97,500     |     | $          | 129,447 |   |
| Issuance of Common  Stock for Payment of Director Fees               |       | $        | —     |     | $          | 14,561 |   |
| Acquisition of Common  Stock for Property, Plant & Equipment     |       | $        | —     |     | $          | (2,581,636 | ) |

 

See Accompanying Notes toConsolidated Financial Statements

 

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Table of Contents

 

CYCLE COUNTRY ACCESSORIES CORP. ANDSUBSIDIARIES

NOTESTO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED SEPTEMBER 30, 2009 AND2008

 

**Note1  — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**

 

Reporting Entityand Principles of Consolidation —Cycle Country Accessories Corp.  (“Cycle Country”) a Nevada corporation, has awholly-owned subsidiary, Cycle Country Accessories Corp. (“Cycle Country — Iowa”),an Iowa Corporation,  which in turn has awholly-owned subsidiary, Cycle Country Accessories Subsidiary Corp (“Cycle CountrySub”), a Nevada Corporation.  During theyear ended September 30, 2004, the operations of Cycle Country Sub weremerged into Cycle Country - Iowa, leaving a corporate shell that is a directsubsidiary of the Iowa subsidiary.

 

The entities arecollectively referred to as the “Company” for these financial statements.  All significant intercompany balances andtransactions have been eliminated in consolidation.

 

Nature of theBusiness - TheCompany has four distinct divisions engaged in the design, manufacture, saleand distribution of products.  Three ofthe divisions have branded, proprietary products, and the other is a contractmanufacturing division.  The largestdivision, Cycle Country ATV Accessories, designs, manufactures and sells apopular selection of branded accessories for vehicles in the powersportsindustry which are sold to various wholesale distributors and retail dealersthroughout the United States of America, Canada, Mexico, South America, Europe,and Asia.  Plazco manufactures, sells,and distributes injection-molded plastic products for vehicles such as golfcars, lawn mowers, and low-speed vehicles (LSVs).  Perf-Form manufactures, sells, anddistributes oil filters for the powersports industry, including ATVs, UTVs andMotorcycles.  Additionally, Imdyne isengaged in the design, manufacture and assembly of an array of parts fororiginal equipment manufacturers (OEMs) and other customers.  The Company has offices in Minnetonka, MN andSpencer, IA, and has approximately 260,000 square feet of modern manufacturingfacilities in Spencer and leased space in Milford, IA.

 

RevenueRecognition - TheCompany primarily ships products to its customers by third party carriers.  The Company recognizes revenues from productsales when title and risk of loss to the products is passed to the customer,which occurs at the point of shipping.

 

Certain costsassociated with the shipping and handling of products to customers are billedto the customer and included as freight income in the accompanying consolidatedstatements of operations.  Sales wererecorded net of sales discounts and allowances. Sales discounts and allowances were approximately $831,000 and$1,180,000 in 2009 and 2008, respectively.

 

Cost of Goods Sold - The components of cost of goods soldin the accompanying consolidated statements of operations include all directmaterials and direct labor associated with the assembly and/or manufacturing ofthe Company’s products.

 

Cash and CashEquivalents - TheCompany considers all highly liquid investments with an original maturity ofthree months or less to be cash equivalents. The Company maintains its accounts primarily at one financialinstitution.  At times throughout theyear, the Company’s cash and cash equivalent balances may exceed amountsinsured by the Federal Deposit Insurance Company.

 

AccountsReceivable -Credit terms are generally extended to customers on a short-term basis.  These receivables do not bear interest,although a finance charge may be applied to balances more than thirty days pastdue.  Trade accounts receivable arecarried on the books at their net realizable value.  The Company performs ongoing creditevaluations of its customers to reduce credit risk.

 

Individual tradeaccounts receivable are periodically evaluated for collectability based on pastcredit history and their current financial condition.  Trade accounts receivable are charged againstthe allowance for doubtful accounts when such receivables are deemed to beuncollectible.  While the Company has alarge customer base that is geographically dispersed, a slowdown in markets inwhich the Company operates may result in higher than expected uncollectibleaccounts, and therefore, the need to revise estimates for bad debts.  To the extent historical experience is notindicative of future performance or other assumptions used by management do notprevail, the provision for uncollectible accounts could differ significantly,resulting in either higher or lower future provisions for uncollectibleaccounts.  The allowance for doubtfulaccounts was $15,000 at September 30, 2009 and 2008.   It is at least reasonably possible that theCompany’s estimate will change in the future.

 

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CYCLE COUNTRY ACCESSORIES CORP. ANDSUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED SEPTEMBER 30, 2009 AND2008

 

Inventories — Inventory is stated at the lower of cost or market.  Inventory consists of raw materials, work in process, and finished goods.    In fiscal year 2008, the Company changed its method from a standard cost system, which approximated first-in, first-out, to the weighted average cost method.  The change in inventory accounting method did not have a material impact on the 2008 consolidated financial statements.  For fiscal year 2009, the cost is determined using the weighted average method.  During the third quarter of 2009, while undergoing lean manufacturing process improvements and upgrades to the ERP software used to manage the Company, management spent significant time evaluating the inventory processes, inventory quantities on hand, future product demand and the estimated utility of inventory.   During this review, management made the determination that some inventory on-hand was obsolete or needed to be written down to the current market values.

 

The Company completed the process improvements and upgrades during the fourth quarter of 2009.  As a result of management review, process improvements and upgrades, management ultimately determined the Company had approximately $283,000 of obsolete inventory, which was applied against the inventory reserve upon disposal.  Adjustments to the inventory reserve for write downs due to lower of cost or market were immaterial.  Management evaluated the Company’s remaining inventory reserve based on the Company’s historical experience and current economic conditions and determined that an inventory reserve of approximately $150,000 at September 30, 2009 was appropriate.   It is reasonably possible the inventory reserve will change in the near future.

 

Property, Plant,and Equipment -Property, Plant and Equipment is stated at cost.  Depreciation is provided over the estimateduseful lives of the assets by using the straight-line and acceleratedmethods.  Long-lived assets, such asProperty, Plant, and Equipment, are reviewed for possible impairment wheneverevents or changes in circumstances indicate that the carrying amount of anasset may not be recoverable. Recoverability of assets to be held and used is measured by a comparisonof the carrying amount of an asset to future net cash flows (undiscounted andwithout interest charges) expected to be generated by the asset.  If these projected cash flows are less thanthe carrying amount, impairment is recognized to the extent that the carryingvalue exceeds its fair value.  Fair valueis determined through various valuation techniques, including discounted cashflow models, quoted market values and third party appraisals, as considerednecessary.  In accordance with ASC 360, theCompany evaluated its long-lived assets using an undiscounted cash flowanalysis.  This analysis supported thecarrying value of the long-lived assets and, therefore, no impairment wasrecorded.  The Company’s analysis usessignificant estimates in its evaluation. It is reasonably possible that its estimates and assumptions couldchange in the near future, which could lead to further impairment of long-livedassets.  The estimated useful lives are as follows:

 
| **Asset  Description** | ** ** | **Years** | ** ** |
|------------------------|------------|-----------|------------|
| Land  Improvements     |       | 15-20     |       |
| Building               |       | 15-40     |       |
| Plant  Equipment       |       | 7-10      |       |
| Tooling  and Dies      |       | 3-7       |       |
| Vehicles               |       | 3-7       |       |
| Office  Equipment      |       | 3-10      |       |

 

Maintenance andrepairs are expensed as incurred; major improvements and betterments arecapitalized.  Construction in progressexpenditures will be depreciated using the straight-line and accumulated methodover their useful lives once the assets are placed into service.

 

Goodwilland Other Intangible Assets - Goodwill andintangible assets are reviewed and assessed for impairment at least annually orwhen indicators of potential impairment exist, using a fair-value basedapproach.  Fair value is estimated using adiscounted cash flow analysis.  If the fair value of a reporting unitexceeds its net book value, no impairment exists. When fair value is less thanthe carrying value of the net assets and related goodwill, an impairment testis performed to measure and recognize the amount of the impairment loss, ifany.  The estimate of fair value was calculated using a discountedcash flow analysis, which requires a number of key estimates andassumptions.  We estimated the future cash flows of the otherintangible assets based on historical and forecasted revenues and operatingcosts.  We applied a discount rate to the estimated future cash flowsfor purposes of the valuation.  This discount rate is based on theestimated weighted average cost of capital, which includes certain assumptionssuch as

 

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CYCLE COUNTRY ACCESSORIES CORP. ANDSUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED SEPTEMBER 30, 2009 AND2008

 

market capital structure, marketbetas, risk-fee rate of return and estimated costs ofborrowing.  Changes in these key estimates and assumptions, or inother assumptions used in this process, could materially affect our impairmentanalysis in a given year.

 

Intangible assets withestimable useful lives are amortized over their respective estimated usefullives.

 

Duringthe third quarter of 2009, the Company determined that indicators of potentialimpairment existed because the Company had experienced a decrease in theCompany’s market capitalization for a sustained period of time and hadsustained two quarters of continued net losses. In accordance with Financial Accounting Standards Board (FASB) ASC 360,the Company evaluated its other intangible assets using an undiscounted cashflow analysis prior to evaluating goodwill. This analysis supported the carrying value of the other intangibleassets, but could not support the carrying amount of goodwill.  Therefore, management determined that noimpairment was necessary of the other intangible assets.

 

Inevaluating goodwill, the Company evaluated the market capitalization at June 30,2009 valuation based on multiples of earnings and discounted cash flow analysisas evidence of the fair value of the entity. It was determined that the fair value did not exceed the carrying amountof goodwill, and accordingly, the Company took an impairment charge for the full amount of the goodwill ofapproximately $4,890,000.

 

TheCompany’s analysis uses significant estimates in the evaluation of otherintangibles and goodwill, such as estimated cash flows from continuingoperations, estimated future revenues, cost of goods sold and grossmargin.  It is reasonably possible thatthe Company’s estimates and assumptions could change in the near future, whichcould lead to further impairment of long-lived assets and other intangibles.

 

Other intangibleassets are stated at cost and consist of trademarks, and patents.  All trademarks acquired by the Company’sacquisitions have been deemed to have an indefinite life and as such will notbe amortized.    Patents are beingamortized over their estimated useful lives of 15 years.

 

Investments - In 2000, the Company invested inGolden Rule (Bermuda) Ltd., a captive insurance company from which theCompany purchased some of its insurance needs. The investment is not an investment of excess cash, but rather amechanism to provide insurance.  In 2009,the current management determined that the program is no longer providingsufficient benefits to warrant continued participation and therefore cancelledthe insurance plan provided by Golden Rule. The Company is in the process of exiting this program during 2010.   This stock is recorded at cost, due to theCompany having less than 20% ownership of Golden Rule (Bermuda) Ltd.

 

Warranty Costs - Estimated future costs related toproduct warranties are accrued as products are sold based on prior experienceand known current events and are included in accrued expenses in theaccompanying consolidated balance sheets. Accrued warranty costs have historically been sufficient to cover actualcosts incurred.

 

Distributor RebatePayable - Inprior years, the Company has offered a quarterly rebate program for its NorthAmerican ATV accessory distributors.  Theprogram rebate was “paid” quarterly to the applicable distributors as a creditagainst future purchases of the Company’s products.  The program rebate liability was calculatedand recognized as ATV accessory products were purchased within a quarter andwas included in accrued expenses in the accompanying consolidated balancesheets for Fiscal Years 2009 and 2008. This program was discontinued during the year ended September 30,2009, and all expenses related to the program have been included in theaccompanying consolidated financial statements. The distributor rebate expense totaled approximately $68,000 and$491,000 in Fiscal Years 2009 and 2008, respectively and was recorded as areduction of sales in the accompanying consolidated financial statements.

 

Income Taxes - Income taxes are providedfor the tax effects of transactions reported in the consolidated financialstatements and consist of taxes currently due plus deferred taxes relatedprimarily to differences between the basis for financial and income tax

 

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Table of Contents

 

CYCLE COUNTRY ACCESSORIES CORP. ANDSUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED SEPTEMBER 30, 2009 AND2008

 

reporting. Deferred taxes also are recognized for operating losses that are available tooffset future taxable income and tax credits that are available to offsetfuture income taxes payable.

 

OnOctober 1, 2008, the Company adopted newly issued authoritative guidancewhich clarified requirements for accounting for income taxes relating to therecognition of income tax benefits and liabilities. The guidance provides atwo-step approach to recognizing and measuring tax benefits and liabilitieswhen realization of the tax position is uncertain. The first step is todetermine whether the tax positions meet the more-likely-than-not condition forrecognition and the second step is to determine the amount to be recognizedbased on the cumulative probability that exceeds 50%.

 

TheCompany adopted the guidance, which requires that the Company recognize in itsconsolidated financial statements only those tax positions that are “more-likely-than-not”of being sustained upon examination by taxing authorities, based on thetechnical merits of the position. As a result of the implementation, theCompany performed a comprehensive review of its material tax positions inaccordance with recognition and measurement standards.

 

TheCompany files income tax returns in the U.S. federal jurisdiction and variousstate jurisdictions. With a few exceptions, the Company is no longer subject toU.S. federal, state, or local income tax examinations by tax authorities foryears before 2006.  The Company’s policy is to recognize interest andpenalties related to uncertain tax benefits in income tax expense. The Companyhas no significant accrued interest or penalties related to uncertain taxpositions as of October 1, 2008 or September 30, 2009 and suchuncertain tax positions as of each reporting date are insignificant

 

Earnings (Loss)Per Share - Basicearnings (loss) per share (“EPS”) is calculated by dividing net income (loss)by the weighted-average number of shares outstanding during the period.  Diluted EPS is computed in a mannerconsistent with that of basic EPS while giving effect to the potential dilutionthat could occur if stock options or other share-based awards were exercised,by dividing net income (loss) by the weighted average number of shares andshare equivalents during the period.

 

As of September 30,2009 and 2008, the Company had 6,572,307 share equivalents outstanding relatingto outstanding share options and unvested restricted shares.  At September 30, 2009 and 2008, theeffects of these shares are excluded from the computation of diluted sharesoutstanding as their effects would be antidilutive due to the Company’s netloss for the years ended September 30, 2009 and 2008.

 

The Company incurred anet loss of $6,798,793 for the year ended September 30, 2009.  A net loss causes all outstanding commonstock equivalents, such as certain stock options, warrants, and restrictedshare awards, to be antidilutive.  As aresult, the basic and dilutive losses per common share are the same.  Historical outstanding potential outstandingshares not included in diluted net loss per share are 25,000 and 8,334 atSeptember 30, 2009 and 2008, respectively. In addition, the Company’s 40,000 outstanding warrants and 500,000employee common stock options at September 30, 2009 and 2008 are not consideredcommon stock equivalents as the exercise price is significantly greater thanthe average market value during both reporting periods.

 

Legal - The Company is subject to legal proceedings andclaims which arise in the ordinary course of its business.  While the ultimate outcome of these mattersis not presently determinable, it is in the opinion of management that theresolution of outstanding claims will not have a material adverse effect on thefinancial position or results of operations of the Company.  Due to the uncertainties in the settlementprocess, it is at least reasonably possible that management’s view of outcomes willchange in the near term.

 

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CYCLE COUNTRYACCESSORIES CORP. AND SUBSIDIARIES

NOTES TOCONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARSENDED SEPTEMBER 30, 2009 AND 2008

 

Advertising - Advertising consists primarily of trademagazine advertisements, product brochures and catalogs, and trade shows.  Advertising expense totaled approximately $103,000and $455,000 in 2009 and 2008, respectively, and is included in selling, general,and administrative expenses in the accompanying consolidated statements ofoperations.

 

Research andDevelopment Costs- Research and development costs are expensed as incurred.  Research and development costs incurredduring fiscal 2009 and 2008, included in selling, general & administrativeexpenses and cost of goods sold in the accompanying consolidated statements ofoperations totaled approximately $422,000 and $434,000, respectively.

 

Shipping andHandling Costs -Shipping and handling costs represent costs associated with shipping productsto customers and handling finished goods. Shipping and handling costs are included in selling, general, andadministrative expenses and cost of goods sold in the accompanying consolidatedstatements of operations for the years ended 2009 and 2008 were approximately $230,000and $193,000, respectively.

 

Use of Estimates —The preparation of consolidatedfinancial statements in conformity with accounting principles generallyaccepted in the United States of America requires management to make estimatesand assumptions that affect the reported amounts of assets, liabilities, andoperating results, the disclosure of contingent assets and liabilities at thedate of the financial statements and the reported amounts of revenues andexpenses.  Significant items subject tosuch estimates include the useful lives and assumptions used in the impairmentanalysis of property, plant, and equipment; valuation of intangible assets; allowancefor doubtful accounts; and allowance for inventory reserves.   Actualresults could differ significantly from those estimates.

 

Fair Value ofFinancial Instruments - On October 1, 2008, the Company adopted FASB ASC 820 “FairValue Measurements” which defines fair value, outlines a framework formeasuring fair value (although it does not expand the required use of fairvalue) and details the required disclosures about fair value measurements.  At the present time, the Company does nothave any financial or nonfinancial assets or liabilities that would requirefair value recognition or disclosures under ASC 820.

 

The carrying valueof cash and cash equivalents, accounts receivable, prepaid expenses, accountspayable, accrued liabilities and debt approximates fair value.  The Company estimates that the fair value ofall financial instruments at September 30, 2009 approximates theircarrying values in the accompanying balance sheet.  The estimated fair value amounts have beendetermined by the Company using appropriate valuation methodologies.

 

Recently Adopted AccountingPronouncements - In June 2009, the FASB issued Topic 105 — GenerallyAccepted Accounting Principles (GAAP) Amendments Based on Statement ofFinancial Accounting Standards Number 168 — the FASB Accounting StandardsCodification and the Hierarchy of Generally Accepted Accounting Principles(Accounting Standards Update (ASU Number 2009 — 01)).  The topic modifies the GAAP hierarchy byestablishing only two levels of GAAP, authoritative and non-authoritativeaccounting literature.  Effective July 2009,the FASB Accounting Standards Codification (“ASC”), also known collectively asthe “Codification”, is considered the single source of authoritative U.S.accounting and reporting standards, except for additional authoritative rules andinterpretive releases issued by the SEC. Non-authoritative guidance and literature would include, among otherthings, FASB Concepts Statements, American Institute of Certified PublicAccountants Issue Papers and Technical Practice Aids and accountingtextbooks.  The Codification wasdeveloped to organize the GAAP pronouncements by topic so that users can moreeasily access authoritative accounting guidance.  It is organized by topic, sub topic, section,and paragraph, each of which is identified by a numerical designation.  All accounting references have been updated,and therefore SFAS references have been replaced with ASC references whereapplicable.  The Company adopted theprovisions of the authoritative accounting guidance for the reporting periodended September 30, 2009, the adoption of which did not have a materialeffect on the Company’s financial statements.

 

Reclassifications - The classifications of certain items in the 2008consolidated balance sheet, consolidated statement of operations andconsolidated statements of cash flows have been changed to conform to theclassifications used in 2009.  Thesereclassifications had no effect on net income (loss) or retained earnings(deficit) as previously reported.

 

F-13

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Tableof Contents

 

CYCLE COUNTRY ACCESSORIES CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED SEPTEMBER 30, 2009 AND 2008

 

**Note 2 —  INVENTORIES -**Inventories are stated at the lower ofcost or market using the weighted average cost method. Cost includes materials,labor, and manufacturing overhead related to the purchase and production ofinventories. Management regularly reviews inventory quantities on hand, futureproduct demand and the estimated utility of inventory. If the review indicatesa reduction in utility below carrying value, management would reduce theCompany’s inventory to a new cost basis through a charge to cost of goods sold.

 

The major components of inventories, as of September 30, 2009 and2008 are as follows:

 
| ** **        | ** ** | **2009**  | ** ** | **2008**  | ** ** |
|-------------------|------------|-----------|------------|-----------|------------|
| Raw Materials     |       | $         | 1,522,838  |      | $          | 2,474,458 |   |
| Work In Process   |       | 160,160   |       | 533,344   |       |
| Finished Goods    |       | 2,055,882 |       | 2,237,931 |       |
| Inventory Reserve |       | (150,000  | )          | (135,234  | )          |
| Total Inventories |       | $         | 3,588,880  |      | $          | 5,110,499 |   |

 

During the third quarter of 2009, while undergoing lean manufacturing process improvements and upgrades to the ERP software used to manage the Company, management spent significant time evaluating the inventory processes, inventory quantities on hand, future product demand and the estimated utility inventory.   During this review, management made the determination that some inventory on-hand was obsolete or needed to be written down to the current market values. Accordingly, the Company increased the reserve by $610,000 to approximately $772,000 during third quarter, until management could complete the review.

 

The Company completed the process improvements and upgrades during the fourth quarter of 2009.  As a result of management review, process improvements and upgrades, management ultimately determined the Company had approximately $283,000 of obsolete inventory, which was applied against the inventory reserve upon disposal.  Adjustments to the inventory reserve for write downs due to lower of cost or market were immaterial.  Management evaluated the Company’s remaining inventory reserve based on the Company’s historical experience and current economic conditions and determined that an inventory reserve of approximately $150,000 at September 30, 2009 was appropriate.   It is reasonably possible the inventory reserve will change in the near future.

 

**Note3  — PROPERTY, PLANT AND EQUIPMENT -**Property, Plant, and Equipment and related accumulateddepreciation at September 30 are as follows:

** **
| ** **                     | ** ** | **2009**   | ** ** | **2008**   | ** ** |
|--------------------------------|------------|------------|------------|------------|------------|
| Land                           |       | $          | 119,820    |       | $          | 119,820 |   |
| Land Improvements              |       | 160,442    |       | 160,442    |       |
| Building                       |       | 5,707,601  |       | 5,672,234  |       |
| Plant Equipment                |       | 7,737,780  |       | 7,696,739  |       |
| Tooling and Dies               |       | 971,279    |       | 876,049    |       |
| Vehicles                       |       | 434,906    |       | 473,078    |       |
| Office Equipment               |       | 1,100,224  |       | 1,105,437  |       |
| Construction in  Progress      |       | 9,328      |       | 9,198      |       |
|                           |       | 16,241,380 |       | 16,112,997 |       |
| Less Accumulated  Depreciation |       | (5,438,072 | )          | (4,663,628 | )          |
|                           |       | $          | 10,803,308 |       | $          | 11,449,369 |   |

 

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Tableof Contents

 

CYCLE COUNTRYACCESSORIES CORP. AND SUBSIDIARIES

NOTES TOCONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARSENDED SEPTEMBER 30, 2009 AND 2008

 

**Note 4  — ACQUIRED INTANGIBLE ASSETS****-  **Acquired intangible assets consist of thefollowing:

 
| ** **                        | ** ** | **Weighted-**    | ** ** | **September 30,  2009** | ** ** |
|-----------------------------------|------------|------------------|------------|------------------------------|------------|
| ** **                        | ** ** | **Average**      | ** ** | **Gross**                    | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                        | ** ** | **Amortization** | ** ** | **Carrying**                 | ** ** | **Accumulated** | ** ** | ** ** | ** ** |
| ** **                        | ** ** | **Period**       | ** ** | **Amount**                   | ** ** | **Amortization** | ** ** | **Net** | ** ** |
| Amortized Intangible  Assets      |       |             |       |                         |       |   |   |   |   |
| Patents                           |       | 11.52            |       | $                            | 67,715     |   | $ | 41,622 |   | $ | 26,092 |   |
|                              |       |             |       | 67,715                       |       | 41,622 |   | 26,092 |   |
| Unamortized Intangible  Assets    |       |             |       |                         |       |   |   |   |   |
| Trademarks                        |       |             |       | 124,835                      |       |   |   | 124,835 |   |
|                              |       |             |       |                         |       |   |   |   |   |
| Total Acquired  Intangible Assets |       |             |       | $                            | 192,550    |   | $ | 41,622 |   | $ | 150,928 |   |

 
| ** **                        | ** ** | **Weighted-**    | ** ** | **September 30,  2008** | ** ** |
|-----------------------------------|------------|------------------|------------|------------------------------|------------|
| ** **                        | ** ** | **Average**      | ** ** | **Gross**                    | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                        | ** ** | **Amortization** | ** ** | **Carrying**                 | ** ** | **Accumulated** | ** ** | ** ** | ** ** |
| ** **                        | ** ** | **Period**       | ** ** | **Amount**                   | ** ** | **Amortization** | ** ** | **Net** | ** ** |
| Amortized Intangible  Assets      |       |             |       |                         |       |   |   |   |   |
| Patents                           |       | 11.52            |       | $                            | 67,715     |   | $ | 35,720 |   | $ | 31,995 |   |
|                              |       |             |       | 67,715                       |       | 35,720 |   | 31,995 |   |
| Unamortized Intangible  Assets    |       |             |       |                         |       |   |   |   |   |
| Trademarks                        |       |             |       | 127,354                      |       |   |   | 127,354 |   |
|                              |       |             |       |                         |       |   |   |   |   |
| Total Acquired  Intangible Assets |       |             |       | $                            | 195,069    |   | $ | 35,720 |   | $ | 159,349 |   |

 

Patents in processin the amount of $27,619 and $18,463 for 2009 and 2008 are not included withinthe amortized intangible assets.

 

Scheduled amortizationexpense amounts at September 30, 2009 are summarized as follows:

 
| 2010       |   | $     | 5,901  |   |
|------------|--------|-------|--------|--------|
| 2011       |   | 5,901 |   |
| 2012       |   | 5,901 |   |
| 2013       |   | 4,277 |   |
| 2014       |   | 1,177 |   |
| Thereafter |   | 2,935 |   |
|       |   | $     | 26,092 |   |

 

**Note 5  — OTHER ASSETS -**The components of other assets at September 30are summarized as follows:

 
| ** **                                     | ** ** | **2009** | ** ** | **2008** | ** ** |
|------------------------------------------------|------------|----------|------------|----------|------------|
| Unamortized Loan Costs                         |       | $        | 15,388     |     | $          | 23,363 |   |
| Investment in Golden  Rule (Bermuda), Ltd |       | 25,000   |       | 25,000   |       |
| Total Other Assets                             |       | $        | 40,388     |     | $          | 48,363 |   |

 

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CYCLE COUNTRYACCESSORIES CORP. AND SUBSIDIARIES

NOTES TOCONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARSENDED SEPTEMBER 30, 2009 AND 2008

 

**Note 6  — ACCRUED EXPENSES -**** **Accrued expenses at September 30 are as follows:

 
| ** **                             | ** ** | **2009** | ** ** | **2008** | ** ** |
|----------------------------------------|------------|----------|------------|----------|------------|
| Distributor Rebate  Payable            |       | $        | —     |     | $          | 17,642 |   |
| Accrued Salaries and  Related Benefits |       | 326,803  |       | 507,539  |       |
| Accrued Warranty  Expense              |       | 50,000   |       | 50,000   |       |
| Accrued Real Estate Tax                |       | 110,127  |       | 112,539  |       |
| Accrued Royalty Expense                |       | 5,131    |       | 6,480    |       |
| Accrued Interest                       |       | 3,381    |       | 3,871    |       |
| Accrued Expense                        |       | 251,602  |       | 27,011   |       |
| Total Accrued Expenses                 |       | $        | 747,044    |     | $          | 725,082 |   |

 

**Note 7  —  DEBTOBLIGATIONS**-The Company andits commercial lender are parties to five secured credit agreements as of September 30,2009.  There are there are two operatinglines of credit and three term notes.

 

Lines of Credit

 

The Company has a line of credit for the lesser of$1,000,000 or 80% of eligible accounts receivable and 35% of eligibleinventory.  This line of credit bearsinterest at prime plus 0.50%, not to exceed 10.5% or be lower than 5.5%.  At September 30, 2009 and 2008, the ratewas 5.5% and the line is collateralized by all of the Company’s assets.    At September 30, 2009 and September 30,2008, there was $1,000, 000 due on Line of Credit One.  Line of Credit One matured on December 31,2009, but has been extended by the lender until June 1, 2010.

 

On September 30,2009, the Company and its commercial lender entered into an additional securedcredit agreement, Line of Credit Two, dated September 30, 2009 as atemporary expansion of its credit facility while the Company and its lendercompleted a refinancing of its credit facilities. Under the terms of this newsecured credit agreement, the Company had an additional line of credit for thelesser of $550,000 or 80% of eligible accounts receivable and 35% of eligibleinventory.  Line of Credit Two bears interestat the same rate as Line of Credit One and is collateralized by all of theCompany’s assets.  At September 30,2009, there was $30,000 due on Line of Credit Two.

 

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CYCLE COUNTRYACCESSORIES CORP. AND SUBSIDIARIES

NOTES TOCONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARSENDED SEPTEMBER 30, 2009 AND 2008

 

Term Loans

 

Term loan balances as of September 30are as follows:

 
| ** **                                                                                                                                                                                                                                                                                                                                  | ** ** | **2009**  | ** ** | **2008**  | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------|------------|-----------|------------|
|                                                                                                                                                                                                                                                                                                                                        |       |      |       |      |       |
| Note 1 to commercial  lender payable in equal monthly installments of $42,049 including interest at  6.125%. The note matures April, 2011 and is secured by all Company assets.                                                                                                                                                             |       | $         | 755,094    |      | $          | 1,197,751 |   |
|                                                                                                                                                                                                                                                                                                                                        |       |      |       |      |       |
| Note 2 to commercial  lender payable in equal monthly installments of $33,449 including interest  fixed at 6.125% until April 2011. Beginning April, 2011, the interest rate is  reset every 60 months at 0.50% over prime not to exceed 10.5% or be less than  5.5%. The note matures in April, 2018 and is secured by all Company assets. |       | 2,660,690 |       | 2,889,085 |       |
|                                                                                                                                                                                                                                                                                                                                        |       |      |       |      |       |
| Note 3 to commercial  lender payable in equal monthly installments of $14,567 including interest at  6.125% until maturity of April, 2013 secured by specific equipment acquired.                                                                                                                                                           |       | 559,159   |       | 695,742   |       |
| Totals                                                                                                                                                                                                                                                                                                                                      |       | 3,974,943 |       | 4,782,578 |       |
| Less current maturities                                                                                                                                                                                                                                                                                                                     |       | (863,160  | )          | (811,053  | )          |
| Net                                                                                                                                                                                                                                                                                                                                         |       | $         | 3,111,783  |      | $          | 3,971,525 |   |

 

Primerate was at 3.25% and 5% as of September 30, 2009 and 2008, respectively.

 

These secured creditagreements contain conditions and covenants that prevent or restrict theCompany from engaging in certain transactions without the consent of thecommercial lender and require the Company to maintain certain financial ratios,including term debt coverage and maximum leverage.  The company was not in compliance with theterm debt coverage or the requirement to provide financial statements in atimely manner as of September 30, 2009. The commercial lender was notified and a waiver was received.  In addition, the Company is required tomaintain a minimum working capital and shall not declare or pay any dividendsor make any other distributions. Additionally, any proceeds from the sale of stock received from theexercise of warrants are to be applied to any outstanding balance on the notesor the line of credit described above.

 

Scheduledlong-term debt maturities at September 30, 2009 are as follows:

 
| 2010       |   | $         | 863,160   |   |
|------------|--------|-----------|-----------|--------|
| 2011       |   | 698,007   |      |
| 2012       |   | 441,718   |      |
| 2013       |   | 395,240   |      |
| 2014       |   | 314,947   |      |
| Thereafter |   | 1,261,871 |      |
|       |   | $         | 3,974,943 |   |

 

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CYCLE COUNTRYACCESSORIES CORP. AND SUBSIDIARIES

NOTES TOCONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARSENDED SEPTEMBER 30, 2009 AND 2008

 

**Note 8 -  INCOME TAXES**

 

The provisions forincome taxes for the years ended September 30 consist of the following:

 
| ** **                            | ** ** | **2009** | ** ** | **2008** | ** ** |
|---------------------------------------|------------|----------|------------|----------|------------|
| Current Tax Provision                 |       | $        | (1,140,108 | )        | $          | 283,285 |   |
| Deferred Tax (Benefit)                |       | (320,892 | )          | (313,542 | )          |
|                                  |       |     |       |     |       |
| Total Income Tax  Provision (Benefit) |       | $        | (1,461,000 | )        | $          | (30,257 | ) |

 

Deferred Tax Assetsand Liabilities for the years ended September 30, 2009 and 2008 arecomprised of the following:

 
| ** **                                       | ** ** | **2009**   | ** ** | **2008**   | ** ** |
|--------------------------------------------------|------------|------------|------------|------------|------------|
| Deferred Tax Assets:                             |       |       |       |       |       |
| Inventory Reserve                                |       | $          | 51,000     |       | $          | 45,980 |   |
| Capitalized Fees                                 |       | 39,000     |       | 41,249     |       |
| Accrued Expenses                                 |       | 124,000    |       | 130,918    |       |
| Allowance for  Uncollectible Accounts            |       | 5,000      |       | 5,100      |       |
| Deferred Gain on Sale                            |       | 66,000     |       | 122,673    |       |
| Charitable  Contributions                        |       | 11,000     |       | —     |       |
| Theft Loss discovered  in subsequent fiscal year |       | 211,000    |       | —     |       |
| State NOL carryforwards                          |       | 22,000     |       | —     |       |
| Business Credit  Carryforward                    |       | 91,000     |       | —     |       |
| Total Deferred Assets                            |       |       | 620,000    |       |       | 345,920 |   |
|                                             |       |       |       |       |       |
| Deferred Tax Liability:                          |       |       |       |       |       |
| Property and Equipment                           |       |       | (2,314,000 | )          |       | (2,360,812 | ) |
| Net Deferred Tax  (Liability)                    |       | $          | (1,694,000 | )          | $          | (2,014,892 | ) |
|                                             |       |       |       |       |       |
| ** **                                       | ** ** | **2009**   | ** ** | **2008**   | ** ** |
| Current Assets                                   |       | $          | 448,000    |       | $          | 345,920 |   |
| Long-Term Liabilities                            |       | (2,142,000 | )          | (2,360,812 | )          |
| Net Deferred Tax  (Liability)                    |       | $          | (1,694,000 | )          | $          | (2,014,892 | ) |

 

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A reconciliation of the income tax provision computed by applying thestatutory rate of 34% for the years ended September 30 is as follows:

 
| ** **                                     | ** ** | **2009**  | ** ** | **2008** | ** ** |
|------------------------------------------------|------------|-----------|------------|----------|------------|
|                                           |       |      |       |     |       |
| Federal Statutory Tax                          |       | $         | (2,808,000 | )        | $          | (132,096 | ) |
| Permanent Items                                |       | 1,701,000 |       | 237,624  |       |
| IRS Adjustment                                 |       | (220,000  | )          | (142,942 | )          |
| State Taxes                                    |       | (44,000   | )          | —   |       |
| Other: R&D and  Workers Opportunity Credit |       | (90,000   | )          | 7,157    |       |
|                                           |       | $         | (1,461,000 | )        | $          | (30,257 | ) |

 

No valuationallowance has been provided for the deferred tax assets at September 30,2009 or 2008, as full realization of these assets is more likely than not.  The Company has state net operating losscarry forwards of approximately $384,000, expiring in tax years 2025 through2030.

 

**Note 9-  STOCKHOLDERS’ EQUITY**

 

Common Stock - The Company has 100,000,000 shares of$0.0001 par value common stock authorized and 7,482,677 and 7,433,037 sharesissued and 6,072,307 and 6,022,307 outstanding at September 30, 2009 and2008, respectively.

 

Preferred Stock - The Company has 20,000,000 shares of$0.0001 par value undesignated preferred stock authorized with no sharesoutstanding at September 30, 2009 and 2008.  The Board of Directors is authorized to adoptresolutions providing for the issuance of preferred shares and theestablishment of preferences and rights pertaining to the shares being issued,including dividend rates.  In the eventof any dissolution or liquidation of the Company, whether voluntary orinvoluntary, the holders of shares of preferred stock described above will bepaid the full amounts they are entitled to receive before any holders of commonstock are entitled to receive, pro rata, any remaining assets of the Companyavailable for distribution to its stockholders.

 

Warrants - The Company has the right, under certaincircumstances, to redeem any unexercised warrants (40,000 outstanding in 2009and 2008) at $4.00 per share. During the years ended September 30, 2009and 2008, the Company did not redeem any warrants, nor were any warrantsexercised.  These warrants expire in June 2010.

 

Treasury Stock — During the year ended September 30,2009, the Company entered into a stock buyback program with the intent torepurchase and retire some of the Company’s outstanding shares.  The stock buyback program began in October of2008, and was originally reported in the Company’s Form 10-Q for theperiod ending December 31, 2008. However, as discussed in Note 19 below, the Company’s funds were notused as instructed, resulting in a fraud loss of $570,000 for the quarterending December 31, 2008, and an additional fraud loss of $50,000 for thequarter ending March 31, 2009, resulting in an overall expense to the Companyof $620,000 for the year ending September 30, 2009.  This is shown on the consolidated statementof operations as fraud expense (collection).

 

In recording thesetransactions in its books and records as treasury stock, the Company previouslyrepresented that the number of its outstanding shares had been reduced by747,250 shares, which was approximately 10 to 12% of its outstandingshares.  This reduction in the number ofoutstanding shares impacted the Company’s earnings per share calculations inits financial statements.

 

The Company alsodisclosed these facts in its Form 10-Q for the periods ending March 31,2009 and June 30, 2009.  The Companycarried forward the number of outstanding shares from its December 31,2008 consolidated financial statements, which impacted the earnings per share calculationsfor these periods as well.  Companymanagement was unaware until January 2010 that these representations wereuntrue.

 

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CYCLE COUNTRY ACCESSORIESCORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS

FOR THE YEARS ENDEDSEPTEMBER 30, 2009 AND 2008

 

The Company has correctedits reporting of the number of outstanding shares in the consolidated financialstatements for the year ended September 30, 2009 and in the amended Form 10-Qsfor the three preceding quarters in the year ended September 30, 2009.

 

As of September 30, 2009,the Company has 1,410,730 shares of its own stock held as treasury stock.  These shares were obtained through asale-leaseback transaction in November of 2007, as is detailed in Notes 17and 18.

 

**Note 10 -  PENSION AND PROFIT SHARING PLAN -**The Company maintains a 401(K) RetirementSavings Plan, which allows qualified employees to defer the maximum portion oftheir earnings allowed by law.  The planalso allows discretionary and matching contributions from the Company.  The Company matches 25% of the employeecontribution, up to a max contribution of 1% of the employee’scompensation.  Company contributions tothe plan totaled approximately $17,000 and $18,000 for the years ended September 30,2009 and 2008, respectively.

 

**Note 11 -  BUSINESS CONCENTRATIONS -**At September 30, 2009, two customersrepresented 52% of the gross accounts receivable.   At September 30, 2008, one of those samecustomers represented 51% of the gross accounts receivable.

 

In 2009, two of theCompany’s customers exceeded 10% of net sales and represented approximately 35%of the total sales.  In 2008, threecustomers exceed 10% of sales, representing approximately 50% of the totalsales.

 

**Note 12- LEASES** — In November 2007, the Companysold its Milford, Iowa property (as further discussed in Notes 17 and 18) to arelated party and entered into an agreement to lease approximately 90% of thefacility under a three year triple net lease that contains two one year renewaloptions.  The annual lease cost is approximately$181,000 payable in monthly installments with the final payment due on November 1,2010.  The company does not intend torenew this lease after November 1, 2010.

 

In April 2009, theCompany entered into a sixty-seven month lease agreement with an unrelatedparty for office space in Minneapolis, totaling approximately $50,000 peryear.  The agreement commenced in June 2009,and the base rent was abated for a period of seven months with the firstpayment due in January 2010.  The Companyis responsible for base rent and operating expenses.

 

At September 30,2009 the Company had the following commitments for payments of rentals underleases which had a non-cancelable term of more than one year:

 

Long-term lease paymentobligations at September 30, 2009 and beyond are as follows:

 

| 2010       |   | $      | 226,570 |   |
|------------|--------|--------|---------|--------|
| 2011       |   | 75,317 |    |
| 2012       |   | 45,066 |    |
| 2013       |   | 45,066 |    |
| 2014       |   | 45,066 |    |
| Thereafter |   | 11,266 |    |
|       |   | $      | 448,351 |   |

 

Rent expense wasapproximately $181,000 and $160,000 for the years ended September 30, 2009and 2008, respectively.

 

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CYCLE COUNTRY ACCESSORIESCORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS

FOR THE YEARS ENDEDSEPTEMBER 30, 2009 AND 2008

 

**Note 13 -  SEGMENT INFORMATION -**Segment information has been presented ona basis consistent with how business activities are reported internally tomanagement. Management solely evaluates the operating profit of each segment byusing the direct costs of manufacturing its products without an allocation ofindirect costs. In determining the total revenues by segment, freight incomeand sales discounts are not allocated to each of the segments for internalreporting purposes.

 

The Company has fouroperating segments that assemble, manufacture, or sell a variety of products.

 

In April 1, 2009,the Company changed its financial segment reporting to reflect management andorganizational changes made by the Company. Periods prior to April 1, 2009 have been restated to reflect the newbasis of segmentation.  Effective April 1,2009, each operating segment is separately managed and has separate financialinformation evaluated regularly by the Company’s Chief Executive Officer andInterim Chief Financial Officer in determining resource allocation andassessing performance.

 

The Company’s financialreporting segments consolidated two previously reported segments into one,while also segregating a small product line into a new segment for betterclarification and reporting.

 

“Cycle Country ATVAccessories” was created by consolidating the former “ATV Accessories” and “WeekendWarrior” segments.  At the same time, theCompany removed the oil filter product line from the “ATV Accessories” segmentand created the “Perf-Form” segment.

 

The Plastic Wheel Coversegment was renamed “Plazco”, with no change to segment data.

 

The Company has similarlyrenamed “Contract Manufacturing” to “Imdyne”, with no change to segment data.

 

·      CycleCountry ATV Accessories is engaged in the design, manufacture, and sale of accessoriesfor all terrain vehicles (ATVs) and utility vehicles (UTVs) such as snowplowblades, lawnmowers, spreaders, sprayers, tillage equipment, winch mounts,utility boxes, and oil filters.

 

·      Plazco,the Company’s plastic products division, designs, manufactures, markets, anddistributes injection-molded plastic products for vehicles such as golf cars,lawn mowers, and low-speed vehicles (LSVs).

 

·      Perf-Form,the Company’s oil filter division, is engaged in the design, manufacturing,sales, and distribution of oil filters for the powersports category, includingATVs, UTVs, LSVs and Motorcycles.

 

·      Imdyne,the Company’s contract manufacturing division, is engaged in the design,manufacture and assembly of a wide array of parts, components, and otherproducts for non-competing OEM and other businesses.

 

Thesignificant accounting policies of the operating segments are the same as thosedescribed in Note 1 for the years ended September 30, 2009 and 2008.

 

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CYCLE COUNTRY ACCESSORIESCORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS

FOR THE YEARS ENDEDSEPTEMBER 30, 2009 AND 2008

 

The following is reconciliationas of September 30 between the revenue and operating profit (loss) of thevarious segments to consolidated amounts:

 
| ** **                             | ** ** | **2009**   | ** ** | **2008**   | ** ** |
|----------------------------------------|------------|------------|------------|------------|------------|
|                                   |       |       |       |       |       |
| Total Revenue by Segment               |       |       |       |       |       |
| CCAC ATV                               |       | $          | 8,649,967  |       | $          | 14,759,198 |   |
| Plazco                                 |       | 689,792    |       | 1,500,730  |       |
| Perf-Form                              |       | 254,197    |       | 219,862    |       |
| Imdyne                                 |       | 1,425,997  |       | 2,144,978  |       |
|                                   |       |       |       |       |       |
| Total Revenue by  Segment              |       | 11,019,953 |       | 18,624,768 |       |
|                                   |       |       |       |       |       |
| Freight Income                         |       | 92,842     |       | 69,299     |       |
| Sales  Discounts & Allowances |       | (831,069   | )          | (1,180,126 | )          |
|                                   |       |       |       |       |       |
| Total Consolidated  Revenue            |       | 10,281,726 |       | 17,513,941 |       |
|                                   |       |       |       |       |       |
| Operating profit (loss)  by Segment    |       |       |       |       |       |
| CCAC ATV                               |       | 4,181,220  |       | 6,734,377  |       |
| Plazco                                 |       | 404,367    |       | 845,572    |       |
| Perf-Form                              |       | 78,069     |       | 72,670     |       |
| Imdyne                                 |       | 407,016    |       | 783,092    |       |
|                                   |       |       |       |       |       |
| Total Profit By Segment                |       | 5,070,672  |       | 8,435,711  |       |
|                                   |       |       |       |       |       |
| Freight Income                         |       | 92,842     |       | 69,299     |       |
| Sales Disc. &  Allow.         |       | (831,069   | )          | (1,180,126 | )          |
| Factory Overhead                       |       | (2,885,631 | )          | (3,026,324 | )          |
|                                   |       |       |       |       |       |
| Gross Profit                           |       | 1,446,814  |       | 4,298,560  |       |
|                                   |       |       |       |       |       |
| Sales, Gen. &  Admin.         |       | (4,037,309 | )          | (4,763,859 | )          |
| Goodwill Impairment                    |       | (4,890,146 | )          | —     |       |
| Fraud Expense                          |       | (620,000   | )          | —     |       |
| Gain on Sale of Assets                 |       | 164,590    |       | 361,461    |       |
| Interest Expense, Net                  |       | (334,741   | )          | (320,122   | )          |
| Other Inc/Exp, Net                     |       | 10,999     |       | 35,441     |       |
| Income Tax (Expense)  Benefit          |       | 1,461,000  |       | 30,257     |       |
| Net Income (Loss)                      |       | $          | (6,798,793 | )          | $          | (358,262 | ) |

 

The following is alisting of the identifiable assets by segments to consolidated amounts:

 

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CYCLE COUNTRY ACCESSORIESCORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS

FOR THE YEARS ENDED SEPTEMBER 30, 2009 AND 2008

 
| **Identifiable Assets**    | ** ** | **2009**   | ** ** | **2008**   | ** ** |
|----------------------------|------------|------------|------------|------------|------------|
| CCAC                       |       | $          | 4,832,042  |       | $          | 11,578,621 |   |
| Plazco                     |       | 553,528    |       | 732,795    |       |
| Perf-Form                  |       | 71,850     |       | 580,161    |       |
| Imdyne                     |       | 10,932,867 |       | 11,671,897 |       |
| Total Identifiable Assets  |       | 16,390,287 |       | 24,563,474 |       |
|                       |       |       |       |       |       |
| Corporate and Other Assets |       | 1,590,688  |       | 813,255    |       |
| Total Assets               |       | $          | 17,980,975 |       | $          | 25,376,729 |   |

 

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CYCLE COUNTRY ACCESSORIESCORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS

FOR THE YEARS ENDEDSEPTEMBER 30, 2009 AND 2008

 

The following is asummary of the Company’s revenue indifferent geographic areas during the years ended September 30,2009 and 2008:

 
| ** **      | ** ** | **2009** | ** ** | **2008** | ** ** |
|-----------------|------------|----------|------------|----------|------------|
| United States   |       | $        | 9,267,487  |     | $          | 16,183,794 |   |
| Other Countries |       |     | 1,014,239  |     |       | 1,330,147 |   |
| Total Revenue   |       | $        | 10,281,726 |     | $          | 17,513,941 |   |

 

As of September 30, 2009and 2008, all of the Company’s long-lived assets are located in the UnitedStates of America.

 

Cycle Country ATVAccessories had sales to individual customers which exceeded 10% of totalrevenues in 2009 and 2008, as described in Note 13.  Plazco, Perf-Form, and Imdyne did not havesales to any individual customer greater than 10% of total revenues during FiscalYears 2009 and 2008.

 

**Note 14 -  RELATED PARTY TRANSACTIONS -**During the years ended September 30,2009 and 2008, the Company had non-eliminated, related party sales transactionswith a company owned by one of its former board members.  Total revenues were approximately $208,000 and$293,000 of which approximately $8,000 and $45,000 remained in accountsreceivable at September 30, 2009 and 2008, respectively.

 

**Note 15 -  SHARE BASED COMPENSATION -**The Company accounts for share-basedemployee grants under  FASB ASC 718,”Share-BasedPayment”, which requires share-based payment transactions to be accounted forusing a fair value based method and the recognition of the related expense inthe results of operations.

 

The Company’s employmentagreement with its chief executive officer, Jeffrey M. Tetzlaff, provides forthe grant of 50,000 shares of stock in the Company, lasting over a three-yearperiod.  At the end of the first andsecond full years of employment, the chief executive officer becomes vested inand receives 16,666 shares of stock each year. At the completion of the chief executive officer’s third full year ofemployment, he shall become vested in and receive the final 16,668 shares ofstock.  Total compensation expense relatedto this agreement and recognized during the years ended September 30, 2009and 2008 was $97,500 and $53,250, respectively. As of September 30, 2009, there was $41,250 of total unrecognizedcompensation costs related to the non-vested share-based compensationarrangement under the plan.  The remainingcost is expected to be recognized in the fiscal year ending September 30,2010.

 

Under the employmentagreement, Mr. Tetzlaff also received an option to purchase up to anadditional 500,000 shares of the Company’s common stock.  The exercise price is the closing price on April 8,2008, which was $1.68 per share.  Thisoption may be exercised at any time during the first three years of employment,and this option may be exercised in full or in part.  Any portion of this option that has not beenexercised on April 7, 2011 will lapse and no longer be an obligation ofthe Company.  Stock shall be restrictedand contain the appropriate legend noting its restriction.

 

Under the provisions of ASC718, stock-based compensation cost is estimated at the grant date based on thefair value of the award and compensation cost is recognized as an expense overthe vesting period in the consolidated financial statements.  The Company uses the Black-Scholes valuationmodel to estimate the fair value of option awards.  Determining the appropriate fair value modeland related assumptions requires judgment, including estimating stock pricevolatility, expected terms, risk-free rate, and fair value of common stock atthe grant date.  The followingassumptions were utilized to estimate the fair value of the Company’s stockoption awards during the year ended September 30, 2008:

 
| Expected Stock Price Volatility |   | 12.83%  |   |
|---------------------------------|--------|---------|--------|
|                            |   |    |   |
| Risk-Free Interest Rate         |   | 3.14%   |   |
|                            |   |    |   |
| Expected Life of Options        |   | 3 Years |   |
|                            |   |    |   |
| Expected Annual Dividends       |   | 0%      |   |

 

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Table ofContents

 

CYCLE COUNTRY ACCESSORIESCORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS

FOR THE YEARS ENDEDSEPTEMBER 30, 2009 AND 2008

 

The expected volatilityrate was based on the historical volatility, for the last three years, of the Company’scommon stock.  The expected liferepresents the average time options that vest are expected to be outstanding basedon the vesting provisions and the Company’s historical exercise, cancellation,and expiration patterns.

 

The risk-free rate wasbased on U.S. Treasury zero-coupon issues with the maturity approximating theexpected life as of the week of the grant date.  There was no annual dividend rate assumed as acash dividend is not expected to be declared and paid in the foreseeablefuture.  The Company updates theseassumptions at least annually and on an interim basis if significant changes tothe assumptions are warranted.

 

The Company recordedstock-based employee compensation expense related to stock options ofapproximately $39,500 , and net of estimated forfeitures, for the year ended September 30,2009.  The Company recognized the fullamount of the stock-based employee compensation expense of its equity incentiveplans in the consolidated statements of operations for the year ended September 30,2009, and did not capitalize any such costs in the consolidated balance sheetsother than in the general overhead pool for inventory costs.  The weighted- average grant-date fair valueper share of options granted during the year ended September 30, 2008, was$0.219 per share.  No options weregranted for the year ended September 30, 2009.

 

The following table listsstock option activity for the year ended September 30, 2009:

 
| ** **                                                | ** ** | ** **     | ** ** | **Weighted**         | ** ** | **Weighted**    | ** ** | ** **    | ** ** | **Weighted**     | ** ** |
|-----------------------------------------------------------|------------|----------------|------------|----------------------|------------|-----------------|------------|---------------|------------|------------------|------------|
| ** **                                                | ** ** | ** **     | ** ** | **Average**          | ** ** | **Average**     | ** ** | ** **    | ** ** | **Average**      | ** ** |
| ** **                                                | ** ** | **Number  of** | ** ** | **Exercise**         | ** ** | **Remaining**   | ** ** | **Intrinsic** | ** ** | **Remaining**    | ** ** |
| ** **                                                | ** ** | **Shares**     | ** ** | **Price  per Share** | ** ** | **Contractual** | ** ** | **Value**     | ** ** | **Contrat Term** | ** ** |
|                                                      |       |           |       |                 |       |            |       |          |       |             |       |
| Outstanding at September 30,2008                     |       | —         |       | $                    | —     |            | $          | —        |       |             |       |   |   |
| Granted                                                   |       | 500,000        |       | 1.68                 |       | 840,000         |       | —        |       | 2.52             |       |
| Exercised                                                 |       | —         |       | —               |       | —          |       |          |       |             |       |
| Forfeiture/Expiration                                     |       | —         |       | —               |       | —          |       |          |       |             |       |
|                                                      |       |           |       |                 |       |            |       |          |       |             |       |
| Outstanding at September 30,2009                     |       | 500,000        |       | $                    | 1.68       |            | $          | 840,000       |       | —           |       | 1.52 |   |
|                                                      |       |           |       |                 |       |            |       |          |       |             |       |
| Options Vested and Exercisableat September 30,  2009 |       | 500,000        |       | $                    | 1.68       |            | $          | 840,000       |       | —           |       |   |   |

 

The Company issues sharesto non-employee members of the board of directors under the approved 2007Incentive Compensation Plan for their services provided to the Company as directors.  A total of 5,373 shares at $0.47 per sharewere earned in 2009 and 3,609 shares at an average of $1.66 per share were earnedin 2008. Total compensation expense recognized was $2,500 and $6,000 in FiscalYears 2009 and 2008, respectively.   Theshares will be issued in Fiscal Year 2010.

 

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Table of Contents

 

CYCLE COUNTRY ACCESSORIESCORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS

FOR THE YEARS ENDED SEPTEMBER 30, 2009 AND 2008

 

TheCompany issued shares as partial compensation to an investor relationsconsulting firm for the services it performed in fiscal year 2009.  A total of 50,000 shares at $0.45 per sharewere issued in fiscal year 2009 and 50,000 shares at $1.83 per share wereissued in fiscal year 2008, with share-based expense of $22,500 and $91,500 recognizedfor fiscal years 2009 and 2008, respectively.

 

**Note 16 -  STOCK REDEMPTION - SALE OF PROPERTY -**On November 14, 2007, the Company soldthe manufacturing facility, including the land, building and certain other equipmentlocated in Milford, Iowa, (the “Milford, Iowa Assets”), in a stock redemptiontransaction with the Company’s founder and his wife.  The Company acquired all of the common sharesowned by the founder and his wife, totaling 1,410,730 shares, in exchange forthe Milford Iowa Assets.  The acquiredshares were redeemed as Treasury Stock. The value of the property was determined based upon a formal appraisaland written market evaluations performed by two independent commercial realtors.  The stock was valued using the stock’sclosing price on November 13, 2007, of $1.83 per share for a total considerationof $2,581,636.

 

**Note 17 -  SALES - LEASEBACK - OPERATING LEASE -**On November 14, 2007, contemporaneouslywith the sale of the Milford, Iowa Assets as described in Note 16 above, theCompany also entered into a sale-leaseback arrangement.  The lease back has been accounted for as anoperating lease with a three-year term. At September 30, 2009, $194,278 of the $725,792 total gain has beendeferred and will be amortized in proportion to lease expense over the term ofthe lease.

 

Amortization of the gainrecognized for the fiscal years ended September 30, 2009 and 2008 was $166,524for each year.  Total lease expense forthe years ended September 30, 2009 and 2008 was $181,504 and $160,265, respectively.

 

**Note 18 - COMMITMENTS ANDCONTINGENCIES**

 

Letters of Credit - Letters of credit are purchaseguarantees that ensure the Company’s payment to third parties in accordancewith specified terms and conditions.  TheCompany is a party to one such agreement which approximated $194,874 and $206,752,as of September 30, 2009 and 2008, respectively.  This letter of credit guarantees the paymentof the insurance premiums to Golden Rule (Bermuda) Ltd., a captiveinsurance company from which the Company previously bought some of itsinsurance (see Note 1).  Though theCompany has changed insurance providers, as part of its prior contracts withGolden Rule (Bermuda) Ltd, the Company is contractually obligated tomaintain this Letter of Credit for three years after termination of theinsurance.  The total letter of creditexpense was $2,780 and $2,847 for the years ended September 30, 2009 and2008, respectively.

 

Purchase Obligations andOther Commitments- At September 30, 2009 and 2008, the Company has purchase obligations formaterials and other contractual obligations in the amount of approximately $400,000and $250,000 respectively.

 

**Note 19 - MISAPPROPRIATION OFFUNDS BY FORMER BOARD CHAIRMAN -**As discussed in Note 9 above, on January 6, 2010,the Company uncovered a misappropriation of funds by its then-Chairman of theBoard of Directors, L. G. (Bob) Hancher, Jr.  Mr. Hancher hadserved on the Board of Directors of the Company since 2001.  Mr. Hancheradmitted to the misappropriation and resigned from the Board.

 

In October 2008, Mr. Hancherrecommended to the Company’s Board of Directors and management that the Companyrepurchase some of its shares.  Mr. Hancherthen undertook efforts to cause the Company to repurchase some of itsshares.  Mr. Hancher represented that he would handle the repurchasesthrough Commerce Street Ventures Group, a company controlled by Mr. Hancher,and through another company with whom he had worked in the past.  In the processof investigating matters relating to the Stock Buyback, a number ofirregularities surrounding the purported transactions surfaced.  In response to ongoing inquiries from managementfor appropriate documentation on the use of $570,000 in cash provided by theCompany to complete the Stock Buyback, on January 6, 2010, the Companyreceived a letter from Mr. Hancher that stated $400,000 of the fundsadvanced to him by the Company were not used to purchase shares of Companystock.

 

TheCompany continues to investigate the use of the remaining funds and to work torecover all of the amounts misappropriated, but any such recoveries will impactsubsequent periods and will be reported for the periods in which suchrecoveries occur.

 

Thefunds reported as used for the Stock Buyback have been re-characterized asfraud expense.  Also, as a result of themisappropriation, the number of outstanding shares was incorrectly reported ineach of the Company’s quarterly reports on Form 10-Q for fiscal 2009,including the Original Filing and have been corrected.

 

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Table ofContents

 

CYCLE COUNTRY ACCESSORIESCORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS

FOR THE YEARS ENDEDSEPTEMBER 30, 2009 AND 2008

 

Inaddition, during the quarter ended March 31, 2009, as part of thispurported Stock Buyback transaction, Mr. Hancher directed the Company topay $50,000 to a consulting brokerage firm. These funds were originally recorded as a pre-paid expense, and were tobe used to pay future legal and other advisory costs.  As a result of the Company’s investigation ofthis entire matter, management has determined the $50,000 in prepaid expensesalso should be treated as fraud expense.

 

At Mr. Hancher’sdirection, over a period of six months, the Company wired a total of $620,000to these two entities to pay for purported share repurchases.

 

Subsequently, Mr. Hancherrepresented that he had created an account in the Company’s name in which hepurported to have purchased 747,250 shares of the Company’s stock.  Basedon the documentation presented by Mr. Hancher at the time, the Companyreported these transactions in its Forms 10-Qs for the periods ending December 31,2008, March 31, 2009 and June 30, 2009 as an increase in treasurystock.

 

Consistent with thedocumentation and other representations made by Mr. Hancher, managementfat the Company made an adjustment to reduce the number of outstanding sharesreported by the transfer agent by 747,250 shares, which were treated by theCompany as treasury stock, on the Company’s consolidated financial statementsfor the period ending December 31, 2008. The adjustment to the Company’s consolidated financial statements wasrecorded on the basis that Mr. Hancher had, as he had represented onnumerous occasions, actually used the funds he was entrusted with to purchasethe Company’s stock.

 

In connection with theaudit of the consolidated financial statements for the fiscal year ended September 30,2009, the Company investigated the circumstances surrounding the stockrepurchases and determined that it had not received satisfactory documentationand other evidence to conclude that the Company had, in fact, repurchased suchshares.

 

After being notified ofirregularities discovered by the Company, Mr. Hancher wrote a letter tothe Company resigning from the Board and acknowledging that he received thefunds from the Company, but admitting that he did not use $450,000 of the fundsto repurchase Company stock.  In his letter, he stated no others hadknowledge of or were involved in this misappropriation.

 

The Company intends topursue all appropriate action to recover amounts due to it as a result of theseevents. The Company is diligently working to recover the funds.  To date, the Company has sought and, in thesecond quarter of 2010, regained control of 195,416 shares of the Companyshares that were acquired with Company funds.  In addition, the Company iscooperating with the various regulatory authorities involved.

 

**Note 20- DELISTING NOTICE FOR COMPANY SHARES FROM NYSE AMEX —**On January 14,2010, the Company received a notice (the “Notice”) from NYSE Amex LLC (“Exchange”)that the Company was not in compliance with some of the Exchange’s continuedlisting standards.  Specifically, the Exchange Notice states that theCompany’s failure to timely file its Form 10-K for the year ended September 30,2009, as required by Sections 134 and 1101 of the Exchange Company is amaterial violation of its listing agreement with the Exchange, for which theExchange is authorized to suspend and remove the Company’s securities from theExchange, unless the Company takes prompt corrective action.  The Exchange gave the Company until January 28,2010 to submit a plan of compliance that would bring the Company back to complianceby April 14, 2010.

 

OnJanuary 8, 2010, the Company had announced that it would be unable to fileits Form 10-K on time due to the Company’s discovery that the Chairman ofits Board of Directors had misappropriated Company funds as previouslydiscussed in Note 19.  The director’s resignation from the Board also hascaused the Company to be out of compliance with Section 801(h) of theExchange’s Company Guide, which requires the Board to be comprised of at least50% independent members.

 

TheExchange gave the Company until the earlier to occur of its next annualshareholders’ meeting or January 6, 2011 to regain compliance.  TheExchange Notice also stated the Company is no longer compliant with Section 803(2)(c) and802(d) of the Company Guide, which require at least two members of theaudit committee and that classified boards having classes of approximatelyequal size.  The Exchange gave the Company until the earlier of the nextannual shareholders’ meeting or January 6, 2011 to regain compliance withthese requirements.

 

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Table ofContents

 

CYCLE COUNTRY ACCESSORIESCORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS

FOR THE YEARS ENDEDSEPTEMBER 30, 2009 AND 2008

 

OnFebruary 17, 2010, the Company received an additional notice (the “February Notice”)from the Exchange that determined the Company is out of compliance with theExchange’s continued listing requirements in Section 134 and 1101 of theExchange’s Company Guide for its failure to timely file its Form 10-Q forits first fiscal quarter ended December 31, 2009.  In addition, theExchange has asserted this failure to file is a material violation of theCompany’s listing agreement with the Exchange.

 

Inconnection with the earlier Notice, the Company filed a Plan of Compliance (the“Plan”) with the Exchange on January 28, 2010.  Since that Plan also addressed the delinquentForm 10-Q referenced in the February Notice, the Company was notrequired to submit an additional plan of compliance in connection with the February Notice.

 

OnMarch 1, 2010, the Company received a letter from the Exchange that it hasaccepted the Company’s previously submitted Plan and, pursuant to such Plan, theExchange has granted the Company an extension until April 14, 2010 toregain compliance with its continued listing standards in order to maintain itslisting on the Exchange.

 

Theletter further acknowledges that through the Company’s recently announcedaddition of a new member to its Board of Directors and Audit Committee, theCompany has regained compliance with Sections 801(h), 802(d), and 803(2)(c) ofthe Exchange’s Company Guide.

 

OnApril 20, 2010, Cycle Country received a letter from the Exchange thatCycle Country has been granted an extension of time to complete the Plan ofCompliance that was previously submitted by the Company to the Exchange.   The Exchange had previously granted CycleCountry until April 14, 2010 to complete its Plan.  Cycle Country was unable to complete thefilings by the earlier date and requested an additional extension.  The Company will continue to be subject toperiodic review by the Exchange to determine whether it is making progressconsistent with the Plan.  The letterfrom the Exchange states that the Exchange staff may initiate delistingproceedings if Cycle Country does not come into compliance with the identifiedstandards by May 17, 2010 or fails to make progress in implementing thePlan during the period covered by the Plan.

 

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Table ofContents

 

**EXHIBIT INDEX**

 

The following exhibitsare filed, or incorporated by reference where indicated, as part of Part IVof this Annual Report on Form 10-K:

 
| **Exhibit  Number** | ** ** | **Exhibit**                                                                                                                                                                                                                                                                          |
|---------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| **3.1**             |       | Articles of  Incorporation (Incorporated by reference to Exhibit 3.1 contained in the  Company’s Registration Statement on Form SB-2 (and amendments thereto)  filed August 29, 2001 (file number 333-68570)).                                                   |
| ** **          |       |                                                                                                                                                                                                                                                                                 |
| **3.2**             |       | Amended and Restated Bylaws  as amended effective through May 7, 2007 (Incorporated by reference to  Exhibit 3.3 contained in the Company’s Quarterly Report on  Form 10-QSB for the quarterly period ended March 30, 2007).                                |
| ** **          |       |                                                                                                                                                                                                                                                                                 |
| **10.1**            |       | Jeffrey Tetzlaff  Employment Agreement, dated June 24, 2008 (Incorporated by reference to  Exhibit 10 contained in the Company’s Current Report on Form 8-K  filed July 2, 2008).*                                                                          |
| ** **          |       |                                                                                                                                                                                                                                                                                 |
| **10.2**            |       | Lease of Milford  Facility, dated November 9, 2007 (Incorporated by reference to  Exhibit 10 contained in the Company’s Current Report on Form 8-K  filed November 20, 2007)                                                                                |
| ** **          |       |                                                                                                                                                                                                                                                                                 |
| **10.3**            |       | Secured Credit  Agreement, dated August 21, 2001 (Incorporated by reference to  Form SB-2 filed August 29, 2001 (file number 333-68570))                                                                                                                              |
| ** **          |       |                                                                                                                                                                                                                                                                                 |
| **10.4**            |       | First Amendment to  Secured Credit Agreement, dated July 22, 2002. (Incorporated by  reference)                                                                                                                                                                                 |
| ** **          |       |                                                                                                                                                                                                                                                                                 |
| **10.5**            |       | Second Amendment to  Secured Credit Agreement, dated May 30, 2003 (Incorporated by reference  to Exhibit 10.10 contained in the Company’s registration statement on  Form SB-2 (and amendments thereto filed January 20, 2006 (file  number 333-131775))    |
| ** **          |       |                                                                                                                                                                                                                                                                                 |
| **10.6**            |       | Third Amendment to  Secured Credit Agreement, dated June 25, 2003 (Incorporated by reference  to Exhibit 10.11 contained in the Company’s registration statement on  Form SB-2 (and amendments thereto filed January 20, 2006 (file  number 333-131775))    |
| ** **          |       |                                                                                                                                                                                                                                                                                 |
| **10.7**            |       | Fourth Amendment to  Secured Credit Agreement, dated January 1, 2005 (Incorporated by  reference to Exhibit 10.12 contained in the Company’s registration  statement on Form SB-2 (and amendments thereto filed January 20,  2006 (file number 333-131775)) |
| ** **          |       |                                                                                                                                                                                                                                                                                 |
| **10.8**            |       | Fifth Amendment to  Secured Credit Agreement, dated April 29, 2005 (Incorporated by  reference to Exhibit 10.13 contained in the Company’s registration  statement on Form SB-2 (and amendments thereto filed January 20,  2006 (file number 333-131775))   |
| ** **          |       |                                                                                                                                                                                                                                                                                 |
| **31.1**            |       | Certification required  by Rule 13a-14(a).                                                                                                                                                                                                                                      |
| ** **          |       |                                                                                                                                                                                                                                                                                 |
| **31.2**            |       | Certification required  by Rule 13a-14(a).                                                                                                                                                                                                                                      |
| ** **          |       |                                                                                                                                                                                                                                                                                 |
| **32.1**            |       | Certification of Chief  Executive Officer, Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant  to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                      |
| ** **          |       |                                                                                                                                                                                                                                                                                 |
| **32.2**            |       | Certification of Chief  Financial Officer, Pursuant to 18 U.S.C. Section 1350, As Adopted  Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                      |

 

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