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EX-31.1 - EXHIBIT 31.1 - ATC Ventures Group, Inc.ex31-1.htm
EX-32.2 - EXHIBIT 32.2 - ATC Ventures Group, Inc.ex32-2.htm
EX-32.1 - EXHIBIT 32.1 - ATC Ventures Group, Inc.ex32-1.htm
 
ANNUAL REPORT FOR CYCLE COUNTRY ACCESSORIES CORP.
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549
FORM 10-K/A
(Amendment No.1)
(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, 2010
OR
 
 
 
 
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE EXCHANGE ACT OF 1934.
For the transition period from      to
Commission file number: 001-31715
Cycle Country Accessories Corp.
(Exact name of registrant as specified in its charter)
Nevada
(State or other jurisdiction of incorporation or organization)
42-1523809
(IRS Employer Identification No.)
1701 38th Ave W, Spencer, Iowa 51301
(Address of principal executive offices)
P: (712) 262-4191
F: (712) 262-0248
www.cyclecountry.com
(Registrant's telephone number, facsimile number, and Corporate Website)
          Securities registered pursuant to Section 12(b) of the Act: None.
          Securities registered 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
          Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No x
          Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No x
          Check whether the issuer (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. x Yes No o
          Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or such shorter period that the registrant was required to submit and post such files). Yes x No o
          Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K ( 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x
          Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of "large accelerated filer" and "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
(Check one):
 
 
 
 
Large accelerated filer
o
Accelerated filer
o
 
 
 
 
Non-accelerated filer
o
Smaller reporting company
x
          Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
          The aggregate market value of the common stock held by non-affiliates of the registrant as of March 31, 2010, the last business day of the registrant's most recently completed second fiscal quarter was approximately $1,261,309 based upon the closing price of the common stock on the NYSE Amex, LLC ("NYSE Amex") on that date.
          The number of shares of the registrant's common stock, par value $0.0001 per share, outstanding as of January 10, 2011 was 6,990,662
 

 

 
TABLE OF CONTENTS
 
 
 
 
 
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F-1

 

 
Cautionary Note About Forward Looking Statements.
Certain matters discussed in this Form 10-K are "forward-looking statements," and the Company intends these forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995 and is including this statement for purposes of those safe harbor provisions. These forward-looking statements can generally be identified as such because they include phrases such as the Company "expects," "believes," "anticipates" or other words of similar meaning. Similarly, statements that describe the Company's future plans, objectives or goals are also forward-looking statements. Such forward-looking statements are subject to certain risks and uncertainties which could cause actual results or outcomes to differ materially from those currently anticipated. Factors that could affect actual results or outcomes include the matters described under the caption "Risk Factors" in Item 1A of this report and the following: changes in consumer spending patterns; the Company's success in implementing its strategic plan, including its focus on innovation and on cost-cutting and revenue enhancement initiatives; actions of and disputes with companies that compete with the Company; the Company's success in managing inventory; the risk that the Company's lenders may be unwilling to provide a waiver or amendment if the Company is in violation of its financial covenants and the cost to the Company of obtaining any waiver or amendment the lenders would be willing to provide; the risk of future write-downs of plant equipment or other intangible assets; movements in foreign currencies or interest rates; fluctuations in the prices of raw materials or the availability of raw materials; the Company's success in restructuring certain parts of its operations; the success of suppliers and customers; 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 adverse weather conditions. Shareholders, potential investors and other readers are urged to consider these factors in evaluating the forward-looking statements and 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 of this filing. The Company assumes no obligation, and disclaims any obligation, to update such forward-looking statements to reflect subsequent events or circumstances.
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EXPLANATORY NOTE
We are filing this Amended Annual Report on Form 10-K/A (the "Amended Filing") to our Annual Report on Form 10-K for the fiscal year ended September 30, 2010, as filed with the Securities and Exchange Commission (the "SEC") on January 18, 2011 (the "Original Filing"), to correct errors relating to the number of shares outstanding, the valuation and timing of the expense recognition of those employee and director equity awards, and the amount and timing of sales discounts and allowances and selling expenses related to a customer incentive program that was put into place by management. The error regarding the number of shares outstanding related to equity compensation awards with multiple vesting dates that covered multi-year service periods. These errors, in total, caused us to overstate total revenue and understate our stock-based compensation and customer incentive program-related selling expenses. Additionally, the error regarding the number of shares that were to have been issued and outstanding had the effect of further misstating the basic and fully-diluted earnings per share for the year ended September 30, 2010. The effects of the restatement are disclosed in Note 21- Restatement of Consolidated Financial Statements.
No other changes are being made to the Financial Statements or any other matter in Part II, Item 8 of the Original Filing. In addition, no changes are being made to any other item of our Original Filing other than the updating of: (i) the Exhibits to include updated Certifications of the Chief Executive and Chief Financial Officers, and (ii) the Exhibit Index to disclose that certain exhibits that were filed with the Original Filing are incorporated by reference into this Amended Filing. The sections of the Original Filing that are not being amended are unchanged and continue in full force and effect as originally filed. This Amended Filing speaks as of the date of the Original Filing and has not been updated to reflect events occurring subsequent to the date of the Original Filing.
PART I
ITEM 1. BUSINESS
Cycle Country Accessories Corp., a Nevada corporation, was incorporated in Nevada in 2001 as an aggregation of various businesses. The Company's operations are held in a wholly-owned subsidiary incorporated in Iowa, Cycle Country Accessories Corp. ("Cycle Country - Iowa"). Cycle Country - Iowa had an unused, wholly-owned subsidiary with no assets, incorporated in Nevada, which was dissolved in 2010. The entities are collectively referred to as the "Company", "we", "our", or "Cycle Country."
Cycle Country is a leading manufacturer and marketer of branded outdoor recreational and powersports products for the outdoor enthusiast. The Company's growing portfolio of well-regarded brands has attained leading market positions in their respective categories due to uncompromising product quality and performance, as well as the Company's nearly 30 years of outstanding customer service.
The Company has four distinct divisions as reportable segments, with three of them engaged in the design, manufacture, sale and distribution of branded, proprietary products; the fourth division, Imdyne, engages in contract manufacturing.
 
 
Cycle Country ATV Accessories
We are one of the largest manufacturers of accessories for all terrain vehicles (ATVs) and utility vehicles (UTVs). We design, manufacture and sell a popular selection of branded accessories for vehicles in the outdoor recreational and powersports industry which are sold to various wholesale distributors and retail dealers throughout the United States of America, Canada, Mexico, South America, Europe, and Asia. This line of branded products includes snowplow blades, lawnmowers, spreaders, sprayers, tillage equipment, winch mounts, utility boxes, baskets and an assortment of other ATV/UTV accessory products. These products custom fit essentially all ATV/UTV models. Our reputation as the recognized leader in our category has enabled us to develop key, long-term relationships with many of the leading ATV/UTV manufacturers and distributors. This segment currently generates most of the Company's revenue and is the largest of the Company's four segments.
We sell our products to many of the leading distributors in the United States, most of which have sold our products continuously for the past 29 years. These distributors sell to virtually every ATV/UTV dealer in North America. Similar strategic arrangements have also been developed internationally, where our current international distributors make our products available in eighteen other countries.
Our products enhance the functionality and versatility of the ATV/UTV. The ATV was initially designed as a recreational vehicle but is rapidly becoming a multi-purpose vehicle serving both recreational and utility functions. Because of this, the market has reacted by developing a wide array of utility and sport utility products (UTVs). Our products help ATV/UTV owners perform many of their utility needs.
 
 
Plazco
Plazco designs, manufactures, markets, and distributes injection-molded plastic products for vehicles such as golf cars, lawn mowers, and low-speed vehicles (LSVs). We believe that we are one of the largest manufacturer of golf car wheel covers in the world, estimating that we control over 50% of the original equipment manufacturer ("OEM") golf car wheel cover business. We have always sold directly to golf car manufacturers and we also have an excellent distribution network that reaches the aftermarket throughout the United States, Europe and Asia.
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Perf-Form
Perf-Form manufactures, sells, and distributes oil filters for the powersports industry. Our filters and coolers fit various models from Harley-Davidson, Ducati, Honda, and Yamaha. Our oil filters are sold through the same distribution channels as our other powersports products. We specialize in hard to find, legacy parts for out-of-production powersports products.
 
 
Imdyne
Imdyne is engaged in the manufacture and assembly of a wide array of parts, components, and other products for non-competing OEM and other customers. Our capabilities include most forms of metal fabrication and plastic injection molding processes. Much of the manufacturing in this segment is in industries similar to the Company's major product lines.
Competition
The Company believes its products compete favorably on the basis of product innovation, product performance, customer service and marketing support and price.
 
 
Cycle Country ATV Accessories: The Company's main competitors in the ATV/UTV accessories business are wholesale distributors who have sourced private label products primarily from manufacturers in Asia, as well as a few large companies for which this category is a very small part of their business. We are one of the very few American manufacturers in our industry, and the only one for whom these products are a primary focus. The main competitors in the ATV/UTV accessories market are Polaris, Arctic Cat, Warn, John Deere, Swisher, Moose, and American Eagle.
 
 
Plazco: The Company's competitors in the plastic wheel covers and other golf car accessories market are Nivel, Inc., and Fore-Par Group, which licenses and markets the popular Cragar-branded wheel covers.
 
 
Perf-Form: The Company primarily competes in the specialty oil filter and oil cooler market with Fram, WIX, Amsoil, K&N, and Purolator. They are all larger than Perf-Form, though we compete well with them in legacy engines for which the sales volume is low and the use of older technologies are appropriate.
 
 
Imdyne: There are many high quality, competitively priced metal fabricators and plastic injection-molding businesses in our market territory. We have a slight competitive advantage over many of them in that our other segments cover some of the overhead of the Company. As a result, we can be competitively priced because the shared overhead creates cost efficiencies.
Competition in this business primarily focuses on product price, product innovation, and quality. Some of our competitors have longer operating histories, stronger brand recognition and greater financial, technical, marketing and other resources than we do. In addition, we may face competition from new participants in our markets because the outdoor recreational products and powersports industries have limited barriers to entry. We experience price competition for our products and competition for shelf space at retailers, both of which may increase in the future.
Financial Information for Business Segments
As noted above, the Company has four reportable business segments. See Note 14 to the consolidated financial statements included elsewhere in this report for financial information concerning each business segment.
International Operations
See Note 14 to the consolidated financial statements included elsewhere in this report for financial information regarding the Company's domestic and international operations.
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Research and Development
The Company's competitive position is supported by designing and marketing new products on a continuous basis. We employ an experienced staff of product design and engineering professionals for the design of new products. This innovation and engineering group serves two primary functions: new product development and modifying existing products to fit other manufacturers' new and legacy powersports equipment. The Company expenses research and development costs as incurred. The amounts expensed by the Company in connection with research and development activities for each of the last two fiscal years are set forth in Note 1 to the Company's consolidated financial statements included elsewhere in this report.
Employees
The Company had 105 regular, full-time employees at September 30, 2010 and 72 at September 30, 2009. The Company considers its employee relations to be good. Temporary employees are utilized primarily to manage peaks in the seasonal manufacturing of products.
Backlog
Unfilled orders for future delivery of products totaled approximately $2.2 million at September 30, 2010 and $2.6 million at September 30, 2009. All unfilled orders at September 30, 2010 will be filled in fiscal year 2011. For the majority of its products, the Company's businesses do not receive significant orders in advance of expected shipment dates.
Patents, Trademarks and Proprietary Rights
The Company owns no single patent that is material to its business as a whole. However, the Company holds various patents and occasionally files applications for patents. The Company has numerous trademarks and trade names that it considers important to its business. The Company has the following trademarks, which are used in this report: Cycle Country(r), Weekend Warrior(tm), State Plow(r), Work Hard Play Hard(r), Imdyne(tm), Perf-Form(tm), and Plazco(tm). The Company owns patents on its wheel cover designs which have been infringed upon and successfully defended.
Supply Chain and Sourcing of Materials
The Company manufactures some products that use materials that have long order lead times or that are only available in a cost effective manner from a limited number of vendors. The Company mitigates product availability and supply chain risks through safety stocks and forecast-based purchase commitments, and, to a lesser extent, with just-in-time inventory deliveries. The Company strives to balance the imperative of holding adequate inventories with the need to maintain flexibility by building inventories to forecast for high-volume products, utilizing build-to-order strategies wherever possible, and by having some products delivered to customers directly from suppliers where possible.
The Company has no material dependence on any one vendor for materials whose interruption or loss in the availability of these materials is believed to present a material adverse impact on the sales and operating results of the Company. Most of the Company's products are made using materials that are generally in adequate supply and are available from a variety of third-party suppliers.
Seasonality
The Company's products are outdoor recreational and powersports-related which results in seasonal variations in sales and profitability. This seasonal variability is due to customers increasing the inventories in the quarters ending September and December, which has historically been the primary selling season for the Company's outdoor recreational and powersports products, with lower inventory volumes during the quarters ending March and June.
Available Information
The Company maintains a website at www.cyclecountry.com. On its website, the Company makes available, free of charge, its Annual Report on Form 10-K, and quarterly reports on Form 10-Q and amendments to those reports, as soon as reasonably practical after the reports have been electronically filed or furnished to the Securities and Exchange Commission. Copies of any materials we file with the SEC are also available at the SEC's Public Reference Room at 100 F Street, N.E.
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Washington, D.C. 20549. Information on the operation of the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains a Web site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC at www.sec.gov.
In addition, the Company makes available on its website its Standards of Conduct and its Code of Ethics. The Company is not including the information contained on or available through its website as a part of, or incorporating such information by reference into, this Annual Report on Form 10-K. This report includes all material information about the Company that is included on the Company's website and is otherwise required to be included in this report.
ITEM 1A. RISK FACTORS
The risks described below are not the only risks we face. Additional risks that we do not yet know of or that we currently think are not material may also impair our future business operations. If any of the events or circumstances described in the following risks actually occurs, our business, financial condition or results of operations could be materially adversely affected. In such cases, the trading price of our common stock could decline.
Our net sales and profitability depend on our ability to continue to conceive, design and market products that appeal to our consumers.
The introduction of new products is critical in our industry and to our growth strategy. Our business depends on our ability to continue to conceive, design, manufacture and market new products and upon continued market acceptance of our product offerings. Rapidly changing consumer preferences and trends make it difficult to predict how long consumer demand for our existing products will continue or what new products will be successful. Our current products may not continue to be popular or new products that we may introduce may not achieve adequate consumer acceptance for us to recover development, manufacturing, marketing and other costs. A decline in consumer demand for our products, our failure to develop new products on a timely basis in anticipation of changing consumer preferences or the failure of our new products to achieve and sustain consumer acceptance could reduce our net sales and profitability.
Competition in our markets could reduce our net sales and profitability.
Competition in this business primarily focuses on product price, product innovation, and quality. Some of our competitors have longer operating histories, stronger brand recognition and greater financial, technical, marketing and other resources than we do. In addition, we may face competition from new participants in our markets because the outdoor recreational products and powersports industries have limited barriers to entry. We experience price competition for our products and competition for shelf space at retailers, both of which may increase in the future. If we cannot compete successfully in the future, our net sales and profitability will likely decline.
Purchases of Company products are discretionary spending and general economic conditions significantly affect the Company's results of operations.
Purchases of our products are generally viewed as discretionary spending by consumers. In times of economic uncertainty, consumers tend to defer expenditures for discretionary items, which affects demand for our products. Our revenues are affected by economic conditions and consumer confidence worldwide, but especially in the United States and Europe. Moreover, our business is cyclical in nature, and its success is dependent upon favorable economic conditions, the overall level of consumer confidence and discretionary income and spending levels. Any substantial deterioration in general economic conditions that diminish consumer confidence or discretionary income or spending can reduce our sales and adversely affect our financial results. The impact of weak consumer credit markets, corporate restructurings, layoffs, declines in the value of investments and residential real estate, higher fuel prices and increases in federal and state taxation all can negatively affect our operating results.
We are dependent upon certain key members of management.
Our success will depend to a significant degree on the abilities and efforts of our senior management. Moreover, our success depends on our ability to attract, retain and motivate qualified management, marketing, technical and sales personnel. These people are in high demand and often have competing employment opportunities. The labor market for skilled employees is competitive and we may lose key employees or be forced to increase compensation to retain these people. Employee turnover could significantly increase our training and other related employee costs. The loss of key personnel, or the failure to attract qualified personnel, could have a material adverse effect on our business, financial condition or results of operations.
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Sources of and fluctuations in market prices of raw materials can affect our operating results.
The primary raw materials we use are metals, resins and packaging materials. These materials are generally available from a number of suppliers for each commodity or purchased component. We believe our sources of raw materials are reliable and adequate for our needs. However, the development of future sourcing issues related to the availability of these materials as well as significant fluctuations in the market prices of these materials may have an adverse effect on our financial results.
We rely on our credit facility to provide us with sufficient working capital to operate our business.
Historically, we have relied upon our existing credit facilities to provide us with adequate working capital to operate our business. The availability of borrowing amounts under our revolving credit facility is dependent upon the amount and quality of the accounts receivable and inventory collateralizing the revolving credit facility. The bankruptcy of a major customer could have a significant negative impact on the availability of borrowing amounts under our revolving credit facility. The availability of borrowing amounts under our credit facilities are dependent upon compliance with the debt covenants set forth in the facilities. Violation of those covenants, whether as a result of operating losses or otherwise, could result in our lenders restricting or terminating our borrowing ability under our credit facilities. As discussed in Note 8 of the consolidated financial statements, as of September 30, 2010, the Company was not in compliance with the term debt coverage requirement or the working capital requirement of its secured credit agreements. If our lenders reduce or terminate our access to amounts under our credit facilities, we may not have sufficient capital to fund our working capital needs and/or we may need to secure additional capital or financing to fund our working capital requirements or to repay outstanding debt under our credit facilities. We can make no assurance that we will be successful in ensuring our availability to amounts under our credit facilities or in connection with raising additional capital and that any amount, if raised, will be sufficient to meet our cash requirements. If we are not able to maintain our borrowing availability under our credit facilities and/or raise additional capital when needed, we may be forced to sharply curtail our efforts to manufacture and promote the sale of our products or to curtail our operations. Ultimately, we may be forced to cease operations.
Sales of our products are seasonal, which causes our operating results to vary from quarter to quarter.
Sales of our products are seasonal. Historically, our net sales and profitability have peaked in the first and fourth fiscal quarters due to the buying patterns of our customers. Seasonal variations in operating results may cause our results to fluctuate significantly in the second and third quarters and may depress our stock price during the first and fourth quarters.
Impairment charges could reduce our profitability.
We test our intangible assets with indefinite useful lives for impairment on an annual basis, or on an interim basis if an event occurs that might reduce the fair value of the reporting unit below its carrying value. Various uncertainties, including changes in consumer preferences, deterioration in the political environment, continued adverse conditions in the capital markets or changes in general economic conditions could impact the expected cash flows to be generated by an intangible asset or group of intangible assets, and may result in an impairment of those assets. Although any such impairment charge would be a non-cash expense, any impairment of our intangible assets could materially increase our expenses and reduce our profitability.
Long-lived assets, such as property, plant, and equipment, are reviewed for possible impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The Company determined that indicators of potential impairment existed because the Company had experienced a decrease in the Company's market capitalization for a sustained period of time and had sustained three quarters of continued net losses for the three quarters ended September 30, 2010. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows (undiscounted and without interest charges) expected to be generated by the asset. If these projected cash flows are less than the carrying amount, impairment is recognized to the extent that the carrying value exceeds its fair value. Fair value is determined through various valuation techniques, including discounted cash flow models, quoted market values and third party appraisals, as considered necessary.
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In accordance with ASC 360, the Company evaluated its long-lived assets and other intangible assets, using an undiscounted cash flow analysis. This analysis supported the carrying value of the long-lived assets and other intangible assets. Therefore, management determined that no impairment was necessary of the long-lived assets and other intangible assets. Given the significant assumptions required and the possibility that actual conditions will differ, we consider the assessment of impairment of our long-lived assets to be a critical accounting estimate.
In evaluating goodwill, the Company evaluated the market capitalization at June 30, 2009 and performed an evaluation based on multiples of earnings and discounted cash flow analysis as evidence of the fair value of the entity. It was determined that the fair value did not exceed the carrying amount of goodwill, and accordingly, the Company took an impairment charge of approximately $4,890,000 during the fiscal year ended September 30, 2009.
The Company's analysis uses 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 estimates and assumptions could change in the near future, which could lead to further impairment of long-lived assets and other intangibles.
We could be delisted by the NYSE Amex Stock Exchange or deregistered by the SEC.
The Company received a comment letter from the SEC staff dated September 17, 2010 regarding its Form 10-K for the fiscal year ended September 30, 2009 and for Form 10-Q for the fiscal quarter ended June 30, 2010. The Company has filed a response addressing the comments but may receive further requests from the SEC with respect to this letter. If the Company is not in compliance with the SEC rules, the SEC could proceed to deregister the Company's stock.
On January 6, 2011, the Company notified NYSE Amex that, as a result of the resignation of Daniel Thralow from the Company's Board of Directors the Company no longer complies with Section 803B(2)(c) of the NSE Amex's Company Guide, which requires that the Company's audit committee have at least two members, both of whom must be independent. In accordance with Section 802(b) of the Company Guide, the Company has until March 16, 2011 to regain compliance with this requirement. The board is currently considering candidates and intends to appoint an independent director to fill the vacancy on the board and the audit committee as soon as possible. If we are unable to fill the vacancy in a timely matter, we could be delisted by the NYSE Amex.
The Company failed to file its 10-K on its due date of January 13, 2011. The NYSE Amex was notified of the failure to file on a timely basis and granted a verbal extension until markets open on January 18, 2011.
We may experience difficulties in integrating strategic acquisitions.
As part of our growth strategy, we intend to pursue acquisitions that are consistent with our mission and that will enable us to leverage our competitive strengths. Risks associated with integrating strategic acquisitions include:
 
 
 
 
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.
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Currency exchange rate fluctuations could increase our expenses.
We currently do not have significant foreign operations, but our growth plan depends somewhat on growth in foreign operations for which the functional currencies are often denominated in Euros, Swiss Francs, Japanese Yen, Chinese Yuan, Taiwan Dollars and Canadian Dollars. As the values of the currencies of the foreign countries in which we have operations increase or decrease relative to the U.S. dollar, the sales, expenses, profits, losses, assets and liabilities of our foreign operations, as reported in our consolidated financial statements, increase or decrease, accordingly. None of our revenues for the year ended September 30, 2010 or 2009 were denominated in currencies other than the U.S. dollar.
Any litigation we undertake to collect amounts due to us could be unsuccessful and the costs could reduce our profitability.
The Company is involved in the collection of funds in connection with the misappropriation of 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 award sufficient to remedy the damages, there may not be sufficient assets to collect any judgment awarded and some or all of the costs incurred in connection with any such litigation or collection efforts may not be fully recovered. It is not possible, at this time, to estimate what those costs may be.
Trademark infringement or other intellectual property claims relating to our products could increase our costs.
We could be either a plaintiff or defendant in trademark and patent infringement claims and claims of breach of license from time to time. The prosecution or defense of intellectual property litigation is both costly and disruptive of the time and resources of our management even if the claim or defense against us is without merit. We could also be required to pay substantial damages or settlement costs to resolve intellectual property litigation.
We also rely on trade secret law to protect certain technologies and proprietary information that we cannot or have chosen not to patent. Trade secrets, however, are difficult to protect. Although we attempt to maintain protection through confidentiality agreements with key personnel, contractors and consultants, we cannot guarantee that such contracts will not be breached. In the event of a breach of a confidentiality agreement or divulgence of proprietary information, we may not have adequate legal remedies to maintain our trade secret protection. Litigation to determine the scope of intellectual property rights, even if ultimately successful, could be costly and could divert management's attention away from business and may not adequately compensate for the damages suffered.
We are subject to environmental and safety regulations.
We are subject to federal, state, and local laws and other legal requirements related to the generation, storage, transport, treatment and disposal of materials as a result of our manufacturing and assembly operations. We believe that our existing environmental management system is adequate and we have no current plans for substantial capital expenditures in the environmental area. We do not currently anticipate any material adverse impact on our results of operations, financial condition or competitive position as a result of compliance with current federal, state, local and foreign environmental laws or other legal requirements. However, risk of environmental liability and changes associated with maintaining compliance with environmental laws is inherent in the nature of our business and there is no assurance that material liabilities or changes would not arise in the future.
Our shares of common stock are thinly traded and our stock price may be more volatile.
Because our common stock is thinly traded, its market price may fluctuate significantly more than the stock market in general or the stock prices of similar companies, which are exchanged, listed or quoted on the NYSE Amex. Thus, our common stock will be less liquid than the stock of companies with broader public ownership, and as a result, the trading prices for our shares of common stock may be more volatile. Among other things, trading of a relatively small volume of our common stock may have a greater impact on the trading price for our stock than would be the case if our public float were larger.
ITEM 2. PROPERTIES
The Company maintains both leased and owned manufacturing, warehousing, distribution and office facilities. The Company believes that its facilities are well maintained and have capacity adequate to meet its reasonably foreseeable needs. As of September 30, 2010, the Company had approximately 260,000 square feet of modern manufacturing facilities in Spencer, IA and Milford, IA.
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The Company's corporate headquarters is located in its owned facility in Spencer, Iowa.
As of September 30, 2010, the Company operated in the following manufacturing, distribution and office locations:
 
 
 
 
Spencer, Iowa - Property owned by the Company, used for manufacturing, distribution and office space primarily for the Imdyne and Cycle Country ATV segments.
 
 
 
 
Milford, Iowa - Leased property used for manufacturing, distribution and office space primarily for the Plazco and Perf-Form segments.
 
 
 
 
Minnetonka, Minnesota - Leased office space
See Note 13 to the consolidated financial statements included elsewhere in this report for a discussion of the Company's lease obligations.
ITEM 3. LEGAL PROCEEDINGS
The Company is subject to legal proceedings and claims which arise in the ordinary course of its business. There is presently only one such claim known to management, which is more fully discussed in Item 7, Management's Discussion and Analysis, as well as in Note 2 to the consolidated financial statements, and is related to Company's claims in connection with the misappropriation of funds by the former Chairman of the Board of Directors.
The Company intends to pursue all appropriate action to recover amounts due to it as a result of these events, which may include litigation proceedings if necessary. In the second fiscal quarter of 2010, the Company recovered 195,416 shares of the Company shares related to the recovery from this misappropriation. In addition, the Company continues to cooperate with the various regulatory authorities involved.
While the ultimate outcome of these matters is not presently determinable, it is in the opinion of management that the resolution of outstanding claims will not have a material adverse effect on the financial position or results of operations of the Company. Due to the uncertainties in the settlement process, it is at least reasonably possible that management's view of outcomes will change in the near term.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Certain information with respect to this item is included in Note 10 to the Company's consolidated financial statements included elsewhere in this report. The Company has only one class of common stock and it is traded on the NYSE Amex under the symbol ATC. As of September 30, 2010, the Company had 43 holders of record of its common stock.
10

 

 
A summary of the high and low sales prices for the Company's common stock during each quarter of the years ended September 30, 2010 and 2009 is as follows:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
First Quarter
 
Second Quarter
 
Third Quarter
 
Fourth Quarter
 
 
 
2010
 
2009
 
2010
 
2009
 
2010
 
2009
 
2010
 
2009
 
Stock prices:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
High
 
$
0.62
 
$
1.08
 
$
0.54
 
$
0.55
 
$
0.68
 
$
0.56
 
$
0.68
 
$
0.62
 
Low
 
$
0.37
 
$
0.29
 
$
0.32
 
$
0.15
 
$
0.38
 
$
0.23
 
$
0.29
 
$
0.23
 
In fiscal 2010, the Company declared no dividends. The Company intends to retain earnings for investment in its operations and does not intend to pay dividends in the foreseeable future. The following 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 8 to the Company's consolidated financial statements included elsewhere in this report, by and among the Company and its lender, the Company is restricted in its ability to make restricted payments (primarily dividends and repurchases of common stock). The Company may not declare or pay dividends without the consent of its lender.
Equity Compensation Plans
As of September 30, 2009, the former Chief Executive Officer, Jeffrey M. Tetzlaff, had an option to purchase 500,000 shares of the Company's stock at an exercise price of $1.68 per share under his Employment Agreement ("Old Agreement"). Effective July 1, 2010, the Company and Mr. Tetzlaff entered into a new Employment Agreement. Under the new agreement, Mr. Tetzlaff no longer has an option to purchase these 500,000 shares.
Under the Old Agreement, Mr. Tetzlaff was granted 50,000 shares of stock in the Company vesting over a three-year period. During the fiscal year ended September 30, 2010, the board elected to accelerate the vesting of the final installment of the shares granted to Mr. Tetzlaff under the Old Agreement. These shares were effectively issued on September 30, 2010.
As of July 1, 2010, the Company entered into a new three-year employment agreement with Jeffrey M. Tetzlaff which included, among other things, an award of 1,005,809 shares to be issued upon the approval of our shareholders. These shares are restricted at issuance, but allow the holder the voting and other participating rights of these shares. The restrictions release as certain provisions in the agreement are met., with the first restriction of 40% lifting October 1, 2010. In accordance with the agreement, 1,005,809 shares were issued to Mr. Tetzlaff , subject to forfeiture, lifting October 1, 2010 . The stockholders approved this award at the 2010 annual meeting. As of October 1, 2010, 402,324 shares were removed from restriction. Effective December 31, 2010, and pursuant to Mr. Tetzlaff's resignation, the Company entered into a Separation Agreement and Release of Claims with Mr. Tetzlaff dated December 31, 2010 which provided for the surrender of the vested and unvested shares of Company stock Mr. Tetzlaff was awarded under this employment agreement.
As of July 1, 2010, the Company entered into a new three-year employment agreement with Robert Davis which included, among other things, an award of 1,005,809 shares to be issued upon the approval of our shareholders. These shares are restricted at issuance, but allow the holder the voting and other participating rights of these shares. The restrictions release as certain provisions in the agreement are met, with the first restriction of 40% lifting October 1, 2010. In accordance with the agreement, 1,005,809 restricted shares were issued to Mr. Davis, subject to forfeiture, effective September 13, 2010. The stockholders approved this award at the 2010 annual meeting. As of October 1, 2010, 402,324 shares were removed from restriction.
During the fiscal year ended September 30, 2010, the Company issued shares to members of the Board of Directors for their services provided to the Company as directors in 2008 and 2009. A total of 5,373 shares were earned in fiscal year 2009 and issued in fiscal year 2010. A total of 3,609 shares were earned in 2008 and issued in fiscal year 2010. At the annual stockholder meeting held in 2010, the stockholders approved the award of 50,000 shares of Company stock to two non-employee directors, to be vested over a three year period. Mr. Thralow has since resigned from the Board and consequently will forfeit the unvested shares.
The Company has a 2007 Incentive Compensation Plan (the "Plan") to reward certain officers and senior management level employees of the Company and its non-employee directors by providing for certain cash benefits and by enabling them to acquire shares of the Company's stock. Non-employee directors and employees selected by the committee appointed by the Board to administer the Plan are eligible to receive awards under the Plan. Under the Plan, awards may be made in the form of options, stock appreciation rights, stock awards, restricted stock unit awards, cash awards and performance awards, which may be subject to conditions as set by the committee administering the plan. A total of 500,000 shares are reserved for issuance under the Plan. The Plan was approved by the Company's stockholders and became effective as of July 1, 2007. No awards are currently outstanding under the Plan.
Equity Compensation Plan Information (Restated)
The following table lists the number of shares granted as of September 30, 2010 and not yet vested as of January 10, 2011.
 
 
 
 
 
 
 
 
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
 
-
 
-
 
500,000
 
Equity compensation plans not approved by security holders
 
-
 
-
 
-
 
Total
 
-
 
-
 
500,000
 
11

 

 
Total Shareholder Return
The graph below compares on a cumulative basis the yearly change since September 30, 2005 in the total return (assuming that dividends were not reinvested) to shareholders on the common stock with (a) the total return (assuming that dividends were not reinvested) on the S&P 500 Composite Index; (b) the total return (assuming that dividends were not reinvested) on the Russell 2000 Index; and (c) the total return (assuming that dividends were not reinvested) on a self-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, 2005 in the Company's common stock, the S&P 500 Composite Index, the Russell 2000 Index and the peer group indices.


* $100 invested on September 30, 2005 in stock or the applicable index or peer group, not including reinvestment of dividends.
The information in this section titled "Total Shareholder Return" shall not be deemed to be "soliciting material" or "filed" with the Securities and Exchange Commission or subject to Regulation 14A or 14C promulgated by the Securities and Exchange Commission or subject to the liabilities of section 18 of the Securities Exchange Act of 1934, as amended, and this information shall not be deemed to be incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended.
12

 

 
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following table presents selected consolidated financial data, which should be read along with the Company's consolidated financial statements and the notes to those statements and with "Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this report. The consolidated statements of operations for the years ended September 30, 2010 (Restated) and September 30, 2009, and the consolidated balance sheet data as of September 30, 2010 (Restated) and September 30, 2009 are derived from the Company's audited consolidated financial statements included elsewhere herein. The consolidated balance sheets and statements of operations for the years ended September 30, 2008, 2007 and 2006 is derived from the Company's audited consolidated financial statements included in its 10K filing for the years then ended and is provided here only to provide necessary context and is provided for comparative purposes in this section only.
SELECTED CONSOLIDATED FINANCIAL DATA
 
 
 
 
 
 
 
 
 
 
 
 
 
 
September 30,
 
September 30,
 
September 30,
 
September 30,
 
September 30,
 
 
 
2010 (Restated)
 
2009
 
2008
 
2007
 
2006
 
STATEMENT OF OPERATIONS
 
 
 
 
 
 
 
 
 
 
 
Sales
 
$
11,944,462
 
$
10,281,726
 
$
17,513,941
 
$
14,214,250
 
$
16,464,214
 
Cost of goods sold
 
9,353,775
 
8,360,912
 
13,215,382
 
9,332,869
 
10,389,976
 
Inventory adjustments (1)
 
592,784
 
474,000
 
-
 
-
 
-
 
Gross profit
 
1,997,903
 
1,446,814
 
4,298,559
 
4,881,381
 
6,074,238
 
 
 
 
 
 
 
 
 
 
 
 
 
Sales, general & admin (2)
 
4,759,663
 
4,037,309
 
4,763,859
 
4,018,875
 
4,707,215
 
Goodwill impairment (3)
 
-
 
4,890,146
 
-
 
-
 
-
 
Fraud expense, net (4)
 
134,775
 
620,000
 
-
 
-
 
-
 
(Gain) loss on sale of assets
 
94,555
 
(164,590
)
(361,462
)
(54,326
)
115,562
 
Operating expense
 
4,988,993
 
9,382,865
 
4,402,397
 
3,964,549
 
4,822,777
 
 
 
 
 
 
 
 
 
 
 
 
 
Other expense
 
(142,813
)
(323,742
)
(284,681
)
(308,559
)
(418,584
)
Net income (loss) pre tax
 
$
(3,133,903
)
$
(8,259,793
)
$
(388,519
)
$
608,273
 
$
832,877
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income (loss)
 
$
(2,023,903
)
$
(6,798,793
)
$
(358,262
)
$
418,142
 
$
611,794
 
 
 
 
 
 
 
 
 
 
 
 
 
BALANCE SHEET
 
 
 
 
 
 
 
 
 
 
 
Total current assets
 
$
6,528,444
 
$
6,958,732
 
$
8,811,039
 
$
8,289,087
 
$
7,934,523
 
Net fixed and intangible assets
 
10,190,580
 
10,981,855
 
11,449,369
 
13,016,669
 
13,612,885
 
Other assets (5)
 
7,413
 
40,388
 
5,116,321
 
4,928,567
 
4,931,542
 
Total assets
 
$
16,726,437
 
$
17,980,975
 
$
25,376,729
 
$
26,234,323
 
$
26,478,950
 
 
 
 
 
 
 
 
 
 
 
 
 
Total current liabilities
 
$
5,565,400
 
$
3,808,053
 
$
3,279,937
 
$
1,436,063
 
$
1,516,142
 
Long term liabilities
 
4,065,279
 
5,281,537
 
6,526,615
 
6,522,496
 
7,222,686
 
Total liabilities
 
$
9,630,679
 
$
9,089,590
 
$
9,806,552
 
$
7,958,559
 
$
8,738,828
 
 
 
 
 
 
 
 
 
 
 
 
 
Net worth
 
$
7,095,758
 
$
8,891,385
 
$
15,570,177
 
$
18,275,764
 
$
17,740,122
 
 
 
 
 
 
 
 
 
 
 
 
 
EQUITY
 
 
 
 
 
 
 
 
 
 
 
Weighted average shares of common stock outstanding
 
 
 
 
 
 
 
 
 
 
 
Basic
 
6,068,247
 
6,059,854
 
6,169,659
 
7,346,617
 
7,271,966
 
Diluted
 
6,068,247
 
6,059,854
 
6,169,659
 
7,346,617
 
7,271,966
 
Income (loss) per common share
 
 
 
 
 
 
 
 
 
 
 
Basic
 
$
(0.33
)
$
(1.12
)
$
(0.06
)
$
0.06
 
$
0.08
 
Diluted
 
$
(0.33
)
$
(1.12
)
$
(0.06
)
$
0.06
 
$
0.08
 
13

 

 

(1)
Includes a charge for excess and obsolete inventory of approximately $315,000 and $283,000 for the fiscal years ended September 30, 2010 and 2009, respectively and a charge for inventory shrink of approximately $277,000 and $191,000 for the fiscal years ended September 30, 2010 and 2009, respectively, all included in cost of goods sold.
 
 
(2)
The year 2008 includes a charge of $117,000 in connection with terminating the employment agreements of the former CEO and CFO who were terminated. Refer to Item 7 for a discussion of changes in sales, general, and administrative expenses for fiscal years 2010 and 2009.
 
 
(3)
The year ended September 30, 2009 includes a goodwill impairment charge of approximately $4,890,000.
 
 
(4)
Includes costs, net of recoveries, associated with the misappropriation of funds discussed elsewhere in this filing.
 
 
(5)
September 30, 2008, 2007, and 2006 includes goodwill of approximately $4,890,000 which was impaired during the year ended September 30, 2009.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Executive Overview
The Company designs, manufactures and markets top-quality outdoor recreational and powersports products for the outdoor enthusiast. Through a combination of innovative products, strong marketing, a talented and passionate workforce, and excellent customer service, the Company has set itself apart from its competition for nearly 30 years. Our Company strives each day to accelerate our creative, entrepreneurial culture, following the strategic vision set by executive management and overseen by the Company's Board of Directors.
Recent Developments
Departure of Director and Chief Executive Officer
Effective December 31, 2010, Daniel Thralow resigned as a member of the Company's Board of Directors. Mr. Thralow also served as a member of the Company's Audit Committee at the time of his resignation. The Company is not aware of any disagreement causing Mr. Thralow's resignation.
Effective December 31, 2010, Jeffrey M. Tetzlaff resigned as the Company's Chief Executive Officer and President to pursue other interests. Mr. Tetzlaff also resigned from the Company's Board of Directors as of the same date. The Board of Directors has appointed Robert Davis, the Company's Chief Operating Officer and Chief Financial Officer to be the Interim Chief Executive Officer.
In connection with Mr. Tetzlaff's resignation, the Company entered into a Separation Agreement and Release of Claims with Mr. Tetzlaff dated December 31, 2010 which provides for, among other things, the payment of $240,000 in equal payments over twenty-four (24) months, a continuation of certain benefits, a limited mutual release of claims and Mr. Tetzlaff's agreement to surrender the shares of Company stock Mr. Tetzlaff was awarded under his Executive Employment Agreement, dated as of July 1, 2010.
Misappropriation of Funds by Former Board Chairman
The Company previously reported the misappropriation of funds by its then-Chairman of the Board of Directors and its Audit Committee, Mr. L. G. Hancher Jr. in the fiscal year ended September 30, 2009. This misappropriation of funds was related to a plan for the Company to purchase shares of its own stock which was to be completed by Mr. Hancher on the Company's behalf (the "Stock Buyback") in fiscal 2009.
The Company continues to work to recover all of the amounts misappropriated. During the year ended September 30, 2010, the Company recovered and cancelled 195,416 shares of Company stock for $120,000 related to the above transaction, which reduced common equity and was recorded as fraud recovery in the consolidated statement of operations. The Company believes the value represents the amount the Company provided for the purchase of shares to the third party that returned these shares to the Company. The price per share is consistent with the trading in the market at the time that the Company believed the shares were being purchased on its behalf.
14

 

 
In June 2010, the Company commenced a lawsuit against Mr. Hancher. On August 2, 2010, Mr. Hancher filed a Chapter 7 petition in the Bankruptcy Court for the Southern District of Indiana. As of the date of the filing, proceedings in the Bankruptcy Court are pending. There has been no recovery to date on this action and the amount of a potential recovery, if any, cannot be reasonably estimated at this time.
On January 13, 2011, the Securities and Exchange Commission filed a complaint in U.S. District Court, Northern District of Iowa, against Mr. Hancher and various affiliates, changing them with six counts of securities violations. On the same day, Mr. Hancher entered into a consent agreement with the SEC in which, among other things, Mr. Hancher agreed to pay back approximately $2.4 million in disgorgement, plus approximately $600,000 in pre-judgment interest, and a fine of $130,000. At this time, it is not believed that this will result in restitution to Cycle Country in the foreseeable future, based on the previous filings in Mr. Hancher's pending bankruptcy case.
Additional recoveries, if any, will impact subsequent periods and will be reported in the periods in which such recoveries occur. The possibility of any future recoveries and the amount of any such recovery remain uncertain, and the Company can have no assurance that any such recoveries can be achieved or that they can be achieved without significant cost to the Company.
Delisting Notice for Company Shares from NYSE Amex.
Upon discovery of the misappropriation of funds noted above, the Company's external, independent auditors and attorneys were engaged to launch an internal investigation into this matter. The misappropriation and subsequent investigation created significant delays, which caused the Company to be unable to timely file its annual report on Form 10-K for the year ended September 30, 2009, as well as its Form 10-Q for the fiscal quarter of 2010 ending December 31, 2009.
On January 8, 2010, the Company notified the Securities and Exchange Commission and the NYSE Amex compliance authorities of the discovery of the misappropriation of funds and announced its expected delay in filing its Form 10-K. 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 continued listing standards. On February 17, 2010, the Company received an additional notice from the Exchange that determined the Company was out of compliance with the Exchange's continued listing requirements for its failure to timely file its Form 10-Q for its first fiscal quarter ended December 31, 2009.
The Company filed a Plan of Compliance (the "Plan") with the Exchange on January 28, 2010. On March 1, 2010, the Company received a letter from the Exchange that it has accepted the Company's Plan and, pursuant to such Plan, the Exchange granted the Company an extension until April 14, 2010 to regain compliance with its continued listing standards in order to maintain its listing on the Exchange. The Company subsequently requested and was granted an additional extension until May 17, 2010 to file its delinquent reports.
On June 4, 2010, the Company received a letter from the NYSE Amex notifying it that the Company had resolved the listing deficiencies discussed above and the Company had regained compliance with the relevant sections of the Company Guide identified in the Notice.
On January 6, 2011, the Company notified NYSE Amex that, as a result of the resignation of Daniel Thralow from the Company's Board of Directors, as described elsewhere in this report, the Company no longer complies with Section 803B(2)(c) of the NYSE Amex's Company Guide, which requires that the Company's audit committee have at least two members, both of whom must be independent. In accordance with Section 802(b) of the Company Guide, the Company has until March 16, 2011 to regain compliance with this requirement. The Board is currently considering candidates and intends to appoint an independent director to fill the vacancy on the board and the audit committee as soon as possible.
Results of Operations
The Company's sales and operating profit (loss) by business segment for the fiscal years ended September 30, 2010 and 2009 are summarized as follows:
15

 

 
 
 
 
 
 
 
 
 
 
 
 
 
2010 (Restated)
 
2009
 
$ Change
 
% Change
 
Total Revenue by Segment
 
 
 
 
 
 
 
 
 
CCAC ATV
 
$
9,025,443
 
$
8,649,967
 
$
375,476
 
4.34
%
Plazco
 
467,032
 
689,792
 
(222,760
)
(32.29
)%
Perf-Form
 
205,250
 
254,197
 
(48,947
)
(19.26
)%
Imdyne
 
3,195,293
 
1,425,997
 
1,769,296
 
124.07
%
 
 
 
 
 
 
 
 
 
 
Total Revenue by Segment
 
12,893,018
 
11,019,953
 
1,873,065
 
17.00
%
 
 
 
 
 
 
 
 
 
 
Freight Income
 
82,472
 
92,842
 
(10,370
)
(11.17
)%
Sales Discounts & Allowances
 
(1,031,028
)
(831,069
)
(199,959
)
(24.06
)%
 
 
 
 
 
 
 
 
 
 
Total Consolidated Revenue
 
$
11,944,462
 
$
10,281,726
 
$
1,662,736
 
16.17
%
 
 
 
 
 
 
 
 
 
 
Gross (Loss) Profit by Segment
 
 
 
 
 
 
 
 
 
CCAC ATV
 
$
4,529,672
 
$
3,807,060
 
$
722,612
 
18.98
%
Plazco
 
14,237
 
378,522
 
(364,285
)
(96.24
)%
Perf-Form
 
(22,456
)
62,713
 
(85,169
)
(135.81
)%
Imdyne
 
1,018,890
 
348,378
 
670,512
 
192.47
%
 
 
 
 
 
 
 
 
 
 
Total Gross Profit by Segment
 
5,540,343
 
4,596,672
 
943,670
 
20.53
%
 
 
 
 
 
 
 
 
 
 
Freight Income
 
82,472
 
92,842
 
(10,370
)
(11.17
)%
Sales Disc. & Allow.
 
(1,031,028
)
(831,069
)
(199,959
)
(24.06
)%
Factory Overhead
 
(2,593,884
)
(2,411,631
)
(182,253
)
7.56
%
 
 
 
 
 
 
 
 
 
 
Gross Profit
 
1,997,903
 
1,446,814
 
551,089
 
38.09
%
 
 
 
 
 
 
 
 
 
 
Sales, General & Admin.
 
(4,759,663
)
(4,037,309
)
(722,354
)
17.89
%
Goodwill Impairment
 
-
 
(4,890,146
)
4,890,146
 
(100.00
)%
Fraud Expense, Net
 
(134,775
)
(620,000
)
485,225
 
(78.26
)%
Gain (Loss) on Sale of Assets
 
(94,555
)
164,590
 
(259,145
)
(157.45
)%
Interest Expense, Net
 
(310,440
)
(334,741
)
24,301
 
(7.26
)%
Other Inc/Exp, Net
 
167,627
 
10,999
 
156,628
 
1,424.02
%
Income Tax Benefit
 
1,110,000
 
1,461,000
 
(351,000
)
(24.02
)%
 
 
 
 
 
 
 
 
 
 
Net Loss
 
$
(2,023,903
)
$
(6,798,793
)
$
4,774,890
 
(70.23
)%
See Note 14 in the notes to the consolidated financial statements included elsewhere in this report for the definition of segment net sales and operating profit.
Fiscal 2010 vs. Fiscal 2009
Net Sales
Net sales for the fiscal year ended September 30, 2010 increased approximately $1.7 million, an increase of approximately 16.17% as compared to the fiscal year ended September 30, 2009 due, materially, to an increase of approximately $1.8 million or 124.07% in the Imdyne segment. The Cycle Country ATV Accessories showed a slight increase in sales of $375,000 or 4.34%. The remaining two segments, Plazco and Perf-Form reported decreased sales of 32.29% and 19.26% respectively. During the fiscal year, the net increase in sales is attributable, in part, to the stabilization of the economic climate and an overall increase in consumer confidence. The Company's business segments were adversely impacted in 2009 by the state of the domestic and global economies. Personal income for the four quarters ended September 30, 2010 increased approximately 1.56% as compared to the four quarters ended September 30, 2009. During the same period, personal consumption for durable goods increased 3.93% all according to the Bureau of Economic Analysis. The Company is continuing to adjust its infrastructure to match its sales volumes as it works through these difficult times.
16

 

 
Sales for the Cycle Country ATV segment increased approximately $375,000 or 4.34% during the fiscal year ended September 30, 2010 as compared to the fiscal year ended September 30, 2009. Sales increased on our largest selling item by approximately 17% by volume and approximately 28% by dollar amounts.
Sales in the Plazco segment decreased approximately $223,000 or 32.29% with sales to one customer decreasing approximately $113,000. The golf industry, critical to the Plazco segment, suffered decreased sales for equipment during the fourth quarter of calendar year 2009 and the first quarter of calendar year 2010 due to the continued softness in the U.S. economy and cautious spending in that industry. Further, we have seen increased competition in this segment from international markets.
The oil filter segment, Perf-Form, showed a decrease in sales of approximately $49,000 or 19.26%. No one customer attributed to this decrease. Sales for five customers decreased a total of approximately $52,000 due, in part, to a general decrease in sales by some of the larger motorcycle dealers including Harley Davidson. One customer, a distributor, had increased sales of approximately $12,000.
The increase in Imdyne, our contract manufacturing business segment, sales was approximately $1.8 million. Sales to one major customer of OEM products increased approximately $600,000 while sales of all OEM products increased approximately $1.5 million. Sales of contract parts increased approximately $250,000.
Cost of Goods Sold
Total costs of goods sold was approximately $9.9 million for the fiscal year ended September 30, 2010 or approximately 83.27% of net sales (Restated) compared to approximately $8.8 million for the fiscal year ended September 30, 2009 or 85.93% of net sales. Profit by segment is calculated before freight income, sales discounts and allowances, and factory overhead. Many of our customers arrange and pay for freight through their own logistics departments. As such, changes in freight revenue are affected by the number of customers for whom we arrange freight.
Discounts and allowances were approximately $1,031,000 or 8.00% of revenue (Restated) and approximately $831,000 or 7.54% of revenues for the years ended September 30, 2010 and 2009, respectively. For the year ended September 30, 2010, the top ten customers received average discounts and allowances of approximately 6.00% of sales. Those same customers received discounts and allowances of approximately 7.38% of sales during the year ended September 30, 2009.
Cost of goods sold for the fiscal years ended September 30, 2010 and 2009 were impacted adversely due to adjustments to inventory counts and valuations. During the year ended September 30, 2010, the Company recorded an adjustment to inventory of approximately $274,000 due to differences discovered in inventory counts. Additionally, the Company disposed of inventory valued at approximately $315,000 that was determined to be obsolete. During the fiscal year ended September 30, 2009, the Company wrote off approximately $191,000 due to a shortage discovered during a physical inventory count at the end of January 2009. The Company also recorded an inventory write-off of approximately $283,000 as a result of the completion of the inventory evaluation started in the third fiscal quarter of fiscal 2009. During the third quarter of fiscal year 2009, while undergoing lean manufacturing process improvement 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 fiscal 2009, the Company had increased its reserve by approximately $610,000 as an estimate of the excess and obsolete inventory on hand. However, in the fourth quarter of fiscal 2009, the Company continued to evaluate the inventory and found that the total amount of obsolete and excess inventory was only approximately $283,000.
Detail of the components of cost of goods sold are presented in the following table:
17

 

 
 
 
 
 
 
 
 
 
Year Ended September 30, 2010
 
Year Ended September 30, 2009
 
 
 
CCAC
 
Plazco
 
Perf-Form
 
Imdyne
 
CCAC
 
Plazco
 
Perf-Form
 
Imdyne
 
Materials
 
3,759,781
 
111,353
 
67,257
 
1,856,446
 
4,024,072
 
142,019
 
128,395
 
875,891
 
Direct Labor
 
329,260
 
33,488
 
33,393
 
211,856
 
304,443
 
37,951
 
25,558
 
99,015
 
Mfg Variance
 
102,545
 
20,161
 
3,239
 
31,812
 
(50,796
)
15,110
 
4,392
 
33,247
 
Subcontract
 
60,112
 
53,862
 
17,263
 
44,445
 
25,493
 
81,813
 
17,783
 
10,828
 
Inventory Variance
 
222,290
 
232,096
 
106,554
 
31,844
 
374,160
 
25,845
 
15,357
 
58,638
 
Royalty
 
21,783
 
1,835
 
 
 
 
 
40,674
 
2,841
 
 
 
 
 
Other
 
-
 
-
 
-
 
-
 
124,861
 
5,691
 
 
 
-
 
 
 
4,495,771
 
452,795
 
227,706
 
2,176,403
 
4,842,907
 
311,270
 
191,485
 
1,077,619
 
 
 
 
% of Total Revenue
 
% of Total Revenue
 
Materials
 
 
41.66
%
 
23.84
%
 
32.77
%
 
58.10
%
 
46.52
%
 
20.59
%
 
50.51
%
 
61.42
%
Direct Labor
 
 
3.65
%
 
7.17
%
 
16.27
%
 
6.63
%
 
3.52
%
 
5.50
%
 
10.05
%
 
6.94
%
Mfg Variance
 
 
1.14
%
 
4.32
%
 
1.58
%
 
1.00
%
 
-0.59
%
 
2.19
%
 
1.73
%
 
2.33
%
Subcontract
 
 
0.67
%
 
11.53
%
 
8.41
%
 
1.39
%
 
0.29
%
 
11.86
%
 
7.00
%
 
0.76
%
Inventory Variance
 
 
2.46
%
 
49.70
%
 
51.91
%
 
1.00
%
 
4.33
%
 
3.75
%
 
6.04
%
 
4.11
%
Royalty
 
 
0.24
%
 
0.39
%
 
0.00
%
 
0.00
%
 
0.47
%
 
0.41
%
 
0.00
%
 
0.00
%
Other
 
 
0.00
%
 
0.00
%
 
0.00
%
 
0.00
%
 
1.44
%
 
0.83
%
 
0.00
%
 
0.00
%
 
 
 
49.81
%
 
96.95
%
 
110.94
%
 
68.11
%
 
55.99
%
 
45.13
%
 
75.33
%
 
75.57
%

Costs of goods sold for the CCAC ATV division were 49.81% of sales for the year ended September 30, 2010 compared to 55.99% for the year ended September 30, 2009. Direct costs for materials decreased from 46.52% of sales to 41.66% of sales as a result of increased efforts to purchase raw materials more efficiently and economically by utilizing purchase commitments, competitive buying practices and volume purchasing. Costs associated with inventory variances were approximately $222,000 for the year ended September 30, 2010 due to inventory count adjustments. During the year ended September 30, 2009, we disposed of inventory totaling approximately $222,000 and realized inventory count adjustments of approximately $152,000. Other direct costs including direct labor, subcontracting, and royalty expenses remained relatively unchanged for the year ended September 30, 2010 compared to the year ended September 30, 2009.
For the year ended September 30, 2010, direct costs of goods sold for the Plazco segment increased to 96.95% of sales from 45.13% of sales for the year ended September 30, 2009. Costs associated with inventory variances increased from approximately $25,000 to approximately $232,000 as a result of the identification and disposal of obsolete inventory in this segment during fiscal year 2010. The increase is due, in part, to increased costs of raw materials realized with smaller purchase quantities needed to support lower sales volumes. We determined it was more advantageous to expend more on a per item basis than to hold excess inventory.
Costs of goods sold were approximately $227,000 or 110.94% of sales and approximately $191,000 or 75.33% of sales for the years ended September 30, 2010 and 2009, respectively for the Perf-Form segment on a decrease of direct materials cost from approximately 50.51% of sales in fiscal year 2009 to 32.77% of sales in fiscal year 2010. During the year ended September 30, 2010, we identified and disposed of specific inventory that was deemed to be obsolete in the amount of approximately $98,000.
The Imdyne segment reported a decrease in costs of goods sold to 68.11% of sales from 75.57% of sales for the years ended September 30, 2010 and 2009, respectively. Imdyne generates much of its revenue from contract manufacturing and custom fabricating. Margins for this segment can, therefore, fluctuate based on our ability to accurately quote, design, and manufacture products to specifications. We continue to strive to improve our operations and processes to increase margins when and where we can.
Gross Profit
Gross profit for the year ended September 30, 2010 (Restated) was approximately $2.0 million (Restated) or 16.73% of revenues (Restated) compared to approximately $1.4 million or 14.07% of revenues for the year ended September 30, 2009 on a consolidated basis. Gross profits improved based, in part, to a shift in the mix of sales for fiscal year 2010 as compared to fiscal year 2009. The two largest segments, Cycle Country ATV and Imdyne, generated a total of 94.79% of the sales in fiscal year 2010 and 91.43% of the sales in fiscal year 2009. The gross profit of these segments combined was 45.40% of sales and 41.24% of sales for the years ended September 30, 2010 and 2009, respectively. The smaller segments, Plazco and Perf-Form, generated 5.21% and 8.57% of total sales for fiscal years 2010 and 2009, respectively with a combined gross loss of approximately 1.22% and gross profit of 46.75% of sales for the same periods, respectively. As a result, combined margins for the Company increased due to increased margins in the larger segments.
18

 

 
Gross profit in the Cycle Country ATV Accessories business segment increased approximately $722,000 from the prior year due to increased sales of approximately $375,000 and decreased costs of goods sold of approximately $347,000. Decreased costs are attributable to a decrease in costs of raw materials as a result of increased efforts to purchase raw materials more efficiently and economically by utilizing purchase commitments, competitive buying practices and volume purchasing.
Gross profit in the Plazco business segment declined approximately $364,000 from 2009 on decreased sales of approximately $223,000 with an increase in costs of goods sold of approximately $141,000. Demand for these products has been down due to negative economic impacts on the golf industry and to increased international competition. Costs have not decreased at the same rate as we have realized increased costs on raw materials with lower quantity purchases.
Gross loss in the Perf-Form oil filter segment was 10.94% of sales in 2010 which was due, in part, to the disposal of obsolete inventory of approximately $98,000 in fiscal 2010. Gross profit for the year ended September 30, 2009 was 24.43%.
Gross profit for the Imdyne contract manufacturing segment increased by approximately $670,000 from 24.43% of sales in 2009 to 31.89% of sales in 2010. Sales to one major customer increased approximately $600,000 for 2010 compared to 2009. Due to improved processes and increased efficiencies, costs on these contracts were down as a percentage of sales for the same period.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased from the prior fiscal year by approximately $722,000 (Restated).
 
 
 
 
Wages, bonuses, and benefits related to executive compensation increased approximately $397,000 (Restated). Information related to employment contracts for Jeffrey M Tetzlaff and Robert Davis are found elsewhere in this filing and in the notes to the audited consolidated financial statements.
 
 
 
 
Salaries and wages related to sales increased approximately $180,000 due to increased commissions on increased sales amounts.
 
 
 
 
Professional fees paid to Bene Merenti, LLC, a related party, increased approximately $159,000, $75,000 of which was attributable to costs associated with attempts to recover amounts misappropriated as further described elsewhere in this Form 10-K and in the notes to the audited consolidated financial statements.
 
 
 
 
Lease expense increased approximately $38,000. In April 2009, the Company entered into a sixty-seven month lease agreement with an unrelated party for office space in Minneapolis, totaling approximately $50,000 per year. The agreement commenced in June 2009, and the base rent was abated for a period of seven months with the first payment due in January 2010.
 
 
 
 
Marketing expenses increased approximately $70,000 (Restated) due, partially, to expenses associated with a new marketing strategy and related expenses.
 
 
 
 
Research and development costs decreased approximately $27,000 (Restated) due to customer incentive programs.
 
 
 
 
Expenses associated with investor relations decreased approximately $112,000 as we discontinued use of an outside firm to supply investor relation services.
 
 
 
 
Costs associated with workers compensation insurance decreased approximately $100,000 due to a change in carriers as discussed elsewhere in this report.
Impairment Charges
During the third quarter of fiscal 2009, the Company determined that indicators of potential impairment existed because the Company had experienced a decrease in the Company's market capitalization for a sustained period of time and had sustained two quarters of continued net losses. In accordance with ASC 360, the Company evaluated its long-lived assets and other intangible assets, using an undiscounted cash flow analysis prior to evaluating goodwill. This analysis supported the carrying value of the long-lived assets and other intangible assets, but could not support the carrying value of goodwill. Therefore, management determined that no impairment was necessary of the long-lived assets and other intangible assets.
19

 

 
In evaluating goodwill, the Company evaluated the market capitalization at June 30, 2009 and performed an evaluation based on multiples of earnings and discounted cash flow analysis as evidence of the fair value of the entity. It was determined that the fair value did not exceed the carrying amount of goodwill, and accordingly, the Company took an impairment charge of approximately $4,890,000.
Long-lived assets, such as property, plant, and equipment, are reviewed for possible impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The Company determined that indicators of potential impairment existed because the Company had experienced a decrease in the Company's market capitalization for a sustained period of time and had sustained three quarters of continued net losses for the three quarters ended September 30, 2010. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows (undiscounted and without interest charges) expected to be generated by the asset. If these projected cash flows are less than the carrying amount, impairment is recognized to the extent that the carrying value exceeds its fair value. Fair value is determined through various valuation techniques, including discounted cash flow models, quoted market values and third party appraisals, as considered necessary. In accordance with ASC 360, the Company evaluated its long-lived assets using an undiscounted cash flow analysis. Impairment is evaluated at the lowest level of reporting which is at the segment level. This analysis supported the carrying value of the long-lived assets and, therefore, no impairment was recorded.
The Company's analysis uses significant estimates in the evaluation of other 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's estimates and assumptions could change in the near future, which could lead to impairment of long-lived assets and other intangibles. These impairment charges could be significant.
Operating Results
The Company recognized an operating loss of approximately $3.0 million in fiscal 2010 (Restated) compared to an operating loss of approximately $7.9 million in fiscal 2009. The loss for fiscal year 2009 includes a goodwill impairment loss of approximately $4.9 million. Fraud expense, net of recoveries, was $135,000 and $620,000 for the years ended September 30, 2010 and 2009, respectively.
Interest Expense
Interest expense was approximately $318,000 and $336,000 for the years ended September 30, 2010 and 2009, respectively. Interest expense approximated 6.58% of average debt for the year ended September 30, 2010 and 6.65% of average debt for the year ended September 30, 2009 and includes approximately $9,600 for fees paid for covenant waivers during the year ended September 30, 2010.
Other Income and Expenses
Other income and expense, which includes miscellaneous income and lease income, was approximately $168,000 and $11,000 for fiscal years 2010 and 2009, respectively. Lease income for the year ended September 30, 2010 totaled $72,000 and was for space in the Milford facility that was leased to others for storage. There was no lease income for fiscal year 2009. Income generated from the sale of scrap was approximately $101,000 and $46,000 for the years ended September 30, 2010 and 2009, respectively. Other expense for the year ended September 30, 2010 includes a charge of $24,900 recognized as an impairment of stock the Company owned in Golden Rule Insurance as further described in Note 1 of the consolidated financial statements.
20

 

 
Pretax Income (Loss) and Income Taxes
The Company recognized a pretax loss of approximately $3.1 million (Restated) in fiscal 2010, compared to a pretax loss of approximately $8.3 million in fiscal 2009. The Company recorded an income tax benefit of approximately $1.11 million (Restated), an effective benefit of 35.4% (Restated) compared to an income tax benefit of approximately $1.46 million in fiscal 2009, an effective benefit of 17.7%.
Net Loss
The Company recognized a net loss of approximately $2.0 million (Restated) in fiscal 2010 or $0.34 per basic and diluted share (Restated) compared to a net loss of approximately $6.8 million in fiscal 2009, or $1.12 per basic and diluted share.
Financial Condition, Liquidity and Capital Resources
The Company's cash flow from operating, investing and financing activities for the years ended September 30, as reflected in the consolidated statements of cash flows, is summarized in the following table:
 
 
 
 
 
 
 
 
 
 
2010
 
2009
 
Net cash provided by (used in) operating activities
 
$
(569,972
)
$
364,292
 
Net cash used in investing activities
 
 
(250,100
)
 
(192,379
)
Net cash provided by (used in) financing activities
 
 
821,521
 
 
(338,999
)
 
 
$
1,449
 
$
(167,086
)
The Company generated a negative cash flow from operating activities of approximately $570,000 for the year ended September 30, 2010 and positive cash flow of approximately $364,000 for the year ended September 30, 2009. The net loss for the year was approximately $1.4 million (Restated) after considering non-cash items of approximately $622,000 (Restated). For the year ended September 30, 2009, the net loss, adjusted for non-cash items of approximately $5.4 million (which includes approximately $4.9 million goodwill impairment charge), was approximately $1.4 million.
Cash provided by financing activities was approximately $822,000 for the year ended September 30, 2010 and cash used by financing activities was approximately $339,000 for the year ended September 30, 2009. The Company drew (net) approximately $1.67 million on its lines of credit during fiscal year 2010. Funds were used to finance operations, purchase fixed assets, and pay down long term debt.
As of September 30, 2010, the Company was in violation of its current ratio and term debt coverage ratio covenants in its loan agreements with its lender. As of January 17, 2011, the Company and its lender entered into the Seventh Amendment to the Secured Credit Agreement and Waiver ("Amendment 7"). Under the terms of Amendment 7, the lender agreed to waive the noncompliance by the Company with the required ratio of current assets to current liabilities as of September 30, 2010, December 31, 2010 and the Company's anticipated noncompliance with the required ratio of current assets to current liabilities through October 1, 2011 and further, to waive the Company's noncompliance with the Term Debt Coverage Ratio as of September 30, 2010, December 31, 2010, and the Company's anticipated noncompliance with the Term Debt Coverage Ratio through October 1, 2011.
Amendment 7 replaces Line of Credit One, Line of Credit Two and Line of Credit Three as described in Note 8 to the consolidated financial statements, with a Revolving Credit Agreement in an amount not to exceed $2,700,000, maturing on March 31, 2011. As of January 17, 2011, the balance due on this Revolving Credit Agreement is $2,054,436.
The Company has agreed to engage an advisor by January 31, 2011 to assist in obtaining replacement financing to refinance all of the Revolving Loans with one or more replacement lenders; and further, to receive a commitment or commitments from on or more replacement lenders to fully take out and refinance all Revolving Loans by February 28, 2011.
Management expects to be able to comply with the requirements of Amendment 7 and has begun the process to secure a commitment for funding from an asset-based lender. Management believes this is an appropriate financing vehicle for its operations and expects it to have a positive impact on the Company's working capital through fiscal year 2011. Further, this funding will help to continue the stabilization and turnaround of the Company while facilitating continued growth. The failure to obtain a replacement lender by March 31, 2011 could result in the lender foreclosing on its security interest resulting in a significant disruption to the Company's operations.
The Company's business is seasonal and the year-end falls during one of our busiest times of year. At September 30, 2010 and September 30, 2009, our lines of credit had been fully utilized, but the Company had significant accounts receivable and inventory to support this debt. Consistent with its historical experience, the Company expects to collect sufficient receivables to repay the line of credit. The Company expects the existing cash balances, the cash flow to be generated from operating activities, and the available borrowing capacity under our credit line agreement to be sufficient to fund normal operations. Short term cash can be generated by more aggressively collecting accounts receivable, and by reducing inventory balances. We also expect to file for income tax refunds due us of approximately $600,000. The timing of those refunds cannot be estimated. Further, one of our long term notes matures in April 2011 after fully amortizing.
Our continued existence is dependent upon our ability to generate cash and to market and sell our products successfully. However, there are no assurances whatsoever that we will be able to borrow further funds from our lender or that we will increase our revenues and/or control our expenses to a level sufficient to provide positive cash flow.
21

 

 
The consolidated financial statements included herein have been prepared assuming the Company will continue as a going concern. During the years ended September 30, 2010 and 2009, the Company incurred net losses approximately $2.0 million (Restated) and $6.8 million, respectively. As of September 30, 2010, the Company had an accumulated deficit of approximately $5.4 million (Restated). As discussed in Note 8 to the consolidated financial statements, as of September 30, 2010, the Company was in violation of covenants with its lender. If the Company is unable to generate profits and unable to continue to obtain financing for its working capital requirements, it may have to curtail its business sharply or cease business altogether. The consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded assets or the amounts and classification of liabilities that might be necessary in the event the Company does not continue as a going concern.
Operating Activities
The following table sets forth the Company's working capital position at the end of each of the past two fiscal years:
 
 
 
 
 
 
 
 
 
 
2010 (Restated)
 
2009
 
Current assets
 
$
6,528,444
 
$
6,958,732
 
Current liabilities
 
 
5,565,400
 
 
3,808,053
 
Working capital
 
$
963,044
 
$
3,150,679
 
 
 
 
 
 
 
 
 
Current ratio
 
 
1.17
 
 
1.83
 
Cash flows provided by (used for) operations totaled approximately $(570,000) and approximately $364,000 in fiscal 2010 and 2009, respectively. Accounts receivable increased approximately $144,000 during fiscal year 2010 compared to a decrease of approximately $1.1 million during fiscal year 2009. Inventory balances decreased approximately $380,000 and $1.5 million during fiscal years 2010 and 2009, respectively. During fiscal year 2009, the Company improved processes to improve the flow of both raw materials and finished goods. As a result, inventory balances decreased significantly during fiscal year 2009 with improved efficiencies. Process improvements continued in fiscal year 2010 as the Company continues to strive to carry inventory balances sufficient to complete and fill orders without carrying excess inventory which puts a strain on cash flow and lines of credit.
Depreciation and amortization charges were $780,000 in fiscal 2010 and $836,000 in fiscal 2009.
Investing Activities
Cash flows used for investing activities were approximately $250,000 and $192,000 in fiscal 2010 and 2009, respectively. Expenditures for property, plant and equipment were $274,000 and $221,000 in fiscal 2010 and 2009, respectively. In general, the Company's ongoing capital expenditures are primarily related to tooling and equipment for new products, lean manufacturing initiatives, and information systems improvements.
Financing Activities
The following table sets forth the Company's debt and capital structure at the end of the past two fiscal years:
 
 
 
 
 
 
 
 
 
 
(2010 Restated)
 
2009
 
Current debt
 
$
699,681
 
$
863,160
 
Long-term debt
 
 
2,478,279
 
 
3,111,783
 
Total debt
 
 
3,177,960
 
 
3,974,943
 
Shareholders' equity
 
 
7,095,758
 
 
8,891,385
 
Total capitalization
 
$
10,273,718
 
$
12,866,328
 
 
 
 
 
 
 
 
 
Total debt to total capitalization
 
 
30.9
 
 
30.9
 
22

 

 
Principal payments on long-term debt were approximately $857,000 and $808,000 for fiscal years 2010 and 2009, respectively.
Contractual Obligations and Off-Balance-Sheet Arrangements
The Company has contractual obligations and commitments to make future payments under its existing credit facility, including principal, interest and operating leases. See Note 8 in the consolidated financial statements included elsewhere in this report for financial information regarding the significant terms and schedule of payments on debt obligations, and Note 13 regarding lease obligations.
As part of the investment in Golden Rule (Bermuda) Ltd, a captive insurance company in which the Company has invested and formerly secured some of its insurance protection, the Company is required to provide a letter of credit primarily as security for the payment of future claims under its workers compensation insurance. Letters of credit outstanding at September 30, 2010 and 2009, respectively, were approximately $195,000.
The Company has no off-balance-sheet arrangements.
Market Risk Management
The Company is exposed to market risk stemming from changes in commodity prices such as steel, plastic resins, and packaging materials, and to a lesser extent to foreign currency exchange rates and interest rates. Changes in these factors could cause fluctuations in earnings and cash flows. The Company may reduce exposure to certain of these market risks by entering into supply agreements and purchase contracts for materials. The Company does not currently use hedging transactions as part of its risk management strategy.
Foreign Currency
The Company currently has a limited amount of foreign sales or off-shore product sourcing for which the functional currencies would commonly be denominated in Euros, Swiss Francs, Japanese Yen, Chinese Yuan, Taiwan Dollars, and Canadian dollars. As the values of the currencies of the foreign countries in which the Company has sales or off-shore product sourcing increase or decrease relative to the U.S. dollar, the sales, expenses, profits, losses, assets and liabilities of the Company's foreign operations, as reported in the Company's consolidated financial statements, increase or decrease, accordingly. None of the Company's revenues for the years ended September 30, 2010 and 2009 were denominated in currencies other than the U.S. dollar.
Interest Rates
The Company's long-term capital needs are largely funded with fixed rate debt and seasonal working capital needs are funded with floating rate debt. The Company's primary exposure is to U.S. interest rates.
Commodities
Certain components used in the Company's products are exposed to commodity price changes. The Company manages this risk through instruments such as purchase orders and supply contracts. Primary commodity price exposures include costs associated with metals, resins and packaging materials.
Sensitivity to Changes in Value
The estimated maximum potential loss from a 100 basis point movement in interest rates on the Company's term loan and short term borrowings outstanding at September 30, 2010 is approximately $50,000 annually before income taxes. These estimates are intended to measure the maximum potential earnings the Company could lose in one year from adverse changes in market interest rates. The calculations are not intended to represent actual losses in fair value or earnings that the
23

 

 
Company expects to incur. The estimates do not consider favorable changes in market rates or the effect of interest rate floors.
Other Factors
The Company anticipates that changing costs of basic raw materials may impact future operating costs and, accordingly, the prices of its products. The Company is involved in continuing programs to mitigate the impact of cost increases through changes in product design and identification of sourcing and manufacturing efficiencies. Price increases and, in certain situations, price decreases are implemented for individual products, when appropriate.
Critical Accounting Policies and Estimates
The Company's management discussion and analysis of its financial condition and results of operations are based upon the Company's consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the U.S. The preparation of these financial statements requires the Company to make estimates and judgments that affect the reported amounts of its assets, liabilities, sales and expenses, and related footnote disclosures. On an on-going basis, the Company evaluates its estimates for product returns, bad debts, inventories, intangible assets, income taxes, warranty obligations, stock based compensation, and litigation. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
The Company believes the following critical accounting policies affect its more significant judgments and estimates used in the preparation of its consolidated financial statements. Management has discussed these policies with the Audit Committee of the Company's Board of Directors.
Allowance for Doubtful Accounts
The Company recognizes revenue when title and risk of ownership have passed to the buyer. Allowances for doubtful accounts are estimated by the individual operating companies based on estimates of losses related to customer accounts receivable balances. Estimates are developed by using standard quantitative measures based on historical losses, adjusting for current economic conditions and, in some cases, evaluating specific customer accounts for risk of loss. The establishment of reserves requires the use of judgment and assumptions regarding the potential for losses on receivable balances. Though the Company considers these balances adequate and proper, changes in economic conditions in specific markets in which the Company operates and any specific customer collection issues the Company identifies could have a favorable or unfavorable effect on required reserve balances.
Inventories
Inventories are stated at the lower of cost or market using the weighted average method. Cost includes materials, labor, and manufacturing overhead related to the purchase and production of inventories. Management regularly reviews inventory quantities on hand, future product demand and the estimated utility of inventory. If the review indicates a reduction in utility below carrying value, management would reduce the Company's inventory to a new cost basis through a charge to cost of goods sold.
During the year ended September 30, 2010, the Company recorded an adjustment to inventory of approximately $274,000 due to differences discovered in inventory counts. Additionally, the Company disposed of inventory valued at approximately $315,000 that was determined to be obsolete. During the third quarter of fiscal year 2009 while undergoing lean manufacturing process improvement 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 the fiscal year ended September 30, 2009, the Company wrote off approximately $191,000 due to a shortage discovered during a physical inventory count at the end of January 2009. The Company also recorded an inventory write-off of $283,000 as a result of the completion of the inventory evaluation started in the third fiscal quarter of 2009. In fiscal 2009, the Company had increased its reserve by approximately $610,000 as an estimate of the excess and obsolete inventory on hand. However, in the fourth quarter of fiscal 2009, the Company continued to evaluate the inventory and found that the total amount was $283,000.
24

 

 
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, 2010 and 2009 was appropriate. It is reasonably possible the inventory reserve will change in the future.
Deferred Taxes
The Company records a valuation allowance to reduce its deferred tax assets to the amount that is more likely than not to be realized. While the Company has considered future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for the valuation allowance, in the event the Company were to determine that it would not be able to realize all or part of its net deferred tax assets in the future, an adjustment to the deferred tax assets would be charged to income in the period such determination was made. Likewise, should the Company determine that it would be able to realize its deferred tax assets in the future in excess of its net recorded amount, an adjustment to the deferred tax assets would increase income in the period such determination was made.
Goodwill and Other Intangible Assets Impairment
Goodwill and intangible assets are reviewed and assessed for impairment at least annually or when indicators of potential impairment exist, using a fair-value based approach. Fair value is estimated using a discounted cash flow analysis. If the fair value of a reporting unit exceeds its net book value, no impairment exists. When fair value is less than the carrying value of the net assets and related goodwill, an impairment test is performed to measure and recognize the amount of the impairment loss, if any. The estimate of fair value was calculated using a discounted cash flow analysis, which requires a number of key estimates and assumptions. We estimated the future cash flows of the other intangible assets based on historical and forecasted revenues and operating costs. We applied a discount rate to the estimated future cash flows for purposes of the valuation. This discount rate is based on the estimated weighted average cost of capital, which includes certain assumptions such as market capital structure, market betas, risk-fee rate of return and estimated costs of borrowing. Changes in these key estimates and assumptions, or in other assumptions used in this process, could materially affect our impairment analysis in a given year.
Intangible assets with estimable useful lives are amortized over their respective estimated useful lives.
The Company has determined that indicators of potential impairment existed at September 30, 2010 and 2009 because the Company has experienced a decrease in the Company's market capitalization for a sustained period of time and has continued net losses. In accordance with ASC 350, the Company evaluated its other intangible assets using an undiscounted cash flow analysis prior to evaluating. This analysis supported the carrying value of the other intangible assets, at each reporting period. The analysis at September 30, 2009 did not support the goodwill the Company had recorded at that time. Therefore, management determined that no impairment was necessary of the other intangible assets at September 30, 2010 and 2009, and the Company took an impairment charge for the full amount of the goodwill of approximately $4,890,000 at September 30, 2009.
The Company's analysis uses significant estimates in the evaluation of 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 the Company's estimates and assumptions could change in the near future, which could lead to further impairment of long-lived assets and other intangibles.
Other intangible assets are stated at cost and consist of trademarks and patents. All trademarks acquired by the Company's acquisitions have been deemed to have an indefinite life and as such will not be amortized. Patents are being amortized over their estimated useful lives of 15 years.
Long-Lived Asset Impairment
Long-lived assets are reviewed and assessed for impairment at least annually or when indicators of potential impairment exist, using a fair-value based approach. Fair value is estimated using a discounted cash flow analysis. If the fair value of a reporting unit exceeds its net book value, no impairment exists. When fair value is less than the carrying value of the net assets and related goodwill, an impairment test is performed to measure and recognize the amount of the impairment loss, if any. The estimate of fair value was calculated using a discounted cash flow analysis, which requires a number of key
25

 

 
estimates and assumptions. We estimated the future cash flows of long-lived assets based on historical and forecasted revenues and operating costs. We applied a discount rate to the estimated future cash flows for purposes of the valuation. This discount rate is based on the estimated weighted average cost of capital, which includes certain assumptions such as market capital structure, market betas, risk-fee rate of return and estimated costs of borrowing. Changes in these key estimates and assumptions, or in other assumptions used in this process, could materially affect our impairment analysis in a given year.
Long-lived assets are depreciated over the estimated useful lives of the assets by using the straight-line and accelerated methods.
The Company has determined that indicators of potential impairment exist because the Company has experienced a decrease in the Company's market capitalization for a sustained period of time and has continued net losses. In accordance with ASC 360, the Company evaluated its long-lived assets using an undiscounted cash flow analysis at the segment level. This analysis supported the carrying value of the long-lived assets. Therefore, management determined that no impairment was necessary.
The Company's analysis uses significant estimates in the evaluation of long-lived assets, 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's estimates and assumptions could change in the near future, which could lead to further impairment of long-lived assets.
Warranties
The Company accrues a warranty reserve for estimated costs to provide warranty services. Warranty reserves are estimated by the Company using standard quantitative measures based on criteria established by the Company. Estimates of costs to service its warranty obligations are based on historical experience, expectation of future conditions and known product issues. To the extent the Company experiences increased warranty claim activity or increased costs associated with servicing those claims, revisions to the estimated warranty reserve would be required. The Company engages in product quality programs and processes, including monitoring and evaluating the quality of its suppliers, to help minimize warranty obligations.
Stock-Based Compensation
The Company accounts for stock-based compensation on a fair value basis. The estimated fair value at date of grant for each stock-based award is recognized in expense over the requisite service period (generally the vesting period).
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Information with respect to this item is included in the Company's consolidated financial statements attached to this report beginning on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None
26

 

 
ITEM 9A. CONTROLS AND PROCEDURES
          Restatement of Prior Period Financial Statements Filed
As the Company announced in January 2012, the Company's Audit Committee determined that previously issued consolidated financial statements for the year ended September 30, 2010 would need to be restated.
          Evaluation of Disclosure Controls and Procedures
Based on management's evaluation (with the participation of our former Chief Executive Officer and Chief Financial Officer) as of the end of the period covered by this report, our former Chief Executive Officer and Chief Financial Officer have concluded that the Company's disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the Exchanged Act), are ineffective, due to the material weakness in our internal control over financial reporting as discussed below, to provide reasonable assurance that the information to be disclosed by the Company in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in SEC rules and forms, and is accumulated and communicated to management, including our principal executive officer and principal financial officer as appropriate to allow timely decisions regarding required disclosures.
Subsequent to the evaluation made in connection with the Original Filing, and in connection with the restatement and filing of this Form 10-K/A, our management, including our current Chief Executive Officer and Chief Financial Officer, re-evaluated the effectiveness of the design and operation of our disclosure controls and procedures and concluded that, because of the material weakness in our internal control over financial reporting of the Company's stock-based compensation plans and customer incentive programs, our disclosure controls and procedures continued to be ineffective as of September 30, 2010. Notwithstanding the material weaknesses discussed below, our management, including our current Chief Executive Officer and Chief Financial Officer, has concluded that the consolidated financial statements included in this Form 10-K/A present fairly, in all material respects, our financial position, results of operations and cash flows for the periods presented in conformity with accounting principles generally accepted in the United States.
          Changes in Internal Control over Financial Reporting
There was no change in the Company's internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended) during period covered by this report that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting.
          Management's Report on Internal Control over Financial Reporting (as Revised)
Cycle Country's management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rule 13a-15(f) or Rule 15d-15(f) under the Securities Exchange Act of 1934, as amended. Internal control over financial reporting is a process designed by, or under the supervision of, Cycle Country's Chief Executive Officer and Chief Financial Officer, and effected by our management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation and fair presentation of financial statements for external purposes in accordance with generally accepted accounting principles, and includes those policies and procedures that:
 
 
 
 
Pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company;
 
 
 
 
Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorization of management and directors of the Company; and
 
 
 
 
Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company's assets that could have a material effect on the financial statements.
Internal control over financial reporting cannot provide absolute assurance of achieving financial reporting objectives because of its inherent limitations. Internal control over financial reporting is a process that involves human diligence and compliance is subject to lapses in judgment and breakdowns resulting from human failures. Internal control over financial reporting also can be circumvented by collusion or improper management override. Because of such limitations, there is a risk that material misstatements may not be prevented or detected on a timely basis by internal control over financial reporting. However, these inherent limitations are known features of the financial reporting process. Therefore, it is possible to design into the process safeguards to reduce, though not eliminate, this risk.
Under the supervision and with the participation of the Company's management, including its Interim Chief Executive Officer and Chief Financial Officer, Cycle Country had originally assessed as of September 30, 2010, the effectiveness of its internal control over financial reporting. Based on its original evaluation as of September 30, 2010, management concluded that our internal controls over financial reporting were ineffective as of September 30, 2010 and that there is a material weakness in our internal control over financial reporting as of September 30, 2010. This
27

 

 
determination was based upon delayed filings of financial and other reports and upon variances found in inventory as well as errors related to stock-based compensation and customer incentive programs discovered since the original filing of Form 10-K. A material weakness is a deficiency, or a combination of control deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of the Company's annual or interim financial statements will not be prevented or detected on a timely basis.
This annual report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. As we are a non-accelerated filer, management's report is not subject to attestation by our registered public accounting firm pursuant to Section 404(b) of the Sarbanes-Oxley Act of 2002 that permit us to provide only management's report in this annual report.
ITEM 9B. OTHER INFORMATION
None.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The following table sets forth for each current director, such director's age, principal occupation for at least the last five years, present position with the Company, the year in which such director was first elected or appointed a director (each serving continuously since first elected or appointed), directorships with other companies whose securities are registered with the Securities and Exchange Commission and term of such director:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Director
 
To Serve
Name
 
Age
 
Principal Occupation
 
Since
 
Until
Paul DeShaw
 
67
 
Mr. DeShaw is a long-standing investor in Cycle Country Accessories Corp. He is also a Director of BDFSC Holdings Corp and a Vice President of Broker Dealer Financial Services Corp, and has been with that firm since 1995.
 
2010
 
2013
 
 
 
 
 
 
 
 
 
Robert Davis
 
49
 
Mr. Davis is the Company's Chief Operating Officer and Chief Financial Officer and Interim Chief Executive Officer. Prior to this role, he was engaged by the Company as a turnaround consultant and acted as the Interim Chief Financial Officer, as well. Through his firm, Bene Merenti LLC, he has been an entrepreneurial C.E.O. for over 20 years, having bought, started, lead, and sold many companies in that period.
 
2009
 
2012
Rules of NYSE Amex require that a majority of the Board of Directors be "independent," as defined in American Stock Exchange Company Guide Section 121(f). Under the NYSE Amex rules, the Board of Directors must make an affirmative determination that a director is independent by determining that the director has no relationships that, in the opinion of the Board of Directors, would interfere with the exercise of independent judgment in carrying out the responsibilities of a director. The Board of Directors has reviewed the independence of its directors under the Amex rules. During this review, the Board of Directors considered transactions and relationships between each director or any member of their family and the Company.
The Board of Directors has determined that Mr. DeShaw is independent under Amex Rule Section 121(f).
EXECUTIVE OFFICERS
The following table lists the Company's executive officers as of the date of this filing:
 
 
 
 
 
NAME
 
OFFICE
 
OFFICER
SINCE
Robert Davis
 
Interim Chief Executive Officer
 
2011
 
 
 
 
 
 
 
Chief Financial Officer and Chief Operating Officer
 
2010
 
 
 
 
 
 
 
Interim Chief Financial Officer, Secretary and Treasurer
 
2009
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The Audit Committee of the Company's Board of Directors is an "audit committee" for purposes of Section 3(a)(58)(A) of the Securities Exchange Act of 1934. Mr. Paul DeShaw is currently the only member of the Audit Committee.
Director Compensation (Restated)
The following table presents director compensation (excluding directors who are Named Executive Officers) for the year ended September 30, 2010:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Name
 
Fees Earned
or Paid in
Cash
($)
 
(Restated)
Stock
Awards
($)
 
Option
Awards
($)
 
Non-Equity
Incentive
Plan
Compensation
($)
 
Change in
Pension 
Value
and Nonqualified
Deferred
Compensation
Earnings ($)
 
All Other
Compensation
($)
 
Restated
Total
Compensation
($)
 
(1)
Paul DeShaw
 
$
-
 
$
-
 
$
-
 
$
-
 
$
-
 
$
-
 
$
-
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(2)
Daniel Thralow
 
$
-
 
$
-
 
$
-
 
$
-
 
$
-
 
$
-
 
$
-
 

(1)
Paul DeShaw was elected to the board at the annual meeting of stockholders in 2010 for a term which will expire at the 2013 annual meeting of stockholders. As of September 30, 2010, Mr. DeShaw was not vested in a 50,000 share compensation award approved by the stockholders to be vested over three years.
 
 
(2)
Daniel Thralow was elected to the board in 2009 to serve until 2012. As of September 30, 2010, Mr. Thralow was not vested in a 50,000 share compensation award approved by the stockholders to be vested over three years. Effective December 31, 2010, Mr. Thralow resigned his position as a member of the board of directors and forfeited these shares.
The Board of Directors has reviewed the qualifications of each member of the Audit Committee for the purpose of determining whether any director serving on the Audit Committee would qualify as an "audit committee financial expert" as that term is defined under the rules of the Securities and Exchange Commission. Based upon that review, it was determined that, Mr. Paul DeShaw qualifies as an audit committee financial expert.
On January 6, 2011, the Company notified NYSE Amex that, as a result of the resignation of Daniel Thralow from the Company's Board of Directors, as described elsewhere in this report, the Company no longer complies with Section 803B(2)(c) of the NYSE Amex's Company Guide, which requires that the Company's audit committee have at least two members, both of whom must be independent. In accordance with Section 802(b) of the Company Guide, the Company has until March 16, 2011 to regain compliance with this requirement. The board is currently considering candidates and intends to appoint an independent director to fill the vacancy on the board and the audit committee as soon as possible. If we are unable to fill the vacancy in a timely matter, we could be delisted by the Exchange.
Section 16(a) Beneficial Ownership Reporting Compliance
For the fiscal year ending September 30, 2010, Paul DeShaw and Daniel Thralow each failed to file a Form 4 for the 50,000 share awards approved at the 2010 annual stockholder meeting. Robert Davis and Jeffrey Tetzlaff each failed to file a Form 4 for the share awards approved at the 2010 annual stockholder meeting. Mr. Davis has since filed his Form 4 for this award.
ITEM 11. EXECUTIVE COMPENSATION (Restated)
The following table sets forth the total compensation earned over the fiscal years ended September 30, 2010 and 2009 by (1) each person who served as the principal executive officer of the Company during fiscal year 2010, (2) the Company's two most highly compensated executive officers as of September 30, 2010 with compensation during fiscal year 2010 of $100,000 or more; and (3) up to two additional individuals, if any, who would have otherwise been included under clause (2) above but for the fact that they were not serving as an executive officer as of September 30, 2010 (the "named executive officers").
29

 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Restated
 
 
 
 
 
 
 
 
 
Name and
 
Fiscal
 
 
 
 
 
Other Annual
 
Restricted Stock
 
Securities Underlying
 
LTIP
 
All Other
 
 
 
Principal Position
 
Year
 
Salary
 
Bonus
 
Comp
 
Awards
 
Options
 
Payouts
 
Comp
 
(1)
 
Jeffrey Tetzlaff, Former President
 
2010
 
176,731
 
135,000
(5)
 
 
13,333
(8)
 
 
 
 
4,185
(11)
 
 
 
 
2009
 
150,000
 
25,000
(6)
-
 
4,167
(9)
-
 
-
 
1,464
(11)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(2)
 
Robert Davis, Interim Chief Executive Officer, Chief Operating Officer and Chief Financial Officer
 
2010
 
59,615
 
135,000
(16)
 
 
-
(10)
 
 
 
 
121,346
(13)
 
 
 
2009
 
-
 
-
 
-
 
-
 
-
 
-
 
116,876
(13)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(3)
 
Randy Kempf, Former President
 
2009
 
187,500
 
-
 
-
 
25,000
(11)
-
 
-
 
10,432
(12)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(4)
 
Alan Bailey, Former Vice President
 
2010
 
76,923
 
-
 
-
 
-
 
-
 
-
 
36,225
(14)
 
 
 
 
2009
 
125,000
 
-
 
500
(7)
-
 
-
 
-
 
18,842
(15)

(1)
Resigned effective December 31, 2010
 
 
(2)
Mr. Davis served as Interim Chief Financial Officer through Bene Merenti, LLC until July 1, 2010 at which time he was named Chief Operating Officer and Chief Financial Officer. As of December 31, 2010, Mr. Davis was also named Interim Chief Executive Officer
 
 
(3)
Employment terminated April, 2008
 
 
(4)
Retired effective April 30, 2010
 
 
(5)
Includes $60,000 signing bonus and $75,000 performance bonus earned and accrued in fiscal year 2010. $50,000 was paid in fiscal year 2011, the balance will be paid under the Separation Agreement and Release of Claims disclosed elsewhere in this filing.
 
 
(6)
Signing bonus
 
 
(7)
Christmas bonus
 
 
(8)
Includes $13,333 for 33,332 shares vested and issued in fiscal year 2010. Excludes 1,005,809 shares issued in fiscal year 2010 as part of an Employee Agreement effective July 1, 2010 but subject to forfeiture and not yet vested as of September 30, 2010. The 1,005,809 shares were subsequently forfeited and cancelled subject to a Separation Agreement and Release of Claims.
 
 
(9)
16,666 shares vested in fiscal year 2009
 
 
(10)
Excludes 1,005,809 shares issued in fiscal year 2010 as part of an Employee Agreement effective July 1, 2010 but subject to forfeiture and not yet vested as of September 30, 2010.
 
 
(11)
Issuance of remaining stock for a total of $100,000
 
 
(12)
Health insurance
 
 
(13)
Amounts paid to Mr. Davis' consulting firm, Bene Merenti LLC for his services as Interim Chief Financial Officer.
 
 
(14)
Includes $14,271 vacation payout, $7,978 value of personal use of company auto and $13,977 paid for health insurance.
 
 
(15)
Includes $6,180 value of personal use of company auto and $12,662 paid for health insurance.
 
 
(16)
Includes $60,000 signing bonus and $75,000 performance bonus earned in 2009 and paid in fiscal year 2010.
Outstanding Equity Awards at Fiscal Year-End
The table below summarizes all unexercised options, stock that has not vested, and equity incentive plan awards for each named executive officer as of September 30, 2010.
OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END (Restated)
 
 
 
 
 
 
 
 
Option Awards
 
Stock Awards
 
Name
 
Number of
Securities
Underlying
Unexercised
Options
(#)
Exercisable
 
Number of
Securities
Underlying
Unexercised
Options
(#)
Unexercisable
 
Equity
Incentive
Plan
Awards:
Number of
Securities
Underlying
Unexercised
Unearned
Options
(#)
 
Option
Exercise
Price
($)
 
Option
Expiration
Date
 
Number of
Shares or
Units of
Stock That
Have not
Vested
(#)
 
Restated Market
Value of
Shares or
Units of
Stock That
Have Not
Vested
$
 
Equity
Incentive
Plan
Awards:
Number
of
Unearned
Shares,
Units or
Other
Rights
That Have
Not
Vested
(#)
 
Equity
Incentive
Plan
Awards:
Market or
Payout
Value of
Unearned
Shares,
Units or
Other
Rights
That
Have Not
Vested
(#)
 
Jeffrey Tetzlaff (1)
 
-
 
-
 
-
 
-
 
-
 
1,005,809
 
$
372,150
 
-
 
-
 
Robert Davis (2)
 
-
 
-
 
-
 
-
 
-
 
1,005,809
 
$
372,150
 
-
 
-
 
 

(1)
Jeffrey Tetzlaff forfeited his award in connection with his resignation effective December 31, 2010.
 
 
(2)
Of this award, 402,324 shares were vested effective October 1, 2010.
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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT (Restated)
The following table sets forth information regarding the beneficial ownership of our Common Stock as of December 31, 2010 each stockholder known by us to own beneficially more than 5% of our Common Stock.
As of December 31, 2010, we had 8,046,471 shares of Common Stock outstanding and 44 stockholders of record. Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission. In computing the number of shares beneficially owned by a person and the percentage ownership of that person, shares of Common Stock subject to options or warrants held by that person that are currently exercisable or will become exercisable within 60 days after September 30, 2010 are deemed outstanding, while such shares are not deemed outstanding for purposes of computing the ownership percentage of any other person. Unless otherwise indicated in the footnotes below, the persons and entities named in the table have sole voting and investment power with respect to all shares beneficially owned, subject to community property laws where applicable.
 
 
 
 
 
 
 
 
Restated Amount and
 
Restated
 
Name and Address of
 
Nature of
 
Percentage
 
Beneficial Owner
 
Beneficial Ownership
 
of Class(6)
 
Alan Bailey
(1)
510,779
(direct)
 
10.41
%
24160 Kelley's Beach Drive
 
326,889
(indirect)
 
 
 
Spirit Lake, IA 51360
 
 
 
 
 
 
 
 
 
 
 
 
 
Lisa Bailey
(2)
326,889
(direct)
 
10.41
%
24160 Kelley's Beach Dr
 
510,779
(indirect)
 
 
 
Spirit Lake, IA 51360
 
 
 
 
 
 
 
 
 
 
 
 
 
Joan Bailey
 
1,055,592
(direct)
 
13.12
%
1209 Country Club Lane
 
 
 
 
 
 
Spencer, IA 51301
 
 
 
 
 
 
 
 
 
 
 
 
 
Robert Davis
(5)
1,005,809
(direct)
 
12.50
%
c/o Cycle Country Accessories Corp.
 
 
 
 
 
 
1701 38th Avenue West
 
 
 
 
 
 
Spencer, IA 51301
 
 
 
 
 
 
 
 
 
 
 
 
 
Paul DeShaw
(3)
391,300
(direct)
 
4.97
%
c/o Cycle Country Accessories Corp.
 
8,700
(indirect)
 
 
 
1701 38th Avenue West
 
 
 
 
 
 
Spencer, IA 51301
 
 
 
 
 
 
 
 
 
 
 
 
 
Hummingbird Management, LLC
(4)
412,922
(direct)
 
5.13
%
Hummingbird Value Fund, LP
 
 
 
 
 
 
TheTarsier Nanocap Value Fund, LP
 
 
 
 
 
 
Hummingbird Capital, LLC
 
 
 
 
 
 
Paul D. Sonkin
 
 
 
 
 
 
145 East 57th Street - 8th Floor
 
 
 
 
 
 
New York, New York 10022
 
 
 
 
 
 
 

(1)
Includes 326,889 shares owned by Mr. Bailey's spouse, Lisa Bailey
 
 
(2)
Includes 510,779 shares owned by Mrs. Bailey's spouse, Alan Bailey
 
 
(3)
Includes 8,700 shares owned by Mr. DeShaw's spouse; includes 50,000 shares awarded but not yet vested and subject to forfeiture.
 
 
(4)
Includes 101,000 shares owned by Hummingbird Value Fund, LP and 311,922 shares owned by The Tarsier Nanocap Value Fund, L.P. Hummingbird Management, LLC serves as the investment manager of each of Hummingbird Value Fund, LP and Tarsier Nanocap Value
 
 
(5)
Includes 603,485 shares awarded but not yet vested and subject to forfeiture.
 
 
(6)
Effective December 31, 2010, Mr. Tetzlaff and Mr. Thralow resigned their positions and will forfeit 1,005,809 (12.50%) and 50,000 (0.62%) of the 8,046,471 total shares outstanding as of December 31, 2010, respectively. Mr. Tetzlaff will retain 50,000 (0.62%) shares earned as part of a previous compensation agreement.
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Under regulations of the Securities and Exchange Commission, persons who have power to vote or to dispose of our shares, either alone or jointly with others, are deemed to be beneficial owners of those shares. The following table sets forth, as of January 10, 2011, the beneficial ownership of the outstanding Common Stock of each current director, each of the Named Executive Officers named in the Summary Compensation Table set forth herein and the executive officers and directors as a group.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Name and Address of
Beneficial Owner
 
Amount and Nature of Beneficial Ownership (Restated)
 
Percentage of
Class (Restated)
 
Robert Davis, Interim CEO, COO, CFO, Corporate Secretary,
(1)
1,005,809
(direct)
 
12.50
%
Treasurer, and Director (2009)
 
 
 
 
 
 
c/o Cycle Country Accessories Corp.
 
 
 
 
 
 
1701 38th Ave West
 
 
 
 
 
 
Spencer, IA 51301
 
 
 
 
 
 
 
 
 
 
 
 
 
Paul DeShaw, Chairman of the Audit Committee, Director (2010)
(1)
391,300
(direct)
 
4.86
%
c/o Cycle Country Accessories Corp.
 
8,700
(indirect)
 
0.11
%
1701 38th Avenue West
 
 
 
 
 
 
Spencer, IA 51301
 
 
 
 
 
 
 
 
 
 
 
 
 
All Officers and Directors as a Group (2 persons)
 
1,405,809
 
 
17.47
%
 

(1)
Includes 603,485 shares issued but not yet vested and subject to forfeiture
Effective December 31, 2010, Mr. Tetzlaff and Mr. Thralow resigned their positions and have been omitted from this table since they are no longer officers or directors of the Company.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
From time to time, the Company has engaged in various transactions with certain of its directors, executive officers and other affiliated parties. The following paragraphs summarize certain information concerning certain transactions and relationships that have occurred during the past fiscal year or are currently proposed.
In fiscal 2010 and 2009, we contracted with Bene Merenti, LLC for the services to the Company of Robert Davis as Interim Chief Financial Officer and a Risk-Management Consultant. Amounts paid to Bene Merenti, LLC were approximately $316,000 and $158,000 for the years ended September 30, 2010 and 2009, respectively and included amounts for services performed, travel, insurance, and expense reimbursements. Bene Merenti, LLC is owned by Robert Davis.
It is our policy that all future transactions between the Company and its officers, directors, principal shareholders and affiliates must be approved by a majority of the independent and disinterested outside directors.
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ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The following table sets forth the fees billed to the Company for the fiscal years ended September 30, 2010 by Boulay, Heutmaker, Zibell & Co. P.L.L.P.
 
 
 
 
 
 
 
 
Fiscal
 
Fiscal
 
 
 
2010
 
2009
 
Audit Fees
 
$
188,200
 
$
136,500
 
Audit-Related Fees
 
 
41,100
 
 
14,500
 
Tax Fees
 
 
6,200
 
 
6,500
 
All Other Fees
 
 
93,700
 
 
-
 
Total Fees
 
$
329,200
 
$
157,500
 
Audit Fees-Includes audit of the Company's annual financial statements, review of the Company's quarterly reports on Form 10-Q, and consents and assistance with and review of registration statements filed with the SEC. .
Audit-Related Fees-Includes accounting consultations related to GAAP and the application of GAAP and includes time and research provided to the Company including work related 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 services provided to the Company including work related to the misappropriations of funds discussed elsewhere in this report.
The Audit Committee of the Company pre-approved all fees discussed above.
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
The following documents are filed as a part of this report:
Financial Statements
Included in Item 8 of Part II of this report are the following:
          Report of Independent Registered Public Accounting Firm.
          Consolidated Balance Sheets - September 30, 2010 and September 30, 2009.
          Consolidated Statements of Operations - Years ended September 30, 2010 and September 30, 2009.
          Consolidated Statements of Shareholders' Equity - Years ended September 30, 2010 and September 30, 2009.
          Consolidated Statements of Cash Flows - Years ended September 30, 2010 and September 30, 2009.
          Notes to the Consolidated Financial Statements.
Financial Statement Schedules
All schedules are omitted because they are not applicable, are not required or the required information has been included in the consolidated financial statements or notes thereto.
Exhibits
A list of the exhibits filed or incorporated by reference as part of this Annual Report on Form 10-K is set forth in the Index to Exhibits which immediately precedes such exhibits and is incorporated herein by this reference.
33

 

 
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on April 16, 2012.
CYCLE COUNTRY ACCESSORIES CORP.
(Registrant)
 
 
 
/s/ Robert Davis
 
Robert Davis
 
Chief Executive Officer
In accordance with the requirements of the Exchange Act, this report has been signed by the following persons on behalf of the registrant and in the capacities indicated.
 
 
 
 
 
Name and Signature
 
Title
 
Date
/s/ Robert Davis
 
Chief Executive Officer, Chief Financial Officer, Treasurer, Secretary and
 
April 16, 2012
Robert Davis
 
Director (principal executive, financial and accounting officer)
 
 
 
 
 
 
 
/s/ Paul DeShaw
 
Director
 
April 16, 2012
Paul DeShaw
 
 
 
 
34

 

 
EXHIBIT INDEX
The following exhibits are filed, or incorporated by reference where indicated, as part of Part IV of 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).
 
 
 
10.2
 
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))
 
 
 
10.9
 
Executive Employment Agreement between the Company and Robert Davis (Incorporated by reference to Exhibit 10.1, contained in the Company's Current Report on Form 8-K filed December 9, 2010)
 
 
 
10.10
 
Separation Agreement and Release of Claims, between the Company and Jeffrey M. Tetzlaff (Incorporated by reference to Exhibit 99.1 contained in the Company's Current Report on Form 8-K filed January 6, 2011)
 
 
 
10.11
 
Sixth Amendment to Secured Credit Agreement, dated April 26, 2055 (previously filed)
 
 
 
10.12
 
Seventh Amendment to Secured Credit Agreement and Waiver dated January 17, 2011 (previously filed)
 
 
 
10.13
 
2007 Incentive Compensation Plan (previously filed)
 
 
 
31.1
 
Certification required by Rule 13a-14(a).
 
 
 
32.1
 
Certification of Interim 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.
35

 

 
CYCLE COUNTRY ACCESSORIES CORP. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2010 AND 2009
F-1

 

 
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and
Stockholders of Cycle Country Accessories Corp. and Subsidiaries
We have audited the accompanying consolidated balance sheets of Cycle Country Accessories Corp. and Subsidiaries as of September 30, 2010 and 2009, and the related consolidated statements of operations, stockholders' equity, and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Cycle Country Accessories Corp. and Subsidiaries as of September 30, 2010 and 2009, and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 19 to the consolidated financial statements, the Company sustained several consecutive periods of operating losses. Those conditions raise substantial doubt about its ability to continue as a going concern. Management's plans regarding those matters are also described in Note 19. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
As discussed in Note 21 to the consolidated financial statements, the consolidated balance sheets as of September 30, 2010, and the related consolidated statements of operations, stockholders' equity, and cash flows for the year ended September 30, 2010 has been restated to correct certain errors relating to stock-based compensation and vendor rebate programs.
Certified Public Accountants
Minneapolis, Minnesota
January 17, 2011, except for Note 21
as to which the date is April 16, 2012
 
 
 
 
 
/s/ Boulay, Heutmaker, Zibell & Co. P.L.L.P.
 
 
Certified Public Accountants
F-2

 

 
CYCLE COUNTRY ACCESSORIES CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
FOR THE YEARS ENDED SEPTEMBER 30, 2010 (Restated) AND 2009
 
 
 
 
 
 
September 30,
2010 Restated(1)
 
September 30,
2009
 
Assets
 
 
 
 
 
 
Current Assets
 
 
 
 
 
 
Cash and cash equivalents
$
28,939
 
$
27,490
 
Accounts receivable, net
 
1,963,548
 
 
1,819,552
 
Inventories
 
3,208,749
 
 
3,588,880
 
Income taxes receivable
 
640,733
 
 
997,413
 
Deferred income taxes
 
366,000
 
 
448,000
 
Prepaid expenses and other
 
320,475
 
 
77,397
 
Total current assets
 
6,528,444
 
 
6,958,732
 
 
 
 
 
 
 
 
Property, plant and equipment, net
 
10,028,623
 
 
10,803,308
 
Intangible assets, net
 
161,957
 
 
178,547
 
Other assets
 
7,413
 
 
40,388
 
 
 
 
 
 
 
 
Total assets
$
16,726,437
 
$
17,980,975
 
 
 
 
 
 
 
 
Liabilities and Stockholders' Equity
 
 
 
 
 
 
Current Liabilities:
 
 
 
 
 
 
Disbursements in excess of bank balances
$
387,141
 
$
438,636
 
Accounts payable
 
695,241
 
 
562,689
 
Accrued expenses
 
1,055,583
 
 
747,044
 
Bank line of credit
 
2,700,000
 
 
1,030,000
 
Current portion of notes payable
 
699,681
 
 
863,160
 
Current portion of deferred gain
 
27,754
 
 
166,524
 
Total current liabilities
 
5,565,400
 
 
3,808,053
 
 
 
 
 
 
 
 
Long-Term Liabilities:
 
 
 
 
 
 
Notes payable, less current portion
 
2,478,279
 
 
3,111,783
 
Deferred gain, less current portion
 
-
 
 
27,754
 
Deferred income taxes
 
1,587,000
 
 
2,142,000
 
 
 
 
 
 
 
 
Total long term liabilities
 
4,065,279
 
 
5,281,537
 
Total liabilities
 
9,630,679
 
 
9,089,590
 
 
 
 
 
 
 
 
Stockholders' Equity:
 
 
 
 
 
 
Common stock, $.0001 par value; 100,000,000 shares authorized; 8,046,471 and 7,482,677 shares issued and 8,046,471 and 6,072,307 outstanding, respectively
 
805
 
 
748
 
Additional paid-in capital
 
12,495,917
 
 
14,849,334
 
Accumulated deficit
 
(5,400,964
)
 
(3,377,061
)
Treasury stock
 
-
 
 
(2,581,636
)
Total stockholders' equity
 
7,095,758
 
 
8,891,385
 
 
 
 
 
 
 
 
Total liabilities and stockholders' equity
$
16,726,437
 
$
17,980,975
 
(1) See Note 21- Restatement of Consolidated Financial Statements- of Notes to Consolidated Financial Statements
See Accompanying Notes to Consolidated Financial Statements
F-3

 

 
CYCLE COUNTRY ACCESSORIES CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED SEPTEMBER 30, 2010 (Restated) AND 2009
 
 
 
 
 
 
 
 
2010 Restated(1)
 
2009
 
Revenue
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net sales
 
$
11,861,990
 
$
10,188,884
 
Freight income
 
 
82,472
 
 
92,842
 
 
 
 
 
 
 
 
 
Total revenues
 
 
11,944,462
 
 
10,281,726
 
 
 
 
 
 
 
 
 
Cost of goods sold
 
 
9,946,559
 
 
8,834,912
 
 
 
 
 
 
 
 
 
Gross profit
 
 
1,997,903
 
 
1,446,814
 
 
 
 
 
 
 
 
 
Selling, general, and administrative expenses
 
 
4,854,218
 
 
3,872,719
 
Goodwill impairment
 
 
-
 
 
4,890,146
 
Fraud expense
 
 
134,775
 
 
620,000
 
 
 
 
 
 
 
 
 
Total operating expenses
 
 
4,988,993
 
 
9,382,865
 
 
 
 
 
 
 
 
 
Loss from operations
 
 
(2,991,090
)