SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED APRIL 1, 2006
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
------ -------
Commission file number 114800
CYTATION CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 16-0961436
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
4902 EISENHOWER BLVD., SUITE 185, TAMPA, FL 33634
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (813) 885-5998
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
The Registrant had 1,000,000 shares of Common Stock, par value $.001 per share,
outstanding as of April 1, 2006.
TABLE OF CONTENTS
PART I FINANCIAL INFORMATION PAGE
Item 1 Financial Statements 3
Consolidated Balance Sheets
As of April 1, 2006 (unaudited) F-1
Consolidated Statements of Operations
Three Months ended April 1, 2006 (unaudited) and
Three Months ended March 31, 2005 (unaudited) F-2
Consolidated Statements of Cash Flows
Three Months ended April 1, 2006 (unaudited) and
Three Months ended March 31, 2005 (unaudited) F-3
Notes to Consolidated Financial Statements F-4
Item 2 Management's Discussion and Analysis or Plan of Operation 4
Item 3 Controls and Procedures 11
PART II OTHER INFORMATION
Item 1 Legal Proceedings 12
Item 2 Unregistered Sales of Equity Securities and Use of Proceeds 12
Item 3 Defaults Upon Senior Securities 12
Item 4 Submission of Matters to a Vote of Security Holders 12
Item 5 Other Information 12
Item 6 Exhibits 13
Unless otherwise indicated or the context otherwise requires, all
references below in this filing to "we," "us" and the "Company" are to Cytation
Corporation, a Delaware corporation, together with its wholly-owned
subsidiaries, Deer Valley Acquisitions Corp., a Florida corporation, and Deer
Valley Homebuilders, Inc., an Alabama corporation. Specific discussions or
comments relating to Cytation Corporation will reference the "Company," those
relating to Deer Valley Acquisitions Corp. will reference "DVA", and those
relating to Deer Valley Homebuilders, Inc. will be referred to as "Deer Valley."
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Page
Number
PART I. Financial Information
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheet as of April 1, 2006
and March 31, 2005 F-1
Consolidated Statements of Operations for the three
months ended April 1, 2006 and March 31, 2005 F-2
Consolidated Statements of Cash Flows for the
three months ended April 1, 2006 and March 31, 2005 F-3
Notes to Consolidated Financial Statements F-4
3
Cytation Corporation
Consolidated Balance Sheet
ASSETS
(UNAUDITED) (AUDITED)
April 1, December 31,
2006 2005
---------------- -------------
CURRENT ASSETS:
Cash $ 3,402,694 $ 221
Certificates of Deposit 152,833 -
Accounts receivable 2,814,314
Notes receivable, other 11,652 -
Inventory 2,476,341
Prepaid expenses and other current assets 121,194 -
---------------- -------------
Total Current Assets 8,979,029 221
PROPERTY AND EQUIPMENT, NET $ 1,821,237 $ -
GOODWILL 4,108,401 -
---------------- -------------
TOTAL ASSETS $ 14,908,667 $ 221
================ =============
LIABILITIES AND STOCKHOLDERS'EQUITY(DEFICIT)
CURRENT LIABILITIES:
Current Maturities of Long Term Debt $ 41,895 $ -
Accounts payable and Accrued Expenses 2,835,127 48,416
Accounts Payable Under Dealer Incentive Programs 395,094
Estimated Warranties 860,000
Compensation and Related Accruals 614,336
Accrued Shareholder Distributions 775,000
Other Accruals 339,787
Income Tax Payable 261,173 -
Accrued Preferred Dividends 113,086
Notes payable and Accrued Interest - 5,500
---------------- -------------
Total Current Liabilities 6,235,498 53,916
LONG TERM LIABILITIES:
Accrued earnout on purchase of Deer Valley Homebuilders, Inc. 496,407 -
Long-Term Debt, Net of Current Maturities 1,424,009 85,000
COMMITMENTS AND CONTINGENCIES - -
STOCKHOLDERS' EQUITY(DEFICIT):
Series A Preferred stock, $0.01 par value, 750,000
shares authorized, 745,626 shares issued and outstanding 7,456 -
Series B Preferred stock, $0.01 par value, 49,451
shares authorized, 49,451 shares issued and outstanding 495 -
Series C Preferred stock, $0.01 par value, 26,750
shares authorized, 26,750 shares issued and outstanding 267 -
Common stock, $0.001 par value, 2,000,000
shares authorized, 1,000,000 and 982,622 shares issued and
outstanding, respectively 1,000 982
Additional paid-in capital 39,306,782 32,723,371
Accumulated deficit (32,563,247) (32,863,048)
---------------- -------------
TOTAL STOCKHOLDERS' EQUITY (DEFICIT) 6,752,753 (138,695)
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) $ 14,908,667 $ 221
================ =============
SEE NOTES TO FINANCIAL STATEMENTS.
F-1
Cytation Corporation
Consolidated Statements of Operations
For The Three Months Ended April 1, 2006 and March 31, 2005
(Unaudited)
2006 2005
------------ ----------------
REVENUE $12,913,079 $ -
COST OF REVENUE 10,895,389 1,182
------------ ----------------
GROSS PROFIT 2,017,691 (1,182)
OPERATING EXPENSES:
Depreciation 36,065 512
Selling, general and administrative 1,249,327 28,810
------------ ----------------
TOTAL OPERATING EXPENSES 1,285,392 29,322
------------ ----------------
OPERATING INCOME/(LOSS) 732,298 (30,504)
OTHER INCOME (EXPENSES)
Loss on termination of ARE agreement - (5,000)
Interest expense, net (13,867) (1,889)
Other Income 6,243 -
------------ ----------------
TOTAL OTHER EXPENSES (7,623) (6,889)
------------ ----------------
INCOME/(LOSS) BEFORE INCOME TAXES 724,675 (37,393)
INCOME TAX EXPENSE 261,173 -
------------ ----------------
NET INCOME (LOSS) $ 463,502 $ (37,393)
Dividends to preferred stockholders 113,086 -
------------ ----------------
NET INCOME (LOSS)AVAILABLE TO COMMON STOCKHOLDERS $ 350,416 $ (37,393)
============ ================
Net Income/(Loss) Per Share (Basic) $ 0.35 $ (0.04)
Net Income/(Loss) Per Share (Fully Diluted) $ 0.01 $ (0.04)
============ ================
Weighted Average Common Shares Outstanding 1,000,000 873,996 *
Weighted Average Common and Common Equivalent Shares Outstanding 39,772,088 873,996 *
============ ================
* Reflects 2 for 1 stock split
SEE NOTES TO FINANCIAL STATEMENTS.
F-2
Cytation Corporation
Consolidated Statements of Cash Flows
For The Three Months Ended April 1, 2006 and March 31, 2005
(Unaudited)
2006 2005
---------------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 463,502 $ (37,393)
Adjustments to reconcile net income (loss) to net cash provided
for/used in operating activities:
Depreciation 36,065 512
Accrued interest on note payable - 1,385
Loss on termination of ARE Agreement - 5,000
Changes in assets and liabilities:
Increase in certificate of deposit (1,415)
Increase in receivables (673,910)
Increase in other receivables (4,152)
Increase in inventories (1,360,783)
Increase in prepayments and other assets (68,775) 8,434
Increase in accounts payable 954,070 (49,751)
Increase in accounts payable under dealer incentives 54,662
Increase in estimated warranties 110,000
Increase in accrued compensation and related expenses 200,397
Increase in other accrued expenses 20,455
Increase in income taxes payable 261,173
---------------- -----------
CASH FLOW USED IN OPERATING ACTIVITIES (8,711) (71,813)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of equipment (245,771) (612)
Purchase of business, net of cash acquired (2,777,116) -
---------------- -----------
CASH FLOW USED IN INVESTING ACTIVITIES (3,022,887) (612)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of preferred stock 6,541,014
Proceeds from issuance of common stock 18 23,500
Payment of stockholder distributions (150,000)
Proceeds from long-term debt 43,039 5,000
---------------- ------------
CASH FLOW PROVIDED BY FINANCING ACTIVITIES 6,434,071 28,500
---------------- ------------
NET INCREASE (DECREASE) IN CASH 3,402,473 (43,925)
---------------- ------------
CASH, Beginning 221 65,644
---------------- ------------
CASH, Ending $ 3,402,694 $ 21,719
================ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the quarter for:
Interest $ 13,867 $ -
================ ============
Taxes $ - $ 828
================ ============
SUPPLEMENTAL DISCLOSURE OF NON CASH INVESTING AND FINANCING ACTIVITIES:
Additional purchase price accrued under earnout provision $ 496,407 $ -
================ ============
Accrual of dividends on preferred stock $ 113,086 $ -
================ ============
SEE NOTES TO FINANCIAL STATEMENTS.
F-3
CYTATION CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation
----------------------
The accompanying unaudited consolidated financial statements for the three
months ended April 1, 2006 and March 31, 2005 have been prepared in accordance
with accounting principles generally accepted in the United States of America
for interim financial information and pursuant to the rules and regulations of
the Securities and Exchange Commission for Form 10-Q. Accordingly, they do not
include all the information and footnotes required by accounting principles
generally accepted in the United States of America for complete financial
statements.
The unaudited financial information included in this report includes all
adjustments which are, in the opinion of management, necessary to reflect a fair
statement of the results for the interim periods. The operations for the three
months ended April 1, 2006 are not necessarily indicative of the results of the
full fiscal year.
The condensed consolidated financial statements included in this report should
be read in conjunction with the financial statements and notes thereto included
in the Registrant's December 31, 2005 Annual Report on Form 10-K and subsequent
filings on form 8-K and Pre 14C.
2. Inventories
------------
Inventories are stated at the lower of cost (first-in, first-out method) or
market. Work-in-process and finished goods inventories include an allocation for
labor and overhead costs. Inventories at April 1, 2006 and December 31, 2005 are
summarized as follows:
April 1, December 31,
2006 2005
---------------------------
(Unaudited)
Raw materials $ 1,261,382 $ 0
Work-in-process 402,285 0
Finished homes 812,674 0
------------- -------------
$ 2,476,341 $ 0
------------- -------------
3. Accounting for Stock Based Compensation
----------------------------------------
At April 1, 2006, the Company had not yet created a stock incentive plan which
authorizes the issuance of options to purchase common stock. Prior to January 1,
2006, the Company accounted for Stock Options and Stock Based Compensation under
the recognition and measurement provisions of APB Opinion No. 25. Accounting for
Stock Issued to Employees, and related Interpretations, as permitted by FASB
Statement No. 123, Accounting for Stock-Based Compensation. No stock-based
employee compensation cost was recognized in the Statement of Operations for the
three months ended March 31, 2005. Effective January 1, 2006, the Company
adopted the fair value recognition provisions of SFAS No. 123(R), Share-Based
Payment, using the modified-prospective-transition method. Under that transition
method, compensation cost for all share-based payments granted prior to, but not
yet vested as of January 1, 2006, based on the grant date fair value estimated
in accordance with the original provisions of SFAS No. 123, and (b) compensation
cost for all share-based payments granted subsequent to January 1, 2006, based
on the grant-date fair value estimated in accordance with the provisions of SFAS
No.123(R). Results for prior periods have not been restated.
As a result of adopting SFAS No.123(R) on January 1, 2006, this statement did
not have any effect on the Company's net income and earning per share for the
quarter ended April 1, 2006 since no options were granted.
F-4
Stock Options and Warrants:
---------------------------
The following table summarizes the activity related to all Company stock options
and warrants for the three months ended April 1, 2006 and the year ended
December 31, 2005:
Weighted Average
Exercise Price Exercise Price
Stock per Share per Share
Warrants Options Warrants Options Warrants Options
-----------------------------------------------------------------
Outstanding at January 1, 2005 - - - - - -
Granted - - - - - -
Exercised - - - - - -
Canceled or expired - - - - - -
------------------------
Outstanding at December 31, 2005 - - - - - -
Granted 21,210,368 - $0.75-2.25 - $1.52 -
Exercised - - - - - -
Canceled or expired - - - - - -
------------------------
Outstanding at April 1, 2006 21,210,368 - $0.75-2.25 - $1.52 -
========================
Exercisable at April 1, 2006 21,210,368 - $0.75-2.25 - $1.52 -
========================
The warrants expire at various dates ranging from January 2011 through March
2013.
F-5
CYTATION CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
4. Earnings Per Share
-------------------
Three Months Ended
-------------------------
April 1, March 31,
2006 2005
-------------------------
Net income available to
common shareholders $ 350,416 $(37,393)
----------- ------------
Weighted average shares outstanding:
Basic 1,000,000 873,996
Add: common stock equivalents 38,772,088 -
----------- ------------
Diluted 39,772,088 873,996
----------- ------------
Earnings per share:
Basic $ 0.35 $ (0.04)
----------- ------------
Diluted $ 0.01 $ (0.04)
----------- ------------
5. Critical Accounting Policies and Estimates
---------------------------------------------
The Company applies judgment and estimates, which may have a material effect in
the eventual outcome of assets, liabilities, revenues and expenses, for accounts
receivable, inventory and goodwill. The following explains the basis and the
procedure for each asset account where judgment and estimates are applied.
REVENUE RECOGNITION
The Company recognizes revenues for manufactured homes sold to independent
dealers when all of the following conditions have been met:
- an order for the home has been received from the dealer,
- an agreement with respect to payment terms (usually in the form
of a written or verbal approval for payment has been received from the
dealer's flooring institution),
- the home has been shipped, and
- risk of loss has passed to the independent dealer.
ADVERTISING COSTS
Advertising costs are charged to operations when incurred and are included in
operating expenses. Advertising costs for the quarters ended April 1, 2006 and
2005 were, $24,445 and $0, respectively.
GOODWILL
As a result of the acquisition of DeerValley Acquisitions Corp. and Deer Valley
Homebuilders, Inc., on January 18, 2006, goodwill is reflected on the
consolidated balance sheets. A valuation was performed by the Company and it was
determined that the estimated fair value of the goodwill in the accounts
exceeded its book value by 3,611,994. With the accrual for the Earnout Agreement
an additional $496,407 has been booked to goodwill bringing total goodwill as of
April 1, 2006 to $4,108,401. There is no assurance that the value of the
acquired entities will not decrease in the future due to changing business
conditions.
DEALER INCENTIVE PROGRAMS
The Company provides rebates to dealers based upon a predetermined formula
applied to the volume of homes sold to the dealer during the year. These rebates
are recorded at the time the dealer sales are consummated.
F-6
CYTATION CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
6. Recent Accounting Pronouncements
---------------------------------
In May 2005, the FASB issued SFAS No. 154, Accounting Changes and Error
Corrections, ("FAS 154"). FAS 154 replaces APB No. 20, "Accounting Changes", and
FAS 3, "Reporting Changes in Interim Financial Statements". FAS 154 changes the
accounting for, and reporting of, a change in accounting principle. FAS 154
requires retrospective application to the prior period's financial statements of
voluntary changes in accounting principle and changes required by new accounting
standards when the standard does not include specific transition provisions,
unless it is impractical to do so. FAS 154 is effective for accounting changes
and corrections of errors in fiscal years beginning after December 15, 2005.
Currently, the Company is not aware of any financial impact that the adoption of
this Statement will have on its consolidated financial statements.
7. Commitments and Contingent Liabilities
---------------------------------------
LITIGATION
The Company in the normal course of business is subject to claims and
litigation. Management of the Company is of the opinion that based on
information available; such legal matters will not ultimately have a material
adverse effect on the financial position or results of operation of the Company.
EARNOUT AGREEMENT
On January 18, 2006, the Company's wholly-owned subsidiary, DeerValley
Acquisitions Corp., entered into an Earnout Agreement (the "Earnout Agreement"),
between Deer Valley Homebuilders, Inc., Deer Valley Acquisitions Corp., and the
former owners of Deer Valley Homebuilders, Inc. In connection with the Capital
Stock Purchase Agreement, the Company entered into the Earnout Agreement,
pursuant to which, additional payments may be paid to the former owners of Deer
Valley Homebuilders, Inc., as an earnout, based upon the Net Income Before Taxes
of Deer Valley Homebuilders, Inc. during the next five (5) years up to a maximum
of $6,000,000. In any given year during the term of the Earnout Agreement, 50%
of the pre-tax profit exceeding $1,000,000 per year will be accrued and become
distributable to the prior shareholders. For the Fourth quarter of 2005, such
pre-tax profit shall be reduced to $250,000. During the first quarter the
Company has not achieved $1,000,000 in pre-tax profit so the Company has not
accrued any earnout attributable to the Quarter ending April 1, 2006. The
Company had pre-tax profit in the Fourth quarter of 2005 in the amount of
$1,242,814 which $992,814 was above the Company's earnout threshold of $250,000.
The Company accrued 50% of the amount in excess of earnout threshold in the
amount of $496,407. The maximum remaining potential accrual under the Earnout
Agreement is $5,503,593.
8. Capital Stock Purchase Agreement and Issuance of Equity
-------------------------------------------------------
Pursuant to the Capital Stock Purchase Agreement dated November 1, 2005, as
amended (the "Capital Stock Purchase Agreement"), DeerValley Acquisitions Corp.,
a wholly owned subsidiary of the Company, acquired, immediately after completion
of the Series A Financing and the Share Exchange, one hundred percent (100%) of
the issued and outstanding capital stock of Deer Valley Homebuilders, Inc. Upon
completion of the acquisition of the capital stock of Deer Valley Homebuilders,
Inc., Deer Valley Homebuilders, Inc. became an indirect wholly owned subsidiary
of the Company.
In order to effectuate the Capital Stock Purchase Agreement, Cytation
Corporation completed a series of transactions exempt from the registration
requirements of the Securities Act of 1933, as amended, pursuant to Section 4(2)
of the Act for transactions not involving a public offering and Rule 506
promulgated by the United States Securities and Exchange Commission under the
Securities Act of 1933, as amended. As of the date of these financials, the
Company has closed on a private placement of approximately 745,622 shares of
Series A Preferred Stock. Pursuant to the Securities Purchase and Share Exchange
Agreement, dated as of January 18, 2006, the Company (a) issued and sold to the
Purchasers, and the Purchasers purchased from the Company, (a) Series A
Preferred Stock, (b) Series A Common Stock Purchase Warrants, and (c) Series B
Common Stock Purchase Warrants. Also on January 18, 2006, the Company completed
a share exchange pursuant to which the Company acquired 100% of the issued and
outstanding capital stock of Deer Valley Acquisitions, Corp. Pursuant to the
Share Exchange Agreement, in exchange for 100% of the issued and outstanding
common stock of Deer Valley Acquisitions, Corp., the Company issued the
following securities to the shareholders of Deer Valley Acquisitions, Corp.: (a)
Series B Preferred Stock, (b) Series C Preferred Stock, and (c) Series C Common
Stock Purchase Warrants.
F-7
In connection with the Securities Purchase and Share Exchange Agreement, on
January 18, 2006, the Company issued to the Lender an Interest Bearing
Non-Convertible Installment Promissory Note ("the Note"), in the original
principal amount of One Million Five Hundred Thousand and No/100 Dollars
($1,500,000), together with interest accruing thereon at an annual rate of
twelve percent (12%) per annum. The business purpose of executing the Note was
to fund the acquisition of Deer Valley Homebuilders, Inc. On March 17, 2006 the
Lender decided to convert its $1,500,000 promissory note that was issued in
January 2006.
Pursuant to the terms of the Debt Exchange Agreement, the Company issued the
Lender its Series A Convertible Preferred Stock, Series A Warrants, and Series B
Warrants to the investor, in exchange for the retirement of its obligations to
repay such promissory note.
In January 2006, the Company issued 17,338 to Sequence Advisors
Corporation, an affiliate of two former directors.
On January 18, 2006, DeerValley Acquisitions, Corp., a wholly-owned subsidiary
of Cytation Corporation, acquired 100% of the issued and outstanding capital
stock of Deer Valley Homebuilders, Inc. The results of Deer Valley Homebuilders,
Inc. will be included in consolidated financial statements for periods after
January 18, 2006. Deer Valley Homebuilders, Inc. is an Alabama corporation with
its business offices located at 205 Carriage Street, P.O. Box 310, Guin, Alabama
35563 and is engaged in the production, sale and marketing of manufactured homes
in the southeastern and south central U.S. housing market. Cytation Corporation
purchased Deer Valley Homebuilders, Inc. to serve as its primary operating
company and to gain entry into the manufactured home market. Deer Valley
Homebuilders, Inc. comprises substantially all of Cytation Corporation's
operations.
The aggregate purchase price for Deer Valley Homebuilders, Inc. was $6,000,000,
including $5,500,000 cash and $500,000 of Cytation Corporation's Series A
Convertible Preferred Stock, Series A Common Stock Purchase Warrants, and Series
B Common Stock Purchase Warrants. In addition, an Earnout Agreement was entered
into, pursuant to which additional payments may be paid to the former owners of
Deer Valley Homebuilders, Inc., as an earnout, based upon the Net Income Before
Taxes of Deer Valley Homebuilders, Inc. during the next five (5) years, up to a
maximum of $6,000,000. The Company is accounting for the $6,000,000 earnout as
contingent consideration in accordance with paragraphs 25 through 28 of SFAS
141. Because the amount, if any, of contingent consideration was not
determinable at the acquisition date, no amount for the contingency will be
recorded in the Company's financial statements until the contingency is
resolved, or the consideration is issued or becomes issuable.
F-8
CYTATION CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The Company considered the effect of EITF 95-8 and based on its analysis the
contingent consideration of a minimum of $0 and a maximum of $6,000,000 over the
next five years is nothing more than a way for the Company to defer payments of
purchase price so the Company did not have to pay Deer Valley Homebuilders
Inc.'s shareholders all money up front. Since Deer Valley Homebuilders, Inc. had
pre-tax profit in 2005 in excess of $3,000,000 it was easy for the Company to
conclude that Deer Valley Homebuilder's business was worth in excess of
$6,000,000 or approximately two times pre-tax profits. The sellers were
interested in receiving all $12 million upfront however, the Company was
unwilling to give it to them up front due to the fact that Deer Valley
Homebuilder's Inc. had only been in business less than two years and it would be
too dilutive to the shareholders to raise all monies upfront, so the Company and
previous shareholders of Deer Valley Homebuilders, Inc. agreed to the price
adjustment target account ("PATA"). So long as Deer Valley Homebuilder's
continues to have pre-tax profits in excess of one million dollars over the next
five years the shareholder's pursuant to their interest sold will be given a
pro-rata portion of the maximum $6,000,000 PATA. Therefore, based on this
analysis the Company will account for all of the PATA, when earned, by recording
it as additional consideration for the acquisition of Deer Valley Homebuilders,
Inc. and will not record it as a period expense related to compensation. It is
also noted that the Company will account for this on an ongoing basis and book
any accrued liability in connection with the PATA as incurred.
The value of the Series A Convertible Preferred Stock, Series A Common Stock
Purchase Warrants, and Series B Common Stock Purchase Warrants were determined
in a private offering also completed on January 18, 2006.
F-9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
CAUTIONARY NOTICE REGARDING FORWARD LOOKING STATEMENTS
We desire to take advantage of the "safe harbor" provisions of the Private
Securities Litigation Reform Act of 1995. This filing contains a number of
forward-looking statements which reflect management's current views and
expectations with respect to our business, strategies, products, future results
and events, and financial performance. All statements made in this filing other
than statements of historical fact, including statements addressing operating
performance, events, or developments which management expects or anticipates
will or may occur in the future, including statements related to distributor
channels, volume growth, revenues, profitability, new products, adequacy of
funds from operations, statements expressing general optimism about future
operating results, and non-historical information, are forward looking
statements. In particular, the words "believe," "expect," "intend,"
"anticipate," "estimate," "may," variations of such words, and similar
expressions identify forward-looking statements, but are not the exclusive means
of identifying such statements, and their absence does not mean that the
statement is not forward-looking. These forward-looking statements are subject
to certain risks and uncertainties, including those discussed below. Our actual
results, performance or achievements could differ materially from historical
results as well as those expressed in, anticipated, or implied by these
forward-looking statements. We do not undertake any obligation to revise these
forward-looking statements to reflect any future events or circumstances.
Readers should not place undue reliance on these forward-looking
statements, which are based on management's current expectations and projections
about future events, are not guarantees of future performance, are subject to
risks, uncertainties and assumptions (including those described below), and
apply only as of the date of this filing. Our actual results, performance or
achievements could differ materially from the results expressed in, or implied
by, these forward-looking statements. Factors which could cause or contribute to
such differences include, but are not limited to, the risks to be discussed in
our Annual Report on form 10-KSB and in the press releases and other
communications to shareholders issued by us from time to time which attempt to
advise interested parties of the risks and factors which may affect our
business. We undertake no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information, future
events, or otherwise.
OVERVIEW
During the period commencing with the fourth quarter of 2002 and ending in
December 2004, the Company engaged in the business of providing consulting and
related services to private companies which wished to become reporting companies
under the Securities Exchange Act of 1934, but which lacked the financial
resources for an initial public offering ("IPO") and which did not wish to
become a reporting company via a reverse merger. Cytation discontinued these
operations in the first quarter of 2005 and was a shell company (as defined in
Rule 12b-2 of the Exchange Act) from the first quarter of 2005 through January
18, 2006.
At the end of 2005, Cytation had nominal operations. The Company had
revenues of $59,114 in fiscal year 2005, as compared to $240,368 in fiscal
year 2004. The Company had a net loss of $173,605 in fiscal year 2005, as
compared to a net loss of $696,689 in fiscal year 2004. The differences in the
foregoing figures are the result of Cytation's discontinuation of operations and
costs related to identification of an acquisition candidate in contemplation of
a reverse merger, which did not occur.
On January 18, 2006, the Company acquired an operating subsidiary, Deer
Valley Homebuilders, Inc. ("Deer Valley"). Deer Valley is a wholly-owned
4
subsidiary of Deer Valley Acquisitions Corp. ("DVA"), which is a wholly-owned
subsidiary of the Company. Deer Valley was formed in January, 2004. Deer
Valley manufactures and designs manufactured homes which are sold to a network
of independent dealers located primarily in the southeastern and south central
regions of the United States. Deer Valley maintains its business offices in
Guin, Alabama and operates manufacturing facilities in Guin, Alabama and in
Sulligent, Alabama.
As a result of the acquisition of Deer Valley on January 18, 2006, Cytation
had gross revenues for the first quarter of 2006 of $12,913,079 and has
significant assets. Because Cytation discontinued its prior operations in the
first quarter of 2005 and was a shell company (as defined in Rule 12b-2 of the
Exchange Act) from the first quarter of 2005 through January 18, 2006 and
because Cytation now has significant revenues from a subsidiary operating in an
entirely different industry, management does not believe that it is informative
or useful to compare the results of operations for the quarter ended April 1,
2006 to the quarter ended March 31, 2005. As a result, the remainder of this
discussion relates only to the quarter ended April 1, 2006. In conjunction with
this discussion it is imperative that investors read the footnotes to the
financial statements attached to this filing.
When evaluating the Company's financial condition and operating
performance, the most important matters on which the company's executives are
currently focused are increasing daily production at Deer Valley's manufacturing
facilities and evaluating other growth opportunities. Management is currently
evaluating additional plant sites and new product offerings to sustain the
company's rapid growth rate. The key performance indicators management examines
are (1) the Deer Valley's production rate, in "floors" produced per day, (2) the
cost of sales, (3) product gross margins, and (4) the size of the Deer Valley's
sales backlog.
Management feels that the following areas present significant opportunities
or risks for the Company:
1) Securities Compliance
Deer Valley has been operated as a private company which is not subject to
federal securities laws and, therefore, may lack the internal or financial
control infrastructure and procedures necessary for public companies to comply
with the provisions of the Securities Exchange Act and Sarbanes-Oxley
regulations. Deer Valley, DVA, and the Company are coordinating with legal
counsel and auditors to put in place proper financial controls and procedures to
insure full compliance with and disclosure under all relevant securities laws.
Of course, there can be no guarantee that there will be no significant
deficiencies or material weaknesses in the quality of Deer Valley's financial
controls. The greatest challenge Management foresees in implementing proper
controls and procedures is that the cost to Deer Valley of such compliance could
be substantial and could have a material adverse effect on our results of
operations.
2) Downturn in the Manufactured Housing Industry
In recent years, the manufactured housing industry experienced a prolonged
and significant downturn as consumer lenders began to tighten underwriting
standards and curtail credit availability in response to higher than anticipated
rates of loan defaults and significant losses upon the repossession and resale
of homes securing defaulted loans. According to the Manufactured Housing
Institute, domestic shipments of manufactured homes peaked in calendar year 1998
with the shipment of 372,843 homes, before declining to a total of 130,802
manufactured homes in calendar year 2004. The manufactured housing industry's
share of new single-family housing starts also increased to 24% in calendar year
1997 before declining to 7.5% of all new single-family housing starts in
calendar year 2004. Other causes of the downturn include a reduced number of
consumer lenders in the traditional chattel (home-only) lending sector and
higher interest rates on home-only loans. These factors have resulted in
declining wholesale shipments, excess manufacturing and retail locations, and
surplus inventory.
Despite the industry decline, which commenced in calendar year 1999, Deer
Valley has been able to successfully launch its business through an efficient
manufacturing and production facility, flexible product designs, an experienced
and capable sales team, stringent cost controls, and attention to dealer
relations, customer satisfaction and service efforts. Additionally, Deer
Valley's affiliated dealers often endeavor to distinguish Deer Valley by selling
our manufactured homes as part of a land-home package which may be financed by a
conventional mortgage. Finally, Deer Valley focuses on the multi-section sector
of the manufactured housing market, which Management feels offers the greatest
potential for growth, because multi-section homes often have an appearance
similar to more traditional site-built homes but are competitively priced when
compared to a site-built home.
3) Rising Interest Rates and Residual Effects of Hurricane Katrina
Two important factors could affect Deer Valley's sales: the residual
effects of Hurricane Katrina and rising interest rates. Interest rates have a
marked effect upon the manufactured housing market. Management feels that
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rising interest rates will drive buyers from traditional "site built" homes
toward the upper end of the manufactured housing market, where our products are
positioned. However, additional increases in interest rates could eventually
adversely affect buyers of Deer Valley products and could cause dealers to
reduce inventories because of "Floor-Plan" expenses.
Hurricane Katrina created a huge need for the rapid replacement of houses
in the Gulf Coast Region. The lure of lucrative "FEMA" contracts caused
suppliers to disrupt or delay normal shipments to their dealers. This created a
rush by dealers to establish new relationships or increase orders with Deer
Valley, which did not interrupt its service in this way. However, because FEMA
has ceased ordering manufactured homes for persons displaced by Katrina, Deer
Valley will face increased competition in our market segment as other producers
return to the commercial supply market.
4) Increased Competition from Other Producers
Recently, large producers of single section homes have focused on either
entering the multi-section home market or expanding their presence in that
market. Accordingly, Deer Valley will likely face increased competition in our
market segment.
5) "Floor Plan" Credit Available to Manufactured Home Dealers
Reduced availability of floor plan financing for manufactured home dealers
could negatively impact Deer Valley's business. A major floor plan financer for
manufactured housing was recently purchased. If this financer or its acquirer
were to discontinue floor plan financing programs for manufactured home dealers,
approximately one-third of the floor plan financing available to manufactured
home dealers would disappear. An occurrence of this type could have a material,
adverse impact upon Deer Valley's business, since dealers would have additional
difficulty in procuring funds to inventory homes based on floor plan financing.
RESULTS OF OPERATIONS
The following discussion of our financial condition and results of operations
should be read in conjunction with our financial statements, included herewith.
This discussion should not be construed to imply that the results discussed
herein will necessarily continue into the future, or that any conclusion reached
herein will necessarily be indicative of actual operating results in the future.
Such discussion represents only the best present assessment by our management.
Historical financial information presented for the quarter ended April 1, 2006
is that of the Company on a consolidated basis with Deer Valley Homebuilders,
Inc. and Deer Valley Acquisitions Corp., which reflects the Company's
acquisition of Deer Valley Homebuilders, Inc. on January 18, 2006.
HISTORICAL RESULTS - QUARTER ENDED APRIL 1, 2006
REVENUES. Overall gross revenue for the quarter ended April 1, 2006 was
$12,913,079. Deer Valley's second plant in Sulligent Alabama (the "Sulligent
Plant") began operations on or about March 1, 2006. Revenues for the quarter
ended April 1, 2006 reflect a full quarter of operations at Deer Valley's
original plant in Guin, Alabama and approximately one month of operations at the
Sulligent Plant. The full impact of the Sulligent Plant on revenues and earnings
will likely not be realized until the second quarter of 2006.
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES. General and administrative
expenses consisted of payroll and related expenses for executive, accounting,
and administrative personnel, professional fees, and other general corporate
expenses. Selling, general, and administrative expenses for the quarter ended
April 1, 2006 were $1,249,327. These general and administrative costs have
increased at our operating subsidiary, Deer Valley, primarily due to increased
production, sales, and operating expenses. At Deer Valley, the production direct
cost of goods has remained generally in the same ratio to sales, with increased
quantity discounts being offset by a rise in material cost. In addition, profit
margins for this quarter were reduced by one-time start-up costs of
approximately $250,000 associated with the opening of the Sulligent Plant.
NET INCOME (LOSS). The net income for the quarter ended April 1, 2006 was
$463,502. After accounting for the dividend payable to preferred shareholders,
the net income available for common stockholders for the quarter ended April 1,
2006 was $350,416. Increased production and sales of Deer Valley's operations
have bolstered net income.
6
LIQUIDITY AND CAPITAL RESOURCES
Management believes that the Company currently has sufficient cash flow
from operations, available bank borrowings, cash, and cash equivalents to meet
its short-term working capital requirements. As of April 1, 2006, the Company
had approximately $3,555,528 in cash and cash equivalents. Because of the
current profits generated by operations and lack of significant capital demand
under our current business plan, our cash reserves are expected to continue to
grow each month. Should our costs and expenses prove to be greater than we
currently anticipate, or should we change our current business plan in a manner
which will increase or accelerate our anticipated costs or capital demand, such
as through the acquisition of new products, our working capital could be
depleted at an accelerated rate.
The company spends its cash to fund increases in production capacity at its
operating subsidiary, Deer Valley, for special legal, accounting, and audit
services necessary to meet SEC reporting requirements, and to pay expenses. To
the extent that it becomes necessary to raise additional cash in the
future as our current cash and working capital resources are depleted, we
will seek to raise it through the public or private sale of debt or equity
securities, the procurement of advances on contracts or licenses, funding from
joint-venture or strategic partners, debt financing or short-term loans, or a
combination of the foregoing. We also may seek to satisfy indebtedness
without any cash outlay through the private issuance of debt or equity
securities.
The net cash used in operating activities as of April 1, 2006 $8,711. The
net cash used in investing activities as of April 1, 2006 was $3,022,887, which
primarily reflects the amount related to the purchase of Deer Valley, which was
$6,375,000, net of cash acquired in the purchase, as well as purchases of
equipment. The net cash provided by financing activities as of April 1, 2006 was
$6,434,071, the majority of which resulted from the issuance of preferred stock.
Deer Valley is contingently liable under the terms of repurchase agreements
with financial institutions providing inventory financing for retailers of Deer
Valley's products. These arrangements, which are customary in the industry,
provide for the repurchase of products sold to retailers in the event of default
by the retailer. The risk of loss under these agreements is spread over numerous
retailers. The price Deer Valley is obligated to pay generally declines over the
period of the agreement (typically 18 to 24 months) and the risk of loss is
further reduced by the sale value of repurchased homes. The maximum amount for
which Deer Valley is contingently liable under such agreements amounted to
$12,272,510 at April 1, 2006. As of April 1, 2006, the company had a reserve of
$60,000 for future repurchase losses, based on prior experience and an
evaluation of dealers' financial conditions. Deer Valley to date has not
experienced significant losses under these agreements, and management does not
expect any future losses to have a material effect on the accompanying financial
statements.
FINANCING
Deer Valley had a fixed-rate revolving line of credit with State Bank and
Trust of Guin, Alabama. Under this line of credit entered into on March 3,
2004, the Company could make loan draws for business purposes up to a maximum
amount of $500,528 in the aggregate. The line of credit matured on March 25,
2005 and was not renewed.
On April 12, 2006, Deer Valley entered into a Loan and Security Agreement
providing for a revolving line of credit in an amount not to exceed Two Million
Five Hundred Thousand and No/100 Dollars ($2,500,000.00) (the "Loan") evidenced
by a revolving credit note (the "Note") and secured by accounts receivable,
inventory, equipment and all other tangible and intangible personal property of
Deer Valley, DVA, and Cytation. The purpose of the Loan is to provide working
capital, to provide Letter of Credit support, to replace Deer Valley's existing
revolving line of credit with State Bank and Trust, and to provide interim
financing for the acquisition of the real property on which Deer Valley operates
a plant in Sulligent, Alabama. The Loan has a one year term and has a variable
interest rate at 2.60% above LIBOR. Upon issuance of a letter of credit, Deer
Valley is charged a letter of credit fee equal 1.00% of the face amount of the
letter of credit. The Loan provides for conditions to meet prior to each
advance, including financial ratios.
In addition to the revolving line of credit described in the preceding
paragraph, Deer Valley, during its normal course of business, is required to
issue irrevocable standby letters of credit in the favor of independent third
party beneficiaries to cover obligations under repurchase agreements.
7
As of April 1, 2006, the following letters of credit were issued and in
force:
Letter of Credit No. 98 issued through State Bank & Trust in the
amount of $400,000 to the favor of beneficiary Bombardier Capital expired
on January 27, 2006 and was replaced with letter of credit to GE Commercial
on January 27, 2006 and expiring January 27, 2007. The beneficiary was
changed from Bombardier Capital to GE, due to GE's buyout of Bombardier's
manufactured housing floor plan division. Personally guaranteed by Joel
Logan, President and General Manager of Deer Valley.
Letter of Credit No. 93 issued through State Bank & Trust in the
amount of $100,000 to the favor of beneficiary 21st Mortgage Corporation,
issued May 3, 2005 and expiring May 3, 2006, pending renewal. Personally
guaranteed by the three largest former shareholders of Deer Valley.
Letter of Credit No. 97 issued through State Bank & Trust in the
amount of $150,000 to the favor of Textron Financial Corporation, issued
August 29, 2005 and expiring August 29, 2006, pending renewal.
All of the Letters of Credit above are required under the terms of the
Repurchase Agreements described below in the section entitled "Critical
Accounting Estimates." As of April 1, 2006, no amounts had been drawn on the
above irrevocable letters of credit by the beneficiaries.
Deer Valley is also obligated under a Promissory Note payable to State Bank
& Trust of Guin, Alabama (the "B&T Note") having a principal balance of
$1,465,904. The B&T Note is payable in monthly installments of $10,000 (which
includes interest at 5.00%) and matures on November 11, 2008. The B&T Note is
secured by all assets of the Company and is personally guaranteed by two major
stockholders of the Company.
Management does not believe that current debt commitments will make it
difficult to secure additional debt or equity financing, since the company has
no significant debt other than long-term mortgages, trade payables, and the
earnout agreement referenced in "Off-Balance Sheet Arrangements" below.
CRITICAL ACCOUNTING POLICIES
Our discussion and analysis of our financial condition and results of
operations are based upon our financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States of
America. The preparation of these consolidated financial statements requires us
to make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses, and related disclosures of contingent assets
and liabilities. For a description of those estimates, see Note 5, Critical
Accounting Policies and Estimates, contained in the explanatory notes to the
Company's financial statements for the quarter ended April 1, 2006, contained in
this filing. On an ongoing basis, we evaluate our estimates, including those
related to reserves, deferred tax assets and valuation allowance, impairment of
long-lived assets, fair value of equity instruments issued to consultants for
services, and estimates of costs to complete contracts. We base our estimates on
historical experience and on various other assumptions which we believe to be
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying value of assets and liabilities which are
not readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions. However, we believe that
our estimates, including those for the above-described items, are reasonable.
CRITICAL ACCOUNTING ESTIMATES
Management is aware that certain changes in accounting estimates employed
in generating financial statements can have the effect of making the Company
look more or less profitable than it actually is. Management does not believe
that either the Company or its auditors have made any such changes in accounting
estimates. A summary of the most critical accounting estimates employed by the
Company in generating financial statements follows below.
WARRANTIES
We provide our retail buyers with a one-year limited warranty covering
defects in material or workmanship, including plumbing and electrical systems.
We record a liability for estimated future warranty costs relating to homes
sold, based upon our assessment of historical experience and industry trends.
In making this estimate, we evaluate historical sales amounts, warranty costs
related to homes sold and timing in which any work orders are completed. We had
a reserve for estimated warranties of $592,500 as of April 2, 2006. Although we
maintain reserves for such claims, there can be no assurance that warranty
expense levels will remain at current levels or that the reserves that we have
8
set aside will continue to be adequate. A large number of warranty claims which
exceed our current warranty expense levels could have a material adverse affect
upon our results of operations.
VOLUME INCENTIVES PAYABLE
We have relied upon volume incentive payments to our independent dealers
who retail our products. These volume incentive payments are accounted for as a
reduction to gross sales, and are estimated and accrued when sales of our
manufactured homes are made to our independent dealers. Volume incentive
reserves are recorded based upon the annualized purchases of our independent
dealers who purchase a qualifying amount of home products from us. We accrue a
liability to our dealers, based upon estimates derived from historical payout
rates. We had a reserve for volume incentives payable of $137,779 as of April
2, 2006.
RESERVE FOR REPURCHASE COMMITMENTS
Most of our independent dealers finance their purchases under a wholesale
floor plan financing arrangement under which a financial institution provides
the dealer with a loan for the purchase price of the home and maintains a
security interest in the home as collateral. When entering into a floor plan
arrangement, the financial institution routinely requires that we enter into a
separate repurchase agreement with the lender, under which we are obligated,
upon default by the independent dealer, to repurchase the manufactured home at
our original invoice price less the cost of administrative and shipping
expenses. Our potential loss under a repurchase obligation depends upon the
estimated net resale value of the home, as compared to the repurchase price that
we are obligated to pay. This amount generally declines on a predetermined
schedule over a period that usually does not exceed 24 months.
The risk of loss that we face under these repurchase agreements is lessened
by several factors, including the following:
(i) the sales of our products are spread over a number of independent
dealers,
(ii) we have had only isolated instances where we have incurred a
repurchase obligation,
(iii) the price we are obligated to pay under such repurchase
agreements declines based upon a predetermined amount over a period
which usually does not exceed 24 months, and
(iv) we have been able to resell homes repurchased from lenders at
current market prices, although there is no guarantee that we will
continue to be able to do so.
The maximum amount for which the Company is contingently liable under such
agreements amounted to approximately $12,272,510 at April 1, 2006. As of April
1, 2006, we had a reserve of $60,000 established for future repurchase
commitments, based upon our prior experience and evaluation of our independent
dealers' financial conditions. This represents an increase from the reserve
amount of $35,000, due to a substantial increase in Deer Valley's sales compared
to the first quarter of 2005. Because Deer Valley to date has not experienced
any significant losses under these agreements, management does not expect any
future losses to have a material effect on our accompanying financial
statements.
REVENUE RECOGNITION
Revenue for Deer Valley's products sold to independent dealers is generally
recorded when all of the following conditions have been met: (i) an order for
the home has been received from the dealer, (ii) an agreement with respect to
payment terms has been received, and (iii) the home has been shipped and risk of
loss has passed to the dealer.
RECENT ACCOUNTING PRONOUNCEMENTS
In December 2004, the FASB issued SFAS No.153, "Exchanges of Nonmonetary
Assets, an amendment of APB Opinion No. 29, Accounting for Nonmonetary
Transactions." The amendments made by Statement 153 are based on the principle
that exchanges of nonmonetary assets should be measured based on the fair value
of the assets exchanged. Further, the amendments eliminate the narrow exception
for nonmonetary exchanges of similar productive assets and replace it with a
broader exception for exchanges of nonmonetary assets that do not have
commercial substance. Previously, Opinion 29 required that the accounting for an
exchange of a productive asset for a similar productive asset or an equivalent
interest in the same or similar productive asset should be based on the recorded
amount of the asset relinquished. Opinion 29 provided an exception to its basic
9
measurement principle (fair value) for exchanges of similar productive assets.
The FASB believes that exception required that some nonmonetary exchanges,
although commercially substantive, be recorded on a carryover basis. By focusing
the exception on exchanges which lack commercial substance, the FASB believes
this statement produces financial reporting which more faithfully represents the
economics of the transactions. SFAS 153 is effective for nonmonetary asset
exchanges occurring in fiscal periods beginning after June 15, 2005. Earlier
application is permitted for nonmonetary asset exchanges occurring in fiscal
periods beginning after the date of issuance. The provisions of SFAS 153 shall
be applied prospectively. The Company has evaluated the impact of the adoption
of SFAS 153, and does not believe the impact will be significant to the
company's overall results of operations or financial position.
In December 2004, the FASB issued SFAS No.123 (revised 2004), "Share-Based
Payment". SFAS 123(R) will provide investors and other users of financial
statements with more complete and neutral financial information by requiring
that the compensation cost relating to share-based payment transactions be
recognized in financial statements. That cost will be measured based on the fair
value of the equity or liability instruments issued. SFAS 123(R) covers a wide
range of share-based compensation arrangements including share options,
restricted share plans, performance-based awards, share appreciation rights, and
employee share purchase plans. SFAS 123(R) replaces FASB Statement No. 123,
"Accounting for Stock-Based Compensation", and supersedes APB Opinion No. 25,
"Accounting for Stock Issued to Employees." SFAS 123, as originally issued in
1995, established as preferable a fair-value-based method of accounting for
share-based payment transactions with employees. However, that statement
permitted entities the option of continuing to apply the guidance in Opinion 25,
as long as the footnotes to financial statements disclosed what net income would
have been had the preferable fair-value-based method been used. Public entities
(other than those filing as small business issuers) will be required to apply
SFAS 123(R) as of the first interim or annual reporting period which begins
after June 15, 2005. For public entities filing as small business issuers, SFAS
123(R) is applicable as of the beginning of the first interim or annual
reporting period beginning after December 15, 2005.
As of April 1, 2006, the Company had not yet created a stock incentive plan
which authorizes the issuance of options to purchase common stock. Effective
January 1, 2006, the Company adopted the fair value recognition provisions of
SFAS No. 123(R), using the modified-prospective-transition method. Under that
transition method, compensation cost for all share-based payments granted prior
to, but not yet vested as of January 1, 2006, are based on the grant date fair
value estimated in accordance with the original provisions of SFAS No. 123 and
on the compensation cost for all share-based payments granted subsequent to
January 1, 2006, based on the grant-date fair value estimated in accordance with
the provisions of SFAS No.123(R). Results for prior periods have not been
restated. Adopting SFAS No.123(R) on January 1, 2006 did not have any effect on
the Company's net income and earning per share for the quarter ended April 1,
2006 since no options were granted.
In December 2004, the Financial Accounting Standards Board issued two FASB
Staff Positions-FSP FAS 109-1, Application of FASB Statement 109 "Accounting for
Income Taxes" to the Tax Deduction on Qualified Production Activities Provided
by the American Jobs Creation Act of 2004, and FSP FAS 109-2 Accounting and
Disclosure Guidance for the Foreign Earnings Repatriation Provision within the
American Jobs Creation Act of 2004. Neither of these affected the Company as it
does not participate in the related activities.
PROPERTY
The Company's executive and operating offices are located at 4902
Eisenhower Blvd., Suite 185, Tampa, FL 33634. The telephone number at the
Company's executive offices is (813) 885-5998. Deer Valley's principal
manufacturing plant and offices are located at 205 Carriage Street, Guin,
Alabama 35563, and its telephone number is (205) 468-8400. Deer Valley's
principal manufacturing plant and company offices consists of a manufacturing
plant with 107,511 square feet, a frame shop with 10,800 square feet, material
shed of 23,172 square feet and offices with 11,250 square feet of space. Deer
Valley owns the buildings and 25.5 acres underlying these facilities.
Due to increased sales, Management believed that the Company needed to
obtain a small satellite production facility near to its facility in Guin,
Alabama, in 2006. On January 25 2006, the Company approved Deer Valley
Homebuilders, Inc. entering into a Sales Contract with Steve J. Logan to
purchase real property located at 7668 Highway 278 in Sulligent, Alabama (the
"Sulligent Property").
SUBSEQUENT EVENT
On April 18, 2006, Deer Valley purchased the Sulligent Property from Steve
J. Logan. The Sulligent Property consists of a 65,992 square foot manufacturing
plant located on approximately 13 acres of land. The purchase price for the
Sulligent Property was $725,000, subdivided as follows. Deer Valley assumed Mr.
Logan's mortgage of approximately $610,000 and will pay the remaining $115,000
10
to Mr. Logan in equal monthly payments of $5,000 for twenty-three months. Deer
Valley obtained the funds for the purchase price of the Sulligent Property from
its revolving line of credit described above under the heading "Financing."
Prior to acquiring the Sulligent Property, Deer Valley's plant on the Sulligent
Property operated, beginning on February 20, 2006, under a short-term lease.
Deer Valley does not invest in real estate or real estate mortgages except
for those necessary to support the company's normal business purposes.
WEBSITE
Deer Valley maintains a website at www.deervalleyhb.com. The information
contained on Deer Valley's website is not a part of this filing, nor is it
incorporated by reference into this filing.
OFF-BALANCE SHEET ARRANGEMENTS
In connection with the purchase of Deer Valley Homebuilders on January 18,
2006, the Company entered into the Earnout Agreement, pursuant to which,
additional payments may be paid to the former owners of Deer Valley
Homebuilders, Inc., as an earnout, based upon the Net Income Before Taxes of
Deer Valley Homebuilders, Inc. during the next five (5) years up to a maximum of
$6,000,000. The business purpose of executing the Earnout Agreement was to set
the purchase price of Deer Valley Homebuilders, Inc. by an objective standard,
given that the owners of DVH and the Company could not agree on an outright
purchase price
During the term of the Earnout Agreement, 50% of the pre-tax profit
exceeding $1,000,000 per year will be accrued and become distributable to the
former owners of Deer Valley. For the fourth quarter of 2005, such pre-tax
profit target was reduced to a quarterly figure of $250,000. During the quarter
ended April 1, 2006 Deer Valley has not achieved $1,000,000 in pre-tax profit,
so the Company has not accrued any earnout attributable to the quarter ending
April 1, 2006. Deer Valley had pre-tax profit in the fourth quarter of 2005 in
the amount of $1,242,814, of which $992,814 was above the quarterly earnout
threshold of $250,000. Accordingly, the Company accrued 50% of the amount in
excess of earnout threshold in the amount of $496,407. The maximum remaining
potential accrual under the Earnout Agreement is $5,503,593.
ITEM 3. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
The Company's Chief Executive Officer and acting Chief Financial Officer
has evaluated the effectiveness of the Company's disclosure controls and
procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act)
as of the fiscal period ending April 1, 2006 covered by this Report on Form
10-QSB. Based upon such evaluation, the Chief Executive Officer and Acting Chief
Financial Officer has concluded that, as of the end of such period, the
Company's disclosure controls and procedures were not effective as required
under Rules 13a-15(e) and 15d-15(e) under the Exchange Act. This conclusion by
the Company's Chief Executive Officer and acting Chief Financial Officer does
not relate to reporting periods after April 1, 2006 or to the controls and
procedures in place at the company's subsidiaries.
Several individuals have been nominated for election to the Board of
Directors of the Company. After the next election, it is anticipated that the
new Board of Directors will establish various committees, including an audit
committee. In addition, the Company's Chief Executive and Acting Chief
Financial Officer is devoting considerable effort to continue to develop and
implement a system of disclosure controls and procedures to ensure that
information required to be disclosed in our reports filed under the Securities
Exchange Act of 1934 is accumulated and communicated to management and its
officers, as appropriate, to allow timely decisions regarding required
disclosure.
CHANGES IN INTERNAL CONTROLS OVER FINANCIAL REPORTING
Beginning with the year ending December 31, 2007, Section 404 of the
Sarbanes-Oxley Act of 2002 will require us to include management's report on our
internal control over financial reporting in our Annual Report on Form 10-K.
The internal control report must contain (1) a statement of management's
responsibility for establishing and maintaining adequate internal control over
our financial reporting, (2) a statement identifying the framework used by
management to conduct the required evaluation of the effectiveness of our
internal control over financial reporting, (3) management's assessment of the
effectiveness of our internal control over financial reporting as of the end of
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our most recent fiscal year, including a statement as to whether or not our
internal control over financial reporting is effective, and (4) a statement that
our registered independent public accounting firm has issued an attestation
report on management's assessment of our internal control over financial
reporting.
In order to achieve compliance with Section 404 within the prescribed
period, management is planning to commence a Section 404 compliance project to
assess the adequacy of our internal control over financial reporting, remediate
any control deficiencies that may be identified, validate through testing that
controls are functioning as documented, and implement a continuous reporting and
improvement process for internal control over financial reporting. Except as
described above, during the first quarter of fiscal year 2006, there have been
no changes in our internal control over financial reporting that have materially
affected, or are reasonably likely to materially affect, our internal control
over financial reporting.
INHERENT LIMITATIONS OF THE EFFECTIVENESS OF INTERNAL CONTROL
A control system, no matter how well conceived and operated, can provide
only reasonable, not absolute, assurance that the objectives of the internal
control system are met. Because of the inherent limitations of any internal
control system, no evaluation of controls can provide absolute assurance that
all control issues, if any, within a company have been detected.
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Although the Company in the normal course of business is subject to claims
and litigation, the Company is not a party to any material legal proceeding nor
is the Company aware of any circumstance which may reasonably lead a third party
to initiate legal proceeding against the Company.
As of the date of this filing, there are no material pending legal or
governmental proceedings relating to our Company or properties to which we are a
party, and to our knowledge there are no material proceedings to which any of
our directors, executive officers, or affiliates are a party adverse to us or
which have a material interest adverse to us.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Unregistered Sales of Equity Securities
Other than the sales reported on Form 8-K, there were no unregistered sales
of equity securities.
Issuer Purchases of Equity Securities
The Company did not repurchase any equity securities during the fiscal
quarter ended April 1, 2006.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
As of January 1, 2006, the Company has elected to change its fiscal year
ending period from a calendar year ending December 31, with quarters ending
March 31, June 30, and September 30, to a 52-53 week year ending on the Saturday
closest to December 31. Under either system the end of the most recent fiscal
year was December 31, 2005, and the commencement of the first quarter of 2006
was January 1. Accordingly, there were no days which fell under one system but
which were excluded from a period under the other system. Under the 52-53 week
year end, the quarter beginning January 1, 2006 ended April 1, 2006.
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ITEM 6. EXHIBITS
EXHIBIT NO. DESCRIPTION
3.01 Certificate of Incorporation of Cytation Corporation. (1)
3.02 Bylaws of Cytation Corporation. (1)
4.01 Certificate of Designation, Rights, and Preferences of Series A
Convertible Preferred Stock. (2)
4.02 Certificate of Designation, Rights, and Preferences of Series B
Convertible Preferred Stock. (2)
4.03 Certificate of Designation, Rights, and Preferences of Series C
Convertible Preferred Stock. (2)
4.04 Certificate of Designation, Rights, and Preferences of Series D
Convertible Preferred Stock. (1)
10.01 Securities Purchase and Share Exchange Agreement dated January 18, 2006,
by and among the Company, Richard A. Fisher, Kevin J. High, certain
purchasers of the Company's Series A Convertible Preferred Stock,
DeerValley Acquisitions Corp., and certain other persons a party thereto.
(2)
10.02 Investor Rights Agreement, by and among the Company, each of the
purchasers of the Company's Series A Convertible Preferred Stock,
and certain other persons a party thereto. (2)
10.03 Earnout Agreement. (2)
10.04 Form of Series A Common Stock Purchase Warrant. (2)
10.05 Form of Series B Common Stock Purchase Warrant. (2)
10.06 Form of Series C Common Stock Purchase Warrant. (1)
10.07 Form of Series D Common Stock Purchase Warrant. (1)
10.08 Form of Series E Common Stock Purchase Warrant. (1)
10.09 Form of Series BD-1 Common Stock Purchase Warrant. (1)
10.10 Form of Series BD-2 Common Stock Purchase Warrant. (1)
10.11 Form of Series BD-3 Common Stock Purchase Warrant. (1)
10.12 Form of Series BD-4 Common Stock Purchase Warrant. (1)
10.13 Form of Series BD-5 Common Stock Purchase Warrant. (1)
10.14 Interest Bearing Non-Convertible Installment Promissory Note. (2)
10.15 Placement Agent Agreement between Cytation Corporation and Midtown
Partners, LLC. (2)
10.16 Debt Exchange Agreement between Vicis Capital Master Fund and Cytation
Corporation. (1)
10.17 Revolving Credit and Security Agreement. (3)
10.18 Revolving Credit Note. (3)
10.19 Continuing Guaranty of Cytation Corporation. (3)
10.20 Continuing Guaranty of Deer Valley Acquisitions Corp. (3)
10.21 Sales Contract for Sulligent Property. (4)
21.01 List of Subsidiaries of the Company. (5)
31.01 Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and
15d-14(a) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002, dated March 3, 2006. (6)
31.02 Certification of Acting Chief Financial Officer pursuant to Rule 13a-14(a)
and 15d-14(a) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002, dated March 3, 2006. (6)
32.01 Certification of Chief Executive Officer pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002, dated March 3, 2006. (6)
32.02 Certification of Acting Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002, dated March 3, 2006. (6)
(1) Previously filed as an exhibit to the Registration Statement on
Form SB-2 filed with the SEC on April 19, 2006 and incorporated herein
by reference.
(2) Previously filed as an exhibit to the Form 8-K filed with the SEC
on January 25, 2006 and incorporated herein by reference.
(3) Previously filed as an exhibit to the Form 8-K filed with the SEC
on April 18, 2006 and incorporated herein by reference.
(4) Previously filed as an exhibit to the Form 8-K filed with the SEC
on April 24, 2006 and incorporated herein by reference.
(5) Previously filed as an exhibit to the Form 10-KSB filed with the
SEC on March 30, 2006 and incorporated herein by reference.
(6) Filed herewith.
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SIGNATURE
---------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Cytation Corporation
---------------------
(Registrant)
Dated: May 22, 2006 By: /s/ Charles G. Masters
-------------------------
Charles G. Masters
President & Chief Executive Officer
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