SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_____________________
FORM SB-2/A
Amendment No. 2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
_____________________
CYTATION CORPORATION
(Name of Registrant in its charter)
_____________________
DELAWARE 2451 16-0961436
(State or other (Primary Standard (I.R.S. Employer
jurisdiction of Industrial Code Identification Number)
incorporation or Number)
organization)
4902 EISENHOWER BLVD., SUITE 185 4902 EISENHOWER BLVD., SUITE 185
TAMPA, FLORIDA 33634 TAMPA, FLORIDA 33634
(813) 885-5998 - FAX (727) 381-3904 (813) 885-5998 - FAX (727) 381-3904
(Address and telephone number of (Address of principal
principal executive offices) place of business)
CHARLES G. MASTERS
CYTATION CORPORATION
4902 EISENHOWER BLVD., SUITE 185
TAMPA, FLORIDA 33634
(813) 885-5998 - FAX (727) 381-3904
(Name, address and telephone number of agent for service)
Copies to:
BRENT A. JONES, ESQ.
BUSH ROSS, P.A.
220 S. FRANKLIN STREET
TAMPA, FLORIDA 33602
(813) 224-9255 - FAX (813) 223-9620
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
From time to time after the effective date of this registration statement.
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434, check
the following box. [ ]
CALCULATION OF REGISTRATION FEE
TITLE OF EACH CLASS OF AMOUNT TO PROPOSED PROPOSED AMOUNT OF
SECURITIES TO BE REGISTERED BE REGISTERED MAXIMUM MAXIMUM REGISTRATION
OFFERING PRICE AGGREGATE FEE
PER SECURITY OFFERING PRICE
(1)
Common Stock, $0.001 par value (2) 9,941,627(7) $ 2.83 $ 28,085,096.28 $ 3,005.11
Common Stock, $0.001 par value (3) 4,945,100(7) $ 2.83 $ 13,969,907.50 $ 1,494.78
Common Stock, $0.001 par value (4) 2,675,000 (7) $ 2.83 $ 7,556,875.00 $ 808.59
Common Stock, $0.001 par value (5) 880,544(7) $ 2.83 $ 2,487,536.80 $ 266.17
Common Stock, $0.001 par value (6) 22,213,157(7) $ 2.83 $ 62,752,168.53 $ 6,714.48
Common Stock, $0.001 par value (8) 776,343(7) $ 2.83 $ 2,193,168.98 $ 234.67
Common Stock, $0.001 par value (9) 2,087,742(7) $ 2.83 $ 5,897,871.15 $ 631.07
Common Stock, $0.001 par value(10) 37,338(7) $ 2.83 $ 105,479.85 $ 11.29
Total Registration Fee $ 13,166.15
(1) Pursuant to Rule 457(c) of the Securities Act of 1933, as amended, the
offering price is based on the average of the closing bid and ask price of
one share of Common Stock, as reported on the OTC Bulletin Board on April
13, 2006, and has been established solely for the purpose of calculating
the registration fee. The amount of Common Stock registered shall also be
deemed, pursuant to Rule 416 under the Securities Act of 1933, as amended,
to include additional shares issuable as a result of stock splits, stock
dividends or similar transactions.
(2) Represents common stock reserved for issuance by the registrant with
respect to the prospective conversion of 745,622 shares of Series A
Convertible Preferred Stock issued as of June 6, 2006 at the election of
the holder of the Series A Preferred Stock.
(3) Represents common stock reserved for issuance by the registrant with
respect to the prospective conversion of 49,451 shares of Series B
Convertible Preferred Stock issued as of June 6, 2006 upon the increase
in authorized common stock at the proposed shareholders meeting.
(4) Represents common stock reserved for issuance by the registrant with
respect to the prospective conversion of 26,750 shares of Series C
Convertible Preferred Stock issued as of June 6, 2006, at the election of
the holders of the Series C Preferred Stock.
(5) Represents common stock reserved for issuance by the registrant with
respect to the prospective conversion of 132,081 shares of Series D
Convertible Preferred Stock issued as of June 6, 2006, upon the increase
in authorized common stock at the proposed shareholders meeting.
(6) Amount represents, in the aggregate, 9,941,641 warrant shares
underlying Series A Warrants; 4,970,827 warrant shares underlying Series B
Warrants; 2,000,000 warrant shares underlying Series C Warrants; 2,000,000
warrant shares underlying Series D Warrants; 880,544 warrant shares
underlying Series E Warrants; 919,162 warrant shares underlying Series BD-1
Warrants; 919,162 warrant shares underlying Series BD-2 Warrants; 459,581
warrant shares underlying Series BD-3 Warrants; 61,120 warrant shares
underlying Series BD-4 Warrants; and 61,120 warrant shares underlying
Series BD-5 Warrants.
(7) Pursuant to SEC Rule 416(a), also covers additional common shares that
may be offered to prevent dilution as a result of stock splits, stock
dividends or similar transactions relating to these shares.
(8) Represents a pool of common stock reserved for issuance by the
registrant with respect to the prospective issuance of common stock as a
dividend payable in kind in satisfaction of dividends that may accrue
during the next twelve (24) months after January 18, 2006 on Series A
Convertible Preferred Stock. The number of shares set aside for the pool
was estimated based upon a the market price set at the average of the
closing price of Cytation Corporation common stock quoted on the OTC
Bulletin Board over the last five months of 2005.
(9) Represents common stock reserved for issuance by the registrant with
respect to the prospective issuance of common stock purchase warrants
incurred as a penalty by the Company for its failure to file and have
declared effective the SB-2 Registration Statement within the specified
time requirements set forth in the Securities Purchase Agreement. This
amount reflects the maximum amount of common stock purchase warrants that
may be incurred as a penalty.
(10) Represents issued and outstanding common stock held by selling shareholders
Sequence Advisors Corp. and Allison Investment Corp.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE, UPON REQUEST OF THE REGISTRANT.
PRELIMINARY PROSPECTUS (SUBJECT TO COMPLETION), DATED JULY 26, 2006
---------------------------
43,556,851 SHARES
Cytation Corporation
COMMON STOCK
---------------------------
This prospectus relates to the issuance of common stock upon conversion of
outstanding convertible preferred stock, the issuance of common stock upon
exercise of outstanding common stock purchase warrants, and the offer and sale
by some of our shareholders during the period in which the registration
statement containing this prospectus is effective of up to 43,556,851 shares of
common stock, consisting of:
- 9,941,627 shares of common stock reserved for issuance by the
registrant with respect to the prospective conversion of 745,622 shares of
Series A Convertible Preferred Stock issued as of June 6, 2006 at the
election of the holder of the Series A Preferred Stock;
- 4,945,100 shares of common stock reserved for issuance by the
registrant with respect to the prospective conversion of 49,451 shares of
Series B Convertible Preferred Stock issued as of June 6, 2006 upon the
increase in authorized common stock at the proposed shareholders meeting;
- 2,675,000 shares of common stock reserved for issuance by the
registrant with respect to the prospective conversion of 26,750 shares of
Series C Convertible Preferred Stock issued as of June 6, 2006, at the
election of the holders of the Series C Preferred Stock;
- 880,544 shares of common stock reserved for issuance by the registrant
with respect to the prospective conversion of 132,081 shares of Series D
Convertible Preferred Stock issued as of June 6, 2006, upon the increase
in authorized common stock at the proposed shareholders meeting;
- 22,213,157 shares of common stock issuable upon the exercise of
9,941,641 warrant shares underlying Series A Warrants; 4,970,827 warrant
shares underlying Series B Warrants; 2,000,000 warrant shares underlying
Series C Warrants; 2,000,000 warrant shares underlying Series D Warrants;
880,544 warrant shares underlying Series E Warrants; 919,162 warrant shares
underlying Series BD-1 Warrants; 919,162 warrant shares underlying Series
BD-2 Warrants; 459,581 warrant shares underlying Series BD-3 Warrants;
61,120 warrant shares underlying Series BD-4 Warrants; and 61,120 warrant
shares underlying Series BD-5 Warrants;
- 776,343 common shares part of a pool of common stock reserved for
issuance by the registrant with respect to the prospective issuance of
common stock as a dividend payable in kind in satisfaction of dividends
that may accrue during the next twenty-four (24) months after January 18,
2006 on the issued and outstanding Series A Convertible Preferred Stock.
The number of shares set aside for the pool was estimated based upon a the
market price set at the average of the closing price of Cytation
Corporation common stock quoted on the OTC Bulletin Board over the last
five months of 2005;
- 2,087,742 common shares reserved for issuance by the registrant with
respect to the prospective issuance of common stock purchase warrants
incurred as a penalty by the Company for its failure to file and have
declared effective the SB-2 Registration Statement within the specified
time requirements set forth in the Securities Purchase Agreement. This
amount reflects the maximum amount of common stock purchase warrants that
may be incurred as a penalty.
- 37,338 issued and outstanding common stock held by selling shareholders
Sequence Advisors Corp. and Allison Investment Corp.
This offering is not being underwritten. The common shares offered under this
prospectus may be sold by the selling shareholders on the public market, in
negotiated transactions with a broker-dealer or market maker as principal or
agent, or in privately negotiated transactions not involving a broker or dealer.
We will not receive any of the proceeds from the sale of these shares by the
selling stockholders. However, we will receive proceeds from the exercise of the
warrants if they are exercised by the selling stockholders. See "Use of
Proceeds." Our common shares are currently quoted on the OTC Bulletin Board
(OTCBB) under the symbol "CYON." The OTCBB is a regulated provider of pricing
and financial information for the over-the-counter (OTC) securities market.
Please read this prospectus carefully. It describes our company, finances,
products and services. Federal and state securities laws require that we
include in this prospectus all the important information that you will need to
make an investment decision.
______
AN INVESTMENT IN THE COMMON SHARES OFFERED FOR SALE UNDER THIS PROSPECTUS
INVOLVES A HIGH DEGREE OF RISK. YOU SHOULD PURCHASE OUR SECURITIES ONLY IF YOU
CAN AFFORD LOSING YOUR ENTIRE INVESTMENT.
SEE "RISK FACTORS" BEGINNING ON PAGE 10 OF THIS PROSPECTUS.
______
NEITHER THE UNITED STATES SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE
SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THE COMMON SHARES OFFERED
FOR SALE UNDER THIS PROSPECTUS OR THE
MERITS OF THAT OFFERING, OR HAS DETERMINED THAT THIS PROSPECTUS IS TRUTHFUL OR
COMPLETE.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
______
The date of this Prospectus is July 26, 2006
TABLE OF CONTENTS
PAGE
----------
Prospectus Summary 6
Risk Factors 10
Use of Proceeds 18
Determination of Offering Price 18
Dilution 18
Selling Security Holders 18
Plan of Distribution 30
Legal Proceedings 35
Directors, Executive Officers, Promoters and Control Persons 35
Certain Relationships and Related Transactions 39
Corporate Governance 40
Executive Compensation 43
Security Ownership of Certain Beneficial Owners and Management 46
Description of Securities 53
Market for Common Equity and Related Stockholder Matters 60
Interest of Named Experts and Counsel 61
Disclosure of Commission Position on Indemnification for
Securities Act Liabilities 62
Organization Within Last Five Years 62
Description of Business 62
Management's Discussion and Analysis or Plan of Operation 72
Description of Property 83
Financial Statements 84 - 141
PART II. INFORMATION NOT REQUIRED IN THE PROSPECTUS
Indemnification of Directors and Officers 142
Other Expenses of Issuance and Distribution 142
Recent Sales of Unregistered Securities 143
Exhibits 146
Undertakings 147
Signatures 148
4902 EISENHOWER BLVD., SUITE 185, TAMPA, FLORIDA 33634
(813) 885-5998 - FAX (727) 381-3904
We have not authorized anyone to provide you with information different
from that contained in this prospectus. The selling stockholders are offering to
sell, and seeking offers to buy, shares of our common stock only in
jurisdictions where offers and sales are permitted. The information contained in
this prospectus is accurate only as of the date of this prospectus, regardless
of the time of delivery of this prospectus or of any sale of common stock.
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE
HAVE FILED A REGISTRATION STATEMENT CONTAINING THIS PROSPECTUS WITH THE
SECURITIES AND EXCHANGE COMMISSION. THE COMMON STOCK OFFERED FOR SALE UNDER
THIS PROSPECTUS MAY NOT BE OFFERED FOR SALE OR SOLD UNTIL THAT REGISTRATION
STATEMENT IS DECLARED EFFECTIVE BY THE SECURITIES AND EXCHANGE COMMISSION. THIS
PROSPECTUS IS NOT AN OFFER TO SELL THE COMMON SHARES-AND DOES NOT SOLICIT AN
OFFER TO PURCHASE THE COMMON SHARES-IN ANY JURISDICTION WHERE THIS OFFER OR SALE
IS NOT OTHERWISE PERMITTED.
PROSPECTUS SUMMARY
This summary highlights important information about our company and
business. Because it is a summary, it may not contain all of the information
that is important to you. To understand this offering fully, you should read
this entire prospectus and the financial statements and related notes included
in this prospectus carefully, and, in particular, that section of this
prospectus captioned "Risk Factors." Unless the context requires otherwise,
"company," "registrant," "we," "us," and "our" and similar terms refer to
Cytation Corporation, "DVA" refers to Deer Valley Acquisitions Corp., and "Deer
Valley" refers to Deer Valley Homebuilders, Inc.
PRIVATE PLACEMENT
This prospectus is part of a registration statement registering for resale
the shares issued or issuable under the transactions described below.
Recently, 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 April 12, 2006,
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.
6
As of April 17, 2006, the Company has closed on a private placement of
approximately 132,081 shares of Series D Preferred Stock. In connection with
this issuance, the Company has also issued Series E Common Stock Purchase
Warrants to the purchasers of the Series D Preferred Stock.
Midtown Partners & Co., LLC ("Midtown Partners"), an SEC and NASD
registered broker dealer, acted as the placement agent for the Company in
connection with the Series A Preferred Stock Offering and the Series D Preferred
Stock Offering. In connection with the Series A Preferred Stock Offering, the
Company paid Midtown Partners a cash commission and issued to Midtown Partners
(a) Series BD-1 Common Stock Purchase Warrants, (b) Series BD-2 Common Stock
Purchase Warrants, and (c) Series BD-3 Common Stock Purchase Warrants. In
connection with the Series D Preferred Stock Offering, the Company paid Midtown
Partners a cash commission and issued to Midtown Partners (a) Series BD-4 Common
Stock Purchase Warrants and (b) Series BD-5 Common Stock Purchase Warrants.
THE COMPANY AND BUSINESS
Cytation Corporation was incorporated under the laws of Delaware on
November 1, 1999. Until June 20, 2001, the Company provided an extensive range
of in-school and online services directed at high school students and their
parents, high school counselors, college admissions officers and corporations
which target with the teen marketplace. On June 20, 2001, the Company sold all
of its assets associated with these activities to TMP Worldwide Inc. for
approximately $7.2 million in cash and debt assumed.
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 that wish to become reporting companies
under the Securities Exchange Act of 1934. In the first quarter of 2005, the
Company discontinued all business operations except finding an appropriate
private entity with which it could engage in a reverse merger or similar
transaction. On January 18, 2006, the Company entered into the Securities
Purchase and Share Exchange Agreement, which resulted in the Company's
acquisition of Deer Valley.
Deer Valley was launched in January, 2004, and is a manufacturer of
factory-built homes in the southeastern and south central housing markets in the
United States. As of the date of this prospectus, we manufacture all of our
factory built homes from a single manufacturing facility located in Guin,
Alabama. We rely upon a team of regional sales directors and approximately 110
independent dealers to market our manufactured homes in over 80 retail
locations. As of the date of this prospectus, we are selling our manufactured
homes in 14 states through our network of independent dealers and retail
centers.
Deer Valley is an Alabama corporation with its business offices located at
205 Carriage Street, P.O. Box 310, Guin, Alabama 33563 and is engaged in the
production, sale and marketing of manufactured homes, primarily multi-section
homes, in the southeastern and south central U.S. housing market. Throughout
this prospectus, the terms "multi-section" and "multi-floor" are used
interchangeably. Both terms refer to a house which is constructed by attaching
two or more factory produced "floors" or "sections" together to form a complete
structure. Each home that we manufacture is built and constructed in accordance
with the federal Manufactured Home Construction and Safety Standards promulgated
by the U.S. Department of Housing and Urban Development, better known as the
"HUD Code."
In recent years, the manufactured housing industry suffered a downturn in
sales as a result of a tightening of credit standards, restricted availability
of retail and wholesale financing, and excessive inventory levels. Despite this
industry decline that commenced in calendar year 1999, we have been able to
successfully launch our 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. Our manufactured homes are often sold as part
of a land-home package and may be financed by a conventional mortgage.
Multi-section homes often have an appearance that is similar to more traditional
site-built homes that are built according to local building codes but are
competitively priced when compared to a site-built home.
7
As of June 6, 2006, we had issued and outstanding 1,000,000 shares of
common stock, 745,622 shares of Series A Convertible Preferred Stock, 49,451
shares of Series B Convertible Preferred Stock, 26,750 shares of Series C
Convertible Preferred Stock, 132,081 shares of Series D Convertible Preferred
Stock, and common share purchase options and warrants entitling the holders to
purchase up to 22,213,157 common shares.
The Company has filed a Preliminary Information Statement on Schedule 14C
(the "Information Statement") with the United States Securities and Exchange
Commission (the "SEC"). In the Information Statement, the Company discloses
that shareholders holding in excess of fifty percent (50%) of all shares
entitled to vote have indicated that they will vote FOR the following proposals
at a special meeting of the shareholders which the Company intends to hold on or
about July 24, 2006:
FOR the election of each of Hans Beyer, John Giordano, and Dale
Phillips to serve as directors of Cytation Corporation until the next
annual meeting of shareholders in the years in which their terms expire and
until their successors are duly elected and qualified, or until their
earlier resignation, removal from office, or death;
FOR amending the Company's Certificate of Incorporation to increase
the authorized preferred stock, par value $.01 per share, of the Company
from 1,140,000 shares to 10,000,000 shares;
FOR amending the Company's Certificate of Incorporation to increase
the authorized common stock, par value $.001 per share, of the Company from
2,000,000 shares to 100,000,000 shares of common stock;
FOR amending the Certificate of Incorporation to change the name of
the Company to Deer Valley Corporation; and
FOR approving a merger with a Florida corporation, solely for purposes
of establishing the Company's domicile in Florida.
In connection with the special meeting, shareholders holding in excess of
fifty percent (50%) of all shares entitled to vote and the consent of
shareholders holding at least fifty percent (50%) of the Series A Preferred
Stock, via a limited, irrevocable power of attorney and proxy, have indicated
their intent to approve each the above reference proposals. Please see
"Description of Securities" and "Directors, Executive Officers, Promoters and
Control Persons" below for a fuller description of the proxy.
Our corporate offices are located at 4902 Eisenhower Blvd., Suite 185,
Tampa, Florida 33634. Our telephone number is (813) 885-5998.
THE OFFERING
This prospectus relates to the issuance of common stock upon conversion of
outstanding convertible preferred stock, the issuance of common stock upon
exercise of outstanding common stock purchase warrants, and the offer and sale
by some of our shareholders during the period in which the registration
statement containing this prospectus is effective of up to 43,556,851 shares of
common stock, consisting of:
- 9,941,627 shares of common stock reserved for issuance by the
registrant with respect to the prospective conversion of 745,622
shares of Series A Convertible Preferred Stock issued as of June 6,
2006 at the election of the holder of the Series A Preferred Stock;
- 4,945,100 shares of common stock reserved for issuance by the
registrant with respect to the prospective conversion of 49,451 shares
of Series B Convertible Preferred Stock issued as of June 6, 2006 upon
the increase in authorized common stock at the proposed shareholders
meeting;
- 2,675,000 shares of common stock reserved for issuance by the
registrant with respect to the prospective conversion of 26,750 shares
of Series C Convertible Preferred Stock issued as of June 6, 2006, at
the election of the holders of the Series C Preferred Stock;
8
- 880,544 shares of common stock reserved for issuance by the
registrant with respect to the prospective conversion of 132,081
shares of Series D Convertible Preferred Stock issued as of June 6,
2006 upon the increase in authorized common stock at the proposed
shareholders meeting;
- 22,213,157 shares of common stock issuable upon the exercise of
9,941,641 warrant shares underlying Series A Warrants; 4,970,827
warrant shares underlying Series B Warrants; 2,000,000 warrant shares
underlying Series C Warrants; 2,000,000 warrant shares underlying
Series D Warrants; 880,544 warrant shares underlying Series E
Warrants; 919,162 warrant shares underlying Series BD-1 Warrants;
919,162 warrant shares underlying Series BD-2 Warrants; 459,581
warrant shares underlying Series BD-3 Warrants; 61,120 warrant shares
underlying Series BD-4 Warrants; and 61,120 warrant shares underlying
Series BD-5 Warrants;
- 776,343 common shares part of a pool of common stock reserved for
issuance by the registrant with respect to the prospective issuance of
common stock as a dividend payable in kind in satisfaction of
dividends that may accrue, at a rate seven percent (7%) per annum,
during the next twenty-four (24) months after January 18, 2006 on the
issued and outstanding Series A Convertible Preferred Stock. The
number of shares set aside for the pool was estimated based upon a the
market price set at the average of the closing price of Cytation
Corporation common stock quoted on the OTC Bulletin Board over the
last five months of 2005. Please see page 56 of this Registration
Statement for more information of the dividend rate for the Series A
Convertible Preferred Stock.
- 2,087,742 common shares reserved for issuance by the registrant
with respect to the prospective issuance of Series A Warrants incurred
as a penalty by the Company for its failure to file the SB-2
Registration Statement within the specified time requirements set
forth in the Investor Rights Agreement dated January 18, 2006 ( the
"Filing Penalty") or for the failure of the Registration Statement to
be declared effective within the specified time (the "Effective Date
Penalty"). This amount reflects the maximum amount of common stock
purchase warrants that may be incurred as a penalty. The Series A
Warrants issuable as a penalty are issuable to the investors that
purchased the Company's Series A Preferred Stock. As of May 23, 2006,
Series A Warrants exercisable, in the aggregate, for 298,250 shares of
Common Stock had accrued as a Filing Penalty. As of July 18,
2006, Series A Warrants exercisable, in the aggregate, for 298,250
shares of Common Stock had accrued as an Effective Date Penalty.
Please see page 49, under the heading "SERIES A PREFERRED STOCK
OFFERING AND DEBT FINANCING", for a more complete description of the
Company's obligations under the Investor Rights Agreement.
- 37,338 issued and outstanding shares of common stock held by
selling shareholders Sequence Advisors Corp. and Allison Investment
Corp.
The common shares offered under this prospectus may be sold by the selling
shareholders on the public market, in negotiated transactions with a
broker-dealer or market maker as principal or agent, or in privately negotiated
transactions not involving a broker or dealer. Information regarding the
selling shareholders, the common shares they are offering to sell under this
prospectus, and the times and manner in which they may offer and sell those
shares is provided in the sections of this prospectus captioned "Selling
Shareholders," "Registration Rights" and "Plan of Distribution," respectively.
We will not receive any of the proceeds from those sales. Should the selling
shareholders, in their discretion, exercise any of the common share purchase
warrants or options underlying the common shares offered under this prospectus,
we would, however, receive the exercise price for those warrants. The
registration of common shares pursuant to this prospectus does not necessarily
mean that any of those shares will ultimately be offered or sold by the selling
shareholders, or that any of the common share purchase warrants underlying the
common shares offered under this prospectus will be exercised.
9
RISK FACTORS
An investment in our common shares involves a high degree of risk and is
subject to many uncertainties. These risks and uncertainties may adversely
affect our business, operating results and financial condition. Additional
risks which are currently unknown to us or which we currently consider to be
immaterial may also impair our business or adversely affect our financial
condition or results of operations. In such an event, the trading price for our
common shares could decline substantially, and you could lose all or part of
your investment. In order to attain an appreciation for these risks and
uncertainties, you should read this prospectus in its entirety and consider all
of the information and advisements contained in this prospectus, including the
following risk factors and uncertainties.
RISKS RELATING TO OUR BUSINESS
RISKS RELATED TO THE ACQUISITION OF DEER VALLEY
WE HAVE A LIMITED OPERATING HISTORY UPON WHICH YOU CAN EVALUATE OUR BUSINESS.
In 2005, we discontinued all business operations in order to concentrate
upon finding an appropriate acquisition transaction. Prior to that time, we had
engaged in providing consulting and related services to private companies that
sought to become reporting companies under the Securities Exchange Act of 1934,
and we were registered as a "Business Development Company" under the Investment
Company Act of 1940. Prior to the acquisition by our wholly-owned subsidiary,
DVA, we terminated our status as a Business Development Company under the
Investment Company Act. Because Deer Valley's business will be our only
operating business, we will need to consolidate our operations and integrate the
management of our operations. No assurances can be given that the results of
operations of Deer Valley after the acquisition will not be adversely affected
or that our new management team will be able to successfully integrate Deer
Valley's operations. The past results of the operations of Deer Valley are not
necessarily indicative of the future results of operations of Deer Valley. We
may also experience difficulties in assimilating the operations and personnel of
Deer Valley's operations as part of our combined business.
10
DEER VALLEY HAS BEEN OPERATED AS A PRIVATE COMPANY THAT IS NOT SUBJECT TO
SARBANES-OXLEY REGULATIONS AND, THEREFORE, MAY LACK THE FINANCIAL CONTROLS AND
PROCEDURES OF PUBLIC COMPANIES
The management of Deer Valley has not been required to establish and
maintain an internal or financial control infrastructure that is necessary to
meet the standards of a public company that is required to comply with the
provisions of the Securities Exchange Act. There can be no guarantee or
assurances given that there are no significant deficiencies or material
weaknesses in the quality of Deer Valley's financial controls. As a result of
the acquisition of Deer Valley, we will be required to comply with the
provisions of Sarbanes-Oxley, including standards for internal and financial
controls, in connection with Deer Valley's operations. The cost to Deer Valley
of such compliance could be substantial and could have a material adverse effect
on our results of operations.
RISKS RELATED TO OUR BUSINESS
WE OPERATE IN AN INDUSTRY THAT HAS EXPERIENCED A PROLONGED AND SIGNIFICANT
DOWNTURN
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.
11
THE CYCLICAL NATURE OF THE MANUFACTURED HOUSING INDUSTRY COULD CAUSE OUR
REVENUES AND OPERATING RESULTS TO FLUCTUATE, AND WE EXPECT THIS CYCLICALITY TO
CONTINUE IN THE FUTURE
The manufactured housing industry is highly cyclical and is influenced by
many national and regional economic and demographic factors, including:
- the availability of consumer financing for homebuyers;
- the availability of wholesale financing for retailers;
- consumer confidence;
- interest rates;
- demographic and employment trends;
- income levels;
- housing demand;
- general economic conditions, including inflation and recessions; and
- the availability of suitable home sites.
According to the Manufactured Housing Institute, calendar year 2004 was the
sixth consecutive year of declining HUD-Code shipments of new manufactured
homes. For much of the 1990's, there was an increase in the number of retail
dealers and manufacturing capacity and liberalization of credit standards. As a
result of higher than anticipated rates of loan defaults and significant losses
incurred through the repossession and resale of manufactured homes, many lenders
raised their interest rates and tightened their credit standards. In addition,
a number of lenders discontinued their loan activities in the industry. While
there has been a recent significant increase in the number of single-section
manufactured homes that have been purchased due to Hurricane Katrina and other
hurricanes, the manufactured housing industry is clearly a cyclical industry
that depends upon general economic conditions, consumer confidence, employment
and income levels and continuing competitive advantages. We cannot predict what
competitive and industry conditions that will impact our business, or to what
extent their impact will be on our future results of operations.
As a result of the foregoing economic, demographic and other factors, our
revenues and operating results could fluctuate, and we expect them to continue
to fluctuate in the future.
OUR LIQUIDITY AND ABILITY TO RAISE CAPITAL MAY BE LIMITED
We may need to obtain additional debt or equity financing in the future.
The type, timing and terms of the financing selected by us will depend on, among
other things, our cash needs, the availability of other financing sources and
prevailing conditions in the financial markets. There can be no assurance that
any of these sources will be available to us at any time or that they will be
available on satisfactory terms.
WE ARE DEPENDENT UPON THE AVAILABILITY OF CONSUMER FINANCING FOR OUR RETAIL
CUSTOMERS
Financing for our retail customers could be limited by more restrictive
credit standards and reduced financing by lenders, which could affect our sales.
Our retail customers generally secure financing from third-party lenders, the
availability of which, terms and costs depend on the lending practices of
financial institutions, government policies and economic and other conditions.
Quasi- government sponsored agencies such as Fannie Mae and Freddie Mac, which
serve as purchasers of loans in secondary financial markets, have recently
tightened standards for manufactured housing loans that each institution will
purchase. Lenders have also tightened credit underwriting standards and
12
increased interest rates for loans made to purchase manufactured homes, thereby
reducing the availability of consumer financing options. A consumer seeking to
finance the purchase of a manufactured home without land will generally pay a
higher interest rate and have a shorter loan maturity than a consumer seeking to
finance a site-built home. Most states also classified manufactured homes as
personal property rather than real property for purposes of taxation and lien
perfection and financing for the purchase of manufactured homes is often more
difficult than conventional mortgage financing. If third-party financing for
manufactured homes were to be further restricted or curtailed, we could expect
to experience a material adverse effect on our results of operations.
REDUCED AVAILABILITY OF WHOLESALE FINANCING FOR INDUSTRY RETAILERS COULD
JEOPARDIZE SALES TO OUR DEALERS AND RETAILERS
Manufactured housing retailers generally finance their inventory purchases
with wholesale floor plan financing provided by lending institutions. We rely
upon our independent dealers and retailers to finance their purchases of our
manufactured homes through wholesale floor plan financing arrangements. Any
reduction in the number of floor plan lenders or tightening of the standards
affecting their purchases of manufactured homes could have a material adverse
effect upon our sales. Reduced availability of floor plan lending may affect
the inventory levels of our independent retailers, the number of retail sales
centers and related wholesale demand, and may also have an adverse effect on our
access to capital on an ongoing basis.
TO FINANCE OUR SALES, WE ROUTINELY ENTER INTO REPURCHASE AND GUARANTEE
OBLIGATIONS WITH THIRD-PARTY LENDERS
In accordance with customary business practice in the manufactured housing
industry, we have entered into repurchase agreements with various financial
institutions and other credit sources who provide floor plan financing to
industry retailers, which provide that in the event of a default by an
independent retailer in its obligation to these credit sources, we will be
obligated to repurchase homes sold to retailers. Under these agreements, we have
agreed to repurchase homes at declining prices over the term of the agreement
(which in most cases can be as long as 24 months). The difference between the
gross repurchase price and the price at which the repurchased manufactured home
can then be resold, which is typically discounted from the original sales price,
will be an expense to us. If we are obligated to repurchase a significant
number of manufactured homes in the future, this would increase our costs, which
could have a negative effect on our earnings. While we incurred no repurchase
obligations in 2005, we estimate that our potential obligation under such
repurchase agreements is approximately $8,043,773 as of October 1, 2005.
We believe that our risk of loss under these repurchase agreements is
lessened by the fact that (1) our experience has shown that we have incurred
only isolated instances of any repurchase liability; (2) our sales are spread
over a large number of independent dealers, thereby minimizing our risk; (3) the
price that we are obligated to pay under these repurchase agreements generally
declines over the period of the agreement and at a predetermined amount; and (4)
in the event of a default by a dealer we believe that we will be able to resell
any home that has been repurchased from a lender, thereby reducing our loss
contingency. While we have established a reserve for possible repurchase
losses, we cannot assure our investors that we will not incur material losses in
excess of these reserves in the future.
THE MANUFACTURED HOUSING INDUSTRY IS HIGHLY COMPETITIVE, AND COMPETITION MAY
INCREASE THE ADVERSE EFFECTS OF INDUSTRY CONDITIONS
The manufactured housing industry is highly competitive. We estimate that
there are approximately 100 manufacturers in the U.S. in our industry and
approximately 8,000 retail sales centers that sell manufactured homes. We
estimate that the 10 largest manufacturers account for approximately 80 percent
of the sales in the manufactured housing market. Competition at both the
manufacturing and retail levels is based upon several factors, including price,
product features, reputation for service and quality, retailer promotional
programs and the terms of retail customer financing. In addition, our homes
compete with repossessed homes that are offered for sale in our markets. A
13
number of our manufacturing competitors also have their own retail distribution
systems and consumer finance and insurance operations. The ability to offer
consumer finance and insurance products may provide some competitors with an
advantage. In addition, we compete against larger competitors that own retail
locations. Our products compete with other forms of low to moderate-cost
housing, including new and existing site-built homes, apartments, townhouses and
condominiums. If we are unable to compete effectively in this environment, our
sales and wholesale shipments could be reduced. As a result, our growth could be
limited.
OUR RESULTS OF OPERATIONS CAN BE AFFECTED BY THE PRICING AND AVAILABILITY OF RAW
MATERIALS
Increased prices and the unavailability of raw materials could have a
material adverse affect on us. Recently the cost of wood and wood products,
gypsum wall board, steel and insulation have increased. Although we have not
experienced any severe or prolonged shortage of such building materials to date,
there can be no assurance that sufficient supplies of wood and wood products,
gypsum wallboard, steel and insulation, as well as other raw materials, will
continue to be available to us on satisfactory terms.
WE ARE CONCENTRATED GEOGRAPHICALLY, WHICH COULD HARM OUR BUSINESS
In 2005, 100% of our revenues were generated from the southeastern and
south central regions of the U.S. A decline in the demand for the manufactured
housing in these states and regions and/or a decline in the economies of these
regions could have a material adverse affect on our sales and results of
operations.
IF THE MANUFACTURED HOUSING INDUSTRY IS NOT ABLE TO SECURE FAVORABLE LOCAL
ZONING ORDINANCES, OUR SALES COULD DECLINE AND OUR BUSINESS COULD BE ADVERSELY
AFFECTED
Manufactured housing communities and individual home placements are subject
to local zoning ordinances and other local regulations relating to utility
service and construction of roadways. In the past, property owners often have
resisted the adoption of zoning ordinances permitting the location of
manufactured homes in residential areas, which we believe has restricted the
growth of the industry. Manufactured homes may not achieve widespread acceptance
and localities may not adopt zoning ordinances permitting the development of
manufactured home communities. If the manufactured housing industry is unable to
secure favorable local zoning ordinances, our sales could decline and our
business, results of operations and financial condition could be adversely
affected.
OUR BUSINESS DEPENDS ON MAINTAINING GOOD RELATIONSHIPS WITH OUR INDEPENDENT
DEALERS
We currently depend entirely on our independent dealers for substantially
all retail sales of our manufactured homes. We do not have written agreements
with these dealers, and these arrangements can be terminated by either party at
any time. We have carefully evaluated our dealer relationships in each
geographic market. Our competitors also are seeking to maintain and expand
their relationships with quality independent dealers. While we believe that we
have excellent relationships with our independent dealers, we cannot assure our
investors that we will be able to maintain these dealer relations, that these
dealers will continue to market and sell our manufactured homes, that these
dealers will be successful, or that we will be able to attract new dealers and
retain those independent dealers that have successfully sold many of our
manufactured homes.
WE COULD INCUR UNANTICIPATED COSTS ARISING FROM OUR WARRANTY OBLIGATIONS
We are subject to routine warranty claims in our business. Although we
maintain reserves for such claims, which to date have been adequate, we cannot
14
grant any assurances that our warranty expense levels will remain at current
levels or that such reserves will continue to be adequate. If we incur a large
number of warranty claims that exceed our current warranty expense levels, we
could have a material adverse affect on results of operations.
IF OUR DEALERS HAVE EXCESS INVENTORIES AND UNANTICIPATED REPOSSESSIONS, WE COULD
BE NEGATIVELY AFFECTED IN OUR SALES AND PROFIT MARGINS
When manufactured housing inventories and repossessed homes increase
significantly, manufacturers in our industry are immediately impacted. The
consolidation of lenders and deterioration in availability of retail financing
of manufactured homes has negatively affected the manufactured housing industry.
Like our competitors, we could be impacted by increases in inventories of
manufactured homes and an increase in the number of available repossessed homes.
In order to increase our manufacturing capacity and increase our sales, we will
need to expand our manufacturing capabilities and obtain financing for these
efforts. We cannot be assured that we will be able to obtain future financing
on acceptable terms. If we are unable to obtain additional financing, or if we
cannot obtain financing on acceptable terms, we may not be able to execute our
business strategy and expand our sales. In addition, the terms of any such
additional financing may restrict our financial flexibility, including debt
obligations that we may incur in the future, or may restrict our ability to
manage our business as we had intended.
WE OPERATE IN A HIGHLY COMPETITIVE BUSINESS AND MANY OF OUR COMPETITORS HAVE
STRONGER BALANCE SHEETS AND CASH FLOWS, AS WELL AS GREATER ACCESS TO CAPITAL
We compete in a highly competitive manufacturing industry. Although retail
operations and dealers that sell manufactured housing are varied and diverse, a
small group of manufacturers account for most of the manufactured housing units
in the industry. We also compete with site-built homes, apartments and
townhouses. To successfully compete in this industry, we will need to continue
to manufacture a quality product and provide superior service in the regional
markets in which we operate.
THE LOSS OF ANY OF OUR EXECUTIVE OFFICERS COULD REDUCE OUR ABILITY TO EXECUTE
OUR BUSINESS STRATEGY AND COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS
AND RESULTS OF OPERATIONS
We are dependent to a significant extent upon the efforts of our management
team, particularly Joel Logan, President and General Manager of Deer Valley,
Charles L. Murphree, Jr., Vice President and Regional Sales Director of Deer
Valley and John Steven Lawler, Director of Finance of Deer Valley. The loss of
the services of one or more of our executive officers could impair our ability
to execute our business strategy and have a material adverse effect upon our
business, financial condition and results of operations. We currently have key
man life insurance, with Deer Valley as beneficiary, on the former owners of
Deer Valley, including executive officers Joel Stephen Logan II, John Steven
Lawler, and Charles Murphree.
OUR OPERATIONS AND SERVICES WILL BE VULNERABLE TO NATURAL DISASTERS,
TELECOMMUNICATIONS FAILURES AND COMPUTER SERVICE FAILURES.
Our operations and services will be vulnerable to fire, earthquakes, power
loss, telecommunications failures, computer service failures, and similar
events. Despite precautions taken by us, a natural disaster or other
unanticipated problem could cause interruptions in the services that we plan to
provide. Accordingly, any disruption of our production could have a material
and adverse effect on our business, results of operations and financial
condition.
15
RISKS RELATED TO AN INVESTMENT IN OUR SECURITIES
WE HAVE NO OPERATING HISTORY AS A PUBLIC REPORTING COMPANY.
Prior to the Company's acquisition of Deer Valley, we operated as a Business
Development Company under the Investment Company Act of 1940 and assisted
companies that desired to become a publicly reporting company but had minimal
operations. Accordingly, our management team has no prior experience in
operating Deer Valley as an independent public company. In addition, our
management team will need to comply with the numerous regulatory and other
requirements applicable to independent public companies, including requirements
relating to corporate governance, listing standards and securities and investor
relations issues.
THE APPLICATION OF "PENNY STOCK" RULES COULD ADVERSELY EFFECT THE MARKET PRICE
OF OUR STOCK
U.S. securities laws require that if the price of our publicly traded
securities is less than $5 per share, the open-market trading of our securities
will be subject to the "penny stock" rules. These rules impose additional sales
restrictions on brokers/dealers who sell securities to persons that may not have
an established relationship with a broker/dealer or may not qualify as an
accredited investor under U.S. securities laws. If the penny stock rules apply,
a broker/dealer must make a special suitability determination and receive
written consent from the purchaser prior to the transaction being consummated.
The broker/dealer must also disclose the commissions that will be paid to the
broker/dealer and provide current quotations for the price of the security being
purchased. The broker/dealer must also furnish monthly statements to these
investors disclosing recent price information on the market in penny stocks.
These additional burdens imposed on brokers/dealers could restrict the ability
or decrease the willingness of brokers/dealers to sell our common stock and may
result in decreased liquidity for our shares and increase the transaction costs
for engaging in securities transactions of our stock.
OUR COMMON STOCK IS THINLY TRADED AND YOU MAY BE UNABLE TO SELL YOUR SHARES OR
OTHERWISE LIQUIDATE YOUR INVESTMENT.
We cannot predict the extent to which an act of public market will develop
for our common stock. While we intend to seek to apply for listing of our
securities on the Nasdaq National Market or other securities exchanges in the
future, no assurances can be given that we will be able to successfully list our
shares on one of these exchanges. We cannot give you any assurance that a
broader or more active public trading market for our common shares will develop
or be sustained, or that current trading levels will be sustained. Due to these
conditions, we can give you no assurance that you will be able to sell your
shares at or near ask prices or at all if you need money or otherwise desire to
liquidate your shares.
WE DO NOT EXPECT TO PAY DIVIDENDS ON OUR COMMON STOCK.
We do not expect to pay any dividends on our common stock in the
foreseeable future. The payment of dividends to our stockholders is subject to
the discretion of our board of directors, and various factors may prevent us
from paying dividends. Such factors include our cash requirements and liquidity
and the requirements of state corporate and other laws.
VOLATILITY OF STOCK PRICE
The price of our common stock may fluctuate widely, depending upon a number
of factors, many of which are beyond our control. These factors include the
perceived prospects of our business and the manufactured housing industry as a
whole; differences between our actual financial and operating results and those
expected by investors and analysts; changes in analysts' recommendations or
projections; changes affecting the availability of financing in the wholesale
and consumer lending markets; actions or announcements by competitors; changes
in the regulatory environment in which we operate; and changes in general
economic or market conditions. In addition, stock markets generally experience
significant price and volume volatility from time to time which may adversely
affect the market price of our common stock for reasons unrelated to our
performance.
16
WE MAY BE UNSUCCESSFUL IN MANAGING OUR GROWTH, WHICH COULD PREVENT US FROM
BECOMING PROFITABLE.
While it may not be realized, we are planning for significant growth for
the foreseeable future. Our growth may place a significant strain on our
management, financial and operating resources. Failure to manage this growth
effectively could have a material adverse affect on our financial condition or
results of operations. Part of our business strategy may be to acquire assets or
other companies which will complement our existing business. We are unable to
predict whether or when any material transaction will be completed should
negotiations commence. If we proceed with any such transaction, we may not
effectively integrate the acquired operations with our own operations. We also
may seek to finance any such acquisition by debt financings or issuances of
equity securities, and such financing may not be available on acceptable terms
or at all.
THE STEPS TAKEN BY US TO PROTECT OUR PROPRIETARY RIGHTS MAY NOT BE ADEQUATE,
WHICH COULD HAVE A MATERIAL ADVERSE AFFECT ON OUR BUSINESS, RESULTS OF
OPERATIONS AND FINANCIAL CONDITION.
We cannot give you any assurance that the measures we rely on to protect
our intellectual properties will prove to be effective in doing so. We also
cannot give you any assurance that our existing trade name will not be
invalidated, that any patents or trademarks we apply for will be granted, or
that any patents or trademarks will ultimately provide significant commercial
benefits. Further, competing companies may circumvent any patents that we may
hold in the future by developing products which closely emulate but do not
infringe our patents. We can give you no assurance that we will be able to
successfully defend our intellectual property rights in any action we may file
for infringement. Similarly, we can not give you any assurance that we will not
be required to defend against litigation involving the patents or proprietary
rights of others, or that we will be able to obtain licenses for these rights.
Legal and accounting costs relating to prosecuting or defending intellectual
property litigation may be substantial. We also rely on proprietary designs,
technologies, processes and know-how not eligible for patent protection. We
cannot give you any assurance that our competitors will not independently
develop the same or superior designs, technologies, processes and know-how.
While we may enter into proprietary rights agreements with our employees and
third parties giving us proprietary rights to certain technology developed by
those employees or parties while engaged by our company, we can give you no
assurance that courts of competent jurisdiction will enforce those agreements.
FORWARD-LOOKING STATEMENTS
In this prospectus, we make a number of statements, referred to as
"forward-looking statements," which are intended to convey our expectations or
predictions regarding the occurrence of possible future events or the existence
of trends and factors that may impact our future plans and operating results.
These forward-looking statements are derived, in part, from various assumptions
and analyses we have made in the context of our current business plan and
information currently available to us and in light of our experience and
perceptions of historical trends, current conditions and expected future
developments and other factors we believe to be appropriate in the
circumstances. You can generally identify forward-looking statements through
words and phrases such as "seek", "anticipate", "believe", "estimate", "expect",
"intend", "plan", "budget", "project", "may be", "may continue", "may likely
result", and similar expressions. When reading any forward looking statement,
you should remain mindful that actual results or developments may vary
substantially from those expected as expressed in or implied by that statement
for a number of reasons or factors, such as those relating to:
- the success of our research and development activities, the
development of additional products, if any, and the speed with which
regulatory authorizations and product launches may be achieved;
- the pace at which the market for our products develop;
- our ability to successfully sell our products;
- our ability to attract the qualified personnel to implement
our growth strategies;
- our ability to further develop sales, marketing and distribution
capabilities;
17
- the accuracy of our estimates and projections;
- our ability to fund our short-term and long-term financing needs;
- changes in our business plan and corporate strategies; and
- other risks and uncertainties discussed in greater detail in the
sections of this prospectus, including those captioned "Risk Factors"
and "Plan of Operation."
Each forward-looking statement should be read in context with, and with an
understanding of, the various other disclosures concerning our Company and our
business made elsewhere in this prospectus, as well as other public reports
filed with the SEC. You should not place undue reliance on any forward-looking
statement as a prediction of actual results or developments. We are not
obligated to update or revise any forward-looking statement contained in this
prospectus to reflect new events or circumstances unless and to the extent
required by applicable law.
USE OF PROCEEDS
The shares of common stock offered by this prospectus are being registered
for the account of the selling shareholders named in this prospectus. As a
result, all proceeds from the sale of the common stock will be retained by the
selling shareholders, and will not be paid or remitted or otherwise made
available to our Company. We will, however, incur all costs associated with
this registration statement and prospectus. We will receive proceeds upon the
exercise of all share purchase warrants (assuming all share purchase warrants
are exercised prior to expiration), which proceeds will be used for working
capital and general corporate purposes.
DETERMINATION OF OFFERING PRICE
Not applicable.
DILUTION
Not applicable.
SELLING SECURITY HOLDERS
The following table sets forth certain information regarding beneficial
ownership of our Common Stock by the Selling Stockholders as of April 12, 2006.
The table further sets forth (i) the name of each Selling Stockholder who is
offering the resale of shares of Common Stock, (ii) the number of shares of
Common Stock that may be sold in this offering; (iii) the number of shares of
Common Stock to be beneficially owned by each Selling Stockholder after the
completion of this offering assuming the sale of all of the shares of the Common
Stock offered by each Selling Stockholder; and (iv) if one (1%) percent or more,
the percentage of outstanding shares of Common Stock to be beneficially owned by
each Selling Stockholder after the completion of this offering assuming the sale
of all of the shares of Common Stock offered by each Selling Stockholder. The
percentage of beneficial ownership reported in the following table is based upon
1,000,000 shares of our Common Stock which were outstanding on April 17, 2006.
Except as noted below, none of the Selling Stockholders have had any position,
office, or other material relationship with us or any of our predecessors or
affiliates within the past three years.
The Selling Stockholders are offering, by this prospectus, as of the date
of this prospectus, as indicated in the following table, an aggregate of
43,556,851 shares of our Common Stock, as follows:
18
- 9,941,627 shares of common stock reserved for issuance by the
registrant with respect to the prospective conversion of 745,622
shares of Series A Convertible Preferred Stock issued as of June 6,
2006 at the election of the holder of the Series A Preferred Stock;
- 4,945,100 shares of common stock reserved for issuance by the
registrant with respect to the prospective conversion of 49,451 shares
of Series B Convertible Preferred Stock issued as of June 6, 2006
upon the increase in authorized common stock at the proposed
shareholders meeting;
- 2,675,000 shares of common stock reserved for issuance by the
registrant with respect to the prospective conversion of 26,750 shares
of Series C Convertible Preferred Stock issued as of June 6, 2006,
at the election of the holders of the Series C Preferred Stock;
- 880,544 shares of common stock reserved for issuance by the
registrant with respect to the prospective conversion of 132,081
shares of Series D Convertible Preferred Stock issued as of June 6,
2006 upon the increase in authorized common stock at the proposed
shareholders meeting;
- An aggregate of 22,213,157 shares of common stock issuable upon
the exercise of 9,941,641 warrant shares underlying Series A Warrants;
4,970,827 warrant shares underlying Series B Warrants; 2,000,000
warrant shares underlying Series C Warrants; 2,000,000 warrant shares
underlying Series D Warrants; 880,544 warrant shares underlying Series
E Warrants; 919,162 warrant shares underlying Series BD-1 Warrants;
919,162 warrant shares underlying Series BD-2 Warrants; 459,581
warrant shares underlying Series BD-3 Warrants; 61,120 warrant shares
underlying Series BD-4 Warrants; and 61,120 warrant shares underlying
Series BD-5 Warrants;
- 776,343 common shares as a pool of common stock reserved for
issuance by the registrant with respect to the prospective issuance of
common stock as a dividend payable in kind in satisfaction of
dividends that may accrue, at a rate of seven percent (7%) per annum,
during the next twenty-four (24) months after January 18, 2006 on the
issued and outstanding Series A Convertible Preferred Stock. The
number of shares set aside for the pool was estimated based upon a the
market price set at the average of the closing price of Cytation
Corporation common stock quoted on the OTC Bulletin Board over the
last five months of 2005. Please see page 56 of this Registration
Statement for more information of the dividend rate for the Series A
Convertible Preferred Stock.
19
- 2,087,742 common shares reserved for issuance by the registrant
with respect to the prospective issuance of Series A Warrant warrants
incurred as a penalty by the Company for its failure to file the SB-2
Registration Statement within the specified time requirements set
forth in the Investor Rights Agreement dated January 18, 2006 (the
"Filing Penalty") or for the failure of the Registration Statement to
be declared effective within the specified time (the "Effective Date
Penalty"). This amount reflects the maximum amount of common stock
purchase warrants that may be incurred as a penalty. The Series A
Warrants issuable as a penalty are issuable to the investors that
purchased the Company's Series A Preferred Stock. As of May 23, 2006,
Series A Warrants exercisable, in the aggregate, for 298,250 shares of
Common Stock had accrued as a Filing Penalty. As of July 18, 2006,
Series A Warrants exercisable, in the aggregate, for 298,250 shares of
Common Stock had accrued as an Effective Date Penalty. Please see page
49, under the heading "SERIES A PREFERRED STOCK OFFERING AND DEBT
FINANCING", for a more complete description of the Company's
obligations under the Investor Rights Agreement.
- 37,338 issued and outstanding shares of common stock held by
selling shareholders Sequence Advisors Corp. and Allison Investment
Corp.
Sequence Advisors Corp. acquired its securities before the transaction
closing in January 2006 to provide a source of funds to be used by former
management to meet post-closing expenses and other obligations and to compensate
former management for its services to the extent funds are unused. Allison
Investment Corp. acquired the right to purchase securities in exchange for
relinquishing its exclusive right to locate a merger candidate for Cytation
Corporation. Subsequently, Allison Investment Corp. exercised that right and
purchased its securities from the Company. Please refer to "Recent Sales of
Unregistered Securities" on page 139 of this Registration Statement for
information on how holders of Series A, B, C, and D Preferred Stock and holders
of Series A, B, C, D, E, and BD Common Stock Purchase Warrants acquired their
securities.
20
TABLE OF SELLING STOCKHOLDERS
-----------------------------
Securities
Beneficially Owned
Securities Being Offered By Selling Stockholders
Securities Owned By Selling Stockholders Prior to Offering By Selling Stockholders After the Offering
------------------------------------------------------------------------ ----------------------- -----------------------
Common Common
Common Common Common Stock Stock Common Common Common Stock Common Percentage
Stock Stock Stock issuable issuable Stock issuable Stock issuable upon Stock to be Assuming
(direct issuable issuable upon upon upon exercise (direct conversion or Beneficially All Shares
ownership) upon upon conversion conversion of Warrants ownership) exercise of Owned After Offered are
conversion conversion of Series C of Series D and Options derivative Offering Sold
of Series A of Series B Convertible Convertible (indirect securities
Convertible Convertible Preferred Preferred ownership) (indirect
Preferred Preferred Stock Stock ownership)
Name of Stock Stock (indirect (indirect
Selling (indirect (indirect ownership) ownership)
Stockholder ownership) ownership)
------------------------------------------------------------------------------------------------------------------------------------
(a) (b) (c) (d) (e) (f) (g) (h) (i) (j)
------------------------------------------------------------------------------------------------------------------------------------
Shawn J. 0 8,334 0 0 0 12,501 0 20,835 0 *
Tolan
David Di 0 10,667 0 0 0 16,001 0 26,668 0 *
Tomasso
Delmont J. 0 13,334 50,000 0 0 20,001 0 83,335 0 *
Monarch, III
Hans C. 0 13,334 0 0 0 20,001 0 33,335 0 *
Beyer
M. Lewis 0 24,667 0 0 0 37,001 0 61,668 0 *
Temaraes &
Louise
Temares
Joseph J. 0 16,667 0 0 0 25,001 0 41,668 0 *
Jacob
Lester E. 0 16,667 0 0 0 25,001 0 41,668 0 *
Segal
21
Jason J. 0 16,667 0 0 0 25,001 0 41,668 0 *
Palumbo
Donald G. 0 16,667 0 0 0 25,001 0 41,668 0 *
Sproat
Chad B. 0 16,667 0 0 0 25,001 0 41,668 0 *
Garrett
Frederick S. 0 18,000 0 0 0 27,000 0 45,000 0 *
Freer
Shahid Q. 0 20,000 0 0 0 30,000 0 50,000 0 *
Din
Anthony J. 0 30,000 0 0 0 45,000 0 75,000 0 *
Sgambati
John Boos & 0 33,334 0 0 0 50,001 0 83,335 0 *
Eileen Boos
Muhammad 0 33,334 0 0 0 50,001 0 83,335 0 *
Hamed
Farooqi
Robert 0 33,334 0 0 0 50,001 0 83,335 0 *
Zenner
Jess G. 0 33,334 10,000 0 0 50,001 0 93,335 0 *
Tucker
Carmine D. 0 33,334 0 0 0 50,001 0 83,335 0 *
D'Amico
Thomas T. 0 33,334 0 0 0 50,001 0 83,335 0 *
Sproat
Michael B. 0 50,000 0 0 0 75,000 0 125,000 0 *
Wellikoff
James C. 0 133,334 0 0 0 200,001 0 333,335 0 *
McGusty Jr.
Thunderbird 0 33,334 0 0 0 50,001 0 83,335 0 *
Global
Corporation,
Contact
Person:
Juan Montes
(1)
Firle 0 33,334 0 0 0 50,001 0 83,335 0 *
Trading,
S.A., Contact
Person:
Juan
Montes
(2)
Farid 0 133,334 0 0 0 200,001 0 333,335 0 *
Kolaleh
Tabibzadeh
Equity Trust 0 133,334 0 0 0 200,001 0 333,335 0 *
Company
Custodian
FBO Gary
K. Chandler
(3)
Double U 0 133,334 0 0 0 199,971 0 333,285 0 *
Master Fund
LP, Contact
Person: Isaac
Winehouse
(4)
Majid 0 240,000 0 0 0 360,000 0 600,000 0 *
Tabibzadeh
& Debbie
Elghanayan
22
Gilda Sierra 0 333,334 0 0 0 500,001 0 833,335 0 *
deAlejo
2005 Trust
U/A dated
4/13/2005
Alberto A.
deAlejo Jr.,
Trustee (5)
Shahab 0 333,334 0 0 0 500,001 0 833,335 0 *
Emrani
Nite 0 533,334 0 0 0 800,001 0 1,333,335 0 *
Capital, LP
Contact
Person:
Keith
Goodman (6)
Vicis 0 6,000,000 0 0 0 11,000,000 0 17,000,000 0 *
Capital Master
Fund, Contact
Person:
Shad
Stastney (7)
Jules 0 33,334 0 0 0 50,001 0 83,335 0 *
Ghedina
Jeffrey 0 66,667 0 0 0 100,001 0 166,668 0 *
Benton
PP57, LLC 0 66,667 0 0 0 100,001 0 166,668 0 *
Contact
Person:
Robert M.
Snibbe, Jr.
(8)
William N. 0 33,334 20,000 0 0 50,001 0 103,335 0 *
& Jean S.
Hagler Trust
(9)
Max R. Frye 0 50,000 0 0 0 75,000 0 125,000 0 *
Gary K. 0 66,667 0 0 0 100,001 0 166,668 0 *
Chandler
Steve J. 0 20,000 0 0 0 300,000 0 500,000 0 *
Logan
Edwin A. 0 133,334 685,000 0 0 200,001 0 1,018,335 0 *
McGusty
Dan 0 13,334 0 0 0 20,001 0 33,335 0 *
Crawford
King Capital 0 66,640 0 0 0 99,960 0 166,600 0 *
Corporation
Contact
Person:
Cameron
King-
President
(10)
Mario 0 0 2,500 0 0 0 0 2,500 0 *
Scarpa
Donald J. 0 0 10,000 0 0 0 0 10,000 0 *
Grissom
Terry N. 0 0 15,000 0 0 0 0 15,000 0 *
Williams
Natalie P. 0 0 20,000 0 0 0 0 20,000 0 *
Collins
Brian 0 0 20,000 0 0 0 0 20,000 0 *
Thornton
23
Robert 0 0 25,000 0 0 0 0 25,000 0 *
McPhail
ZTZ Trust 0 0 30,000 0 0 0 0 30,000 0 *
Corp.
Contact
Person:
Lucien
Lallouz (11)
D. Gregg 0 0 40,000 0 0 0 0 40,000 0 *
Diamond
Joy Melton 0 0 50,000 0 0 0 0 50,000 0 *
Mark R. 0 0 80,000 0 0 0 0 80,000 0 *
Sage and
Cathy L.
Sage, as
Trustees of
the Mark R.
Sage and
Cathy L.
Sage
Revocable
Trust
Agreement
by
Instrument
dated
October 20,
2005 (12)
Apogee 0 0 190,100 0 0 0 0 190,100 0 *
Financial
Investments,
Inc.
Attn:
Richard
Diamond,
VP (13)
Richard B. 0 0 250,000 0 0 0 0 250,000 0 *
Masters
Famalom, 0 0 302,500 0 0 0 0 302,500 0 *
LLC
attn: Chris
Phillips,
Managing
Member (14)
Daedalus 0 0 342,500 0 0 0 0 342,500 0 *
Consulting,
Inc.
attn: Hans
Beyer (15)
Stacy L. 0 0 581,500 0 0 0 0 581,500 0 *
Bagley
Eddie D. 0 0 16,000 0 0 0 0 16,000 0 *
Carter
Deecembra 0 0 575,000 0 0 0 0 575,000 0 *
Diamond
Charles G. 0 0 1,630,000 0 0 0 0 1,630,000 0 *
Masters
Nancy S. 0 33,334 0 0 0 50,001 0 83,335 0 *
Masters
24
Total CFO, 0 0 0 2,675,000 0 2,000,000 0 4,675,000 0 *
LLC
attn: Chris
Phillips,
Managing
Member (16)
Midtown 0 0 0 0 0 2,420,145 0 2,420,145 0 *
Partners &
Co., LLC
Bruce Jordan,
Managing
Director (17)
Joel Logan 0 200.000 0 0 0 300,000 0 500,000 0 *
Charles 0 133,334 0 0 0 200,001 0 333,335 0 *
Murphree
John Steven 0 66,667 0 0 0 100,001 0 166,668 0 *
Lawler
James David 0 100,000 0 0 0 150,000 0 250,000 0 *
Shaw
William 0 80,000 0 0 0 120,000 0 200,000 0 *
Joseph
Aycock, Jr.
Jerry Ray 0 33,334 0 0 0 50,001 0 83,335 0 *
Cooper, Jr.
Timm Gann 0 26,667 0 0 0 40,001 0 66,668 0 *
Jimmy Ray 0 26,667 0 0 0 40,001 0 66,668 0 *
Hawkins
Fred and 0 0 0 0 13,340 13,340 0 26,680 0 *
Joan Halbig
Paul T. 0 0 0 0 6,667 6,667 0 13,334 0 *
Green
Ricky A. 0 0 0 0 35,000 35,000 0 70,000 0 *
and Tina L.
Martin
Douglas 0 0 0 0 20,000 20,000 0 40,000 0 *
Greenway
Sr.
Scott 0 0 0 0 67,000 67,000 0 134,000 0 *
Strickland
Gary R. 0 0 0 0 30,000 30,000 0 60,000 0 *
Martin &
Valerie A.
Martin
Eddie M. 0 0 0 0 35,000 35,000 0 70,000 0 *
Wilson
25
Jimmy O. 0 0 0 0 36,400 36,400 0 72,800 0 *
Smith
Dudley H. 0 0 0 0 29,800 29,800 0 59,600 0 *
Dinkins
Richey C. 0 0 0 0 30,000 30,000 0 60,000 0 *
Swinney
Wayne N. 0 0 0 0 5,000 5,000 0 10,000 0 *
Spillers
James 0 0 0 0 20,000 20,000 0 40,000 0 *
Bradford
Bishop
Albert D. 0 0 0 0 20,000 20,000 0 40,000 0 *
Aycock
Larry L. 0 0 0 0 20,000 20,000 0 40,000 0 *
Wiginton
and
Jan H.
Wiginton,
JTWROS
26
Harold K. 0 0 0 0 66,667 66,667 0 133,334 0 *
Wilson
Ken Wilson 0 0 0 0 50,000 50,000 0 100,000 0 *
Dennis A. 0 0 0 0 15,000 15,000 0 30,000 0 *
Wilson
DD Growth 0 0 0 0 166,667 166,667 0 333,334 0 *
Premium
Fund
Alberto
Micalizzi,
Chairman
(18)
Charles R. 0 0 0 0 33,334 33,334 0 66,668 0 *
Barber, Jr.
Michael E. 0 0 0 0 54,000 54,000 0 108,000 0 *
Stephens
Matt
Clayton 0 0 0 0 33,334 33,334 0 66,668 0 *
David H. 0 0 0 0 16,667 16,667 0 33,334 0 *
Silvertooth
Mickey 0 0 0 0 10,000 10,000 0 20,000 0 *
Hankins
Robert 0 0 0 0 20,000 20,000 0 40,000 0 *
Leighton
Gibens
Ruby 0 0 0 0 13,334 13,334 0 26,668 0 *
E.Lawhon
Geraldine 0 0 0 0 13,334 13,334 0 26,668 0 *
Shaw
Steve N. 0 0 0 0 10,000 10,000 0 20,000 0 *
Bostic
Family 0 0 0 0 10,000 10,000 0 20,000 0 *
Home
Center, Inc.
attn:Charles
Stricklin,
President
(19)
Allison 20,000 0 0 0 0 0 20,000 0 0 *
Investment
Corp.,
Contact
Person
Raymond
Burke (20)
Sequence 17,338 0 0 0 0 0 17,338 0 0 *
Advisors
Corp.,
Richard
Fisher
Contact
Person (21)
TOTAL 37,338 9,941,627 4,945,100 2,675,000 880,544 22,213,157 37,338 40,605,420 0 *
27
* Less than 1%
(1) Juan Montes has sole voting and investment control over the securities of
Cytation Corporation owned by Thunderbird Global Corporation. Mr. Montes
disclaims beneficial ownership of the securities of Cytation Corporation
owned by Thunderbird Global Corporation, except to the extent of his
pecuniary interest therein, and the inclusion of these shares in this
Filing shall not be deemed an admission of beneficial ownership of all of
the reported shares or for any other purpose.
(2) Juan Montes,has sole voting and investment control over the securities of
Cytation Corporation owned by Firle Trading, S.A. Mr. Montes disclaims
beneficial ownership of the securities of Cytation Corporation owned by
Firle Trading, S.A, except to the extent of his pecuniary interest therein,
and the inclusion of these shares in this Filing shall not be deemed an
admission of beneficial ownership of all of the reported shares or for any
other purpose.
(3) Gary K. Chandler has sole voting and investment control over the securities
of Cytation Corporation owned by Equity Trust Company. Mr. Chandler
disclaims beneficial ownership of the securities of Cytation Corporation
owned by Equity Trust Company, except to the extent of his pecuniary
interest therein, and the inclusion of these shares in this Filing shall
not be deemed an admission of beneficial ownership of all of the reported
shares or for any other purpose.
(4) Isaac Winehouse, as manager of B & W Equities, LLC, the general partner of
Double U Master Fund, LP, has sole voting and investment control over the
securities of Cytation Corporation owned by Double U Master Fund, LP. Mr.
Winehouse disclaims beneficial ownership of the securities of Cytation
Corporation owned by Double U Master Fund, LP, except to the extent of his
pecuniary interest therein, and the inclusion of these shares in this
Filing shall not be deemed an admission of beneficial ownership of all of
the reported shares or for any other purpose.
(5) Alberto A. deAlejo, Jr., as Trustee, has sole voting and investment control
over the securities of Cytation Corporation owned by Gilda Sierra deAlejo
2005 Trust. Mr. deAlejo disclaims beneficial ownership of the securities of
Cytation Corporation owned by the Gilda Sierra deAlejo 2005 Trust, except
to the extent of his pecuniary interest therein, and the inclusion of these
shares in this Filing shall not be deemed an admission of beneficial
ownership of all of the reported shares or for any other purpose.
(6) Keith Goodman, as Manager of the General Partner, has sole voting and
investment control over the securities of Cytation Corporation owned by
Nite Capital, LP. Mr. Goodman disclaims beneficial ownership of the
securities of Cytation Corporation owned by Nite Capital, LP, except to the
extent of his pecuniary interest therein, and the inclusion of these shares
in this Filing shall not be deemed an admission of beneficial ownership of
all of the reported shares or for any other purpose.
(7) Shad L. Stastney, as Managing Member, has sole voting and investment
control over the securities of Cytation Corporation owned by Vicis Capital
Master Fund. Mr. Stastney disclaims beneficial ownership of the securities
of Cytation Corporation owned by Vicis Capital Master Fund, except to the
extent of his pecuniary interest therein, and the inclusion of these shares
in this Filing shall not be deemed an admission of beneficial ownership of
all of the reported shares or for any other purpose.
(8) Robert M. Snibbe, Jr., as Managing Member, has sole voting and investment
control over the securities of Cytation Corporation owned by PP57, LLC. Mr.
Snibbe disclaims beneficial ownership of the securities of Cytation
Corporation owned by PP57, LLC, except to the extent of his pecuniary
interest therein, and the inclusion of these shares in this Filing shall
not be deemed an admission of beneficial ownership of all of the reported
shares or for any other purpose.
(9) William N. & Jean S. Hagler, as Co-Trustees, have shared voting and
investment control over the securities of Cytation Corporation owned by
William N. & Jean S. Hagler Trust. Either Co-Trustee, acting alone, has
authority to act on behalf of the Trust.
(10) Cameron King, as President, has sole voting and investment control over the
securities of Cytation Corporation owned by King Capital Corporation. Mr.
King disclaims beneficial ownership of the securities of Cytation
Corporation owned by King Capital Corporation, except to the extent of his
pecuniary interest therein, and the inclusion of these shares in this
Filing shall not be deemed an admission of beneficial ownership of all of
the reported shares or for any other purpose.
28
(11) Lucien Lallouz, as President, has shared voting and investment control over
the securities of Cytation Corporation owned by ZTZ Trust Corp with Sharon
Lallouz. Mr. Lallouz and Ms. Lallouz disclaim beneficial ownership of the
securities of Cytation Corporation owned by ZTZ Trust Corp., except to the
extent of their pecuniary interest therein, and the inclusion of these
shares in this Filing shall not be deemed an admission of beneficial
ownership of all of the reported shares or for any other purpose.
(12) Mark R. Sage and Cathy L. Sage, as Trustees, have shared voting and
investment control over the securities of Cytation Corporation owned by the
Mark R. Sage and Cathy L. Sage Revocable Trust.
(13) Richard Diamond, as Vice President, has sole voting and investment control
over the securities of Cytation Corporation owned by Apogee Financial
Investments, Inc. Mr. Diamond disclaims beneficial ownership of the
securities of Cytation Corporation owned by Apogee Financial Investments,
Inc., except to the extent of his pecuniary interest therein, and the
inclusion of these shares in this Filing shall not be deemed an admission
of beneficial ownership of all of the reported shares or for any other
purpose.
(14) Christopher Phillips, as Managing Member, has sole voting and investment
control over the securities of Cytation Corporation owned by Famalom, LLC.
Mr. Phillips disclaims beneficial ownership of the securities of Cytation
Corporation owned by Famalom, LLC., except to the extent of his pecuniary
interest therein, and the inclusion of these shares in this Filing shall
not be deemed an admission of beneficial ownership of all of the reported
shares or for any other purpose.
(15) Hans Beyer, as President, has sole voting and investment control over the
securities of Cytation Corporation owned by Daedalus Consulting. Mr. Beyer
disclaims beneficial ownership of the securities of Cytation Corporation
owned by Daedalus Consulting, except to the extent of his pecuniary
interest therein, and the inclusion of these shares in this Filing shall
not be deemed an admission of beneficial ownership of all of the reported
shares or for any other purpose.
(16) Christopher Phillips, as Managing Member, has sole voting and investment
control over the securities of Cytation Corporation owned by Total CFO,
LLC. Mr. Phillips disclaims beneficial ownership of the securities of
Cytation Corporation owned by Total CFO, LLC, except to the extent of his
pecuniary interest therein, and the inclusion of these shares in this
Filing shall not be deemed an admission of beneficial ownership of all of
the reported shares or for any other purpose.
(17) Bruce Jordan, as Managing Member, has sole voting and investment control
over the securities of Cytation Corporation owned by Midtown Partners &
Co., LLC. Mr. Jordan disclaims beneficial ownership of the securities of
Cytation Corporation owned by Midtown Partners & Co., LLC, except to the
extent of his pecuniary interest therein, and the inclusion of these shares
in this Filing shall not be deemed an admission of beneficial ownership of
all of the reported shares or for any other purpose.
(18) Alberto Micalizzi, as Chairman, has sole voting and investment control over
the securities of Cytation Corporation owned by DD Growth Premium Fund. Mr.
Micalizzi disclaims beneficial ownership of the securities of Cytation
Corporation owned by DD Growth Premium Fund, except to the extent of his
pecuniary interest therein, and the inclusion of these shares in this
Filing shall not be deemed an admission of beneficial ownership of all of
the reported shares or for any other purpose.
(19) Charles Stricklin, as President, has sole voting and investment control
over the securities of Cytation Corporation owned by Family Home Center,
Inc. Mr. Stricklin disclaims beneficial ownership of the securities of
Cytation Corporation owned by Family Home Center, Inc., except to the
extent of his pecuniary interest therein, and the inclusion of these shares
in this Filing shall not be deemed an admission of beneficial ownership of
all of the reported shares or for any other purpose.
(20) Raymond Burke, as Chairman, has sole voting and investment control over the
securities of Cytation Corporation owned by Allison Investment Corp. Mr.
Burke disclaims beneficial ownership of the securities of Cytation
Corporation owned by Allison Investment Corp., except to the extent of his
pecuniary interest therein, and the inclusion of these shares in this
Filing shall not be deemed an admission of beneficial ownership of all of
the reported shares or for any other purpose.
(21) Richard Fisher has sole voting and investment control over the securities
of Cytation Corporation owned by Sequence Advisors Corp. Mr. Fisher
disclaims beneficial ownership of the securities of Cytation Corporation
owned by Sequence Advisors Corp., except to the extent of his pecuniary
interest therein, and the inclusion of these shares in this Filing shall
not be deemed an admission of beneficial ownership of all of the reported
shares or for any other purpose.
29
PLAN OF DISTRIBUTION
ELIGIBLE SHARES
The Selling Stockholders will re-offer, pursuant to this prospectus, shares
of our Common Stock which we:
- have issued in connection with Rule 506 offerings;
- shall issue upon the conversion of shares of our Series A
Convertible Preferred Stock;
- shall issue upon the conversion of shares of our Series B
Convertible Preferred Stock;
- shall issue upon the conversion of shares of our Series C
Convertible Preferred Stock;
- shall issue upon the conversion of shares of our Series D
Convertible Preferred Stock;
- shall issue upon the exercise of Common Stock purchase warrants;
- shall issue as stock dividends; and
- shall issue pursuant to contractual obligations.
There can be no certainty as to when and if the shares of our Series A
Convertible Preferred Stock will be converted, or if our Common Stock purchase
warrants will be exercised. Your attention is directed to the sections captioned
"Description of Securities-Series A Convertible Preferred Stock" and the section
captioned "Description of Securities-Warrants."
The term "Selling Stockholders" as used by us in this prospectus includes
pledgees, donees, transferees or other successors in interest selling shares of
our Common Stock received after the date of this prospectus from one or more of
the Selling Stockholders named in the table commencing on page 21 as a pledge,
gift, partnership distribution or other non-sale related transfer.
To the extent any successor(s) to the named selling stockholders wish to
sell under this prospectus the Company must file a prospectus supplement
identifying such successors as selling stockholders.
30
DISTRIBUTION METHOD
All of the Selling Stockholders have advised us that they may sell, from
time to time, pursuant to this prospectus, their shares of our Common Stock (an
aggregate of 43,556,851 shares as of the date of this prospectus) on the OTC
Bulletin Board, in isolated transactions, or in a combination of such methods of
sale. They have also advised us that their sales may be made at fixed prices
which may be changed, at market prices prevailing at the time of sale, at prices
related to prevailing market prices, or at negotiated prices with institutional
or other investors. In addition, the Selling Stockholders may sell, when
permissible, pursuant to the exemption of Rule 144 under the Securities Act.
The Selling Stockholders will act independently of each other. They may
sell the shares of our Common Stock pursuant to this registration
statement/prospectus by one or more of the following methods, without
limitation:
- a block trade on which the broker-dealer so engaged will attempt
to sell the shares of our Common Stock as agent, but may position and
resell a portion of the block as principal to facilitate the
transaction;
- purchases by the broker-dealer as principal and resales by such
broker-dealer for its account pursuant to this prospectus;
- ordinary brokerage transactions and transactions in which the
broker solicits, or acts as an intermediary for purchasers; or
- face-to-face transactions between the Selling Stockholder and
purchasers without a broker-dealer.
In effecting sales, a broker-dealer engaged by a Selling Stockholder may
arrange for other brokers or dealers to participate. Such brokers or dealers
may receive commissions or discounts from the Selling Stockholder in amounts
which will be negotiated immediately prior to sale. This compensation to a
particular broker-dealer might be in excess of customary commissions for routine
market transactions. Brokers or dealers and any participating brokers or
dealers acting as described in this paragraph may be deemed to be "underwriters"
within the meaning of Section 2(11) of the Securities Act in connection with
these sales. Any profits realized by the Selling Stockholder and the
compensation of such brokers or dealers may be deemed to be underwriting
discounts and commissions under the Securities Act.
Upon our being notified by a Selling Stockholder that any material
arrangement has been entered into with a broker-dealer for the sale of shares of
our Common Stock through a block trade, a purchase by a broker or dealer, or any
special offering other than an underwritten offering, we shall file a
post-effective amendment to the Registration Statement. In such amendment we
shall disclose (a) the name of each broker-dealer, (b) the number of shares
involved, (c) the price at which such shares were sold, (d) the commissions paid
or discounts or concessions allowed to such broker-dealer(s), where applicable,
(e) that such broker-dealer(s) did not conduct any investigation to verify the
information set out in this prospectus, as supplemented, and (f) other facts
material to the transaction.
31
In the event that a group of Selling Stockholders advises us that they have
engaged an underwriter to sell for them and any other Selling Stockholder who or
which so advises, we shall file a post-effective amendment to the Registration
Statement, of which this prospectus is Part I, so that a new amended prospectus
will become available describing the underwritten offering, whether on a firm
commitment or best efforts basis. As of the date of this prospectus, we have
received no such advice.
From time to time, one or more of the Selling Stockholders may pledge,
hypothecate or grant a security interest in, or transfer or assign, some or all
of the shares of our Common Stock owned by them. The pledgees, secured parties
or persons to whom such securities have been hypothecated shall, upon
foreclosure in the event of a default, and the transferees and assignees shall,
be deemed to be Selling Stockholders for the purpose of this prospectus. The
number of shares of our Common Stock beneficially owned by a Selling Stockholder
who or which so transfers, pledges or assigns will decrease as and when the
Selling Stockholder takes such action. The plan of distribution for the Selling
Stockholder's shares of our Common Stock sold hereunder will otherwise remain
unchanged by reason of a transfer, pledge or assignment. A Selling Stockholder
may also enter into option or other transactions with a broker-dealer that
involve the delivery of shares of our Common Stock to the broker-dealer. The
broker-dealer may then resell or otherwise transfer the shares of our Common
Stock. A Selling Stockholder may also loan or pledge shares of our Common Stock
to a broker-dealer. The broker-dealer may then sell the shares of our Common
Stock so loaned or, upon a default, may sell or otherwise transfer the pledged
shares of our Common Stock.
In order to comply with the securities laws of some states, the shares of
our Common Stock will have to be sold for a Selling Stockholder in those
jurisdictions only through registered or licensed brokers or dealers.
We have advised the Selling Stockholders of the requirement under the
Securities Act that each of them, or any broker-dealer acting for him, she or
it, must deliver a copy of this prospectus in connection with any resale by such
Selling Stockholder of shares of our Common Stock under this prospectus.
We have also undertaken, if, in our opinion in the future, this prospectus
no longer complies with Section 10(a)(3) of the Securities Act, to advise the
Selling Stockholders of this opinion, to request that the Selling Stockholders
cease use of this prospectus and to confirm our then intention to amend the
Registration Statement of which this prospectus is part I in order to effect
such compliance.
UNDERWRITERS AND UNDERWRITING OBLIGATION
The following selling shareholders are affiliates of Midtown Partners, a
SEC and NASD registered broker-dealer: (a) Apogee Financial Investments, Inc., a
selling shareholder holding 1,901 shares of Series B Preferred Stock convertible
into 190,100 shares of common stock; (b) Famalom, LLC, a selling shareholder
holding 3,025 shares of Series B Preferred Stock convertible into 302,500 shares
32
of common stock; (c) Daedalus Consulting, Inc., a selling shareholder holding
3,425 shares of Series B Preferred Stock convertible into 342,500 shares of
common stock; (d) Deecembra Diamond, a selling shareholder holding 5,750 shares
of Series B Preferred Stock convertible into 575,000 shares of common stock; and
(e) Total CFO, LLC, a selling shareholder holding 26,750 shares of Series B
Preferred Stock convertible into 2,675,000 shares of common stock and a Series C
Common Stock Purchase Warrant exercisable for 2,000,000 shares of common stock
(collectively, the "Midtown Affiliates"). The Company is registering for re-sale
the common stock issuable upon exercise or conversion of the securities
referenced above in this paragraph. As such, as an affiliate of Midtown
Partners, the selling shareholders referenced above in this paragraph fall into
the definition of an "underwriter," as defined in Section 2(11) of the
Securities Act of 1933, as amended, relative to the securities owned by each
such selling securityholder being registered hereunder.
Except for the prior engagement of Midtown Partners as placement agent in
connection with the private Series A Preferred Stock Offering and the private
Series D Preferred Stock Offering, and as an owner of securities, Midtown
Partners does not have a material relationship with the Company. Further, except
as an owner of securities of the Company, none of the Midtown Affiliates have a
material relationship with the Company. None of the Midtown Affiliates may
return any of the above referenced securities. There is no arrangement under
which any Midtown Affiliate may purchase additional shares or securities in
connection with these offerings. None of the Midtown Affiliates have a
contractual right to designate or nominate a member of the Board of Directors.
Each of the Midtown Affiliates plan to resale the above referenced
securities pursuant to the plan of distribution as discussed at page 31 under
the heading "DISTRIBUTION METHOD." Based upon representations received, each of
the Midtown Affiliates do not intend to engage in passive market making
transactions under Rule 103 of Regulation M or to conduct any stabilizing
transactions. Each of the Midtown Affiliates are not making any warrant or
rights offering to existing security holders.
33
COMPLIANCE
We have also advised each of the Selling Stockholders that a court may
determine at a later date that he, she or it is an "underwriter" within the
meaning of Section 2(11) of the Securities Act. In such event the Selling
Stockholder may be found liable for monetary damages to purchasers under
Sections 11, 12(2) and 15 of the Securities Act if there are any defects in this
prospectus (i.e., material misstatements or omissions). We have also advised
them that they may be found liable under Section 10(b) of the Act and Rule 10b-5
for such material misstatements or omissions, if any.
We and the Selling Stockholders are obligated to take such steps as may be
necessary to ensure that the offer and sale by the Selling Stockholders of an
aggregate, as of the date of this prospectus, of 43,556,851 shares of our Common
Stock offered by this prospectus, will comply with the requirements of the
federal securities laws and regulations, including Regulation M.
In general, Rule 102 under Regulation M prohibits any Selling Stockholder
or a broker-dealer acting for such Selling Stockholder from, directly or
indirectly, bidding for, or purchasing, any shares of our Common Stock, or
attempting to induce any person to bid for, or to purchase, shares of our Common
Stock during a restricted period (as such term is defined in Rule 100) which
ends when he, she or it has completed his, her or its participation in a
distribution of shares in an offering made pursuant to this prospectus. Rule
102 sets forth certain exceptions for the Selling Stockholder, including
exercising a stock option or warrant.
We are bearing all costs relating to the registration of the shares of our
Common Stock offered by this prospectus. Any commissions, discounts or other
fees payable to a broker-dealer in connection with any sale of shares of our
Common Stock will be borne by the Selling Stockholder selling such shares.
34
LEGAL PROCEEDINGS
Although the Company and its subsidiaries are in the normal course of
business subject to claims and litigation, neither the Company nor its
subsidiaries are 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 or its subsidiaries.
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.
DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
OFFICERS AND DIRECTORS
As of June 29, 2006, the directors and executive officers of Cytation
Corporation, Inc., their ages, positions, the dates of initial election or
appointment as directors or executive officers, and the expiration of their
terms are as set forth in the following table. Please note that Joel Logan,
Charles Murphree, and John Lawler are not directors or executive officers of
Cytation Corporation but are included in this table pursuant to Rule 3b-7
because they are executive officers and/or directors of the Company's subsidiary
who perform policy-making functions.
NAME OF
DIRECTOR/EXECUTIVE
OFFICER AGE POSITION PERIOD SERVED
Charles G. Masters 66 President, Chief Executive Officer, January 18, 2006 to Present; term
and Class II Director as Class II Director expires in2007
Christopher Portner 40 Class I Director July 2001 to Present; term as
Class I Director expires in 2006
Joel Stephen Logan, II 37 Member of the Board of Directors January 2004 to Present; term as
of Deer Valley Homebuilders, Inc., Director expires in 2006
President and General Manager of
Deer Valley Homebuilders, Inc.
Charles L. Murphree, Jr. 44 Member of the Board of Directors of April 2004 to Present; term as
Deer Valley Homebuilders, Inc., Director expires in 2006
Vice President and Regional Sales
Director of Deer Valley Homebuilders, Inc.
35
John Steven Lawler 37 Member of the Board of Directors of January 2004 to Present; term as
Deer Valley Homebuilders, Inc., Director expires in 2006
Director of Finance, Deer Valley]
Homebuilders, Inc.
Hans Beyer 40 Proposed Class II Director Nominee; term would expire
in 2007
John Giordano 48 Proposed Class III Director Nominee; term would
expire in 2008
Dale Phillips 58 Proposed Class I Director Nominee; term would
expire in 2009
DUTIES, RESPONSIBILITIES AND EXPERIENCE
CHARLES G. MASTERS, Chief Executive Officer, President and Director of
Cytation Corporation. Mr. Masters was the founder of Deer Valley Acquisitions
Corporation and, since its inception in July 2005, has served as its Chief
Executive Officer. In March 1998, Mr. Masters founded and has since served as
CEO and CFO of Bumgarner Enterprises, Inc., an oil and gas development and a
business consulting firm. Since 2001, Mr. Masters has also served as Director,
CEO and CFO of Ranger Industries, Inc., a public company, which is the sole
shareholder of Bumgarner Enterprises. Ranger Industries engages in business
consulting, due diligence research, and oil and gas exploration and development.
Mr. Masters has founded and served as the CEO and CFO of several private
companies involved in the development of military electronic communications and
test equipment, pioneering the introduction of microprocessors into point of
sale equipment, medical equipment, artificial intelligence devices, and the
development of laser scanners. Mr. Masters received a B.S.E.E. (1961) from Duke
University, a M.S.E.E. (1964) from the University of Pittsburgh and a M.S.M.S.
(1966) from Johns Hopkins University.
CHRISTOPHER PORTNER, Director of Cytation Corporation. Since March 1998,
Mr. Portner has been a certified financial planner and a general securities
principal with PSA Equities and a portfolio manager with PSA Capital Management
of Lutherville, Maryland. From 1995 through February 1998, Mr. Portner was a
financial consultant with Peremel & Company of Baltimore, Maryland. Mr. Portner
is a graduate of the College of Financial Planning's professional education
program, holds a Bachelor of Science degree in both Business and English from
Towson State University. Mr. Portner plans to resign as director at a special
meeting to be held on July 24, 2006.
JOEL STEPHEN LOGAN, II, Director, President, and General Manager of Deer
Valley Homebuilders, Inc. Mr. Logan has extensive experience in the
manufactured home industry. Since 2004, Mr. Logan has served as General Manager
and President for Deer Valley Homebuilders, Inc. From 1996 until 2003, Mr.
Logan worked as President of Pinnacle Homes of Alabama, a manufactured housing
company. Mr. Logan is a graduate of Mississippi State University, from which he
holds a degree in Business Administration. Mr. Logan is included here as an
executive officer because he is an executive officer of the Company's subsidiary
who performs a policy-making function, as determined by Rule 3b-7.
CHARLES L. MURPHREE, JR., Director, Vice President, and Regional Sales
Director of Deer Valley Homebuilders, Inc. Since April of 2004, He has worked as
Regional Sales Director and Vice President of Deer Valley Homebuilders, Inc.
From 2003 until 2004, Mr. Murphree served as Plant Manager for Clayton Homes,
Inc. From 2000 through 2003, Mr. Murphree worked as General Manager of the
Energy and LifeStyle Divisions of Southern Energy Homes, Inc. Clayton Homes,
Inc. and Southern Energy Homes, Inc. are producers of manufactured housing. Mr.
Murphree graduated from the University of Alabama with a Bachelor of Science in
Business Administration. Mr. Murphree is included here as an executive officer
because he is an executive officer of the Company's subsidiary who performs a
policy-making function, as determined by Rule 3b-7.
36
JOHN STEVEN LAWLER, Director and Director of Finance of Deer Valley
Homebuilders, Inc. Since April 2004, Mr. Lawler, a certified public accountant,
has worked as Director of Finance for Deer Valley Homebuilders, Inc. From 2001
until 2004, he served as ERP and IT Project Manager for Cavalier Homes, Inc.
From 1999 until 2001, Mr. Lawler worked as the ERP Team Leader for Financial
Accounting for Cavalier Homes, Inc. Cavalier Homes, Inc. is a producer of
manufactured housing. Mr. Lawler holds a Bachelor of Science in Business
Administration from the University of Alabama. Mr. Lawler is included here as an
executive officer because he is an executive officer of the Company's subsidiary
who performs a policy-making function, as determined by Rule 3b-7.
HANS BEYER, Nominee for Director. Since February of 2005, Mr. Beyer has
served as a partner for Saxon Gilmore Carraway Gibbons Lash & Wilcox, P.A. At
Saxon Gilmore Carraway Gibbons Lash & Wilcox, P.A., he oversees and manages
complex legal matters. Since September 2005, Mr. Beyer has served as the Senior
Vice President of Mirabilis Ventures, Inc. At Mirabilis Ventures, Inc., he
oversees private equity investments. Mirabilis Ventures, Inc. is a diversified,
privately-held holding company with interests in a variety of companies in
industries including construction, business consulting, and software
development. In addition, Mr. Beyer is President and Founder for Daedalus
Consulting, Inc., which provides Internet research and business consulting
services, primarily for start-up and small companies. In connection with his
position at Daedalus Consulting, Inc., Mr. Beyer provides consulting advice on
business matters. From 2003 to February 2005, Mr. Beyer was a partner at
Buchanan Ingersoll, P.C. Prior to 2002, Mr. Beyer was the founder and President
of the Law Firm of Hans Christian Beyer, P.A. Mr. Beyer holds a B.A. from the
University of Michigan and a J.D. from the University of Michigan Law School.
JOHN GIORDANO, Nominee for Director. For the past five years Mr. Giordano
has served as Chair of the Business, Tax and Corporate Finance Practice Group at
Bush Ross, P.A., a Tampa, Florida law firm. He is regularly involved in complex
business-related transactions, has extensive experience in a broad range of
areas, including federal and state securities law, corporate finance, mergers,
acquisitions, and tax law, and has acted as general corporate counsel for
numerous Florida-based public and private corporations. Mr. Giordano attended
the University of Florida, where he received a B.S., a J.D., and an L.L.M. in
taxation.
DALE PHILLIPS, Nominee for Director. For the past five years, Mr. Phillips
has served as a director and Vice President of Finance for RE Purcell
Construction Co., Inc., a paving and utility contractor. He is also a director
and Vice President for Dalmari, Inc. Mr. Phillips holds an A.S. (1968) in
Business Management from Champlain College and a B.A. (1971) in Accounting from
Castleton State College.
SIGNIFICANT EMPLOYEES
Other than the executive officers of Deer Valley named above, no other
employees are required to be disclosed under this item. Because of their
importance to the success of Deer Valley and the Company, Deer Valley maintains
"key man" life insurance policies, with Deer Valley as beneficiary, on the
former owners of Deer Valley, including Joel Stephen Logan II, John Steven
Lawler, and Charles Murphree.
FAMILY RELATIONSHIPS
There are no family relationships among any of our directors and executive
officers.
INVOLVEMENT IN LEGAL PROCEEDINGS
To the best of our knowledge, there is no material proceeding to which any
director, officer or affiliate of the Company, any owner of record or
beneficially of more than 5% of any class of voting securities of the Company,
or security holder is a party adverse to the Company or has a material interest
adverse to the Company or any of its subsidiaries.
To the best of our knowledge, during the past five years, none of our
directors or executive officers were involved in any of the following: (1) any
bankruptcy petition filed by or against any property or business of which such
37
person was a general partner or executive officer either at the time of the
bankruptcy or within two years prior to that time; (2) any conviction in a
criminal proceeding or being subject to a pending criminal proceeding (excluding
traffic violations and other minor offenses); (3) being subject to any order,
judgment, or decree, not subsequently reversed, suspended or vacated, of any
court of competent jurisdiction, permanently or temporarily enjoining, barring,
suspending, or otherwise limiting his involvement in any type of business,
securities or banking activities; and (4) being found by a court of competent
jurisdiction (in a civil action), the SEC, or the Commodities Futures Trading
Commission to have violated a federal or state securities or commodities law,
and the judgment has not been reversed, suspended, or vacated.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
the Company's directors, officers and holders of more than 10% of the Company's
equity securities to file with the Securities and Exchange Commission initial
reports of ownership and reports of changes in ownership. Based solely on a
review of the forms, reports, and certificates filed with the Company by such
persons, all Section 16(a) filing requirements were complied with by such
persons during the last fiscal year.
SPECIAL MEETING OF THE SHAREHOLDERS AND PROXY
The management of the Company will likely change soon. The Company has
filed a Preliminary Information Statement on Schedule 14C (the "Information
Statement") with the United States Securities and Exchange Commission (the
"SEC"). In the Information Statement, the Company discloses that shareholders
holding in excess of fifty percent (50%) of all shares entitled to vote have
indicated that they will vote FOR the following proposals at a special meeting
of the shareholders which the Company intends to hold on or about July 24, 2006:
FOR the election of each of Hans Beyer, John Giordano, and Dale
Phillips to serve as directors of Cytation Corporation until the next
annual meeting of shareholders in the years in which their terms expire and
until their successors are duly elected and qualified, or until their
earlier resignation, removal from office, or death;
FOR amending the Company's Certificate of Incorporation to increase
the authorized preferred stock, par value $.01 per share, of the Company
from 1,140,000 shares to 10,000,000 shares;
FOR amending the Company's Certificate of Incorporation to increase
the authorized common stock, par value $.001 per share, of the Company from
2,000,000 shares to 100,000,000 shares of common stock;
FOR amending the Certificate of Incorporation to change the name of
the Company to Deer Valley Corporation; and
FOR approving a merger with a Florida corporation, solely for purposes
of establishing the Company's domicile in Florida.
MAJORITY VOTE FOR ALL PROPOSALS
In connection with the special meeting the Company has solicited and
received the votes of shareholders holding in excess of fifty percent (50%) of
all shares entitled to vote and the consent of shareholders holding at least
fifty percent (50%) of the Series A Preferred Stock, via an irrevocable proxy
38
limited in scope to the five proposals detailed above and limited in duration to
July 30, 2006 or the adoption of the proposals listed above, whichever occurs
earlier. The shareholders listed in the following paragraphs and the
accompanying table have signed the limited, irrevocable power of attorney and
proxy.
Pursuant to the restrictions of the Certificates of Designation of the
Company's Series A and Series C convertible preferred stock, and in accordance
with the record date of June 5, 2006, the aggregate shares available to be voted
on the proposals are 8,585,895. Fifty percent of the aggregate shares available
to be voted on the proposals amounts to 4,292,948 shares. The following
shareholders have indicated that they intend to vote for all of the proposals:
SHAREHOLDER NUMBER OF SHARES TO BE VOTED FOR PROPOSALS
Charles G. Masters 1,430,000
Edwin McGusty 685,000
Deecembra Diamond 675,000
Stacy Bagley 597,500
Daedalus Consulting and Hans Beyer 342,500
Richard Masters 250,000
Robert Christian 100,000
Famalom, LLC and Total CFO, LLC 302,500
Vicis Capital Master Fund 49,900
Apogee Financial Investments, Inc (proxy holder) 190,100
TOTAL 4,622,500
Please note that private transactions undertaken subsequent to the
execution of the irrevocable proxy have changed the number of shares held by
some of the shareholders in the above table. However, since the terms of the
irrevocable proxy and the documents evidencing the subsequent transactions
provide that the shares remain subject to the proxy despite being transferred,
the above table reflects pre-transaction voting and ownership. For the number of
shares currently held by the shareholders listed in the above table, please see
the Table of Selling Security Holders, above.
APPROVAL OF AT LEAST FIFTY PERCENT OF THE ISSUED AND OUTSTANDING SERIES A
PREFERRED STOCK
The voting restrictions of the Certificate of Designation of the Company's
Series A Preferred Stock apply only if the holders of Series A Preferred Stock
vote with all shareholders. When the consent of at least fifty percent of the
holders of Series A Preferred Stock is required before certain corporate actions
may be taken, no such restrictions apply. Accordingly, the consent of Vicis
Capital Master Fund, which holds approximately 60.6% of the Company's Series A
Preferred Stock, represents the consent required to approve increasing the
authorized preferred stock of the Company and merging with a Florida corporation
for the sole purpose of establishing the Company's domicile in Florida.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Except as set forth below, there were no transactions during the last two
fiscal years, and there are no proposed transactions to which the Company or
its subsidiary was or is to become a party, in which any director, executive
officer, director nominee, beneficial owner of more than five percent (5%) of
any class of our stock, or members of their immediate families had, or is to
have, a direct or indirect material interest.
Charles G. Masters, the current President of Cytation, and several
potential investors met with the officers and principals of Deer Valley
Homebuilders, Inc. during the fall 2004 for the purpose of exploring a variety
of potential investment relationships in or with Deer Valley Homebuilders, Inc.
Over the course of the next year, numerous possible relationships were discussed
primarily by Mr. Masters and Joel S. Logan II, the President of Deer Valley. The
founders of Deer Valley desired to be bought out by an acquisition company,
preferably public, but also desired to continue to operate the company. Toward
this end, Mr. Masters formed Deer Valley Acquisitions Corp. in July of 2005. The
aforementioned discussions ultimately led to an agreement for Deer Valley
Acquisitions Corp. to purchase 100% of the outstanding shares of Deer Valley.
This agreement was formalized as the Securities Purchase and Share Exchange
Agreement. Subsequent to the signing of the document, DVA negotiated a merger
with Cytation Corporation, and entered into a agreement with Midtown Partners to
raise approximately $7,500,000 from accredited investors to allow the
consolidated Cytation/DVA to fulfill the cash obligations of the Securities
Purchase and Share Exchange Agreement. The entire transaction was completed as a
series of contemporaneous closings which occurred January 18, 2006 and which are
more fully described under "Change in Control and Acquisition" below. During the
past two years, other than the negotiations described above, there were no
negotiations, transactions, or material contracts between Cytation Corporation
and Deer Valley Homebuilders, Inc.
In connection with the Securities Purchase and Share Exchange Agreement, on
January 18, 2006, the Company issued to Vicis Capital Master Fund, Inc. (the
"Lender") an Interest Bearing Non-Convertible Installment Promissory 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 "Promissory Note"). The Lender also owns
Series A Preferred Stock, Series A Common Stock Purchase Warrants, and Series B
Common Stock Purchase Warrants. In March 2006, the Lender agreed to convert the
Promissory Note into 150,000 shares of Series A Preferred Stock, Series A Common
39
Stock Purchase Warrants entitling the holder to purchase 2,000,000 shares of
Common Stock at an exercise price of one dollar and fifty cents ($1.50) per
share, and Series B Common Stock Purchase Warrants entitling the holder to
purchase 1,000,000 shares of Common Stock at an exercise price of two dollars
and twenty five cents ($2.25).
In connection with the Capital Stock Purchase Agreement, DVA 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. Joel Stephen Logan,
II, the President and General Manager of Deer Valley Homebuilders, Inc., Charles
L. Murphree, Jr., the Vice President and Regional Sales Director of Deer Valley
Homebuilders, Inc., and John Steven Lawler, Director of Finance of Deer Valley
Homebuilders, Inc., are each a party to the Earnout Agreement.
Pursuant an oral consulting agreement with Ranger Industries, Inc.,
Cytation paid, in two installments on January 30, 2006 and February 8, 2006, a
$100,000 consulting fee to Ranger Industries, Inc., as payment in full, for
services rendered. Ranger Industries, Inc. is controlled by Charles G. Masters,
the Chief Executive Officer & President of Cytation Corp.
On January 25 2006, the Company approved Deer Valley entering into a Sales
Contract with Steve J. Logan to purchase real property located at 7668 Highway
278 in Sulligent, Alabama (the "Sulligent Property"). 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 Company paid the purchase price for the
Sulligent Property of $725,000 in cash. Deer Valley obtained the funds for the
purchase price of the Sulligent Property from its revolving line of credit
described below 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. Steven J. Logan is the father of
Deer Valley's President, and General Manager, Joel Logan. The purchase of the
Sulligent Property was approved by the disinterested members of Deer Valley's
Board of Directors and the Chief Executive Officer of Cytation Corporation.
The disinterested members of the board of Deer Valley have approved a
consulting agreement between Deer Valley and Steve J. Logan, the father of Joel
Stephen Logan, II, a Member of the Board of Directors, President, and General
Manager of Deer Valley. Under the consulting agreement, Mr. Logan agreed to
remain as a personal guarantor on a loan on the Guin property and to provide
real estate consulting services from time to time, as requested. Deer Valley,
in return, agreed to pay Mr. Logan $5,000 per month for five years and to assume
the mortgage on the Guin property. Mr. Logan's personal guaranty allowed Deer
Valley to obtain a materially lower interest rate than it would have otherwise
been able to obtain. There are no specific minimum hours which Mr. Logan must
work. There are no enforcement provisions available to Deer Valley, should Mr.
Logan refuse to provide consulting services. To date, the number of consulting
hours Mr. Logan has provided has been nominal
Midtown Partners & Co., LLC ("Midtown Partners"), an SEC and NASD
registered broker dealer, acted as the placement agent for the Company in
connection with the Series A Preferred Stock Offering and the Series D Preferred
Stock Offering and was paid commissions as previously disclosed in the Company's
filings. Christopher Phillips and other Series B Preferred Stockholders have an
ownership interest in Midtown Partners.
CORPORATE GOVERNANCE
AUDIT COMMITTEE
With the resignations of Messrs. Richard A. Fisher, Kevin J. High, Richard
Parke, and John J Gilece, Jr. from the Board of Directors, we do not currently
have an audit committee, but one will be appointed as the current year
progresses. The board member who is currently performing the equivalent
functions of an audit committee is Charles G. Masters, who has not been
determined to be an "audit committee financial expert."
40
AUDIT COMMITTEE FINANCIAL EXPERT
We do not currently have an "audit committee financial expert" as defined
under Item 401(e) of Regulation S-B. As discussed above, our Board of
Directors plans to form an Audit Committee and is actively seeking to appoint an
individual to the Board of Directors and the Audit Committee who would be deemed
an audit committee financial expert and who would be independent as that term
is used in Item 7(d)(3)(iv) of Schedule 14A.
AUDIT COMMITTEE CHARTER
The Board of Directors has not adopted a written audit committee charter.
NOMINATING COMMITTEE
The Company does not currently have a standing Nominating Committee. The
Company feels that it is appropriate not to have a standing Nominating Committee
due to the size of the Company. Currently, the Board of Directors, as a whole,
recommends candidates who will be nominated as management's slate of directors
at each annual or special meeting of the shareholders. In connection with
selecting candidates for nomination to the Board of Directors, including any
nominees recommended by security holders, the Board of Directors (1) reviews
compliance by security holders with the Company's nominating procedures
contained in the Bylaws; (2) reviews information assembled for the purpose of
selecting candidates for nomination to membership on the Board of Directors,
taking into account the skills and characteristics reflected in the then-current
Board members, and identifies any particular qualifications necessary to augment
the skills, expertise and experience represented on the Board; and (3) following
appropriate investigation, ascertains the willingness of selected candidates to
serve and extends invitations to become candidates.
In identifying candidates for membership on the Board of Directors, the
Board takes into consideration all of the factors that it considers appropriate,
which may include diversity, knowledge of the Company's business and other
related industries, skills, and experience of the nominee in the context of the
needs of the Board as a whole. Nominees are selected who have the highest
personal and professional integrity, as well as demonstrated abilities, and whom
the Board believes will best serve the long-term interests of the stockholders.
The Board considers recommendations from stockholders, directors and officers,
in light of upcoming elections and actual or expected Board vacancies. All
candidates, including those recommended by shareholders, are evaluated using the
same criteria. The Board of Directors has not adopted a written charter for a
Nominating Committee. Due to the size of the Company, the Board of Directors
does not currently have a formal procedure to be followed by security holders in
submitting recommendations or nominations for candidates for the Board of
Directors. Security holders may submit such recommendations or nominations
directly to the Board of Directors at the Company's address, listed on this
Registration Statement.
The Board has determined that none of the current members of the Board of
Directors are independent within the meaning of the listing standards of NASDAQ.
COMPENSATION COMMITTEE
The Company does not have a formal Compensation Committee. The Board of
Directors, acting as a Compensation Committee, meets to discuss and deliberate
on issues surrounding the terms and conditions of executive officer
compensation, including base salaries, bonuses, awards of stock options, and
reimbursement of certain business-related costs and expenses.
BOARD MEETINGS
Directors are expected to attend all or substantially all Board meetings
and meeting of the committees, if any, on which they serve. Occasionally,
unforeseen circumstances may prevent a director from attending. All Board
members attended the most recent annual board meeting.
41
There were two telephonic board meetings of the Board of Directors in 2005
with all five directors in attendance. The board acted nine times in 2005 by
unanimous consent. No incumbent directors attended fewer than seventy-five
percent of the aggregate of the total number of meetings of the board of
directors (held during the period for which they have been directors) and the
total number of meetings held by all committees of the board on which they
served (during the periods which they served).
SHAREHOLDER COMMUNICATION WITH THE BOARD
At such time as the Company shall appoint a Corporate Secretary,
shareholders and other parties interested in communicating with any director may
do so in care of the Company's Corporate Secretary by phone or written
correspondence pursuant to the contact information contained in this
Registration Statement. The Corporate Secretary shall review all correspondence
and shall regularly forward all correspondence to the designated board member
or, in the case of correspondence directed to the Board as a group, to the
Chairman of the Board (except that the Corporate Secretary will not forward
commercial correspondence or duplicative correspondence, except that copies will
be maintained of all such correspondence). A written log of all correspondence
will be maintained by the Corporate Secretary. All correspondence from the
shareholders relating to accounting, internal controls, or auditing matters will
be forwarded to appropriate parties in accordance with procedures developed by
the Board with respect to such matters. Until the Company appoints a Corporate
Secretary, shareholders or other parties interested in communicating with any
director may do so in care of Charles G. Masters, the Company's Chief Executive
Officer, President, and Director, who shall record and forward all
correspondence in the manner described above.
42
EXECUTIVE COMPENSATION
EXECUTIVE COMPENSATION
The following table sets forth information regarding the compensation
earned by our Chief Executive Officer and each of our most highly compensated
executive officers whose aggregate annual salary and bonus exceeded $100,000 for
each of the years indicated with respect to services rendered by such persons.
SUMMARY COMPENSATION TABLE (9)
ANNUAL
COMPENSATION LONG-TERM COMPENSATION
------------ ----------------------
NAME AND PRINCIPAL YEAR SALARY BONUS OTHER ANNUAL RESTRICTED PAYOUTS ALL OTHER
POSITION ($) COMPENSATION STOCK COMPENSATION
($) AWARDS/ LTIP ($)
SECURITIES PAYOUTS
UNDERLYING ($)
OPTIONS
SARS
(#)
-----------------------------------------------------------------------------------------------------------------------
Charles G. Masters (1) 2005 - - - - - -
2004 - - - - - -
2003 - - - - - -
Joel Stephen Logan, 2005 $52,000 $ 245,161 $ 143,617(7) - - -
II(2) 2004 $49,000 $ 62,121 $ 162,120(8) - - -
2003 - - - - - -
Charles L. Murphree, 2005 $52,000 $ 124,353 86,710(7) - - -
Jr.(3) 2004 $48,000 $ 34,389 $ 97,516(8) - - -
2003 - - - - - -
John Steven Lawler (4) 2005 $52,000 $ 118,291 $ 67,021(7) - - -
2004 $47,000 $ 31,494 $ 75,846(8) - - -
2003 - - - - - -
Richard A. Fisher(5) 2005 $ 0 - $ 0 $ 0 - -
2004 $ 0 - $ 352,982 $ 0 - -
2003 $ 0 - $ 140,000 $ 25,000 - -
Kevin J. High (6) 2005 $ 0 - $ 0 $ 0 - -
2004 $ 0 - $ 95,284 $ 0 - -
2003 $ 0 - $ 375,000 $ 0 - -
43
1) On January 18, 2006, Mr. Masters was elected to serve as a
Director, Chief Executive Officer, and President of Cytation
Corporation.
2) Mr. Logan is President and General Manager of Deer Valley
Homebuilders, Inc., a material operating subsidiary of Cytation
Corporation, acquired on January 18, 2006. Mr. Logan has been included
under Rule 3b-7 of the Exchange Act, as amended, as an executive
officer of a subsidiary who performs certain policy making functions
identified in Rule 3b-7. Mr. Logan's executive compensation above
includes historical compensation paid by Deer Valley Homebuilders,
Inc. prior to the acquisition by Cytation Corporation.
3) Mr. Murphree is Vice President and Regional Sales Director of
Deer Valley Homebuilders, Inc, a material operating subsidiary of
Cytation Corporation acquired on January 18, 2006. Mr. Murphree has
been included under Rule 3b-7 of the Exchange Act, as amended, as an
executive officer of a subsidiary who performs certain policy making
functions identified in Rule 3b-7. Mr. Murphree's executive
compensation above includes historical compensation paid by Deer
Valley Homebuilders, Inc. prior to the acquisition by Cytation
Corporation.
4) Mr. Lawler is Director of Finance of Deer Valley Homebuilders,
Inc, a material operating subsidiary of Cytation Corporation, acquired
on January 18, 2006. Mr. Lawler has been included under Rule 3b-7 of
the Exchange Act, as amended, as an executive officer of a subsidiary
who performs certain policy making functions identified in Rule 3b-7.
Mr. Lawler's executive compensation above includes historical
compensation paid by Deer Valley Homebuilders, Inc. prior to the
acquisition by Cytation Corporation.
5) Mr. Fisher resigned as Chairman and General Counsel, effective as
of January 18, 2006. Mr. Fisher's compensation for 2004 includes (a)
$275,000 paid in 2001 but not earned as compensation until 2004, (b)
$30,000 book value of restricted shares of common stock of Cytation
Corporation, and (c) $15,000 book value of 25,000 shares of common
stock acquired upon exercise of stock option. Mr. Fisher's
compensation for 2003 includes $100,000 paid in 2001 but not earned as
compensation until 2003.
44
6) Mr. High resigned as President, effective as of January 18, 2006.
Mr. High's compensation for 2004 includes (a) $30,000 book value of
restricted shares of common stock of Cytation Corporation, and (b)
$45,285 from the cancellation of indebtedness of an affiliate. Mr.
High's compensation for 2003 includes $225,000 paid in 2001 but not
earned as compensation until 2003.
7) Amount relates to partial reimbursement for payment of taxes
accrued in 2005 and payable by shareholder due to status as a
Subchapter S corporation.
8) Amount relates to partial reimbursement for payment of taxes
accrued in 2004 and payable by shareholder due to status as a
Subchapter S corporation.
9) None of the nominees for director have received any compensation
from Cytation Corporation.
STOCK OPTIONS AND STOCK APPRECIATION RIGHTS GRANT TABLE
Neither the Company, DVA, nor Deer Valley Homebuilders, Inc. issued any
common share purchase options or stock appreciation rights during the 2005
fiscal year to its named executive officers.
STOCK OPTIONS AND STOCK APPRECIATION RIGHTS EXERCISE AND VALUATION TABLE
With respect to each of our named executive officers, there have not been
any common share purchase options or stock appreciation rights exercised in
fiscal year 2005, and there are not any unexercised common share purchase
options or stock appreciation rights as of December 31, 2005.
EMPLOYMENT AGREEMENTS WITH NAMED EXECUTIVE OFFICERS
No employment agreements were in effect during 2005. On January 18, 2006,
Deer Valley entered into the following employment agreements with the following
executive officers.
On January 18, 2006, Deer Valley Homebuilders, Inc. entered into a seven
year employment agreement with Joel Stephen Logan, II. Under the terms of Mr.
Logan's Employment Agreement, Mr. Logan is (a) entitled to receive a fixed
annual salary of $52,000, (b) entitled to receive a monthly "hitch bonus" of $60
per "floor" produced by the Company, (c) is eligible to participate and receive
4.6% of the net income before taxes of the Company, and (d) entitled to receive
health benefits and coverage, as provided by the Company. By contract, Mr.
Logan is entitled to serve on the Board of Directors of Deer Valley
Homebuilders, Inc. and Deer Valley Acquisitions, Corp. until the earlier of (a)
the expiration of the non-compete clause in his Employment Agreement, or (b)
final payment under the Earnout Agreement.
On January 18, 2006, Deer Valley Homebuilders, Inc. entered into a seven
year employment agreement with Charles L. Murphree, Jr. Under the terms of Mr.
Murphree's Employment Agreement, Mr. Murphree is (a) entitled to receive a fixed
annual salary of $52,000, (b) entitled to receive a monthly "hitch bonus" of
$33.33 per "floor" produced by the Company, (c) is eligible to participate and
receive 2.2% of the net income before taxes of the Company, and (d) entitled to
receive health benefits and coverage, as provided by the Company. By contract,
Mr. Murphree is entitled to serve on the Board of Directors of Deer Valley
Homebuilders, Inc. and Deer Valley Acquisitions, Corp. until the earlier of (a)
the expiration of the non-compete clause in his Employment Agreement, or (b)
final payment under the Earnout Agreement.
On January 18, 2006, Deer Valley Homebuilders, Inc. entered into a seven
year employment agreement with John Steven Lawler. Under the terms of Mr.
Lawler's Employment Agreement, Mr. Lawler is (a) entitled to receive a fixed
annual salary of $52,000, (b) entitled to receive a monthly "hitch bonus" of $35
per "floor" produced by the Company, (c) is eligible to participate and receive
45
2% of the net income before taxes of the Company, and (d) entitled to receive
health benefits and coverage, as provided by the Company.By contract, Mr. Lawler
is entitled to serve on the Board of Directors of Deer Valley Homebuilders, Inc.
and Deer Valley Acquisitions, Corp. until the earlier of (a) the expiration of
the non-compete clause in his Employment Agreement, or (b) final payment under
the Earnout Agreement.
STOCK OPTION PLANS
During 2005, the Company did not maintain any stock option plans.
COMPENSATION OF DIRECTORS
Except for reimbursement for his or her reasonable expenses for attending
Board and Board Committee meetings, the Company currently does not provide for
compensation to be paid to members of the Board of Directors.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The table below sets forth information with respect to the beneficial
ownership of our capital stock as of June 6, 2006 for (i) any person whom we
know to be the beneficial owner of more than 5% of our outstanding common stock
(ii) each of our directors or those nominated to be directors, and executive
officers and (iii) all of our directors and executive officers as a group.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT(1)
TITLE OF CLASS NAME AND ADDRESS AMOUNT AND NATURE PERCENTAGE OF CLASS(2)
OF BENEFICIAL OWNER OF
BENEFICIAL OWNERSHIP
Common Stock issuable Charles G. Masters, Director of 1,713,335 (4) 8.6%
upon conversion of Series Cytation Corp., Chief Executive
B Preferred Stock; Officer & President of Cytation
Common Stock issuable Corp.(3)
upon conversion of Series
A Preferred Stock, Series
A Common Stock
Purchase Warrants, and
Series B Common Stock
Purchase Warrants.
Common Stock Christopher Portner, Director of 38,332 *
Cytation Corporation(3) Direct Ownership
Common Stock issuable Joel Stephen Logan, II, Member 500,000 2.5%
upon conversion of Series of the Board of Directors of Direct Ownership(6)
A Preferred Stock; Deer Valley Homebuilders, Inc.,
Common Stock issuable President and General Manager
upon exercise of Series A of Deer Valley Homebuilders,
and Series B Warrants Inc.(5)
46
Common Stock issuable Charles L. Murphree, Jr., 333,335 1.6%
upon conversion of Series Member of the Board of Direct Ownership(7)
A Preferred Stock; Directors of Deer Valley
Common Stock issuable Homebuilders, Inc., Vice
upon exercise of Series A President and Regional Sales
and Series B Warrants Director of Deer Valley
Homebuilders, Inc.(5)
Common Stock issuable John Steven Lawler, Member of 166,668 *
upon conversion of Series the Board of Directors of Deer D irect Ownership(8)
A Preferred Stock; Valley Homebuilders, Inc.,
Common Stock issuable Director of Finance, Deer Valley
upon exercise of Series A Homebuilders, Inc.(5)
and Series B Warrants
Common Stock issuable Christopher Phillips(3) 5,357,700(9) 27.0%
upon conversion of Series
B Preferred Stock or
Series C Preferred Stock;
Common Stock issuable
upon exercise of Series C
Warrants
Common Stock issuable Hans Beyer, 565,933(10) 2.8%
upon conversion of Series Director Nominee (3)
A and B Preferred Stock;
Common Stock issuable
upon exercise of Series A
and Series B Warrants
All Officers and Directors 3,317,603 16.7%
as a group (5 persons)
* Less than 1%.
(1) Nominees for director Dale Phillips and John Giordano own no securities of
Cytation Corporation.
(2) Applicable percentage of ownership is based on (i) 1,000,000 shares of
common stock being issued and outstanding as of June 6, 2006, (ii) an
aggregate of 9,941,627 shares of common stock which are issuable upon the
conversion of 745,622 shares of the Company's Series A Convertible
Preferred Stock currently issued and outstanding, (iii) an aggregate of
4,945,100 shares of common stock which are issuable upon the conversion of
49,451 shares of the Company's Series B Convertible Preferred Stock
currently issued and outstanding, (iv) an aggregate of 2,675,000 shares of
common stock which are issuable upon the conversion of 26,750 shares of the
Company's Series C Convertible Preferred Stock currently issued and
outstanding, and (v) an aggregate of 880,544 shares of common stock which
are issuable upon the conversion of 132,081 shares of Series D Preferred
Stock . Calculations do not include outstanding warrants, options, or other
rights issued by the Company, unless the reporting person is the beneficial
owner of the warrant, option, or other right. Beneficial ownership is
determined in accordance with the rules of the Commission and generally
includes voting of investment power with respect to securities. Shares of
common stock subject to securities exercisable or convertible into shares
of common stock that are exercisable or exercisable within 60 days are
deemed to be beneficially owned by the person holding such options for the
purpose of computing the percentage of ownership of such persons, but are
not treated as outstanding for the purpose of computing the percentage
ownership of any other person. Unless otherwise noted, we believe that all
shares are beneficially owned and that all persons named in the table have
sole voting and investment power with respect to all shares of common stock
owned by them.
47
(3) Unless otherwise indicated, the mailing address of the shareholder is 4902
Eisenhower Blvd., Suite 185, Tampa, FL 33634.
(4) Includes (a) 1,630,000 common shares issuable upon conversion of 16,300
shares of the Company's Series B Preferred Stock directly owned by Charles
G. Masters, (b) 33,334 common shares issuable upon conversion of 2,500
shares of the Company's Series A Preferred Stock owned by Charles Masters'
spouse, (c) 33,334 common shares issuable upon exercise of the Company's
Series A Common Stock Purchase Warrant owned by Charles Masters' spouse,
and (d) 16,667 common shares issuable upon exercise of the Company's Series
B Common Stock Purchase Warrant owned by Charles Masters' spouse. Charles
G. Masters disclaims beneficial ownership of securities owned by his
spouse, except to the extent of his pecuniary interest therein, and the
inclusion of these shares in this filing shall not be deemed an admission
of beneficial ownership of all of the reported shares for purposes of
Section 16 or for any other purpose.
(5) Unless ohterwise indicated, the mailing address of the shareholder is 205
Carriage St., Guin, Alabama 35563.
(6) Includes (a) 200,000 common shares issuable upon exercise of the Company's
Series A Preferred Stock; (b) 200,000 common shares issuable upon exercise
of the Company's Series A Common Stock Purchase Warrant, and (c) 100,000
common shares issuable upon exercise of the Company's Series B Common Stock
Purchase Warrant.
(7) Includes (a) 133,334 common shares issuable upon exercise of the Company's
Series A Preferred Stock, (b) 133,334 common shares issuable upon exercise
of the Company's Series A Common Stock Purchase Warrant, and (c) 66,667
common shares issuable upon exercise of the Company's Series B Common Stock
Purchase Warrant.
(8) Includes (a) 66,667 common shares issuable upon exercise of the Company's
Series A Preferred Stock, (b) 66,667 common shares issuable upon exercise
of the Company's Series A Common Stock Purchase Warrant, and (c) 33,334
common shares issuable upon exercise of the Company's Series B Common Stock
Purchase Warrant.
(9) Includes (a) 302,500 common shares issuable upon conversion of 303 shares
of the Company's Series B Preferred Stock owned by Famalom, LLC, an entity
for which Christopher Phillips serves as the managing member, (b) 2,675,000
common shares issuable upon conversion of 2,675 shares of the Company's
Series C Preferred Stock owned by Total CFO, LLC, an entity for which Mr.
Phillips serves as the managing member, (c) 2,000,000 shares of common
stock which are issuable upon exercise of a Series C Warrant held by Total
CFO, LLC, an entity for which Mr. Phillips serves as the managing member,
and (d) 190,100 common shares issuable upon conversion of 190 shares of the
Company's Series B Preferred Stock indirectly owned by nature of Mr.
Phillip's ownership of Apogee Financial Investments, Inc. The conversion
rights of each holder of outstanding shares of Series C Preferred Stock is
limited in the certificate of designations, preferences and rights of such
stock, and the exercise rights in the Series C Warrant issued to Total CFO,
LLC are limited, so, in each instance, the holder is not entitled to
convert any Series C Preferred Stock, or exercise any Series C Warrant, to
48
the extent that, after such conversion, the sum of the number of shares of
common stock beneficially owned by such holder and its affiliates, will
result in beneficial ownership of more than 4.99% of the outstanding shares
of common stock. In addition, rights and designation of the Series C
Preferred Stock are restricted so that the holder of the Series C Preferred
Stock does not vote greater then 4.99% of the Company's issued and
outstanding capital stock. The Company has voluntarily elected to disclose
Mr. Phillips' ownership interest on this beneficial ownership table even
though he is not a director, officer, and the Series C Preferred Stock is
subject to such conversion and voting limitations. As a result, the
inclusion of Series C Preferred Stock and the Series C Warrant in this
Filing shall not be deemed an admission of beneficial ownership of all of
registered securities under Section 16 or for any other purpose. In
addition, Christopher Phillips disclaims beneficial ownership of securities
owned by Famalom, LLC, Total CFO, LLC, and Apogee Financial Investments,
Inc., except to the extent of his pecuniary interest therein, and the
inclusion of these shares in this Filing shall not be deemed an admission
of beneficial ownership of all of the reported shares or for any other
purpose.
(10) Includes (a) 13,333 common shares issuable upon exercise of the Company's
Series A Preferred stock, (b) 13,333 common shares issuable upon exercise
of the Company's Series A Common Stock Purchase Warrant, (c) 6,667 common
shares issuable upon exercise of the Company's Series B Common Stock
Purchase Warrant, (d) 342,500 shares of common stock issuable upon the
conversion of 3,425 shares of Series B Convertible Preferred Stock owned
indirectly through Daedalus Consulting, Inc., and (3) 190,100 common shares
issuable upon conversion of 1,901 shares of the Company's Series B
Preferred Stock indirectly owned by nature of Mr. Beyer's indirect
ownership of Apogee Financial Investments, Inc. Mr. Beyer disclaims
beneficial ownership of securities owned by Daedalus Consulting, Inc. and
Apogee Financial Investments, Inc., except to the extent of his pecuniary
interest therein, and the inclusion of these shares in this Filing shall
not be deemed an admission of beneficial ownership of all of the reported
shares or for any other purpose.
CHANGE IN CONTROL AND ACQUISITION
On January 18, 2006, the Company entered into the Securities Purchase and
Share Exchange Agreement, (the "Securities Purchase and Share Exchange
Agreement") by and among the Company, Richard A. Fisher, Kevin J. High, certain
purchasers of the Company's Series A Convertible Preferred Stock, DVA, the
shareholders of DVA, and Vicis Capital Master Fund (the "Lender").
SERIES A PREFERRED STOCK OFFERING AND DEBT FINANCING
On January 18, 2006, the Company closed on a private placement of
approximately $5,202,735 of Series A Preferred Stock. Pursuant to the
Securities Purchase and Share Exchange Agreement, dated as of January 18, 2006,
the Company issued and sold to the Purchasers, and the Purchasers purchased from
the Company, (a) 520,274 shares of Series A Preferred Stock, (b) Series A Common
Stock Purchase Warrants entitling the holders to purchase up to an aggregate of
6,936,980 shares of Common Stock at an exercise price of one dollar and fifty
cents ($1.50) per share, and (c) Series B Common Stock Purchase Warrants
entitling the holders to purchase up to an aggregate of 3,468,490 shares of
Common Stock at an exercise price of two dollars and twenty five cents ($2.25)
per share (the "Series A Preferred Stock Offering"). See, "CAPITAL STRUCTURE"
below for description of Series A Preferred Stock, Series A Common Stock
Purchase Warrants, and Series B Common Stock Purchase Warrants.
Since January 18, 2006, Cytation Corporation hasissued an additional
$2,253,480 (or 225,248 shares) of Series A Preferred Stock, Series A Warrants
exercisable for 3,004,640 shares of common stock, and Series B Warrants
exercisable for 1,502,320 shares of common stock. Such amounts include the
securities issued in connection with the Debt Conversion described in the
immediately following paragraph. Cytation has sold the Series A Preferred Stock
and warrants to institutional, accredited, and a limited number of
non-accredited investors pursuant to Rule 506 promulgated by the United States
Securities and Exchange Commission under the Securities Act of 1933, as amended.
Also, on January 18, 2006, the Company issued its Interest Bearing
Non-Convertible Installment Promissory Note (the "Promissory Note"), in the
---------------
49
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. In March 2006, Vicis Capital Master Fund,
Inc. (the "Lender") agreed to convert the Promissory Note into 150,000 shares of
Series A Preferred Stock, Series A Common Stock Purchase Warrants entitling the
holder to purchase 2,000,000 shares of Common Stock at an exercise price of one
dollar and fifty cents ($1.50) per share, and Series B Common Stock Purchase
Warrants entitling the holder to purchase 1,000,000 shares of Common Stock at an
exercise price of two dollars and twenty five cents ($2.25) (the "Debt
----
Conversion").
----------
The issuance of the Series A Preferred Stock, Series A Warrants, and Series
B Warrants were 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.
Such securities were issued to institutional or accredited investors.
Midtown Partners & Co., LLC ("Midtown Partners"), an SEC and NASD
registered broker dealer, acted as the placement agent for the Company in
connection with the Series A Preferred Stock Offering. Midtown Partners is
located in Tampa, Florida. In connection with the Series A Preferred Stock
Offering, the Company paid Midtown Partners a cash commission equal to
$674,371.50 and issued (a) Series BD-1 Common Stock Purchase Warrants to Midtown
Partners entitling Midtown Partners to purchase 919,162 shares of the Company's
common stock at an exercise price of seventy five cents ($.75) per share, (b)
Series BD-2 Common Stock Purchase Warrants to Midtown Partners entitling Midtown
Partners to purchase 919,162 shares of the Company's common stock at an exercise
price of one dollar and fifty cents ($1.50) per share, and (c) Series BD-3
Common Stock Purchase Warrants to Midtown Partners entitling Midtown Partners to
purchase 459,581 shares of the Company's common stock at an exercise price of
two dollars and twenty five cents ($2.25) per share. See, "CAPITAL STRUCTURE"
below for description of Series BD-1, BD-2, and BD-3 Warrants.
The issuance of the Series BD Warrants to Midtown Partners was 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. Such securities were
issued to institutional or accredited investors.
Except for the matters discussed immediately below, to Cytation's
knowledge, no holder of Series A Preferred Stock was an affiliate of, or was a
party to a material contact with, any holder of Series B Preferred Stock, any
holder of Series C Preferred Stock, or the former owners of Deer Valley
Homebuilders, Inc. The former owners of Deer Valley Homebuilders, Inc. acquired
$500,000, in the aggregate, of Series A Preferred Stock using a portion of the
proceeds from the $6,000,000 cash purchase price received upon completion of the
sale of 100% of the issued and outstanding capital stock of Deer Valley
Homebuilders, Inc. In addition, the father of Joel Logan, a former owner and
current officer of Deer Valley Homebuilders, Inc., purchased 15,000 shares of
Series A Preferred Stock (and related Series A and Series B warrants) for
$150,000. Edwin McGusty, an employee of Midtown Partners & Co., LLC, the
placement agent for the Series A Preferred Offering, purchased 10,000 shares of
Series A Preferred Stock (and related Series A and Series B warrants) for
$100,000. Hans Beyer, an owner of Daedalus Consulting, an owner of 3,425 shares
of Series B Preferred Stock, purchased 1,000 shares of Series A Preferred Stock
(and related Series A and Series B warrants) for $10,000. Max Frye, an
employee of Deer Valley Homebuilders, Inc. purchased 3,750 shares of Series A
Preferred Stock (and related Series A and Series B warrants) for $37,500.
Some affiliates of Deer Valley Homebuilders, Inc. ("Deer Valley") purchased
shares in the Series A Preferred Stock Offering, which closed on January 18,
2006. The following eight former owners of Deer Valley purchased an aggregate of
$500,000 in shares of Series A Convertible Preferred Stock, Series A Common
Stock Purchase Warrants, and Series B Common Stock Purchase Warrants: Joel
50
Logan, Charles Murphree, John Steven Lawler, James David Shaw, William Joseph
Aycock, Jr., Jerry Ray Cooper, Jr., Timm Gann, and Jimmy Ray Hawkins. In the
aggregate, the eight former owners of Deer Valley acquired (a) 66,666 shares of
Series A Convertible Preferred Stock convertible into 666,666 shares of common
stock, (b) Series A Common Stock Purchase Warrants exercisable for 666,666
shares of common stock, and (c) Series B Common Stock Purchase Warrants
exercisable for 666,666 shares of common stock.
The proceeds from the Series A Preferred Stock Offering and the Loan
referenced above were used as follows: (a) $6,000,000 to purchase 100% of the
issued and outstanding capital stock of Deer Valley Homebuilders, Inc., (b)
$636,871 as payment of commissions to Midtown Partners & Co., LLC, and (c)
$294,344 for working capital and payment of accountant, legal, consulting and
miscellaneous offering expenses.
In connection with the Series A Preferred Stock financing, pursuant to an
Investor Rights Agreement dated January 18, 2006, if the Company did not file a
registration statement registering the resale of the Series A Preferred Stock
and related warrants within sixty days after January 18, 2006, then, in lieu of
monetary damages or specific performance, the Company agreed to issue to each
purchaser of Series A Convertible Preferred Stock (a "Series A Investor") an
additional Series A Common Stock Purchase Warrant exercisable for the number of
shares of Common Stock equal to 1.5% of the sum of (i) the number of shares of
Common Stock issuable upon conversion of the Series A Preferred Stock held by
each such Series A Investor, and (ii) the number of shares of common stock
issuable upon exercise of the Series A Warrant held by each such Series A
Investor (a "Filing Penalty"). The Company filed this registration statement on
April 19, 2006. As a result, as a Filing Penalty, the Company must issue to the
Series A Investors Series A Warrants exercisable, in the aggregate, for 298,250
of Common Stock. Because the Registration Statement has been filed no additional
Filing Penalty will accrue. As of the date of this registration statement, the
Company has not yet issued the additional Series A Warrants issuable as a Filing
Penalty.
Also, pursuant to an Investor Rights Agreement dated January 18, 2006, the
Company agreed that if this registration statement is not declared effective by
the United States Securities and Exchange Commission (the "SEC") within one
hundred eighty days after January 18, 2006 (the "Effective Date"), then, in lieu
of monetary damages or specific performance, and for each additional thirty (30)
day period after the Effective Date that this registration statement is not
declared effective, the Company is required to issue to each Series A Investor
an additional Series A Warrant exercisable for the number of shares of common
stock equal to 1.5% of the sum of (i) the number of shares of common stock
issuable upon conversion of the Series A Preferred Stock into common stock held
by each such Series A Investor, and (ii) the number of shares of common stock
issuable upon exercise of the Series A Warrants held by each such Series A
Investor; provided, however, in no event shall the aggregate number of shares of
common stock issuable upon exercise of the Series A Warrants issued in
connection with the effectiveness of the Registration Statement exceed nine
percent (9.0%) of the common stock issuable upon conversion of the Series A
Preferred Stock and upon exercise of the Series A Warrants originally issued on
January 18, 2006 (the "Effective Date Penalty"). As of July 18, 2006, Series A
Warrants exercisable, in the aggregate, for 298,250 shares of Common Stock had
accrued as an Effective Date Penalty. The maximum Effective Date Penalty is
issuance of a Series A Warrant exercisable, in the aggregate, for 1,789,492
shares of Common Stock.
See page 59, under the heading "OPTIONS AND WARRANTS CONVERTIBLE INTO
COMMON SHARES" for a more detailed description of the terms of the Series A
Warrants issuable as a Filing Penalty and Effective Date Penalty.
SHARE EXCHANGE
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. (the "Share Exchange"). Deer Valley Acquisitions
Corp. became a wholly-owned subsidiary of Cytation Corporation as a result of
the Share Exchange. 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) issued 49,451 shares of the Company's Series B
Preferred Stock, (b) 26,750 shares of the Company's Series C Preferred Stock,
and (c) Series C Common Stock Purchase Warrants to Midtown Partners entitling
Midtown Partners to purchase 2,000,000 shares of the Company's common stock at
an exercise price of seventy five cents ($.75) per share. See, "CAPITAL
STRUCTURE" below for description of Series B Preferred Stock, Series C Preferred
Stock and Series C Common Stock Purchase Warrants.
51
The issuance of the Series B Preferred Stock, Series C Preferred Stock and
Series C Common Stock Purchase Warrants to the shareholders of Deer Valley
Acquisitions, Corp. was 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. Such securities were issued to institutional or accredited
investors.
ADDITIONAL WARRANT
In connection with its issuance of an Interest Bearing Non-Convertible
Installment Promissory Note, having an original principal balance of One Million
Five Hundred Thousand and No/100 Dollars ($1,500,000), the Company, pursuant to
the Securities Purchase and Share Exchange Agreement, issued to the Lender a
Series D Common Stock Purchase Warrant to purchase 2,000,000 shares of Common
Stock at an exercise price per share equal to Seventy Five Cents ($.75). See,
"CAPITAL STRUCTURE" below for description of the Series D Common Stock Purchase
Warrants.
The issuance of the Series D Common Stock Purchase Warrants was 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. Such securities were
issued to institutional or accredited investors.
ACQUISITION
Pursuant to the Share Exchange, Deer Valley Acquisitions Corp. became a
wholly-owned subsidiary of Cytation Corporation. Immediately thereafter,
pursuant to the Capital Stock Purchase Agreement dated November 1, 2005, as
amended, Deer Valley Acquisitions Corp., acquired 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 indirectly wholly-owned
subsidiary of Cytation Corporation. Pursuant to the terms of the Capital Stock
Purchase Agreement, DVA purchased one hundred percent (100%) of the issued and
outstanding capital stock of Deer Valley Homebuilders, Inc. for $6,000,000 cash.
An additional portion of the purchase price is calculated and paid as an earnout
to the former owners of Deer Valley Homebuilders, Inc., pursuant to the Earnout
Agreement, based upon the net income before taxes of Deer Valley Homebuilders,
Inc. during the next five (5) years up to a maximum of an additional $6,000,000.
Cytation Corporation engaged acquired Deer Valley Homebuilders, Inc. in order to
acquire a profitable manufacturing operating subsidiary.
A vote of the shareholders of Cytation Corporation was not required to (a)
acquire one hundred percent (100%) of the issued and outstanding capital stock
of Deer Valley Homebuilders, Inc., or (b) issue the Series A Preferred Stock,
Series B Preferred Stock, Series C Preferred Stock or related warrants. An
affirmative vote of the holders of a majority of the outstanding voting shares
is required to increase the authorized capital stock. The increase in
authorized capital stock is the subject of Proposal No. 3 above.
As a result of the transaction, Cytation Corporation has issued Series A
Preferred Stock, Series B Preferred Stock, and Series C Preferred Stock. See
CAPITAL STRUCTURE below for a discussion of the rights, preferences, and
designations of the Series A Preferred Stock, Series B Preferred Stock, and
Series C Preferred Stock.
Upon completion of the acquisition, Deer Valley Homebuilders, Inc. entered
into Employment Agreements with Joel Stephen Logan, II, Charles L. Murphree,
Jr., John Steven Lawler. See EMPLOYMENT AGREEMENTS WITH NAMED EXECUTIVE OFFICERS
for additional information concerning these Employment Agreements. By contract,
Mr. Logan, Mr. Murphee, and Mr. Lawler are entitled to serve on the Board of
Directors of Deer Valley Homebuilders, Inc. and Deer Valley Acquisitions, Corp.
until the earlier of (a) the expiration of the non-compete clause in his
Employment Agreement, or (b) final payment under the Earnout Agreement.
We have treated the transaction using purchase accounting methods, and we
have not treated the transaction as a "reverse acquisition" or "reverse merger"
for accounting purposes. Deer Valley Homebuilders, Inc. expenses payments under
52
its Employment Agreements with Messrs. Logan, Murphree, and Lawler as
compensation is earned. If compensation is earned but not paid, then the
compensation is accrued as a liability on Deer Valley's balance sheet. Deer
Valley Homebuilders, Inc. chose this accounting treatment based upon FASB
Concepts Statement No. 6, paragraphs 139 through 142. The Company has adopted
SFAS 123R, beginning with on January 1, 2006.
Deer Valley Homebuilders Inc.'s manufactured and modular homes are subject
to local zoning and housing regulations. Installation of homes and utility
connections are subject to state and local regulation, and must be complied with
by the dealer or other person installing the home. Deer Valley does not install
homes or connect utilities to homes. A number of states require manufactured
and modular home producers to post bonds to ensure the satisfaction of consumer
warranty claims. Several states have licensing requirements governing the
delivery of manufactured and modular homes. Deer Valley has complied with these
requirements in Alabama, Mississippi, Louisiana, Arkansas, Georgia, Florida,
North Carolina, South Carolina, Tennessee, Kentucky, Indiana, Illinois,
Missouri, Oklahoma, and Texas. Many of these states require that companies
renew their license applications or notify the state after a change in
ownership. Deer Valley is in the process of notifying states of the change in
its ownership and renewing its licenses, when required. Some of the states
which require renewal of licenses have waived the renewal requirement.
There is no material relationship between Cytation Corporation or its
affiliates, or any director or officer of Cytation Corporation, and any other
party to the Capital Stock Purchase Agreement other than with respect to the
transactions contemplated in the Capital Stock Purchase Agreement, or as
disclosed in this Registration Statement. Upon completion of the acquisition,
the former owners of Deer Valley Homebuilders, Inc. acquired less than a five
percent (5%) ownership interest in Cytation Corporation.
There are no existing agreements which may provide for a further change in
control of the Company.
SERIES D PREFERRED STOCK OFFERING
On April 17, 2006, the Company closed on a private placement of
approximately $1,320,810 of Series D Preferred Stock. The Company issued (a)
132,081 shares of Series D Preferred Stock and (b) Series E Common Stock
Purchase Warrants entitling the holders to purchase up to an aggregate of
880,544 shares of Common Stock at an exercise price of three dollars ($3.00) per
share (the "Series D Preferred Stock Offering"). See, "CAPITAL STRUCTURE" below
for description of Series D Preferred Stock and Series E Common Stock Purchase
Warrants.
The issuance of the Series D Preferred Stock and Series E Warrants was
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. Such
securities were issued to institutional investors, accredited investors, and a
limited number of non-accredited investors.
Midtown Partners & Co., LLC ("Midtown Partners"), an SEC and NASD
registered broker dealer, acted as the placement agent for the Company in
connection with the Series A Preferred Stock Offering. Midtown Partners is
located in Tampa, Florida. In connection with the Series D Preferred Stock
Offering, the Company paid Midtown Partners a cash commission equal to $99,180,
and payment of $19,836 for non-accountable expenses, and issued (a) Series BD-4
Common Stock Purchase Warrants to Midtown Partners entitling Midtown Partners to
purchase 61,120 shares of the Company's common stock at an exercise price of one
dollar and fifty cents ($1.50) per share and (b) Series BD-5 Common Stock
Purchase Warrants to Midtown Partners entitling Midtown Partners to purchase
61,120 shares of the Company's common stock at an exercise price of three
dollars ($3.00) per share. See, "CAPITAL STRUCTURE" below for description of
Series BD-4 and BD-5 Warrants.
DESCRIPTION OF SECURITIES
CAPITAL STRUCTURE
Our authorized capital consists of 2,000,000 shares of common stock, par
value $.001 per share (these shares are referred to herein as "common shares" or
53
"common stock"), and 1,140,000 shares of preferred stock, par value $.01 per
share (these shares are referred to herein as "preferred shares or "preferred
stock"), having such rights, preferences, privileges and restrictions as may be
designated from time-to-time by our board of directors. On January 18, 2006, our
board of directors designated (a) 750,000 of the preferred shares as Series A
Convertible Preferred Stock (these shares are referred to herein as "Series A
Preferred Stock"), with the rights, preferences, privileges and restrictions
described below, (b) 49,451 of the preferred shares as Series B Convertible
Preferred Stock (these shares are referred to herein as "Series B Preferred
Stock"), with the rights, preferences, privileges and restrictions described
below, and (c) 26,750 of the preferred shares as Series C Convertible Preferred
Stock (these shares are referred to herein as "Series C Preferred Stock"), with
the rights, preferences, privileges and restrictions described below. Our board
of directors designated 300,000 of the preferred shares as Series D Convertible
Preferred Stock (these shares are referred to herein as "Series D Preferred
Stock"), with the rights, preferences, privileges and restrictions described
below. As of June 6, 2006, there were issued and outstanding 1,000,000 shares of
Common Stock, 745,622 shares of Series A Preferred Stock, 49,451 shares of
Series B Preferred Stock, 26,750 shares of Series C Preferred Stock, and 132,081
shares of Series D Preferred Stock. Our shares of Common Stock were held by
approximately 320 stockholders of record as of that date.
On April 17, 2006, the Company completed a private placement of $1,320,810
of its Series D Convertible Preferred Stock (the "Series D Offering"). In
connection with the Series D Offering, the Company issued (a) 132,081 shares of
its Series D Convertible Preferred Stock and (b) Series E Common Stock Purchase
Warrants entitling the holder to purchase up to an aggregate of 880,544 shares
of its Common Stock at an exercise price of three dollars ($3.00) per share.
The issuance of the Series D Convertible Preferred Stock and Series E
Warrants were 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.
Such securities were issued only to institutional, accredited investors, and a
limited number of non-accredited investors.
Midtown Partners & Co., LLC ("Midtown Partners"), an SEC and NASD
registered broker dealer, acted as the placement agent for the Company in
connection with the issuance of Series D Convertible Preferred Stock. Midtown
Partners is located in Tampa, Florida. In connection with the Series D
Offering, Midtown Partners is entitled to receive cash commissions equal of
$99,181, plus payment of $19,836 as reimbursement of non-accountable expenses.
Midtown Partners & Co., LLC is also entitled to receive (a) a Series BD-4 Common
Stock Purchase Warrant entitling Midtown Partners to purchase 66,121 shares of
the Company's common stock at an exercise price of one dollar and fifty cents
($1.50) per share, and (c) a Series BD-5 Common Stock Purchase Warrants
entitling Midtown Partners to purchase 66,121 shares of the Company's common
stock at an exercise price of three dollars ($3.00) per share.
The issuance of the Series BD Warrants to Midtown Partners was 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. Such securities were
issued only to institutional or accredited investors.
54
COMMON SHARES
Our common shareholders are entitled to one vote per share on all matters
to be voted upon by those shareholders and are not entitled to cumulative voting
for the election of directors. Subject to the rights of our Series A Preferred
Stock to receive preferential dividends, our common shareholders are entitled to
receive ratably, with the holders of Series B Preferred Stock, Series C
Preferred Stock, and Series D Preferred Stock, in dividends as they may be
declared by our board of directors out of funds legally available for that
purpose. Subject to (a) the rights of our Series A Preferred Stock to receive a
preferential payment, in an amount equal to stated value plus accrued dividends,
upon liquidation, dissolution, or winding up of the Company, (b) the rights of
our Series B Preferred Stock to receive a preferential payment, in an aggregate
amount of $100,000, upon liquidation, dissolution, or winding up of the Company,
and (c) the rights of our Series C Preferred Stock to receive a preferential
payment, in an aggregate amount of $100,000, upon liquidation, dissolution, or
winding up of the Company, our common shareholders will be entitled to share
ratably, with the holders of Series B Preferred Stock and Series C Preferred
Stock on an as-converted basis, in all of the assets which are legally available
for distribution, after payment of all debts and other liabilities. Our common
shareholders have no preemptive, subscription, redemption or conversion rights.
All of our currently outstanding common shares are validly issued, fully paid
and non-assessable.
PREFERRED SHARES
We may issue our preferred shares from time to time in one or more series
as determined by our board of directors. The voting powers and preferences, the
relative rights of each series, and the qualifications, limitations and
restrictions thereof may be established by our board of directors without any
further vote or action by our shareholders. None of our preferred stock
has a redemption date.
55
SERIES A PREFERRED STOCK
Our Series A Preferred Stock has the following rights,
preferences, privileges and restrictions:
- RANK-Our Series A Preferred Stock ranks senior to our Common
Stock, Series B Preferred Stock, Series C Preferred Stock, Series D
Preferred Stock and any other securities we may issue.
- STATED VALUE - $10.00 per shares of Series A Preferred Stock.
- CONVERSION-Each share of Series A Preferred Stock, at its stated
value of $10 per share, together with any accrued and unpaid
dividends, is convertible at the option of the holder at any time
after the Conversion Date (as defined below) into Common Stock at a
price of Seventy Five Cents ($.75) per share of Common Stock.
"Conversion Date" shall mean either (1) the date on which the United
States Securities and Exchange Commission declares effective the
Company's registration statement registering the Series A Preferred
Stock for resale, or (2) the date that the holder of the Series A
Convertible Preferred Stock has satisfied the minimum one (1) year
holding requirements set forth in Rule 144(d) promulgated by the
United States Securities and Exchange Commission under the Securities
Act, as amended.
- LIMITATION ON CONVERSION - The conversion rights of each holder
of Series A Preferred Stock is limited in the certificate of
designations, preferences and rights of such stock, so that the holder
is not entitled to convert any Series A Preferred Stock to the extent
that, after such conversion, the sum of the number of shares of common
stock beneficially owned by such holder and its affiliates, will
result in beneficial ownership of more than 4.99% of the outstanding
shares of common stock.
- DIVIDENDS-A holder of Series A Preferred Stock are entitled to
receive a dividend at a rate per annum equal to seven percent (7%),
payable semi-annually, at the option of the company, (i) in cash, to
the extent funds are legally available therefor, or (ii) in shares of
registered Common Stock at a ten percent (10%) discount to the "Market
Price" (as such term is defined in the designations for the Series A
Preferred Stock. The Series A Preferred Stock ceases to accrue the
seven percent (7%) fixed dividend on the earliest of (a) the payment
of the liquidation preference on each share of Series A Preferred
Stock upon the liquidation, dissolution or winding-up of the
Corporation, (b) the conversion of the Series A Preferred Stock in
common stock, or (c) the date two (2) years from the date of issuance
of the share of Series A Preferred Stock. After the date two (2) years
from the date of issuance of a share of Series A Preferred Stock, the
holders of such Series A Preferred Stock participates ratably, on an
as-converted basis, with our common stock as to the payment of
dividends.
- LIQUIDATION RIGHTS-In the event of any liquidation, dissolution
or winding up of the Company, either voluntary or involuntary, our
series 'A' preferred shareholders are entitled to receive an amount
per share equal to the greater of $10 for each outstanding share plus
accrued and unpaid dividends, as adjusted for stock dividends, stock
distributions, splits, combinations or recapitalizations, or the
amount such shareholders would be entitled to receive had they
converted their series 'A' preferred shares into common shares. These
rights are prior and in preference to any distribution of any of our
assets to our common shareholders, holders of Series B Preferred
Stock, holders of Series C Preferred Stock, or holders of any other
series or class of preferred shares.
- VOTING RIGHTS-The holders of Series A Preferred stock have the
right to vote on an as-converted basis, with our common shareholders
on all matters submitted to a vote of our shareholders. In addition,
we cannot, without the prior approval of the holders of at least fifty
percent (50%) of our then issued and Series A Preferred Stock voting
as a separate class:
o liquidate, dissolve, or wind-up the business and affairs of
the company, or consent to any of the foregoing;
o effectuate any merger, reorganization, or recapitalization
of the company, or enter into any agreement to do any of the
foregoing;
56
o purchase or redeem or pay or declare any dividend or make
any distribution on, any shares of stock other than the Series A
Preferred Stock so long as an accrued dividend on the Series A
Preferred Stock is unpaid, or permit any subsidiary of the
Company to take any such action, except for certain securities
repurchased from former employees, officers, directors,
consultants;
o increase the authorized number of shares of Preferred Stock
or Series A Preferred Stock;
o alter or change the voting or other powers, preferences, or
other rights, privileges, or restrictions of the Series A
Preferred Stock contained herein (by merger, consolidation, or
otherwise); and
o issue any securities senior to the Series A Preferred Stock,
except certain Qualified Financings (as defined below), or incur
any new debt, except certain Permitted Debt (as defined below).
"Qualified Financing" means an equity offering that (a) the gross
aggregate proceeds raised and liquidation preferences is no more
than $3,000,000; (b) the dividend rate does not exceed ten
percent (10%); and (c) the holders of the new securities do not
have voting rights more favorable than voting rights granted to
the Series A Preferred Stock. "Permitted Debt" means (w) trade
payables, inventory financing, and the accounts receivable
factoring, all incurred in the ordinary course of business; (x)
surety bonds and letters of credit issued or obtained in the
ordinary course of business; (y) refinancings of the Company's
existing debt facilities (including a $1,500,000 loan incurred on
January 18, 2006); and (z) up to $3,000,000 of new indebtedness.
- LIMITATION ON VOTING- The voting rights of each holder of Series
A Preferred Stock is limited in the certificate of designations,
preferences and rights of such stock, so that the holder is not
entitled to vote any Series A Preferred Stock to the extent that such
voting will allow such holder to vote more than 4.99% of the
outstanding voting securities of the Company.
SERIES B PREFERRED STOCK
Our Series B Preferred Stock has the following rights,
preferences, privileges and restrictions:
- RANK- Our Series B Preferred Stock ranks junior to our Series A
Preferred Stock, ranks pari passu with our Series C Preferred Stock
and Series D Preferred Stock as to an initial aggregate liquidation
preference of $100,000, and ranks pari passu, on an as converted
basis, with our common stock, as to all other matters, including
voting rights, payment of dividends, and liquidation, after payment of
the initial liquidation preference of $100,000.
- CONVERSION-Each share of Series B Preferred Stock automatically
converts into one hundred (100) shares of Common Stock upon the
shareholders approval of an increase in the authorized shares of
common stock of the Company.
- DIVIDENDS-Holders of Series B Preferred Stock participate
ratably, on an as-converted basis, with our Common Stock as to the
payment of dividends.
- LIQUIDATION RIGHTS-In the event of any liquidation, dissolution
or winding-up of the Company, either voluntary or involuntary, after
payment of any liquidation preference to the holders of Series A
Preferred Stock, the holders of Series B Preferred Stock are entitled
to receive an initial aggregate liquidation preference of $100,000,
and then the holders of Series B Preferred Stock are entitled to
participate ratably, on an as-converted basis, with our common stock
as to any distribution of assets.
- VOTING RIGHTS-The holders of Series B Preferred stock have the
right to vote on an as-converted basis, with our common shareholders
on all matters submitted to a vote of our shareholders.
57
SERIES C PREFERRED STOCK
Our Series C Preferred Stock has the following rights,
preferences, privileges and restrictions:
- RANK- Our Series C Preferred Stock ranks junior to our Series A
Preferred Stock, ranks pari passu with our Series B Preferred Stock
and Series D Preferred Stock as to an initial aggregate liquidation
preference of $100,000, and ranks pari passu, on an as converted
basis, with our common stock, as to all other matters, including
voting rights, payment of dividends, and liquidation, after payment of
the initial liquidation preference of $100,000.
- CONVERSION-Each share of Series C Preferred Stock converts into
one hundred (100) shares of Common Stock, at the option of the holder.
- LIMITATION ON CONVERSION - The conversion rights of each holder
of Series C Preferred Stock is limited in the certificate of
designations, preferences and rights of such stock, so that the holder
is not entitled to convert any Series C Preferred Stock to the extent
that, after such conversion, the sum of the number of shares of common
stock beneficially owned by such holder and its affiliates, will
result in beneficial ownership of more than 4.99% of the outstanding
shares of common stock.
- DIVIDENDS-Holders of Series C Preferred Stock participate
ratably, on an as-converted basis, with our Common Stock as to the
payment of dividends.
- LIQUIDATION RIGHTS-In the event of any liquidation, dissolution
or winding-up of the Company, either voluntary or involuntary, after
payment of any liquidation preference to the holders of Series A
Preferred Stock, the holders of Series C Preferred Stock are entitled
to receive an initial aggregate liquidation preference of $100,000,
and then the holders of Series C Preferred Stock are entitled to
participate ratably, on an as-converted basis, with our common stock
as to any distribution of assets.
- VOTING RIGHTS-The holders of Series C Preferred stock have the
right to vote on an as-converted basis, with our common shareholders
on all matters submitted to a vote of our shareholders.
- LIMITATION ON VOTING- The voting rights of each holder of Series
C Preferred Stock is limited in the certificate of designations,
preferences and rights of such stock, so that the holder is not
entitled to vote any Series C Preferred Stock to the extent that such
voting will allow such holder to vote more than 4.99% of the
outstanding voting securities of the Company.
SERIES D PREFERRED STOCK
Our Series B Preferred Stock has the following rights,
preferences, privileges and restrictions:
- RANK- Our Series D Preferred Stock ranks junior to our Series A
Preferred Stock, ranks pari passu with our Series B Preferred Stock
and Series C Preferred Stock as to an initial aggregate liquidation
preference, and ranks pari passu, on an as converted basis, with our
common stock, as to all other matters, including voting rights,
payment of dividends, and liquidation, after payment of the initial
liquidation preference of $100,000 to the holders of Series B
Preferred Stock and Series C Preferred Stock and of $30,000 to holders
of Series D Preferred Stock.
- CONVERSION-Each 1.5 outstanding shares of Series D Convertible
Preferred Stock shall automatically be converted into ten (10) shares
of Common Stock upon the shareholders' approval of an increase in the
authorized shares of common stock of the Company.
- DIVIDENDS-Holders of Series D Preferred Stock participate
ratably, on an as-converted basis, with our Common Stock as to the
payment of dividends.
- LIQUIDATION RIGHTS-In the event of any liquidation, dissolution
or winding-up of the Company, either voluntary or involuntary, after
58
payment of any liquidation preference to the holders of Series A
Preferred Stock, the holders of Series D Preferred Stock are entitled
to receive an initial aggregate liquidation preference of $30,000, and
then the holders of Series D Preferred Stock are entitled to
participate ratably, on an as-converted basis, with our common stock
as to any distribution of assets.
- VOTING RIGHTS-The holders of Series D Preferred stock have the
right to vote on an as-converted basis, with our common shareholders
on all matters submitted to a vote of our shareholders.
OPTIONS AND WARRANTS CONVERTIBLE INTO COMMON SHARES
As of June 6, 2006, there were outstanding Series A Common Stock Purchase
Warrants entitling the holders to purchase up to an aggregate of 9,941,641
shares of Common Stock at an exercise price of one dollar and fifty cents
($1.50) per share. A Series A warrant is exercisable, in whole or in part, at
any time after the earlier of (a) the date a registration statement covering
such Series A warrants and underlying warrant shares is declared effective, or
(b) twelve (12) months from the date of grant and before the close of business
on the date five (5) years from the initial exercise date.
As of June 6, 2006, there were outstanding Series B Common Stock Purchase
Warrants entitling the holders to purchase up to an aggregate of 4,970,827
shares of Common Stock at an exercise price of two dollars and twenty five cents
($2.25) per share. A Series B warrant is exercisable, in whole or in part, at
any time after the earlier of (a) the date a registration statement covering
such Series B warrants and underlying warrant shares is declared effective, or
(b) twelve (12) months from the date of grant and before the close of business
on the date seven (7) years from the initial exercise date.
As of June 6, 2006, there were outstanding Series C Common Stock Purchase
Warrants entitling the holders to purchase up to an aggregate of 2,000,000
shares of Common Stock at an exercise price of seventy five cents ($.75) per
share. The Series C warrant is exercisable, in whole or in part, at any time
after the earlier of (a) the date a registration statement covering such Series
C warrants and underlying warrant shares is declared effective, or (b) twelve
(12) months from the date of grant and before the close of business on the date
five (5) years from the initial exercise date.
As of June 6, 2006, there were outstanding Series D Common Stock Purchase
Warrants entitling the holders to purchase up to an aggregate of 2,000,000
shares of Common Stock at an exercise price of seventy five cents ($.75) per
share. The Series D warrant is exercisable, in whole or in part, at any time
after the earlier of (a) the date a registration statement covering such Series
D warrants and underlying warrant shares is declared effective, or (b) twelve
(12) months from the date of grant and before the close of business on the date
seven (7) years from the initial exercise date.
As of June 6, 2006, there were outstanding Series E Common Stock Purchase
Warrants entitling the holders to purchase up to an aggregate of 880,544 shares
of Common Stock at an exercise price of three dollars ($3.00) per share. The
Series E warrant is exercisable, in whole or in part, at any time after the
earlier of (a) the date a registration statement covering such Series E warrants
and underlying warrant shares is declared effective, or (b) twelve (12) months
from the date of grant and before the close of business on the date three (3)
years from the initial exercise date.
As of June 6, 2006, there were outstanding Series BD-1 Common Stock
Purchase Warrants entitling the holders to purchase up to an aggregate of
919,162 shares of Common Stock at an exercise price of seventy five cents ($.75)
per share. A Series BD-1 warrant is exercisable, in whole or in part, at any
time after the earlier of (a) the date a registration statement covering such
Series BD-1 warrants and underlying warrant shares is declared effective, or (b)
twelve (12) months from the date of grant and before the close of business on
the date five (5) years from the initial exercise date.
As of June 6, 2006, there were outstanding Series BD-2 Common Stock
Purchase Warrants entitling the holders to purchase up to an aggregate of
919,162 shares of Common Stock at an exercise price of one dollar and fifty
cents ($1.50) per share. A Series BD-2 warrant is exercisable, in whole or in
part, at any time after the earlier of (a) the date a registration statement
59
covering such Series BD-2 warrants and underlying warrant shares is declared
effective, or (b) twelve (12) months from the date of grant and before the close
of business on the date five (5) years from the initial exercise date.
As of June 6, 2006, there were outstanding Series BD-3 Common Stock
Purchase Warrants entitling the holders to purchase up to an aggregate of
459,581 shares of Common Stock at an exercise price of two dollars and twenty
five cents ($2.25) per share. A Series BD-3 warrant is exercisable, in whole or
in part, at any time after the earlier of (a) the date a registration statement
covering such Series BD-3 warrants and underlying warrant shares is declared
effective, or (b) twelve (12) months from the date of grant and before the close
of business on the date seven (7) years from the initial exercise date.
As of June 6, 2006, there were outstanding Series BD-4 Common Stock
Purchase Warrants entitling the holders to purchase up to an aggregate of 61,120
shares of Common Stock at an exercise price of one dollar and fifty cents
($1.50) per share. A Series BD-4 warrant is exercisable, in whole or in part, at
any time after the earlier of (a) the date a registration statement covering
such Series BD-4 warrants and underlying warrant shares is declared effective,
or (b) twelve (12) months from the date of grant and before the close of
business on the date three (3) years from the initial exercise date.
As of June 6, 2006, there were outstanding Series BD-5 Common Stock
Purchase Warrants entitling the holders to purchase up to an aggregate of 61,120
shares of Common Stock at an exercise price of three dollars ($3.00) per share.
A Series BD-5 warrant is exercisable, in whole or in part, at any time after the
earlier of (a) the date a registration statement covering such Series BD-5
warrants and underlying warrant shares is declared effective, or (b) twelve (12)
months from the date of grant and before the close of business on the date three
(3) years from the initial exercise date.
LIMITATION ON EXERCISE OF WARRANTS
The exercise rights of the Series A, B, C, D, E, and BD Warrants are
limited so that the holder is not entitled to exercise such warrant to the
extent that, after such exercise, the sum of the number of shares of common
stock beneficially owned by such holder and its affiliates, will result in
beneficial ownership of more than 4.99% of the outstanding shares of common
stock.
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock trades on the OTC Bulletin Board under the trading symbol
"CYON." The prices set forth below reflect the quarterly high and low bid
information for shares of our common stock during the last two fiscal years, as
reported by the OTC Bulletin Board. These prices reflect inter-dealer prices
without retail markup, markdown, or commission, and may not represent actual
transactions. Please note that the board of directors approved a two-for-one
stock dividend on November 4, 2005, which doubled the numbers of shares
outstanding. This stock dividend did not include our preferred stock. The prices
listed for the quarter which ended on December 31, 2005, reflect post-dividend
sales. The remaining prices, for quarters preceding the dividend, have been
adjusted to retroactively reflect post dividend sales.
As of June 6, 2006, there were approximately 320 registered holders or
persons otherwise entitled to hold our common shares pursuant to a shareholders'
list provided by our transfer agent, Computershare Investor Services. The number
of registered shareholders excludes any estimate by us of the number of
beneficial owners of common shares held in street name.
2005 QUARTER ENDED HIGH LOW
------------------ ---- ---
December 31, 2005 $4.25 $.60
September 30, 2005 $0.75 $0.25
June 30, 2005 $0.875 $0.175
March 31, 2005 $0.50 $0.125
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2004 QUARTER ENDED
------------------
December 31, 2004 $1.50 $0.895
September 30, 2004 $2.50 $1.15
June 30, 2004 $5.125 $0.30
March 31, 2004 $.30 $.30
Our common stock is covered by an SEC rule imposing additional sales
practice requirements on broker-dealers who sell such securities to persons
other than established customers and accredited investors, which are generally
institutions with assets in excess of $5,000,000, or individuals with net worth
in excess of $1,000,000 or annual income exceeding $200,000, or $300,000 jointly
with a spouse. For transactions covered by the rule, the broker-dealer must make
a special suitability determination for the purchaser and transaction prior to
the sale. Consequently, the rule may affect the ability of broker-dealers to
sell our securities, and also may affect the ability of purchasers of our stock
to sell their shares in the secondary market. The rule may also cause fewer
broker-dealers to be willing to make a market in our common stock, and it may
affect the level of news coverage we receive.
We have not declared or paid any cash dividends on our common stock since
our inception, and our Board of Directors currently intends to retain all
earnings for use in the business for the foreseeable future. Any future payment
of dividends will depend upon our results of operations, financial condition,
cash requirements, and other factors deemed relevant by our Board of Directors.
DIVIDENDS
We have never paid cash dividends on our capital stock and do not
anticipate paying any cash dividends with respect to those securities in the
foreseeable future. Our current business plan is to retain any future earnings
to finance the expansion and development of our business. Any future
determination to pay cash dividends will be at the sole discretion of the Board
of Directors and will be dependent upon our financial condition, results of
operations, capital requirements and other factors, as our Board may deem
relevant at that time. Our Board of Directors has the right to authorize the
issuance of preferred stock, without further shareholder approval, the holders
of which may have preferences over the holders of the common stock as to the
payment of dividends.
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS
The Company has not authorized any equity compensation plans.
INTEREST OF NAMED EXPERTS AND COUNSEL
No expert or counsel named in this prospectus as having prepared or
certified any part of this prospectus or having given an opinion upon the
validity of the securities being registered or upon other legal matters in
connection with the registration or offering of the Common Stock was employed on
a contingency basis, or had, or is to receive, in connection with the offering,
a substantial interest, direct or indirect, in the Registrant or any of its
parents or subsidiaries. Nor was any such person connected with the Registrant
or any of its parents or subsidiaries as a promoter, managing or principal
underwriter, voting trustee, director, officer, or employee.
The validity of the shares of common stock of Cytation Corporation will be
passed upon for Cytation Corporation by Bush Ross, P.A.
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DISCLOSURE OF COMMISSION POSITION ON INDEMNIFICATION FOR SECURITIES ACT
LIABILITIES
Subject to some limitations, our Certificate of Incorporation provides that
we will indemnify an officer or director who was or is a party or is threatened
to be made a party to any threatened, pending, or completed action, suit, or
proceeding, whether civil, criminal, administrative, or investigative, by reason
of the fact that such person is or was, or has agreed to become, a director or
officer. Insofar as indemnification for liabilities arising under the
Securities Act of 1933 (the "Act") may be permitted to directors, officers and
controlling persons of the small business issuer pursuant to the foregoing
provision, or otherwise, the small business issuer has been advised that, in the
opinion of the Securities and Exchange Commission, such indemnification is
against public policy as expressed in the Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities is
asserted by one of our directors, officers, or controlling persons in connection
with the securities being registered, we will, unless, in the opinion of our
legal counsel, the matter has been settled by controlling precedent, submit the
question of whether such indemnification is against public policy to a court of
appropriate jurisdiction. We will then be governed by the court's decision.
ORGANIZATION WITHIN LAST FIVE YEARS
We were incorporated on November 1, 1999 under the laws of the State of
Delaware. Our wholly-owned subsidiary Deer Valley Acquisitions Corp. was
incorporated on June 22, 2005 under the laws of the State of Florida. Deer
Valley Homebuilders, Inc., which is 100% owned by Deer Valley Acquisitions Corp.
was incorporated on January 15, 2004 under the laws of the State of Alabama.
DESCRIPTION OF BUSINESS
BUSINESS DEVELOPMENT
Cytation Corporation was incorporated under the laws of Delaware on
November 1, 1999. Until June 20, 2001, Cytation Corporation provided an
extensive range of in-school and online services directed at high school
students and their parents, high school counselors, college admissions officers
and corporations which target the teen marketplace. On June 20, 2001, the
Company sold all of its assets associated with these activities to TMP Worldwide
Inc. for approximately $7.2 million in cash and debt assumed.
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. Specifically, during that
period the Company provided the following services to its clients:
- assisted in the selection of competent corporate and securities
counsel and independent auditors experienced in SEC practice and
procedure;
- developed strategies, assisted in applying, and provided the
stockholder distribution and base necessary, for listing on the OTCBB,
the BBX, NASDAQ or the American Stock Exchange, including advice with
respect to meeting applicable initial and maintenance listing
requirements;
- assisted client companies' outside legal counsel in the
preparation and filing with the SEC of a registration statement,
generally on Form SB-2;
- assisted client companies' outside legal counsel and auditors
with respect to SEC Staff comments on the registration statement;
- assisted client companies in preparing for an audit of their
financial statements in connection with the registration statement;
- assisted client companies in obtaining market makers;
- assisted client companies with respect to obtaining a "manual
exemption" from filing requirements under state securities laws;
- evaluated opportunities for research on client companies;
- evaluated general client company profile materials;
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- advised client company management regarding general private to
public company transition issues and matters; and
- introduced client companies to possible institutional sources of
private financing.
The Company did not provide investor relations or financial public
relations services or assist client companies in selecting investor relations or
a financial public relations services provider. Nor did the Company underwrite
client companies' securities. Management of the Company did not take management
or director positions with any client company, and the Company did not provide
consulting services related to the management or operation of client businesses.
The Company was compensated in cash and client company stock for its services.
All transactions in the securities of client companies were effected by
unaffiliated members of the National Association of Securities Dealers in open
market transactions.
In September of 2004, the Company elected to become a business development
company under the Investment Company Act of 1940. In the first quarter of 2005,
the Company discontinued all business operations except finding an appropriate
private entity with which it could engage in a reverse merger or similar
transaction. In December of 2005, the Company withdrew its election to be
treated as a business development company under the Investment Company Act of
1940. Cytation Corporation's audited balance sheet as of December 31, 2005, and
audited statements of income, cash flows, and changes in stockholders' equity
for the one year periods ending December 31, 2005 and December 31, 2004 are
included below.
On January 18, 2006, Cytation entered into the Securities Purchase and
Share Exchange Agreement, which, among other matters, (a) resulted in Cytation's
issuance of approximately $5,202,735 (or 520,274 shares) of its Series A
Convertible Preferred Stock, $.001 Par Value ("Series A Preferred Stock"),
Series A Common Stock Purchase Warrants exercisable for 6,936,980 shares of
common stock (the "Series A Warrants"), and Series B Common Stock Purchase
Warrants exercisable for 3,468,490 shares of common stock (the "Series B
Warrants") (the "Series A Preferred Offering"), and (b) resulted in Cytation's
issuance of its Interest Bearing Non-Convertible Installment Promissory Note, in
the original principal amount of One Million Five Hundred Thousand and No/100
Dollars ($1,500,000) (the "Debt Offering").
In addition, on January 18, 2006, Cytation acquired 100% of the issued and
outstanding capital stock of DVA, in exchange for the issuance of (a) 49,451
shares of the Company's Series B Preferred Stock, $.001 Par Value ("Series B
Preferred Stock"), (b) 26,750 shares of the Company's Series C Preferred Stock,
$.001 Par Value (the "Series C Preferred Stock"), and (c) Series C Common Stock
Purchase Warrants exercisable for 2,000,000 shares of common stock of Cytation
Corporation. (the "Share Exchange"). Deer Valley Acquisitions, Corp. is a
Florida corporation formed in July 2005. DVA's audited balance sheet as of
December 31, 2005, and audited statements of income, cash flows and changes in
stockholders' equity for the six month period ending December 31, 2005 are
included below.
Immediately after completion of the Series A Preferred Offering and Share
Exchange, DVA, a wholly owned subsidiary of Cytation, acquired 100% of the
issued and outstanding capital stock of Deer Valley. Deer Valley is an Alabama
corporation formed in January 2004. Deer Valley's audited balance sheet as of
December 31, 2005, and audited statements of income, cash flows, and changes in
stockholders' equity for the years ended December 31, 2005 and December 31, 2004
are included below. In addition, the Pro Forma condensed Financial Statements as
of December 31, 2005 for Cytation, DVA, and Deer Valley are included below.
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, the remaining
discussion of the Company's business relates to the operations of Cytation's
newly acquired operating subsidiary, Deer Valley.
Deer Valley was launched in January, 2004 and is a manufacturer of
factory-built homes in the southeastern and south central housing markets in the
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United States. As of the date of this Registration Statement, we manufacture our
factory built homes in two manufacturing facilities located in Guin, Alabama and
Sulligent, Alabama. We rely upon a team of regional sales directors and
approximately 80 independent dealers to market our manufactured homes in over
110 retail locations. As of the date of this Registration Statement, we are
selling our manufactured homes in 15 states through our network of independent
dealers and retail centers.
Deer Valley is an Alabama corporation with its business offices located at
205 Carriage Street, P.O. Box 310, Guin, Alabama 33563 and is engaged in the
production, sale, and marketing of manufactured homes in the southeastern and
south central U.S. housing market.
BUSINESS OF THE ISSUER
OVERVIEW
Each home that we manufacture is built and constructed in accordance with
the federal Manufactured Home Construction and Safety Standards promulgated by
the U.S. Department of Housing and Urban Development, better known as the "HUD
Code." According to the Manufactured Housing Institute, new HUD Code homes that
were shipped in November, 2005, represented an increase of 46.7 percent, as
compared to shipments made in November, 2004. Comparing 2005 to the previous
year, shipments of single-section homes were up 221 percent while shipments of
multi-section homes were down 16.6 percent. (The terms "multi-section" and
"multi-floor" are used interchangeably in this document. Both terms refer to a
house which is constructed by attaching two or more factory produced "floors" or
"sections" together to form a complete structure.) The Manufactured Housing
Institute estimates that hurricane-related demand for single-section homes by
the Federal Emergency Management Agency ("FEMA") accounted for roughly 40
percent of all manufactured homes that were shipped in November. Our production
and marketing efforts have concentrated on multi-section homes and, as of the
date of this Registration Statement, we have not delivered any FEMA-related
orders nor have we been contracted to do so.
In recent years, the manufactured housing industry has suffered a downturn
in sales as a result of a tightening of credit standards, restricted
availability of retail and wholesale financing, and excessive inventory levels.
Despite this industry decline, which commenced in calendar year 1999, we have
been able to successfully launch our 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. Our manufactured homes are often sold as
part of a land-home package and may be financed by a conventional mortgage.
Multi-section homes often have an appearance similar to more traditional
site-built homes, which are built according to local building codes, but are
competitively priced when compared to site-built homes.
MANUFACTURING OPERATIONS
We currently produce all of our manufactured homes at two manufacturing
facilities consisting of an approximately 118,000 square foot facility located
in Guin, Alabama and a 65,992 square foot plant in Sulligent, Alabama. Our
Sulligent plant commenced operations on February 20, 2006. Our manufacturing
facilities normally function on a single-shift, five-day work week basis. As of
December 31, 2005, we were producing seven (7) floors per day or approximately
1,680 floors on an annual basis. A "floor" is a section of a manufactured home.
Our manufactured homes are constructed in accordance with the Federal
Manufactured Home Construction and Safety Standards ("HUD Standards"). In 2005,
approximately 100% of the homes we produced were built to HUD Standards.
We plan to continue operating on a single shift, five day work week basis.
During the fiscal year ended December 31, 2005, the Company produced an average
of 28 floor sections per week. This represented an 11.5% increase in floor
section production from the 661 floor sections we produced in the fiscal year
ended December 31, 2004.
Because all of our manufactured homes are constructed in accordance with
HUD Standards, our manufacturing facility is subject to strict oversight and
monitoring by the U.S. Department of Housing and Urban Development, using
independent third-party inspection agencies for enforcement. Each home we
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manufacture complies with the HUD Standards and has a special label affixed to
the exterior of the home indicating that the home has been designed,
constructed, tested, and inspected to comply with stringent federal standards
set forth in these HUD Standards. As required by the National Manufactured Home
Construction and Safety Standards Act of 1974, each home that we manufacture may
not be shipped from our factory unless it complies with HUD Standards and
receives a certification label from an independent third-party inspector. Our
manufacturing facility must meet performance standards for heating, plumbing,
air conditioning, thermal and electrical systems, structural design, fire
safety, and energy efficiency. We also conduct our own in-plant inspection and
quality assurance program.
We manufacture homes which are designed as primary residences ready for
immediate occupancy. The homes, many of which are customized at our factory to
the home buyer's specifications, are constructed in one or more sections and
transported by independent trucking companies to dealer locations or to a
customer's site.
Our homes are manufactured under controlled conditions in an indoor
facility located on 25.5 acres in Guin, Alabama, which has approximately 107,516
square feet of floor space, a frame shop with 10,800 square feet, a material
shed with 23,172 square feet of space and an office facility consisting of
11,250 square feet of space. In addition, on February 20, 2006, the Company
opened a 65,992 square foot plant in Sulligent, Alabama. Please see "Description
of Property" below for a fuller description of the Guin and Sulligent plants. At
the two plants we employ an average of 350 employees who generally work one
shift per day, five days per week. Construction of our homes is based upon an
assembly line system, commencing by moving a unit through the plant, stopping at
a number of work stations where various components and sub-assemblies are
attached. Each section is permanently attached to a steel support chassis, and
various components are later added, including floors, interior and exterior
walls, roof, cabinets, ceilings, and windows. It takes approximately 2 and 1/2
days to complete construction of a home at our manufacturing facilities. As of
December 31, 2005 we had the capacity to produce an aggregate of approximately
seven floors per day. Once the home has been assembled and quality review
testing has been completed, the home is ready to be transported to a dealer
location or for installation and hookup to a homebuyer's utility systems.
While our manufactured homes are constructed with many of the same
components and building materials used in site-built homes, we utilize a
cost-efficient assembly line manufacturing process which enables us to produce a
quality home at a much lower cost per square foot than a traditional site-built
home. A Deer Valley home is built with residential features, including 1/2 inch
drywall, Thermopane(TM) brand windows, enhanced insulation, oak cabinets,
cultured marble vanities, and two inch by six inch exterior wall construction
standards.
The extent of customization of the home performed by Deer Valley varies to
a significant degree with the price of the home. In the higher price range of
the market, the home buyer is often less sensitive to the price increase
associated with significant design modifications. Our experience in producing a
customized home on a cost-effective basis has allowed us to offer customized
homes and provide factory provided trim-out services and walk-through
inspections of the home.
Because the cost of transporting a manufactured home is significant,
substantially all of Deer Valley's homes are sold to dealers within a 500 mile
radius of our manufacturing facility. Deer Valley arranges, at the dealer's
expense, for the transportation of finished homes to dealer locations using
independent trucking companies. Customary sales terms are cash--on-delivery or
guaranteed payment from a floor plan financing source. Dealers or other
independent installers are responsible for placing the home on site and making
utility hook-ups.
BACKLOG OF ORDERS AND SALES POLICIES
Substantially all production is initiated against specific orders. As of
December 31, 2005, our backlog of orders was 11.77 weeks of orders. Dealer
orders are subject to cancellation prior to commencement of production, and we
do not consider our backlog to be firm orders. Because we operate in an industry
where order lead times are extremely short, Deer Valley does not view backlog at
any point in time to be indicative of the level of Deer Valley's future
revenues.
Our sales are made to dealers either through floor plan financing
arrangements with a financial institution or on a cash basis. When a
manufactured home is purchased, we receive payment either directly from the
dealer or from a financial institution which has agreed to finance dealer
purchases of our manufactured homes. As customary in our industry, many
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financial institutions which finance dealer purchases require that we execute a
repurchase agreement which provides that, in the event a dealer defaults on its
repayment of the financing arrangement, we agree to repurchase the manufactured
home from the financing institution, in accordance with a declining repurchase
price schedule that is mutually agreed upon. Because we do not build
significant inventories of either finished goods or raw materials and initiate
production against a specific product order, we do not have significant
inventories or a backlog of product orders.
COMPONENTS
The principal raw materials used in the production of a manufactured home
include wood, wood products, panels, steel, sheetrock, vinyl siding, gypsum
wallboard, fiberglass insulation, carpet, appliances, electrical items, windows,
roofing materials, electrical supplies, roof trusses, and plumbing fixtures. We
believe that the raw materials used in the production of our manufactured homes
are readily available from a wide variety of suppliers and that the loss of any
single supplier would not have a material adverse effect on our business.
Although we rely upon Odyssey Group (sheet rock, plumbing, and other assembly
items), WoodPerfect (lumber supplies), Morris Sales Company (lumber and siding,
panels), General Electric (appliances), and Owens Corning (insulation) in
purchasing materials to assemble our homes, we are not dependent on a single
source or supplier for component purchases.
PRODUCTS
We currently offer 22 different models of manufactured homes, with a
variety of decors that are marketed under our Deer Valley brand name. We
currently manufacture and sell multi-section manufactured homes, with 100% of
the manufactured homes we produced in 2005 consisting of multi-section units.
We offer over 22 different floor plans, ranging in size from approximately
1,560 to 2,580 square feet. Many of our homes are customized to the homebuyer's
specifications. We believe that our willingness to offer factory trim-out
services and customize floor plans and design features to match homebuyer
preferences is a principal factor which differentiates us from our competitors.
Each home typically includes three to five bedrooms, a great room which
functions as a living room, family room, and dining room, a kitchen, two or
three bathrooms, and features central air conditioning and heating, a water
heater, a dishwasher, a refrigerator, a microwave, a cook top/range, and an
oven. We offer a wide range of colors, moldings, and finishes and provide
optional features including fireplaces, wood floors, and modern kitchen
counter-tops. We continue to modify and improve the design of our manufactured
homes in consultation with our sales representatives and independent dealer
network. We also utilize computer-aided and other design methods in an effort
to continuously improve the design of our manufactured homes and to permit our
customers to customize their purchases.
Deer Valley has traditionally focused on designing manufactured homes with
features comparable to site-built homes. In addition to offering the consumer
options specified in the preceding paragraph, Deer Valley generally offers
extensive customization of floor plan designs and exterior elevations to meet
specific customer preferences.
Once a manufactured home has been completed at our manufacturing facility,
we utilize an independent trucking company to transport the home to either a
retail sales center or a customer's site. All transportation costs are borne by
the independent retailer or other independent installer, who is responsible for
placing the manufactured home on the customer's site, joining the interior and
exterior seams and providing any utility hookups.
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The following table sets forth the total factory homes built and sold,
square footage, and retail price range in 2005:
Number of Homes Sold:
-----------------------
Multi-section Homes 1,385 floors or 842 units
Total Homes 1,385 floors or 842 units
Type of Homes Square Feet Retail Price Range (excluding land)
Multi-floor Homes 1,560 - 2,580 $59,000 to $119,000
INDEPENDENT DEALER NETWORK
As of the date of this Filing, we had approximately 80 participating
independent dealers marketing our manufactured homes at 110 locations. Our
independent dealers are not required to exclusively sell homes manufactured by
Deer Valley and will typically choose to offer the products of other
manufacturers in addition to those of Deer Valley. We do not have written
exclusive agreements with our independent dealers and do not have any control
over the operations of, or financial interest in, any of our independent
dealers. Deer Valley is not dependent on any single dealer, and in 2005, Deer
Valley's largest dealer location accounted for approximately 10% of our sales.
We believe that our independent dealer network enables us to avoid the
substantial investment in management, capital, and overhead associated with
company-owned sales centers. Although we do not rely upon exclusive dealer
arrangements, we typically rely upon a single dealer within a given geographical
market to distribute our products. We believe our strategy of selling our
manufactured homes through independent dealers helps to ensure that our
manufactured homes are competitive with those of other companies in terms of
quality, consumer acceptability, product design, and price.
MARKETS SERVED
During the fiscal year ended December 31, 2005, we estimate that the
percentage of our revenues by region was as follows:
Regions Primary States Percentage of Revenue by Region
------- -------------- -------------------------------
Southeast Alabama, Florida, Georgia, 85%
Kentucky, Mississippi,
North Carolina, South Carolina
and Tennessee
South Central Louisiana, Oklahoma, Texas, 15%
Illinois, Arkansas, Missouri,
and Indiana
Our manufacturing facility currently serves approximately 80 dealers and
our sales staff maintains and monitors our relationships with each independent
retailer in an effort to maintain excellent relationships with our network of
independent dealers.
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OUR SALES FORCE
At December 31, 2005, Deer Valley sold manufactured homes through
approximately 80 independent dealers at approximately 110 retail locations in 15
states, principally in the southeastern and south-central United States.
Deer Valley markets its homes through product promotions tailored to
specific dealer needs. In addition, Deer Valley advertises in local media and
participates in regional manufactured housing shows.
CONTINUING OPERATIONS
MANUFACTURED HOMES - INDUSTRY OVERVIEW
Our manufactured homes are built entirely in our factories, in accordance
with national HUD Standards specified by the U.S. Department of Housing and
Urban Development (HUD) through its Federal Manufactured Home Construction and
Safety Standards.
Manufactured homes are constructed in a factory environment, utilizing
assembly line techniques, which allows for volume purchases of materials and
components and more efficient use of labor. The quality of manufactured homes
has increased significantly, as producers generally build with the same
materials as site-built homes. Many features associated with site-built homes
are included in manufactured homes, such as central heating, name-brand
appliances, carpeting, cabinets, walk-in closets, wall coverings, and porches.
Also, many of our independent dealers offer optional features including central
air conditioning, carports, garages, and furniture packages.
With respect to the retail financing of manufactured housing, interest
rates are generally higher and the terms of loans shorter than for site-built
homes. In recent years, some lenders stopped extending loans to finance the
purchase of manufactured homes. This has had the effect of making financing for
manufactured homes even more expensive and more difficult to obtain relative to
financing for site-built homes.
Due to the difficult financing environment for chattel financing
nationwide, the industry has been trending toward more conventional mortgage
financing for land and homes. Chattel financing is personal property financing
secured only by the home and not by the underlying land on which the home is
sited. In contrast, "land and home" financing is real property financing secured
by the home and by the underlying land on which the home is placed.
The manufactured housing market entered into a steep decline that began in
1999 before stabilizing at or near a historical lows in 2003 and 2004. Although
industry wide shipments overall increased in 2005, such overall increase was, in
large part, a result of homes made to FEMA specifications and sold for disaster
relief. In addition, because the FEMA specifications are for single-wide homes,
the percentage of multisection homes being produced relative to the total number
of manufactured homes being produced also has dipped.Management believes that
thedip in the percentage of multisection homes being produced relative to the
total manufactured home industry is likely a temporary trend, and will reverse
as FEMA sales slow-down. Management continues to be encouraged by its continued
back-log, now at over 300 homes, and the excellent reviews for its regionally
designed homes received from dealers and consumers.
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WARRANTIES, QUALITY CONTROL, AND SERVICE
Deer Valley endeavors to adhere to strict quality standards and
continuously refines its production procedures. In addition, in accordance with
the construction codes promulgated by HUD, an independent HUD-approved,
third-party inspector inspects each manufactured home for compliance during
construction at our manufacturing facilities.
Deer Valley provides initial home buyers with a one-year limited warranty
against manufacturing defects in the home's construction. In addition, direct
warranties are often provided by the manufacturers of components and appliances.
At each of its two manufacturing facilities Deer Valley has experienced
quality assurance personnel who provide on-site service to dealers and home
buyers. Deer Valley continuously works to enhance its quality assurance systems,
placing high emphasis on improving the value and appeal of Deer Valley's homes
and reducing consumer warranty claims. Please see "Property" below for more
information on our manufacturing facilities.
INDEPENDENT DEALER FINANCING
Substantially all of Deer Valley's independent dealers finance their
purchases through "floor plan" arrangements 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. In connection with a floor plan
arrangement, the financial institution which provides the independent dealer
financing customarily requires Deer Valley to enter into a separate repurchase
agreement with the financial institution, under which Deer Valley is obligated,
upon default by the independent dealer, to repurchase the home at Deer Valley's
original invoice price less the cost of all damaged/missing items, plus certain
administrative and shipping expenses. The repurchase agreement relates to homes
that are located on an authorized dealer's lot and in new, sellable condition.
As a result, the potential repurchase liability may be offset by the value of
the repurchased house. The risk of loss which we face under these repurchase
agreements is also lessened by additional factors listed below at "Reserve for
Repurchase Commitments."
As of December 31, 2005, Deer Valley's contingent repurchase liability
under floor plan financing arrangements through independent dealers was
approximately $9,600,519. While homes repurchased by Deer Valley under
floor-plan financing arrangements are usually sold to other dealers, no
assurance can be given that Deer Valley will be able to sell to other dealers
homes which it may be obligated to repurchase in the future or that Deer Valley
will not suffer more losses with respect to, and as a consequence of, those
arrangements than we have accrued in our financial statements.
COMPETITION
The manufactured housing industry is highly competitive at both the
manufacturing and retail levels, with competition based upon numerous factors,
including total price to the dealer, customization to homeowners' preferences,
product features, quality, warranty repair service, and the terms of dealer and
retail customer financing. Deer Valley has many competitors, ranging from very
large, experienced, and well-financed companies to small, specialized
manufacturers. Numerous firms produce manufactured and modular homes in the
southeastern and south central United States, many of which are in direct
competition with us. In addition, certain of Deer Valley's competitors provide
retail customers with financing from captive finance subsidiaries.
Manufactured homes also compete with other forms of housing, including
site-built and prefabricated homes. Historically, manufactured housing has had a
price advantage over these other forms of housing. That advantage has
deteriorated, however, as the credit market in the manufactured housing industry
has, at both the retail and wholesale levels, continued to tighten, while
interest rates for site-built houses in recent years have been at historic lows,
thus increasing the competitive pressures on manufactured housing.
The capital requirements for entry as a producer in the manufactured
housing industry are relatively small. However, Deer Valley believes that the
qualifications for obtaining inventory financing, which are based upon the
financial strength of the manufacturer and each of its dealers, have recently
become more difficult to meet due to the departure of financial institutions
from the market and efforts of our competitors to add dealers to their sales
network.
Deer Valley believes that its willingness to customize floor plans and
design features to match customer preferences, offer factory provided trim-out
and installation services, and provide efficient customer service differentiate
it from most of its competitors in the manufactured housing industry.
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COMPETITIVE NICHE
We believe that we have certain competitive advantages in our market as
described below:
WE CONCENTRATE OUR EFFORTS ON MANUFACTURING AND MARKETING TOP-QUALITY HUD CODE
HOMES.
By focusing our manufacturing efforts exclusively on HUD Code homes on a
cost-effective basis and by relying upon our strong network of regional
independent dealers within our geographical market, we have been able to
minimize our administrative and marketing expenses while providing our customers
with a competitively priced product which maximizes value for the purchase price
paid for the home.
WE FOCUS UPON PRODUCING A SUPERIOR QUALITY HOME, WITH ATTENTION TO DETAIL,
QUALITY MATERIALS, AND SERVICE TO OUR CUSTOMERS.
By focusing our manufacturing efforts on the fastest growing sector of the
manufactured housing industry, and by paying attention to manufacturing details,
procuring quality components, and raw materials, and offering factory-provided
trim-out options and service capabilities to our customers, we have focused upon
servicing our customers that purchase a manufactured home from us. By providing
factory trim-out services and walk-through services to a customer, we have been
able to respond quickly to customer inquiries to ensure that our retail
customers are satisfied with the quality of our home products.
WE PRODUCE A QUALITY MANUFACTURED HOME PRODUCT WHICH IS COMPETITIVELY PRICED.
By focusing our efforts on controlling costs and maintaining a high quality
manufacturing facility, we have been able to provide a high-quality product at
an attractive value. Our multi-section homes sold for an average retail price
ranging from $59,000 to $119,000 in 2005, excluding land costs.
WE HAVE AN EXPERIENCED MANAGEMENT TEAM WHICH HAS EXTENSIVE EXPERIENCE IN THE
MANUFACTURED HOUSING BUSINESS.
Our management team is made up of seasoned industry veterans in key
leadership positions whose interests are closely aligned with those of our
shareholders. Some of our senior management team members will receive
substantial additional payments from the acquisition of Deer Valley by the
Company, depending upon the future success and profitability of Deer Valley.
WE HAVE A STRONG NETWORK OF INDEPENDENT DEALERS.
We have a strong network of independent dealers who operate in a highly
fragmented industry consisting of approximately 8,000 dealers in the United
States. We do not own any company retail stores and do not provide any
financial or insurance-related services which could significantly increase Deer
Valley's administrative expenses. We maintain close relationships with each of
our independent dealers and carefully monitor our service responsibilities to
the customers who purchase a manufactured home from us. We also provide
significant volume discounts to our dealers in an effort to maintain a strong
network of independent dealers.
REGULATION
Deer Valley's manufactured homes are subject to a number of federal, state
and local laws. Construction of manufactured housing is governed by the National
Manufactured Housing Construction and Safety Standards Act of 1974 ("1974 Act").
In 1976, HUD issued regulations under the 1974 Act establishing comprehensive
national construction standards. The HUD regulations cover all aspects of
manufactured home construction, including structural integrity, fire safety,
wind loads, thermal protection, plumbing, and electrical work. Such regulations
preempt conflicting state and local regulations. Deer Valley's manufacturing
facilities and the plans and specifications of its manufactured homes have been
approved by a HUD-designated inspection agency. An independent, HUD-approved
third-party inspector checks each of Deer Valley's manufactured homes for
compliance during at least one phase of construction. In 1994, HUD amended
manufactured home construction safety standards to improve the wind force
resistance of manufactured homes sold for occupancy in coastal areas prone to
hurricanes. Failure to comply with the HUD regulations could expose Deer Valley
to a wide variety of sanctions, including closing Deer Valley's plants. Deer
Valley believes its manufactured homes meet or surpass all present HUD
requirements.
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Manufactured, modular, and site-built homes are all built with
particleboard, paneling, and other products which contain formaldehyde resins.
Since February 1985, HUD has regulated the allowable concentration of
formaldehyde in certain products used in manufactured homes and requires
manufacturers to warn purchasers concerning formaldehyde-associated risks. Deer
Valley currently uses materials in its manufactured homes which meet HUD
standards for formaldehyde emissions and which otherwise comply with HUD
regulations in this regard. In addition, certain components of manufactured
homes are subject to regulation by the Consumer Product Safety Commission
("CPSC") which is empowered to ban the use of component materials believed to be
hazardous to health and to require the manufacturer to repair defects in
components of its homes. The CPSC, the Environmental Protection Agency, and
other governmental agencies are evaluating the effects of formaldehyde. In
February 1983, the Federal Trade Commission adopted regulations requiring
disclosure of manufactured home's insulation specifications.
Deer Valley Homebuilders Inc.'s manufactured and modular homes are subject
to local zoning and housing regulations. Installation of homes and utility
connections are subject to state and local regulation, and must be complied with
by the dealer or other person installing the home. Deer Valley does not install
homes or connect utilities to homes. A number of states require manufactured
and modular home producers to post bonds to ensure the satisfaction of consumer
warranty claims. Several states have licensing requirements governing the
delivery of manufactured and modular homes. Deer Valley has complied with these
requirements in Alabama, Mississippi, Louisiana, Arkansas, Georgia, Florida,
North Carolina, South Carolina, Tennessee, Kentucky, Indiana, Illinois,
Missouri, Oklahoma, and Texas. Many of these states require that companies
renew their license applications or notify the state after a change in
ownership. Deer Valley is in the process of notifying states of the change in
its ownership and renewing its licenses, when required. Some of the states
which require renewal of licenses have waived the renewal requirement.
REGULATORY APPROVAL
Other than the regulations described above, no federal or state regulatory
approvals are required for our principal products and services.
TRADEMARKS, PATENTS, AND INTELLECTUAL PROPERTY RIGHTS
We do not rely upon any significant patent rights, licenses or franchises
under the trademarks or patents of any other person or entity in conducting our
business. While Deer Valley utilizes the mark "Deer Valley" and "Deer Valley
Homebuilders" as Company trademarks in marketing its manufactured homes, we do
not own any trademarks or patents registered with the United States Patent and
Trademark Office. We do offer several models and brand names for our products
to our dealers and customers but have not relied upon trademark protection in
marketing these products.
COSTS AND EFFECTS OF COMPLIANCE WITH ENVIRONMENTAL LAWS
Other than as described above, there are no special or unusual
environmental laws or regulations that will require us to make material
expenditures or that can be expected to materially impact the operation of our
business.
EMPLOYEES
We currently have approximately 350 employees, all of whom are full-time.
None of our employees are represented by a labor union and we consider our
relationships with our employees to be good.
REPORTS TO SECURITY HOLDERS
We are not required to deliver an annual report to security holders and
will not send such an annual report to our security holders. We are a public
company and file annual, quarterly and special reports, proxy statements and
other information with the Securities and Exchange Commission ("SEC"). Copies of
the reports, proxy statements and other information may be read and copied at
the SEC's Public Reference Room at 450 Fifth Street, N.W., Washington, D.C.
20549. You can request copies of such documents by writing to the SEC and paying
a fee for the copying cost. You may obtain information on the operation of the
Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains a
web site at http://www.sec.gov which contains reports, proxy and information
statements and other information regarding registrants that file electronically
with the SEC.
71
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"). 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 in
contemplation of a reverse merger, which did not occur, and of the purchase of
Deer Valley. As a result of the acquisition of Deer Valley Homebuilders, Inc. on
January 18, 2006, Cytation now has gross revenues in excess of $3,000,000 per
month and significant assets.
Deer Valley is a wholly-owned subsidiary of DVA, which is a wholly-owned
subsidiary of the Company. Deer Valley was formed in January, 2004, and its
offices and principal manufacturing plant are located in Guin, Alabama. 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. For more information on Deer Valley's lines of
business and principal products and services, please see the section of this
filing entitled "Description of Business."
72
Deer Valley maintains its business offices in Guin, Alabama. and operates
manufacturing facilities in Guin, Alabama and in Sulligent, Alabama. As of the
date of this filing Deer Valley's plant on the Sulligent Property is producing
approximately 12 floors per week. For more information on floors and rates of
production, please see the section of this filing entitled "Property" below.
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 growth rate. The key performance indicators management examines are
(1) Deer Valley's production rate, in "floors" produced per day, (2) the cost of
sales, (3) product gross margins, and (4) the size of Deer Vallye's sales
backlog. For more information on these performance indicators, please see the
attached financial statements and notes thereto and the section of this document
entitled "Description of Business."
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, we
have been able to successfully launch our 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, our
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
73
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. For more information on multi-section homes,
please see the section of this document entitled "Description of Business."
3) Rising Interest Rates and Residual Effects of Hurricane Katrina
Two important factors could affect our 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 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 - Fiscal Year Ended December 31, 2005
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 year ended December 31, 2005 and the year ended December 31, 2004, is that
of the Company on a consolidated versus combined basis with Deer Valley
Homebuilders, Inc., which reflects the Company's acquisition of Deer Valley
Homebuilders, Inc. on January 18, 2006, pursuant to the terms of the Securities
Purchase and Share Exchange Agreement.
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, because Deer Valley
constitutes all of the Company's operations, and because management does not
believe that it is informative or useful to compare the results of operations
74
for the year ended December 31, 2005 on an unaudited pro forma condensed
combined consolidated basis, giving effect to the acquisition of Deer Valley, as
compared to fiscal year 2004, the remainder of this discussion on the fiscal
year ended December 31, 2005 relates to the operations of Cytation's newly
acquired operating subsidiary, Deer Valley. In conjunction with this discussion
it is imperative that investors read the footnotes to the financial statements
attached to this filing.
HISTORICAL RESULTS - FISCAL YEAR ENDED DECEMBER 31, 2005; COMPARISON OF FISCAL
YEAR ENDED DECEMBER 31, 2004.
REVENUES. Overall net revenues for the year ended December 31, 2005 were
$35,717,073. In addition, overall net revenues for the year ended December 31,
2004 were $15,394,215. The increase of $20,322,858 is a direct result of
increased sales and production of homes which increased from 655 floors in 2004
to 1,385 floors in 2005.
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 year ended
December 31, 2005 were $2,996,023. In addition, general and administrative
expenses for the year ended December 31, 2004 were $1,559,333. These general
and administrative costs have increased primarily due to increased production,
sales, and operating expenses. The production direct cost of goods was
generally in the same ratio to sales for both periods with increased quantity
discounts being offset by a rise in material cost. The remainder of the
increase was due to salary expenses, which increased from $894,722 in 2004 to
$1,423,298 in 2005.
NET INCOME (LOSS). The net income for the year ended December 31, 2005 was
$3,366,658. The net income for the year ended December 31, 2004 was $1,010,506.
The increase in net income is primarily due to increased production and sales of
Deer Valley's operations. Because of this and because fixed expenses were
spread over a significantly larger number of units produced with no reduction in
price per unit, the gross profit margin was greater in 2005 than in 2004. The
increase in production can be seen in a comparison of daily output. As of
December 31, 2004, Deer Valley produced 4 floors per day, whereas as of December
31, 2005, Deer Valley produced 7 floors per day.
RESULTS OF OPERATIONS - QUARTER ENDED APRIL 1, 2006
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.
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.
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 on
the quarter ended April 1, 2006 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.
75
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 February 20, 2006, and the first home
manufactured at the Sulligent Plant was delivered on 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
$463,501. After accounting for the dividend payable to preferred shareholders,
and the deemed dividend to preferred shareholders on beneficial conversion
features, the net loss for the quarter ended April 1, 2006 was $1,140,828.
Increased production and sales of Deer Valley's operations have bolstered net
income.
76
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 for the next 12 months. As of April
1, 2006, the Company had approximately $3,555,528 in cash and cash equivalents.
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 provided by operating activities as of December 31, 2005 and
December 31, 2004 was $3,376,520 and $787,139, respectively. The increase was
due to an increase in sales from 655 floors to 1,385 floors from 2004 to 2005.
In particular the net income increased by $2,356,152 from 2004 to 2005 due to an
increase in sales and due to the fact that Deer Valley operated for all of 2005,
unlike 2004. The net cash used in investing activities as of December 31, 2005
and December 31, 2004 was $260,631 and $1,705,470, respectively. This change
was primarily due to differences in capital asset purchases during that period.
In particular, in 2004 Deer Valley purchased its first manufacturing facility in
Guin, Alabama, whereas in 2005 Deer Valley had very few purchases of capital
assets. The net cash used in financing activities as of December 31, 2005 was
$1,748,444, and the net cash produced by financing activities as of December 31,
2004 was $2,482,150. The cash financing activities in 2004 included $1,100,000
invested as capital in the form of common stock, of which 66,000 was repurchased
at end of 2004 as treasury stock, and $1,543,314 in loan proceeds used to
purchase the Guin manufacturing facility and equipment. Net cash financing
activities in 2005 were primarily for distributions to shareholders, which
amounted to $1,670,540. These distributions were more substantial in 2005 than
the $52,618 distributed in 2004 because Deer Valley was more profitable.
The net cash used in operating activities as of April 1, 2006 was $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 the Company was contingently liable under such agreements amounted to
$9,600,519 and $4,516,365 at December 31, 2005 and 2004, respectively. As of
December 31, 2005 and December 31, 2004, the company had a reserve of $35,000
and $3,500, respectively, for future repurchase losses, based on prior
experience and an evaluation of dealers' financial conditions. 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. The risk of loss which we face under these repurchase agreements is
also lessened by additional factors listed below under "Reserve for Repurchase
Commitments."
77
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
with Fifth Third Bank 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 previous 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.
On May 26, 2006, Deer Valley entered into a Loan Agreement with Fifth Third
Bank (the "Lender") providing for a loan of Two Million and No/100 Dollars
($2,000,000.00) (the "Loan") evidenced by a promissory note and secured by a
first mortgage on Deer Valley's properties in Guin, Alabama and Sulligent,
Alabama, including the structures and fixtures located thereon, as well as Deer
Valley's interest in any lease thereof. The purpose of the loan is to pay off an
existing loan from another bank secured by the Guin property and to reduce the
outstanding balance on Deer Valley's revolving credit facility with the Lender.
The net effect of the reduction in the revolving credit balance is to increase
the credit available to the Company for working capital under its revolving
facility. The Loan has a term from May 26, 2006 through June 1, 2011 and has a
variable interest rate at 2.25% above LIBOR. There is no prepayment penalty.
Future advances are available under the Loan Agreement, subject to approval by
the Lender. Also on May 26, 2006, the Company and DVA guaranteed the Loan.
Should Deer Valley default, thereby triggering acceleration of the Loan,
Cytation and DVA would become liable for payment of the Loan.
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,
78
issued May 3, 2005 and expiring May 3, 2006, pending renewal. Personally
guaranteed by the three largest former shareholders of the Company.
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.
As of April 1, 2006, Deer Valley was 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 assest of the Company and is personally
guaranteed by two former stockholders of the Company.
79
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, Critial
Accounting Policies and Estimates, contained in the explanatory notes to the
Company's financial statements for the quarter ended April 1, 2006, which are
included 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 have
a reserve for estimated warranties of $750,000 as of December 31, 2005, compared
to $550,000 as of December 31, 2004 and $860,000 as of April 1, 2006. Although
80
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
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. Volume incentive costs represent a significant expense to us, and any
significant changes in actual payouts could have an adverse affect on our
financial performance. 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 $9,600,519 at December 31, 2005. As of December 31, 2005
and December 31, 2004 we had a reserve of $35,000 and $3,500, respectively,
established for future repurchase commitments, based upon our prior experience
and evaluation of our independent dealers' financial conditions. 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 are
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.
81
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
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
82
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.
DESCRIPTION OF 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
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"). 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, paid in cash at closing. 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 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.
Deer Valley does not invest in real estate or real estate mortgages.
83
FINANCIAL STATEMENTS
At the end of 2005, Cytation had nominal operations and was a shell company
(as defined in Rule 12b-2 of the Exchange Act). As a result of the acquisition
of Deer Valley Homebuilders, Inc. on January 18, 2006, Cytation now has
significant assets and gross revenues in excess of $3,000,000 per month. To
facilitate understanding of the financial effect of this acquisition and for
clarity of presentation, the following financial statements are included in this
Registration Statement:
84
CYTATION CORPORATION
FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2005 AND 2004
(AUDITED)
TABLE OF CONTENTS:
AUDIT REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM - WHEELER, HERMAN, HOPKINS & LAGOR, PA 86
AUDIT REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM -
RADIN, GLASS & CO., LLP 87
FINANCIAL STATEMENTS:
BALANCE SHEET AS OF DECEMBER 31, 2005 AND 2004 88
STATEMENT OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2005
AND 2004 89
STATEMENT OF STOCKHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31,
2005 AND 2004 90
STATEMENT OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2005
AND 2004 91
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 92 - 97
85
CYTATION CORPORATION
FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2005 AND 2004
(AUDITED)
AUDIT REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
Cytation Corporation
Tampa, Florida
We have audited the accompanying balance sheets of Cytation Corporation as of
December 31, 2005 and the related statements of operations, changes in
stockholders' deficit, and cash flow for the year then ended. These financial
statements are the responsibility of the company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with 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. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Cytation Corporation at
December 31, 2005, and the results of its operations and its cash flows for the
year then ended, in conformity with accounting principles generally accepted in
the United States.
/s/ Wheeler, Herman, Hopkins & Lagor, PA
Wheeler, Herman, Hopkins & Lagor, PA
Certified Public Accountants
Tampa, Florida
March 24, 2006
86
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
February 25, 2005
The Board of Directors and Stockholders
Cytation Corporation
Bristol, RI
We have audited the accompanying balance sheets of Cytation Corporation as of
December 31, 2004 and 2003 and the related statements of operations, changes in
stockholders' equity (deficit), and cash flow for the years then ended. These
financial statements are the responsibility of the company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with 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. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Cytation Corporation at
December 31, 2004 and 2003, 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.
The accompanying financial statements for the year ended December 31, 2004 have
been prepared assuming that the Company will continue as a going concern. As
discussed in Note 1 to the financial statements, the Company has suffered
operating losses and has a net capital deficiency that raise substantial doubt
about its ability to continue as going concern. Management's plans in regard to
these matters are also described in Note 1. The financial statements do not
include any adjustments that might result form the outcome of this uncertainty.
/s/ Radin Glass & Co., LLP
Certified Public Accountants
New York, NY
87
CYTATION CORP
Cytation Corporation
Balance Sheet
As of December 31, 2005 and 2004
ASSETS
2005 2004
CURRENT ASSETS:
Cash $ 220 $ 65,644
Notes receivable, stockholder - 10,113
Notes receivable, other - 5,000
Prepaid expenses and other current assets - 8,706
Total Current Assets 220 89,463
PROPERTY AND EQUIPMENT, Net $ - $ 4,496
OTHER ASSETS:
Security deposit $ - $ 1,800
Investment - 59,718
Total Other Assets - 61,518
TOTAL ASSETS $ 220 $ 155,477
========== ===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 48,416 $ 92,306
Notes payable and accrued interest 90,500 120,228
Total Current Liabilities 138,916 212,534
STOCKHOLDERS' EQUITY(DEFICIT):
Common stock, $0.001 par value, 2,000,000 shares
authorized, 982,662 and 872,330 shares issued and
outstanding respectively 982 872
Additional paid-in capital 32,723,371 32,608,015
Shares Subscribed (not issued) (23,500) -
Accumulated deficit (32,839,549) (32,665,944)
Total Stockholders' Deficit (138,696) (57,057)
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 220 $ 155,477
=========== ============
See Reports of Independent Registered Public Accounting Firm and Notes to
Financial Statements.
88
CYTATION CORP
Cytation Corporation
Statements of Operations
For the Years Ended December
31,
2005 2004
REVENUE
Consulting revenue - cash $ 59,114 $ 86,900
Consulting revenue - non cash - 153,468
TOTAL REVENUE 59,114 240,368
COST OF REVENUE 1,738 746,896
GROSS PROFIT 57,376 (506,528)
OPERATING EXPENSES:
Depreciation 1,037 3,857
Selling, general and administrative 246,533 367,007
TOTAL OPERATING EXPENSES 247,570 370,864
OPERATING INCOME/(LOSS) (190,194) (877,392)
OTHER INCOME (EXPENSES)
Gain on sale and distribution of investment 31,902 187,976
Loss on sale of property and equipment (4,270) -
Loss on termination of ARE agreement (5,000) -
Interest income (expenses), net (6,043) (5,298)
Other Income - -
TOTAL OTHER INCOME 16,589 182,678
INCOME/(LOSS) BEFORE INCOME TAXES (173,605) (694,714)
INCOME TAX EXPENSE - 1,975
NET LOSS (173,605) $(696,689)
========= =========
Net (Loss) Income Per Share (Basic) $ (0.18) $ (0.87)
Net (Loss) Income Per Share (Fully Diluted) $ (0.18) $ (0.87)
========= =========
Weighted Average Common Shares Outstanding 944,303 799,830
Weighted Average Common and Common Equivalent Shares Outstanding 944,303 799,830
========= =========
See Reports of Independent Registered Public Accounting Firm and Notes to
Financial Statements
89
CYTATION CORP
Cytation Corporation
Statements of Changes in Stockholders' Deficit
For The Years Ended December 31, 2005 and 2004
Common Stock Additional Shares Accumulated
Shares Amount Paid-in Subscribed Deficit
Capital For Total
Balance - December 31, 2003 582,330 $582 $33,118,610 $(31,969,255) $1,149,937
Exercise of options 50,000 50 (25) - 25
Issuance of common stock for services 240,000 240 71,760 - 72,000
Distributions - non cash - (582,330) - (582,330)
Net loss - - (696,689) (696,689)
Balance - December 31, 2004 872,330 $872 $32,608,015 $(32,665,944) $(57,057)
Exercise of options - - - - -
Issuance of common stock 110,332 110 115,356 - 115,466
Shares subscribed (not issued) - - - (23,500) - (23,500)
Net loss - - (173,605) (173,605)
Balance - December 31, 2005 982,662 $982 $32,723,371 $(23,500) $(32,839,549) $(138,696)
See Reports of Independent Registered Public Accounting Firm and Notes to
Financial Statements
90
Cytation Corporation
Statements of Cash Flows
For the Years Ended December 31,
2005 2004
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (173,605) $ (696,689)
Adjustments to reconcile net income (loss) to net cash used
in operating activities:
Depreciation 1,036 3,856
Non-cash consulting income 64,830 (153,468)
Non cash compensation 49,601 884,750
Gain on sales of marketable securities (31,902) (187,976)
Gain on disposal of equipment 4,270 -
Accrued interest on note payable 9,155 5,544
Write-off of note receivable-other 5,000 55,169
Changes in operating assets and liabilities:
Prepaid expenses and others 10,506 (8,706)
Accounts payable and accrued expenses (38,390) (41,794)
CASH FLOW USED IN OPERATING ACTIVITIES (99,499) (139,314)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of equipment (812) (5,127)
Proceeds from sales of marketable securities - 212,824
Proceeds from disposal of equipment 2 -
(Issuance) collection of notes receivable - (5,000)
CASH FLOW PROVIDED BY INVESTING ACTIVITIES (810) 202,697
CASH FLOWS FROM FINANCING ACTIVITIES:
--------------------------------------
Proceeds from issuance of common stock 74,267 25
Collections (issuance) of note receivable (39,382) -
CASH FLOW PROVIDED BY FINANCING ACTIVITIES 34,885 25
NET INCREASE (DECREASE) IN CASH (65,424) 63,408
CASH, Beginning of Year 65,644 2,236
CASH, End of Year $ 220 $ 65,644
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the years for:
Interest $ 14,345 $ -
Taxes $ - $ 1,975
Non-cash investing and financing activities:
Distributions of Solomon shares $ - $ 582,330
SEE REPORTS OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM AND NOTES TO
FINANCIAL STATEMENTS
91
CYTATION CORPORATION
NOTES TO FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2005 AND 2004
(AUDITED)
NOTES TO FINANCIAL STATEMENTS
1. BUSINESS.
Cytation Corporation was incorporated under the laws of Delaware on November 1,
1999. Until June 20, 2001, the Company provided an extensive range of in-school
and online services directed at high school students and their parents, high
school counselors, college admissions officers and corporations which target
with the teen marketplace. On June 20, 2001, the Company sold all of its assets
associated with these activities to TMP Worldwide Inc. for approximately $72
million in cash and debt assumed.
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 that wish to become reporting companies
under the Securities Exchange Act of 1934. In the first quarter of 2005, the
Company discontinued all business operations except finding an appropriate
private entity with which it could acquire or enter into a similar transaction
with. On January 18, 2006, the Company entered into the Securities Purchase and
Share Exchange Agreement, which resulted in a change of control of the Company
followed simultaneously with an acquisition of a private company. See
"Subsequent Events".
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES.
USE OF ESTIMATES- The Company's financial statements are prepared in conformity
with accounting principles generally accepted in the United States of America
which require management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. Actual results could
differ from those estimates.
PROPERTY AND EQUIPMENT - Property and equipment are stated at cost and
depreciated using the straight-line method over the estimated useful lives of
the assets ranging from three to seven years for equipment, auto and furniture
Leasehold improvements are amortized over the term of the lease or the estimated
life of the improvement, whichever is shorter. Whenever assets are sold or
retired, their cost and related accumulated depreciation are removed from the
appropriate accounts. Any gains and losses on dispositions are recorded in
current operations.
FAIR VALUE OF FINANCIAL INSTRUMENTS - The carrying amounts reported in the
balance sheet for cash, short-term loan, accounts payable and accrued expenses
approximate fair value based on the short-term maturity of these instruments.
INCOME TAXES - The Company utilizes the liability method of accounting for
income taxes as set forth in SFAS 109, "Accounting for Income Taxes" Under the
liability method, deferred taxes are determined based on the difference between
the financial statement and tax bases of assets and liabilities using enacted
tax rates in effect in the years in which the differences are expected to
reverse.
REVENUE RECOGNITION - Revenues were recognized when services are performed and
the earnings process is completed.
EMPLOYEE STOCK OPTIONS AND SHARES ISSUED FOR SERVICES - The Company accounts for
employee stock transactions in accordance with APB Opinion No. 25, "Accounting
for Stock Issued to Employees." The Company has adopted the pro forma disclosure
requirements of SFAS 123, "Accounting for Stock-Based Compensation."
Accordingly, any excess of fair market value of stock issued to employees over
exercise prices has been recorded as compensation expense and additional paid in
capital.
EARNING (LOSS) PER SHARE - The Company adopted the provision of SFAS No. 128,
"Earnings per Share". SFAS No. 128 eliminates the presentation of primary and
fully dilutive earnings per share ("EPS") and requires presentation of basic and
diluted EPS. Basic EPS is computed by dividing income (loss) available to common
stockholders by the weighted-average number of common shares outstanding for the
period. Diluted EPS is based on the weighted-average number of shares of common
stock and common stock equivalents outstanding for the period.
REPORTING OF SEGMENTS - The Company adopted No. 131, "Disclosures about Segments
of an Enterprise and Related Information". SFAS No. 131 establishes the criteria
for determining an operating segment and establishes the disclosure requirements
for reporting information about operating segments. The Company had determined
that under SFAS No. 131, it operated in one segment of service.
NEW 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
92
CYTATION CORPORATION
NOTES TO FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2005 AND 2004
(AUDITED)
the recorded amount of the asset relinquished. Opinion 29 provided an exception
to its basic 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 that lack commercial
substance, the FASB believes this statement produces financial reporting that
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 that begins after
June 15, 2005. For public entities that file as small business issuers SFAS
123(R) is applicable as of the beginning of the first interim or annual
reporting period that begins after December 15, 2005. The Company evaluated the
impact of the adoption of SFAS 123(R), and believes that the impact will be
insignificant to the company's overall results of operations and financial
position.
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.
3. NOTES RECEIVABLE, STOCKHOLDERS AND OTHERS
2005 2004
------ -------
Note receivable from stockholders,
non-interest bearing and due on demand. $ -- $10,113
Note receivable from an unrelated entity, due on -- 5,000
demand without interest. ------ -------
Total $ -- $15,113
====== =======
4. PROPERTY AND EQUIPMENT
Property and equipment at December 31, 2005 and 2004 consist of the following:
Estimated
2005 2004 Useful Lives
----- ------- ------------
Computer and equipment $ -- $47,945 3 years
Leasehold Improvements -- 10,414 7 years
----- -------
Sub-total -- 58,359
Less: accumulated depreciation -- 53,863
----- -------
Property and Equipment, Net $ -- $ 4,496
===== =======
Depreciation expense for the years ended December 31, 2005 and 2004 was $1,037
and $3,857, respectively.
93
CYTATION CORPORATION
NOTES TO FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2005 AND 2004
(AUDITED)
5. STOCKHOLDERS' EQUITY
AUTHORIZED SHARES-The Company's authorized shares consisted of 3,140,000 shares,
divided into 2,000,000 shares of common stock, par value $.001 per share and
1,140,000 shares of preferred stock, par value $.01 per share. As of December
31, 2005 the Company had 982,662 shares of common stock issued and outstanding.
ISSUANCE OF COMMON STOCK - On February 14, 2005, the Company authorized
theissuance for no consideration of 3,332 shares to Bost & Co., an unaffiliated
third party, in settlement of a prior investment.
Also on February 14, 2005, the Company authorized the issuance for nominal
consideration of 30,000 restricted shares of its common stock to Richard Parke
in consideration of his agreement to serve as a director of the Company. The
Company recorded an expense of $20,333 in connection with the issuance of these
shares.
On March 4, 2005, the Company agreed to issue 47,000 of its common shares to an
unaffiliated third party for $23,500 in cash and a warrant to purchase 20,000
shares of the common stock of Solomon Technologies, Inc ("Solomon Warrant"). All
of these shares were issued on June 30, 2005 when the market price of the
Company's common stock was $1.22 per share. On September 1, 2005, the Solomon
Warrant was issued and $2,634 was recorded as a reduction of paid-in capital
based on the Black-Scholes option valuation model.
On November 14, 2005, the Company issued 20,000 restricted shares of its common
stock for $1.00 a share to an unaffiliated third party and issued 10,000
restricted shares of its common stock to Foley Hoag LLP in reduction of
approximately $45,000 of indebtedness. Foley Hoag agreed to reduce its then
outstanding liability to $85,000 with scheduled payments of $14,167 on February
1, February 15, March 15, April 15, May 15, and June 15, 2006. The agreement
was verbally agreed to in November 2005 and subsequently signed on January 4,
2006.
The Board of Directors of the Company declared a 2-for-1 stock dividend for
stockholders of record on November 14, 2005. The "payment" date for this
dividend is November 23, 2005. All shares and per share amounts have been
retroactively restated to reflect this stock dividend.
In November 2005, the Company entered into a letter of intent to acquire an
unrelated private company. The Company will be the surviving corporation, but
the business, ownership and management of the Company will change. In connection
with the proposed acquisition, the Company will authorize additional shares of
common stock and preferred stock expected to be issued in the transaction,
declare a 2-or-1stock dividend, and issue to third party's stockholders newly
issued shares of its preferred stock. The third party paid the Company $10,000
upon completion of due diligence and agreed to assume and to pay approximately
$120,000 of the Company's liabilities at the closing of the transaction. After
the transaction, stockholders of the third party will own approximately 94% of
the total issued and outstanding securities of the Company.
WARRANTS-The following table summarizes the changes in warrants outstanding and
related price ranges are as follows:
Weighted Average
Shares Exercise Price
------- ---------------
Outstanding at December 31, 2004 2,932 495.00
Granted --
Exercised --
Expired or cancelled (2,932) (495.00)
-------
Outstanding at December 31, 2005 --
=======
No options have been granted to employees during the year ended December 31,
2005 and 2004. Therefore, if the Company had recognized compensation cost for
the employee stock options in accordance with SFAS No. 123, the Company's pro
forma net income (loss) and earning (loss) per share would have been the same as
the net income (loss) and earning (loss) per share as reported on the
accompanying statements of operations.
6. COMMITMENTS AND CONTINGENCIES
The Company rented its office on a month-to-month basis. Rent expense was
approximately $11,592 and $11,000 for the years ended December 31, 2005 and
2004, respectively.
During the first quarter of 2005, the Company reviewed business opportunities
resulting from its status as a Business Development Company under the Investment
Company Act of 1940 and evaluated other courses of action. On April 8, 2005, the
Company entered into a letter of intent with Evolve Oncology, Inc. ("Evolve") to
effect a reverse merger with Evolve. The Company terminated this letter of
intent on August 4, 2004.
94
CYTATION CORPORATION
NOTES TO FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2005 AND 2004
(AUDITED)
7. INCOME TAXES
At December 31, 2005 and 2004, the Company had net operating loss carryforwards
of approximately $19,700,000 and $19,500,000, expiring 2011 through 2025. SFAS
No. 109 additionally requires the establishment of a valuation allowance to
reflect the likelihood of realization of deferred tax assets. At December 31,
2005 and 2004, a valuation allowance for the full amount of the deferred tax
asset was recorded because of operating losses incurred and the uncertainties as
to the amount of taxable income that would be generated in the future years. In
addition, the utilization of such net operating losses is subject to certain
limitations under Federal income tax laws.
The components of the net deferred tax asset consist of the following at
December 31, 2005 and 2004:
2005 2004
------------------ ------------
Net operating loss carryforwards $ 6,895,000 $ 6,825,000
Valuation allowance (6,895,000) (6,825,000)
------------------ ------------
$ -- $ --
================== ============
The provision for income taxes differs from the amount computed applying the
statutory federal income tax rate to income before income taxes as follows as of
December 31, 2005 and 2004:
2005 2004
------- -------
Income tax (benefit) computed at statutory rate at 35% $(70,000) $ (240,000)
Utilization of NOL -
Tax benefit not recognized 70,000 240,000
--------- ----------
Provision for income taxes $ - $ -
========= ==========
8. INVESTMENT/NON-CASH INCOME:
By agreement of the majority board of directors, on September 1, 2005, the
Company entered into a settlement agreement with HTA whereby HTA issued to the
Company an additional 196,456 shares of its common stock and an additional
49,114 warrants. The HTA common stock was valued at $0.25 per share, and
accordingly the Company recorded non-cash income in the amount of $49,114.
Based on the Black-Scholes option valuation model, the HTA warrants have zero
value with volatility of 0.01%. Therefore, the Company recorded no non-cash
income with respect to these warrants.
On September 1, 2005 the Company distributed 196,456 shares of HTA common stock
and 197,582 HTA warrants to its two officers. The Company recorded compensation
expense on the distribution of the HTA shares in the amount of $49,114 and,
based the zero value of the HTA warrants under the Black-Scholes valuation
model, no compensation expense for the HTA warrants was recorded.
9. SUBSEQUENT EVENTS
On January 18, 2006, the Company entered into the Securities Purchase and Share
Exchange Agreement, (the "Securities Purchase and Share Exchange Agreement") by
and among the Company, Richard A. Fisher, an individual, and Kevin J. High,
certain purchasers of the Company's Series A Convertible Preferred Stock (as
defined below), DVA, the shareholders of DVA, and Vicis Capital Master Fund (the
"Lender").
On January 18, 2006, the Company entered into the Investor Rights Agreement (the
"Investor Rights Agreement"), by and among the Company, each of the purchasers
of the Company's Series A Preferred Stock, each of the shareholders of DVA, and
the Lender. Pursuant to the Investor Rights Agreement, the Company (a) has
95
agreed to register certain securities for resale, including the Company's shares
related to the Series A Preferred Stock, the Series B Preferred Stock, the
Series C Preferred Stock, the Series A Common Stock Purchase Warrants, and the
Series B Common Stock Purchase Warrants, and (b) granted pre-emptive rights to
the holders of the Company's Series A Preferred Stock.
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
CYTATION CORPORATION
NOTES TO FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2005 AND 2004
(AUDITED)
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. Such agreement is described in
more detail herein under Common Stock Purchase Agreement.
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. See discussion below for description of Deer Valley
Homebuilders, Inc.'s business, operations, assets, and financial information.
In order to effectuate the Capital Stock Purchase Agreement, Cytation
Corporation completed a series of tranactions 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.
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.
The company no longer has any office lease obligations on a month by month
basis.
In January 2006, the Company issued 17,338 to Sequence Advisors Corporation, an
affiliate of two former directors.
On November 14, 2005, the Company issued 5,000 (pre-split) restricted shares of
its common stock to Foley Hoag LLP in reduction of approximately $45,000 of
indebtedness. As a result of the 2-for-1 stock dividend of November 14, 2005,
Foley Hoag now holds 10,000 shares. Foley Hoag agreed to reduce its then
outstanding liability to $85,000 with scheduled payments of $14,167 on February
1, February 15, March 15, April 15, May 15, and June 15, 2006. The agreement was
verbally agreed to in November 2005 and subsequently signed on January 4, 2006.
As of the date of these statements all required payments under such obligation
have been made.
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. The Company
expects that, should any amount of contingent consideration be issuable, such
amount would result in an additional element of the cost of acquiring Deer
Valley Homebuilders, Inc.
96
CYTATION CORPORATION
NOTES TO FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2005 AND 2004
(AUDITED)
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.
The following table summarizes the estimated fair values of the assets acquired
and liabilities assumed at the date of acquisition.
AT DECEMBER 31, 2005
Current assets $ 6,398,562
Property, plant, and equipment 1,611,531
Goodwill 3,611,994
------------
Total assets acquired $11,622,087
------------
Current liabilities (3,879,939)
Long-term debt (1,367,148)
------------
Total liabilities assumed ($5,247,087)
------------
Net assets acquired $ 6,375,000
============
97
DEERVALLEY ACQUISITIONS CORP.
FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2005
(AUDITED)
TABLE OF CONTENTS:
AUDIT REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM 99
FINANCIAL STATEMENTS:
BALANCE SHEET AS OF DECEMBER 31, 2005 100
STATEMENT OF OPERATIONS FOR THE PERIOD FROM DATE OF INCEPTION
(JUNE 22, 2005) THROUGH DECEMBER 31, 2005 101
STATEMENT OF STOCKHOLDERS' DEFICIT FROM DATE OF INCEPTION
(JUNE 22, 2005) THROUGH DECEMBER 31, 2005 102
STATEMENT OF CASH FLOWS FROM DATE OF INCEPTION (JUNE 22, 2005)
THROUGH DECEMBER 31, 2005 103
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 104 - 108
98
DEERVALLEY ACQUISITIONS CORP.
FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2005
(AUDITED)
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Stockholders and Board of Directors
DeerValley Acquisitions Corp.
We have audited the accompanying balance sheet of DeerValley Acquisitions Corp.
as of December 31, 2005, and the related statements of operations, stockholders'
deficit and cash flows for the period from the date of inception (June 22, 2005)
through December 31, 2005. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit 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 includes 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 provide a reasonable
basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of DeerValley Acquisitions Corp.
as of December 31, 2005 and results of its operations and its cash flows for the
period from the date of inception (June 22, 2005) through December 31, 2005, in
conformity with accounting principles generally accepted in the United States of
America.
/s/ Wheeler, Herman, Hopkins & Lagor, PA
Wheeler, Herman, Hopkins & Lagor, PA
Certified Public Accountants
Tampa, Florida
March 24, 2006
99
DEERVALLEY ACQUISITIONS CORP.
Balance Sheet
As of December 31, 2005
ASSETS
2005
---------
CURRENT ASSETS:
Cash $ 36
---------
Total Current Assets 36
TOTAL ASSETS $ 36
=========
LIABILITIES AND STOCKHOLDERS'DEFICIT
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 6,446
Loan from stockholder 195
---------
Total Current Liabilities 6,641
STOCKHOLDERS' EQUITY(DEFICIT):
Common stock, no par value, 30,000,000
shares authorized, 7,620,100 -
Additional paid-in capital 44,010
Accumulated deficit (50,615)
---------
TOTAL STOCKHOLDERS'DEFICIT (6,605)
TOTAL LIABILITIES AND STOCKHOLDERS'DEFICIT $ 36
=========
SEE REPORTS OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM AND NOTES TO
FINANCIAL STATEMENTS
100
DEERVALLEY ACQUISITIONS CORP.
Statement of Operations
For The Period From Inception (June 22, 2005) Through December 31, 2005
OPERATING EXPENSES:
Selling, general and administrative $ 50,615
-----------
TOTAL OPERATING EXPENSES (50,615)
-----------
LOSS BEFORE INCOME TAXES (50,615)
INCOME TAX EXPENSE -
NET LOSS $ (50,615)
===========
Net (Loss) Income Per Share (Basic) $ (0.01)
Net (Loss) Income Per Share (Fully Diluted) $ (0.01)
===========
Weighted Average Common Shares Outstanding 7,620,100
Weighted Average Common and Common Equivalent Shares Outstanding 7,620,100
===========
SEE REPORTS OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM AND NOTES TO
FINANCIAL STATEMENTS
101
DEERVALLEY ACQUISITIONS CORP
Statements of Change in Stockholders' Deficit
For The Period From Inception (June 22, 2005) Through December 31, 2005
Common Stock Additional Accumulated
Shares Amount Paid-in Capital Deficit Total
----------------------- --------------- ----------- --------
Balance - June 22, 2005 - $ - $ - $ - $ -
Issuance of common stock 7,620,100 - 44,010 - 44,010
Net loss - - (50,615) (50,615)
---------------------------------------------------------------------
Balance - December 31, 2005 7,620,100 $ - $ 44,010 $(50,615) $(6,605)
=====================================================================
SEE REPORTS OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM AND NOTES TO
FINANCIAL STATEMENTS
102
DEERVALLEY ACQUISITIONS CORP.
Statement of Cash Flows
For The Period From Inception (June 22, 2005) Through December 31, 2005
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(50,615)
Adjustments to reconcile net loss to net cash used in
operating activities:
Increase in accounts payable and accrued expenses 6,446
--------
CASH FLOW USED IN OPERATING ACTIVITIES (44,169)
--------
CASH FLOWS FROM FINANCING ACTIVITIES:
Loan from stockholder 195
Proceeds from issuance of common stock 44,010
--------
CASH FLOW PROVIDED BY FINANCING ACTIVITIES 44,205
--------
NET INCREASE IN CASH 36
CASH, Beginning of Year -
--------
CASH, End of Year $ 36
========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the years for:
Interest $ -
========
Taxes $ -
========
SEE REPORTS OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM AND NOTES TO
FINANCIAL STATEMENTS
103
DeerValley Acquisitions Corp.
Notes to Financial Statements
December 31, 2005
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Operations
DeerValley Acquisitions Corp. (the "Company") was incorporated in Florida on
June 22, 2005.
The Company was formed for the sole purpose of acquiring the rights to purchase
Deer Valley Homebuilders, Inc.
On January 18, 2006, the Company was party to a share purchase agreement with
Deer Valley Homebuilders, Inc., a Alabama corporation and a share exchange
agreement with Cytation Corp., a Delaware corporation with executive offices in
Rhode Island. (See Note 6.)
Revenue Recognition
The Company recognizes revenue when services are provided. The Company currently
has no revenue and anticipates no revenue in the near future.
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original maturity of
three months or less to be cash equivalents.
Accounts Receivable
Accounts receivable are stated at estimated net realizable value. Accounts
receivable are comprised of balances due from customers net of estimated
allowances for uncollectible accounts. In determining collectibility, historical
trends are evaluated and specific customer issues are reviewed to arrive at
appropriate allowances.
Financial Instruments
Fair value estimates discussed herein are based upon certain market assumptions
and pertinent information available to management as of December 31, 2005. The
respective carrying value of certain on-balance-sheet financial instruments
approximated their fair values. These financial instruments include cash,
accounts receivable, accounts payable and notes payable. Fair values were
assumed to approximate carrying values for these financial instruments because
they are short term in nature and their carrying amounts approximate fair
values.
Long Lived Assets
The carrying value of long-lived assets is reviewed on a regular basis for the
existence of facts and circumstances that suggest impairment. The Company will
measure the amount of any impairment based on the amount that the carrying value
of the impaired assets exceed the undiscounted cash flows expected to result
from the use and eventual disposal of the impaired assets. At December 31, 2005,
no impairment of long-lived assets was deemed appropriate.
Use of Estimates
The Company's financial statements are prepared in conformity with accounting
principles generally accepted in the United States of America which require
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
104
DeerValley Acquisitions Corp.
Notes to Financial Statements
December 31, 2005
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Advertising Costs
Advertising costs are charged to expense as incurred. Advertising costs are
included in selling, general and administrative expenses were $0 during 2005.
Segment Information
The Company follows SFAS 131, "Disclosures about Segments of an Enterprise and
Related Information". Certain information is disclosed, per SFAS 131, based on
the way management organizes financial information for making operating
decisions and assessing performance. The Company currently operates in a single
segment and will evaluate additional segment disclosure requirements as it
expands its operations.
Income Taxes
The Company follows SFAS 109 "Accounting for Income Taxes" for recording the
provision for income taxes. Deferred tax assets and liabilities are computed
based upon the difference between the financial statement and income tax basis
of assets and liabilities using the enacted marginal tax rate applicable when
the related asset or liability is expected to be realized or settled. Deferred
income tax expenses or benefits are based on the changes in the asset or
liability each period. If available evidence suggests that it is more likely
than not that some portion or all of the deferred tax assets will not be
realized, a valuation allowance is required to reduce the deferred tax assets to
the amount that is more likely than not to be realized. Future changes in such
valuation allowance are included in the provision for deferred income taxes in
the period of change.
Recent Accounting Pronouncements
In December 2004, the FASB issued SFAS 123(R), "Share-Based Payment." SFAS
123(R) amends SFAS 123, "Accounting for Stock-Based Compensation," and APB
Opinion 25, "Accounting for Stock Issued to Employees." SFAS 123(R) requires
that the cost of share-based payment transactions (including those with
employees and non-employees) be recognized in the financial statements. SFAS
123(R) applies to all share-based payment transactions in which an entity
acquires goods or services by issuing (or offering to issue) its shares, share
options, or other equity instruments (except for those held by an ESOP) or by
incurring liabilities (1) in amounts based (even in part) on the price of the
entity's shares or other equity instruments, or (2) that require (or may
require) settlement by the issuance of an entity's shares or other equity
instruments. This statement is effective (1) for public companies qualifying as
SEC small business issuers, as of the first fiscal year beginning after December
15, 2005, or (2) for all other public companies, as of the first fiscal year or
interim period beginning after June 15, 2005, or (3) for all nonpublic entities,
as of the first fiscal year beginning after December 15, 2005. Management does
not expect adoption of SFAS 123(R) to have a material impact on the Company's
financial statements.
In December 2004, the FASB issued SFAS 153, "Exchanges of Nonmonetary Assets,"
an amendment to Opinion No. 29, "Accounting for Nonmonetary Transactions."
Statement 153 eliminates certain differences in the guidance in Opinion No. 29
as compared to the guidance contained in standards issued by the International
Accounting Standards Board. The amendment to Opinion No. 29 eliminates the fair
value exception for nonmonetary exchanges of similar productive assets and
replaces it with a general exception for exchanges of nonmonetary assets that do
not have commercial substance. Such an exchange has commercial substance if the
future cash flows of the entity are expected to change significantly as a result
of the exchange. SFAS 153 is effective for nonmonetary asset exchanges occurring
in periods beginning after June 15, 2005. Earlier application is permitted for
nonmonetary asset exchanges occurring in periods beginning after December 16,
2004. Management does not expect adoption of SFAS 153 to have a material
105
DeerValley Acquisitions Corp.
Notes to Financial Statements
December 31, 2005
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
impact on the Company's financial statements.
In December 2004 the Financial Accounting Standards Board issued two FASB
Staff Positions-FSP FAS109-1, 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
NOTE 2. BASIS OF REPORTING
The Company's financial statements are presented on a going concern basis, which
contemplates the realization of assets and satisfaction of liabilities in the
normal course of business.
The Company has had limited operating experienced. Significant losses from
operations are not expected as a result of continued operations. For the year
ended December 31, 2005, the Company incurred a net loss of $50,615 and has a
stockholders' deficit of $6,605 at December 31, 2005.
The financial statements do not include any adjustments to reflect the possible
future effects on the recoverability and classification of assets or the amounts
and classification of liabilities that may result from the possible inability of
the Company to continue as a going concern.
NOTE 3. LOANS FROM STOCKHOLDERS
Loans from stockholders reflect the net balance due to its affiliates at
December 31, 2005, which amounted to $ 195.
NOTE 4. INCOME TAXES
The Company accounts for income taxes under SFAS 109, which requires use of the
liability method. SFAS 109 provides that deferred tax assets and liabilities are
recorded based on the differences between the tax bases of assets and
liabilities and their carrying amounts for financial reporting purposes,
referred to as temporary differences. Deferred tax assets and liabilities at the
end of each period are determined using the currently enacted tax rates applied
to taxable income in the periods in which the deferred tax assets and
liabilities are expected to be settled or realized.
The provision for income taxes differs from the amount computed by applying the
statutory federal income tax rate to income before provision for income taxes.
The sources and tax effects of the differences are as follows:
Income tax provision at the federal statutory rate 34%
--------------------------------------------------------------------
Effect of operating losses (34)%
--------------------------------------------------------------------
-
--------------------------------------------------------------------
No benefit from the Company's operating losses has been allocated to the Company
from the consolidated group. No recognition of the future benefit of the
accumulated operating losses has made in connection with the change in ownership
of the Company's assets as described in Note 6.
106
DeerValley Acquisitions Corp.
Notes to Financial Statements
December 31, 2005
NOTE 5. COMMITMENTS AND CONTINGENCIES
Operating and Capital Leases:
The Company has never had and currently has no operating or capital leases as of
December 31, 2005.
Litigation:
During the periods covered by these financial statements the Company has not
been involved in litigation resulting from its normal business operations. The
Company does not believe that there is any pending or potential litigation that
could have a material impact on its financial condition or results of operation.
NOTE 6. SUBSEQUENT EVENTS
On January 18, 2006, Cytation Corporation entered into the Securities Purchase
and Share Exchange Agreement, (the "Securities Purchase and Share
Exchange Agreement") by and among Cytation Corporation, Richard A. Fisher,
an individual, and Kevin J. High, certain purchasers of Cytation
Corporation's Series A Convertible Preferred Stock (as defined below),
DVA, the shareholders of DVA, and Vicis Capital Master Fund (the "Lender").
On January 18, 2006, Cytation Corporation entered into the Investor Rights
Agreement (the "Investor Rights Agreement"), by and among Cytation
Corporation, each of the purchasers of Cytation Corporation's Series A
Preferred Stock, each of the shareholders of DVA, and the Lender. Pursuant to
the Investor Rights Agreement, Cytation Corporation (a) has agreed to
register certain securities for resale, including Cytation Corporation's
shares related to the Series A Preferred Stock, the Series B Preferred Stock,
the Series C Preferred Stock, the Series A Common Stock Purchase
Warrants, and the Series B Common Stock Purchase Warrants, and (b) granted
pre-emptive rights to the holders of Cytation Corporation's Series A
Preferred Stock.
On January 18, 2006, Cytation Corporation'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, Cytation Corporation
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
Cytation Corporation could not agree on an outright purchase price. Such
agreement is described in more detail herein under Capital Stock Purchase
Agreement.
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 Cytation Corporation, 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 Cytation Corporation.
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,
Cytation Corporation has closed on a private placement of approximately
745,622 shares of Series A Preferred Stock. Pursuant to the Securities
107
DeerValley Acquisitions Corp.
Notes to Financial Statements
December 31, 2005
NOTE 6. SUBSEQUENT EVENTS (CONTINUED)
Purchase and Share Exchange Agreement, dated as of January 18, 2006, Cytation
Corporation (a) issued and sold to the Purchasers, and the Purchasers purchased
from Cytation Corporation, (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, Cytation Corporation completed a share exchange pursuant to
which Cytation Corporation 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., Cytation Corporation 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.
In connection with the Securities Purchase and Share Exchange Agreement, on
January 18, 2006, Cytation Corporation 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, Cytation
Corporation 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.
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 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.
The following table summarizes the estimated fair values of the assets acquired
and liabilities assumed at the date of acquisition.
The following table summarizes the estimated fair values of the assets acquired
and liabilities assumed at the date of acquisition.
AT DECEMBER 31, 2005
Current assets $ 6,398,562
Property, plant, and equipment 1,611,531
Goodwill 3,611,994
Total assets acquired $ 11,622,087
------------------
Current liabilities (3,879,939)
Long-term debt (1,367,148)
Total liabilities assumed (5,247,087)
------------------
Net assets acquired $ 6,375,000
108
DEER VALLEY HOMEBUILDERS, INC.
FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2005 AND 2004
109
DEER VALLEY HOMEBUILDERS, INC.
FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2005 AND 2004
TABLE OF CONTENTS
Page
Audit Report of Independent Registered Public Accounting Firm 111
Balance Sheets at December 31, 2005 and 2004 112
Statements of Operations for the Years Ended December 31, 2005 and 2004 113
Statement of Stockholders' Equity for the Years Ended December 31, 2004 114
Statements of Cash Flows for the Years Ended December 31, 2005 and 2004 115
Notes to Financial Statements 116 - 125
110
AUDIT REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and
Stockholders of Deer Valley Homebuilders, Inc.
We have audited the accompanying balance sheets of Deer Valley Homebuilders,
Inc. as of December 31, 2005 and 2004, and the related statements of operations,
stockholders' equity and cash flows for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan and perform the audits 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 audits 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 audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Deer Valley Homebuilders, Inc.
as of December 31, 2005 and 2004, and the results of its operations and its cash
flows for years then ended in conformity with accounting principles generally
accepted in the United States of America.
/s/ Wheeler, Herman, Hopkins & Lagor, PA
Wheeler, Herman, Hopkins & Lagor, PA
Tampa, Florida
February 8, 2006
111
DEER VALLEY HOMEBUILDERS, INC.
BALANCE SHEETS
DECEMBER 31, DECEMBER 31,
2005 2004
------------- --------------
ASSETS
CURRENT ASSETS:
Cash and Cash Equivalents $ 2,931,263 $ 1,563,818
Certificate of Deposit 151,418
Accounts Receivable 2,140,404 1,064,518
Other Receivable 7,500 1,000
Inventories 1,115,558 687,110
Prepayments and Other Current Assets 52,419 48,916
------------- --------------
Total Current Assets 6,398,562 3,365,362
------------- --------------
Property, Plant and Equipment
Property, Plant and Equipment at Cost 1,814,683 1,705,470
Less: Accumulated Depreciation (203,152) (84,211)
------------- --------------
Net Property, Plant and Equipment 1,611,531 1,621,259
------------- --------------
TOTAL ASSETS $ 8,010,093 $ 4,986,621
============= ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current Maturities of Long-Term Debt $ 55,716 $ 58,190
Accounts Payable 1,166,020 496,821
Accounts Payable under Dealer Incentive Programs 340,432 108,056
Estimated Warranties 750,000 550,000
Compensation and Related Accruals 413,939 271,121
Accrued Stockholder Distributions 925,000 545,540
Other Accrued Expenses 228,832 67,967
------------- --------------
Total Current Liabilities 3,879,939 2,097,695
------------- --------------
Long-Term Debt, Net of Current Maturities 1,367,148 1,442,578
------------- --------------
Total Long-Term Debt 1,367,148 1,442,578
------------- --------------
Commitments and Contingencies (Note 9)
Stockholders' Equity
Common Stock, $1.00 Par Value, 1,000 shares authorized,
940 shares issued and 940 shares outstanding for 2005 and 1,000 shares issued,
and 940 shares outstanding for 2004 940 1,000
Paid-In Capital 2,762,066 1,099,000
Treasury Stock, at Cost; 60 Shares 0 (66,000)
Retained Earnings 0 412,348
------------- --------------
Total Stockholders' Equity 2,763,006 1,446,348
------------- --------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 8,010,093 $ 4,986,621
============= ==============\
See Reports of Independent Registered Public Accounting Firm and Notes to
Financial Statements
112
DEER VALLEY HOMEBUILDERS, INC.
STATEMENT OF OPERATIONS
FOR YEARS ENDED DECEMBER 31,
2005 2004
----------------- ---------------
Net Revenue $ 35,717,073 $ 15,394,215
Cost of Sales 29,292,051 12,769,267
----------------- ---------------
Gross Profit 6,425,022 2,624,948
----------------- ---------------
Selling, General and Administrative 2,996,023 1,559,333
----------------- ---------------
Operating Income 3,428,999 1,065,615
----------------- ---------------
Other Income (Expense)
Interest Expense ( 74,904) ( 55,109)
Interest Income 12,563 --
----------------- ---------------
( 62,341) ( 55,109)
Net Income $ 3,366,658 $ 1,010,506
================= ===============
Basic and Diluted Net Income Per Share $ 3,574 $ 1,011
================= ===============
Weighted Average Shares Outstanding 942 1,000
================= ===============
See Reports of Independent Registered Public Accounting Firm and Notes to
Financial Statements
113
DEER VALLEY HOMEBUILDERS, INC.
STATEMENT OF STOCKHOLDERS' EQUITY
COMMON STOCK ADDITIONAL Treasury
------------------- PAID-IN Stock TREASURY RETAINED
SHARES AMOUNT CAPITAL (In Shares) STOCK EARNINGS TOTAL
------- -------- ----------- ---------- --------- ------------ ------------
As of January 7, 2004 1,000 $ 1,000 $ 1,099,000 $ -- $ -- $ 1,100,000
Purchase of Treasury
Stock (60) (66,000) (66,000)
Cash Distributions (52,618) (52,618)
Accrual of Distributions (545,540) (545,540)
Net Income 1,010,506 1,010,506
------- -------- ----------- --------- ------------ ------------
As of December 31,
2004 1,000 1,000 1,099,000 (60) (66,000) 412,348 1,446,348
Purchase of Treasury
Stock (60) (60) (65,940) 60 66,000 -- --
Cash Distributions (1,125,000) (1,125,000)
Accrual of Distributions (925,000) (925,000)
Net Income 3,366,658 3,366,658
------- -------- ----------- ---------- --------- ------------- ------------
Adjustment of Undistributed
Retained Earnings to APIC 1,729,006 (1,729,006)
As of December 31,
2005 940 $ 940 $ 2,762,066 0 $ -- $ - $ 2,763,006
======= ======== =========== ========== ========= ============ ===========
See Reports of Independent Registered Public Accounting Firm and Notes to
Financial Statements
114
DEER VALLEY HOMEBUILDERS, INC.
STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------------
2005 2004
------------------ ------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 3,366,658 $ 1,010,506
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation on property, plant and equipment 118,941 84,211
Changes in assets and liabilities:
(Decrease) in receivables (1,075,886) (1,064,518)
(Decrease) in other receivables ( 6,500) ( 1,000)
(Decrease) in inventories ( 428,448) ( 687,110)
(Decrease) in prepayments and other assets ( 3,503) ( 48,916)
Increase in accounts payable 669,199 496,821
Increase in accounts payable under dealer incentives 232,376 108,056
Increase in estimated warranties 200,000 550,000
Increase in compensation and related accruals 142,818 271,121
Increase in accrued expenses 160,865 67,967
------------------ ------------------
Net cash provided by operating activities 3,376,520 787,139
------------------ ------------------
Cash Flows from Investing Activities:
Purchase of capital assets ( 109,213) (1,705,470)
Purchase of certificate deposit ( 151,418) --
------------------ ------------------
Net cash used in investing activities ( 260,631) (1,705,470)
------------------ ------------------
Cash Flows from Financing Activities:
Proceeds from notes payable -- 1,543,314
Repayments of notes payable ( 77,904) ( 42,546)
Purchase of treasury stock -- ( 66,000)
Issuance of common stock -- 1,100,000
Payment of cash distributions (1,670,540) ( 52,618)
------------------ ------------------
Net cash (used in) provided by financing activities (1,748,444) 2,482,150
------------------ ------------------
Net Increase in Cash and Cash Equivalents 1,367,445 1,563,818
Cash and Cash Equivalents at Beginning of Year 1,563,818 --
------------------ ------------------
Cash and Cash Equivalents at End of Year $ 2,931,263 $ 1,563,818
================== ==================
Supplemental Cash Flows Information:
Cash Paid for Interest $ 94,904 $ 50,099
================== ==================
Cash Paid for Income Taxes $ -- $ --
================== ==================
Non-cash investing and financing activities:
Accrued distributions to stockholders $ 925,000 $ 545,540
================== ==================
See Reports of Independent Registered Public Accounting Firm and Notes to
Financial Statements
115
DEER VALLEY HOMEBUILDERS, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2005 AND 2004
1. NATURE OF BUSINESS, BASIS OF PRESENTATION, AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
THE COMPANY - Deer Valley Homebuilders, Inc. (the Company) was organized and
incorporated as an Alabama corporation on January 7, 2004 and is headquartered
in Guin, Alabama. The Company operates on a 52-53 week year end.
NATURE OF OPERATIONS - The Company designs and produces manufactured homes which
are sold to a network of dealers located primarily in the southeastern and
south-central regions of the United States. The Company operates out of one
manufacturing facility located in Guin, Alabama (the northwestern region of
Alabama). Business is seasonal and cyclical with the potential for significant
fluctuations in quarterly earnings as a result of factors impacting the broader
housing market, including but not limited to changes in the availability and
cost of customer financing, changes in the cost of construction materials, and
changes in the economic conditions within the market regions served by the
Company.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
ACCOUNTING ESTIMATES - The Company's financial statements are prepared in
conformity with accounting principles generally accepted in the United States of
America which require management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS - The carrying value of the Company's cash
equivalents, accounts receivable, accounts payable and accrued expenses
approximates fair value because of the short-term nature of these instruments.
CASH EQUIVALENTS - The Company considers all highly liquid investments with
original maturities of three months or less to be cash equivalents.
ACCOUNTS RECEIVABLE - Accounts receivable represent balances due from dealers.
Credit risk associated with balances due from dealers is evaluated by management
relative to financial condition and past payment experience. As a result of
management's reviews no reserves for uncollectible amounts have been recorded in
the accompanying financial statements.
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.
PROPERTY, PLANT AND EQUIPMENT - Property, plant and equipment is stated at cost
and depreciated over the estimated useful lives of the related assets ranging
from 5 to 40 years primarily using the straight-line method. Maintenance and
repairs are expensed as incurred. Depreciation expense amounted to $118,941 and
$84,211 for the years ended December 31, 2005 and 2004, respectively.
CATEGORY USEFUL LIFE
-------- ------------
Land and Improvements 10 years
Buildings 40 years
Machinery and Equipment 5-10 years
Furniture and Fixtures 5-10 years
116
IMPAIRMENT OF LONG-LIVED ASSETS - In accordance with SFAS No. 144, Accounting
for the Impairment or Disposal of Long-Lived Assets, the Company evaluates the
carrying value of long-lived assets to be held and used when events and
circumstances warrant such a review. The carrying value of long-lived assets is
considered impaired when the anticipated undiscounted cash flow from such assets
is less than its carrying value. In that event, a loss is recognized based on
the amount by which the carrying value exceeds the fair market value of the
long-lived assets. Fair market value is determined primarily using the
anticipated cash flows discounted at a rate commensurate with the risk involved.
Losses on long-lived assets to be disposed of are determined in a similar
manner, except that the fair market values are primarily based on independent
appraisals and preliminary or definitive contractual arrangements less costs to
dispose.
REVENUE RECOGNITION - Revenue for manufactured homes sold to independent dealers
generally is recorded when all of the following conditions have been met; (a) an
order for the home has been received from the dealer, (b) 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), and (c)
the home has been shipped and risk of loss has passed to the dealer.
PRODUCT WARRANTIES - The Company provides the retail home buyer a one-year
limited warranty covering defects in material or workmanship in home structure,
plumbing and electrical systems. The Company estimated warranty costs are
accrued at the time of the sale to the dealer following industry standards and
historical warranty cost incurred. Periodic adjustments to the estimated
warranty accrual are made as events occur which indicate changes are necessary.
As of December 31, 2005 and 2004, the Company has provided a liability of
$750,000 and $550,000, respectively for estimated warranty costs relating to
homes sold, based upon management's assessment of historical experience factors
and current industry trends.
Management reviews its warranty requirements at the close of each reporting
period and adjusts the reserves accordingly. The following tabular presentation
reflects activity in warranty reserves during the periods presented:
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------
2005 2004
------------ ----------
Balance at Beginning of Period $ 550,000 $ --
Warranty Charges 1,758,473 798,164
Warranty Payments (1,558,473) (248,164)
------------ ----------
Balance at End of Period $ 750,000 $ 550,000
============ ==========
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.
NET INCOME PER SHARE - Basic income per share represents the Company's net
income divided by the weighted average shares of common stock outstanding during
the period. The Company has no common stock equivalents, convertible
instruments or other arrangements that would result in a dilutive effect on
basic income per common share.
INCOME TAXES - The Company has elected to be taxed under the provision of
Subchapter S of the Internal Revenue Code. Under those provisions, the Company
does not pay federal or state corporate income taxes on its taxable income.
Instead, the stockholders are liable for individual federal and state income
taxes on their respective share of the Company's taxable income in their
individual income tax returns. Accordingly, the accompanying financial
statements do not include income taxes. See Note 6 for information about pro
forma income taxes.
117
NEW ACCOUNTING PRONOUNCEMENTS - In December 2004, the FASB issued SFAS No.153,
"Exchanges of Nonmonetary Assets, an amendment of APB Opinion No. 29,
Accounting for NonmonetaryTransactions." 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
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 that lack commercial substance,
the FASB believes this statement produces financial reporting that 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 that begins after
June 15, 2005. For public entities that file as small business issuers SFAS
123(R) is applicable as of the beginning of the first interim or annual
reporting period that begins after December 15, 2005. The Company evaluated
the impact of the adoption of SFAS 123(R), and believes that the impact will be
insignificant to the company's overall results of operations and financial
position.
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.
2. CASH AND CASH EQUIVALENTS
Cash and cash equivalents at December 31, 2005 and 2004, are held in one
financial institution in Guin, Alabama, and exceed the FDIC limits of
insurability.
118
3. INVENTORIES
Inventories consisted of the following components:
DECEMBER 31,
--------------
2005 2004
---------- --------
Raw Materials $ 881,563 $408,821
Work-in-Process 184,599 156,718
Finished Goods 49,396 121,571
---------- --------
Total Inventory $1,115,558 $687,110
========== ========
4. PROPERTY, PLANT AND EQUIPMENT
Property, Plant and Equipment consisted of the following:
DECEMBER 31,
--------------
2005 2004
---------- ----------
Land and Improvements $ 296,915 $ 277,500
Buildings 822,500 822,500
Machinery and Equipment 559,107 495,145
Furniture and Fixtures 136,161 110,325
---------- ----------
Total Property,
Plant and Equipment $1,814,683 $1,705,470
========== ==========
5. CREDIT ARRANGEMENTS
REVOLVING LINE OF CREDIT - The Company 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. Amounts drawn on the line
of credit accrue interest at the fixed interest rate of 5.5%. The line of
credit matured on March 25, 2005 and was not renewed. The line of credit was
secured by inventory and accounts receivable of the Company.
IRREVOCABLE STANDBY LETTERS OF CREDIT - The Company during its normal course of
business is required to issue irrevocable standby letters of credit in the favor
of independent third party beneficiaries. As of December 31, 2005, 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 GE Commercial Distribution
Finance Corporation, issued January 27, 2005, and expiring January 27,
2006. Personally guaranteed by the largest stockholder of the Company. (See
Note 9.)
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. Personally guaranteed by the
three largest stockholders of the Company. (See Note 9.)
119
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. Personally guaranteed by the
three largest stockholders of the Company. (See Note 9.)
As of December 31, 2005, no amounts had been drawn on the above irrevocable
letters of credit by the beneficiaries.
6. PRO FORMA INCOME TAXES (UNAUDITED)
The following unaudited pro forma income tax information gives effect to Federal
and State income taxes as if the Company was subject to State and Federal income
taxes.
The pro forma provision for income taxes consists of the following:
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------
2005 2004
----------- ----------
Current:
United States Federal $1,275,242 $ 523,698
States 77,775 60,630
Deferred Income Taxes (134,473) (266,828)
----------- ----------
Pro Forma Income Tax Provision $1,218,544 $ 317,500
=========== ==========
The above pro forma provision for income taxes was computed using the asset and
liability method. Under this method, deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled. The
effect on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date.
The pro forma provision for income taxes are based upon management's best
estimate of the expected pro forma effective tax rate for the year ended
December 31, 2005 and the actual pro forma effective tax rate for the year ended
December 31, 2004, respectively.
Pro forma deferred income tax assets and liabilities are as follows:
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------
2005 2004
----------- ----------
Warranty and Other Reserves $416,642 $266,351
Depreciation Methods (78,823) 40,477
--------- --------
Deferred Tax Assets, Net $337,819 $306,828
========= ========
Current Deferred Assets $337,819 $306,828
Net Non-current Deferred Tax Assets - -
--------- --------
Deferred Tax Assets, Net $337,819 $306,828
========= ========
The Company's pro forma provision for income taxes is lower than the income tax
expense that would result from using the Federal Statutory Rate of 34%. The
State of Alabama has issued a capital investment credit for a 20-year period in
the amount of $85,000 per year. The following table reflects reconciliation
between the statutory rate and the pro forma effective tax rate for each of the
periods presented:
120
6. PRO FORMA INCOME TAXES (CONTINUED) (UNAUDITED)
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------
2005 2004
----------- ----------
United States Federal Statutory Rate 34.00% 35.0%
State Income Tax Rate, Net of
Federal Benefit 4.29% 1.9%
Non-deductible and Other Items -2.10% -5.5%
----------- ----------
Pro Forma Effective Income Tax Rate 36.19% 31.4%
=========== ==========
As noted in Subsequent Events, on January 18, 2006 the Company's S-corporation
election was terminated and on a go forward basis will be treated as a C
Corporation. The Company has reserved approximately $925,000 for a distribution
to the prior S-corporation shareholders to pay their tax associated with
earnings for the 2005 year end.
7. LONG-TERM DEBT
Long-term debt of the Company was as follows:
DECEMBER 31,
---------------
2005 2004
-------------- --------------
Note payable to State Bank & Trust, payable in
monthly installments of $10,000 including interest
at 5.00%, maturing November 11, 2008, secured
by all assets of the Company and personally
guaranteed by two major stockholders of the
Company $ 1,416,499 $ 1,462,992
Note payable to GMAC, payable in monthly
installments of $618 including interest at 8.00%,
maturing March 29, 2009, secured by 2003
Chevrolet truck -- 26,641
Note payable to Great American, payable in
monthly installments of $251 including interest
at 11.11%, maturing February 1, 2007, secured
by copier equipment 3,282 5,777
Note payable to Great American, payable in
monthly installments of $240 including interest
at 13.96%, maturing February 28, 2007, secured
by copier equipment 3,083 5,358
-------------- --------------
Total 1,422,864 1,500,768
Less: Current portion of long-term debt ( 55,716) ( 58,190)
-------------- --------------
Total Long-Term Debt, net of current portion $ 1,367,148 $ 1,442,578
============== ==============
Total interest costs for the years ended December 31, 2005 and 2004, amounted to
$74,903 and $55,109, respectively, as reflected on the face of the accompanying
statement of income.
121
7. LONG-TERM DEBT (CONTINUED)
At December 31, 2005, principal repayment requirements on long-term debt were as
follows:
YEAR ENDING DECEMBER 31 AMOUNT
-------------------------- ------
2006 55,717
2007 53,859
2008 1,313,288
---------
Total 1,422,864
Less: Current portion
of long-term debt (55,716)
---------
Total Long-Term Debt,
net of current portion $1,367,148
=========
8. STOCKHOLDERS' EQUITY
Effective end of business day on December 31, 2004, the Company purchased
approximately sixty shares of common stock from one of its minority stockholders
for a total cost of $66,000 and recorded the purchased shares as treasury stock.
These shares were retired on December 16, 2005.
During the years ended December 31, 2005 and 2004, the Company's board of
directors authorized stockholder distributions payable to stockholders' of
record in the amount of $2,050,000 and $598,158, respectively. At December 31,
2005 and 2004, $925,000 and $545,540, respectively, of these authorized
distributions to stockholders had not been paid and has been recorded as accrued
stockholder distributions, as reflected on the face of the accompanying balance
sheet as a current liability of the Company.
9. COMMITMENTS AND CONTINGENCIES
REPURCHASE AGREEMENTS - The Company is contingently liable, for periods ranging
from 18 to 24 months, under the terms of repurchase agreements with financial
institutions who provide inventory financing for retailers of the Company'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 on its lending agreement. The contingent obligation terminates when the
retailer sells the homes. The risk of loss under these agreements is spread over
numerous retailers and, generally, the company has the right to repossess the
home in the event of the dealers default. The maximum amount for which the
Company is contingently liable under such agreements amounted to $9,600,519 and
$4,516,365 at December 31, 2005 and 2004, respectively.
The remaining outstanding contingent liability arising from sales to dealers
prior to December 31, 2004 amounted to $525,000 on the date of this filing. The
Company evaluates its liability under these arrangements in accordance with FASB
Interpretation No. 45 Guarantor's Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of Others. The Company
to date has not experienced significant losses under these agreements and
periodically evaluates the dealers' financial condition. As a result, management
does not expect any future losses that may arise under these agreements to have
a material effect on the accompanying financial statements. As of December 31,
2005 and 2004 the Company had a reserve of $35,000 and 3,500, respectively, for
future repurchase losses.
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.
IRREVOCABLE STANDBY LETTERS OF CREDIT - See Note 5 Credit Arrangements.
EMPLOYMENT CONTRACTS - See Note 12 Subsequent Events.
122
10. RELATED PARTY TRANSACTIONS
During the year ended December 31, 2004, the Company purchased its single
manufacturing facility, underlying land, and certain equipment content of the
facility from the father of the Company's president/majority stockholder at a
cost of $1,500,000. In addition, the Company pays this same related party a
consulting fee of $5,000 per month. Total consulting fees paid amounted to
$60,000 and $75,000 during 2005 and 2004, respectively. This agreement expires
in 2008. Management asserts that these transactions are arms length
transactions between the Company and the related party.
Stockholder distributions approximating $2,050,000 and $598,158 were declared
payable to the stockholders of the Company during 2005 and 2004, respectively,
pro rata to their common stock ownership interest, as reflected on the face of
the accompanying statement of retained earnings. Each of these stockholders was
also employed by the Company during 2005 and 2004 and was paid employee
compensation based on negotiated arm's length employment agreements.
11. COMMON STOCK PURCHASE AGREEMENT
On November 1, 2005, Deer Valley Acquisitions Corp., a Florida corporation
("DVA"), entered into a Common Stock Purchase Agreement with the
stockholders/employees of the Company to sell all of the issued and outstanding
common stock of Deer Valley Homebuilders, Inc. for a price of $6,000,000. As a
condition of closing, each stockholder/employee will enter into a five year
employment agreement and will be entitled to participate in a price adjustment
target account ("PATA"). The PATA shall be a liability accruing for any
calendar year in which the Company's pretax earnings exceed $1,000,000. The
PATA calculations will begin on October 2, 2005; however, the $1,000,000
calculation for the fourth quarter of 2005 will be $250,000. At the end of any
such year, the PATA will be increased by an amount equal to 50% of the pretax
earnings of the Company that is over the $1,000,000 threshold for such calendar
year. Partial cash distributions of up to 50% of any stockholder's/employee's
pro rata accrued value of the PATA will be made by DVA at the request of the
stockholder/employee at any time after January 1, 2007. All funds remaining in
the PATA will be distributed to the stockholders/employees on the earlier of
January 1, 2014 or the date that the PATA has accumulated a total of $6,000,000,
assuming the employment agreement has been completed. If the
stockholder/employee fails to complete his employment term either by voluntarily
leaving the Company, is terminated for cause; or violates the Company's
non-compete agreement shall forfeit their portion of the PATA. That
stockholder's/employee's share of the PATA will be redistributed 50% back to the
Company and 50% assigned to the remaining stockholders/employees on a pro-rata
basis.
12. SUBSEQUENT EVENTS
On January 18, 2006, Cytation Corporation entered into the Securities Purchase
and Share Exchange Agreement, (the "Securities Purchase and Share Exchange
Agreement") by and among Cytation Corporation, Richard A. Fisher, an individual,
and Kevin J. High, certain purchasers of Cytation Corporation's Series A
Convertible Preferred Stock (as defined below), DVA, the shareholders of DVA,
and Vicis Capital Master Fund (the "Lender").
On January 18, 2006, Cytation Corporation entered into the Investor Rights
Agreement (the "Investor Rights Agreement"), by and among Cytation Corporation,
each of the purchasers of Cytation Corporation's Series A Preferred Stock, each
of the shareholders of DVA, and the Lender. Pursuant to the Investor Rights
Agreement, Cytation Corporation (a) has agreed to register certain securities
for resale, including Cytation Corporation's shares related to the Series A
Preferred Stock, the Series B Preferred Stock, the Series C Preferred Stock, the
Series A Common Stock Purchase Warrants, and the Series B Common Stock Purchase
Warrants, and (b) granted pre-emptive rights to the holders of Cytation
Corporation's Series A Preferred Stock.
On January 18, 2006, Cytation Corporation'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
123
12. SUBSEQUENT EVENTS (CONTINUED)
Stock Purchase Agreement, Cytation Corporation 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 Cytation
Corporation could not agree on an outright purchase price. Such agreement is
described in more detail herein under Capital Stock Purchase Agreement.
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 Cytation Corporation, 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 Cytation Corporation.
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,
Cytation Corporation 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, Cytation
Corporation (a) issued and sold to the Purchasers, and the Purchasers purchased
from Cytation Corporation, (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, Cytation Corporation completed a share exchange pursuant to
which Cytation Corporation 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., Cytation Corporation 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.
In connection with the Securities Purchase and Share Exchange Agreement, on
January 18, 2006, Cytation Corporation 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, Cytation
Corporation 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 connection with the transaction described herein, the Company's S-corporation
election was terminated and on a go forward basis will be treated as a C
Corporation. The Company has reserved $925,000 for a distribution to the prior
S-corporation shareholders to pay their tax associated with earnings for the
2005 year end.
On January 25 2006, Deer Valley Homebuilders, Inc. entered into a Sales Contract
with the father of the Company's President to purchase real property located at
7668 Highway 278 in Sulligent, Alabama. The purchase price for the Sulligent
Property is $725,000 cash, and the closing is scheduled to occur on or about
April 30, 2006. We intend on obtaining a loan, secured by a mortgage on the
Sulligent Property, to finance the purchase price for the Sulligent Property.
Currently, Deer Valley is occupying the Sulligent Property pursuant to a short
term lease. Deer Valley's plant on the Sulligent Property opened on February
20, 2006 and, as of the date of this filing, is producing approximately 12
floors per week.
124
12. SUBSEQUENT EVENTS (CONTINUED)
No employment agreements were in effect during 2005. On January 18, 2006, the
Company entered into the following employment agreements with the following
executive officers.
On January 18, 2006, Deer Valley Homebuilders, Inc. entered into a seven year
employment agreement with Joel Stephen Logan, II. Under the terms of Mr.
Logan's Employment Agreement, Mr. Logan is (a) entitled to receive a fixed
annual salary of $52,000, (b) entitled to receive a monthly "hitch bonus" of $60
per "floor" produced by the Company, and (c) is eligible to participate and
receive 4.6% of the net income before taxes of the Company, and (d) entitled to
receive health benefits and coverage, as provided by the Company.
On January 18, 2006, Deer Valley Homebuilders, Inc. entered into a seven year
employment agreement with Charles L. Murphree, Jr. Under the terms of Mr.
Murphree's Employment Agreement, Mr. Murphree is (a) entitled to receive a fixed
annual salary of $52,000, (b) entitled to receive a monthly "hitch bonus" of
$33.33 per "floor" produced by the Company, (c) is eligible to participate and
receive 2.2% of the net income before taxes of the Company, and (d) entitled to
receive health benefits and coverage, as provided by the Company.
On January 18, 2006, Deer Valley Homebuilders, Inc. entered into a seven year
employment agreement with John Steven Lawler. Under the terms of Mr. Lawler's
Employment Agreement, Mr. Lawler is (a) entitled to receive a fixed annual
salary of $52,000, (b) entitled to receive a monthly "hitch bonus" of $35 per
"floor" produced by the Company, and (c) is eligible to participate and receive
2% of the net income before taxes of the Company, and (d) entitled to receive
health benefits and coverage, as provided by the Company.
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 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.
THE FOLLOWING TABLE SUMMARIZES THE ESTIMATED FAIR VALUES OF THE ASSETS ACQUIRED
AND LIABILITIES ASSUMED AT THE DATE OF ACQUISITION.
AT DECEMBER 31, 2005
Current assets $ 6,398,562
Property, plant, and equipment 1,611,531
Goodwill 3,611,994
------------
Total assets acquired $ 11,622,087
-------------
Current liabilities (3,879,939)
Long-term debt (1,367,148)
------------
Total liabilities assumed ($5,247,087)
-------------
Net assets acquired $ 6,375,000
=============
125
Cytation Corporation
Consolidated Pro Forma Balance Sheet
As of December 31, 2005
Cytation DeerValley DeerValley Purchase Price Pro Forma Pro Forma
Corp. Homebuilders, Inc. Acquisitions Corp. Adjustments Adjustments Consolidated
(Unaudited) (Unaudited) (Unaudited) (Unaudited) (Unaudited) (Unaudited)
CURRENT ASSETS:
Cash $ 220 $ 2,931,263 $ 36 $ (6,375,000) (6) $ 7,132,729 (10) $ 3,689,248
Certificate of Deposit - 151,418 - - - 151,418
Accounts Receivable - 2,140,404 - - - 2,140,404
Other Receivable 7,500 7,500
1,115,558 1,115,558
Prepaid expenses and
other current assets - 52,419 - - 134,473 (8) 186,892
------------ ------------------ ------------------- --------------- ---------------- -----------
Total Current Assets 220 6,398,562 36 (6,375,000) 7,267,202 7,291,020
PROPERTY AND EQUIPMENT, Net - 1,611,531 - - - 1,611,531
OTHER ASSETS: - - - - - -
Goodwill - - - 3,611,994 (6) - (6) 3,611,994
------------ ------------------ ------------------- --------------- --------------- -----------
Total Other Assets - - - 3,611,994 - 3,611,994
TOTAL ASSETS $ 220 $ 8,010,093 $ 36 $ (2,763,006) $ 7,267,202 $12,514,545
============ ================== ================== ================= ============== ===========
LIABILITIES AND STOCKHOLDERS'EQUITY(DEFICIT)
CURRENT LIABILITIES:
Current Maturities of
Long-Term Debt $ - $ 55,716 $ - $ - $ - $ 55,716
Accounts payable 48,416 1,166,020 6,446 - 611,759 (7) 1,832,641
Accounts Payable under
Dealer Incentive Programs 340,432 - - 340,432
Estimated Warranties 750,000 - - 750,000
Compensation and Relate
Accruals 413,939 - - 413,939
Accrued Stockholder
Distributions 925,000 - - 925,000
Income Tax Payable - - - - 1,267,008 (8) 1,267,008
Loan from Stockholder 195 195
Other Accrued Expenses 90,500 228,832 - - - 319,332
------------- ------------------ ------------------- --------------- ---------------- -----------
Total Current
Liabilities 138,916 3,879,939 6,641 - 1,878,767 5,904,263
LONG TERM LIABILITIES:
Long-Term Debt, Net
of Current Maturities - 1,367,148 - - - (1) 1,367,148
STOCKHOLDERS' EQUITY(DEFICIT):
Series A Preferred stock,
$0.01 par value, 750,000 shares
authorized, 745,626 shares issued
and outstanding - 7,456 (2) 7,456
Series B Preferred stock,
$0.01 par value, 49,451 shares
authorized, 49,451 shares issued
and outstanding 495 (4) - 495
Series C Preferred stock,
$0.01 par value, 26,750 shares
authorized, 26,750 shares issued
and outstanding 267 (5) - 267
Common stock, no par value,
30,000,000 shares authorized,
7,620,100 - - - -
Common stock, $0.001 par value,
2,000,000 shares authorized,
982,622 shares issued and
outstanding 982 940 - (940) (6) - 982
Additional paid-in
capital (APIC) 32,723,371 2,762,066 44,010 (2,762,828) (6) 6,513,514 (9) 39,280,133
Retained Earnings
and Accumulated
deficit (32,863,049) 0 (50,615) 0 (6) (1,132,535) (8) (34,046,199)
------------- ------------------ ------------------- -------------- --------------- -----------
TOTAL
STOCKHOLDERS'
EQUITY (DEFICIT) (138,696) 2,763,006 (6,605) (2,763,006) 5,388,435 5,243,134
TOTAL LIABILITIES
AND STOCKHOLDERS'
EQUITY (DEFICIT) $ 220 $ 8,010,093 $ 36 $ (2,763,006) $ 7,267,202 $12,514,545
============= ================= =================== ============== =============== ===========
126
(1) Debt issued in connection with Acquisition $1,500,000 Face - Subsequent to
the 8-K/A previously filed, this has been converted into Series A preferred
stock.
(2) Series A Preferred Stock issued in connection with acquisition - Face amount
$7,456,215 (745,622 shares at $10.00 per share) Par Value $7,456, APIC
$7,448,759 prior to transaction costs.
(3) Reduction in Series A Preferred stock's APIC due to transaction costs
- Comittment fee $ 60,000
- Legal fees in connection with Equity Raise 48,000
- Investment banking fees 827,245
--------------
Total Transaction costs related to Equity Financing $ 935,245
==============
(4) Series B preferred stock issued in connection with DeerValley Acquisitions
Corp.: In connection with the acquisition the common shareholders of DeerValley
Acquistions Corp. exchanged 4,945,100 no par common for 49,451 shares of Series
B Preferred with a par of $.01
(5) Series C preferred Stock issued in connection with DeerValley Acquisitions
Corp.: In connection with the acquisition the common shareholders of DeerValley
Acquistions Corp. exchanged 2,675,000 no par common for 26,750 shares of Series
C Preferred with a par of $.01
(6) Goodwill booked in connection with Acquisition
- Purchase price of acquisition $ 6,000,000
- Merger related expenses 280,000
- Legal fees in connection with merger 95,000
--------------
- Total Acquisition Price and related costs 6,375,000
- Net book value of acquisition 2,763,006
--------------
- Purchase price in excess of
book value (Goodwill) 3,611,994
==============
(7) Payables still owed in connection with transaction
- Investment banking fees $ 553,759
- Legal fees in connection with transaction 58,000
--------------
Total Payables $ 611,759
==============
(8) Pro forma income tax payable
Net Income(Loss) Cytation Corp. $ (173,605)
Net Income(Loss) Deer Valley Homebuilders, Inc. 3,366,659
Net Income(Loss) Deer Valley Acquisitions Corp. (50,615)
---------------
Net Income(Loss) Consolidated Group before taxes 3,142,439
Pro forma effective Income Tax Rate 36.04%
---------------
Pro forma income tax payable 1,132,535
===============
The components of the provision for income taxes are as follows:
Current taxes 1,267,008
Deferred taxes (134,473)
--------------
Provision for income taxes 1,132,535
==============
127
The items accounting for the difference between income taxes computed at the
federal statutory rate and the provision for income taxes are as follows:
Impact on
Amount Rate
---------- ------
Income tax at federal rate 1,068,429 34.00%
State tax, net of Federal effect 134,811 4.29%
Permanent Differences:
Meals & Entertainment 23,677 0.75%
Officers Life Insurance 9,180 0.29%
---------- ------
Total Permanent Differences 32,857 1.04%
---------- ------
Total Tax Credits (83,131) -2.65%
Rounding (20,431) -0.64%
---------- ------
Total Provision 1,132,535 36.04%
========== ======
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amount of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's net deferred income taxes are as follows:
Current Deferred Tax Assets: 134,473
Valuation allowance -
------------
Total Deferred Tax Assets 134,473
============
Current Deferred Tax Liabilities:
Deferred tax effect of tax credits -
Non-Current Deferred Tax Liabilities:
Accelerated depreciation -
(9) Reconciliation of APIC
APIC in connection with
Series A Preferred Stock $ 7,448,759 (See (2) above)
Total transaction related costs 935,245 (See (3) above)
------------
Adjustment related to APIC 6,513,514
============
(10)Cash
Total Raise Series A Preferred
Stock $ 7,456,215
Transaction fees paid 323,486 (3)-(7)
-------------
Cash remaining 7,132,729
=============
128
Cytation Corporation
Pro Forma Consolidated Statements of Operations
For The Year Ended December 31, 2005
(Unaudited)
Cytation DeerValley DeerValley Pro Forma Pro Forma
Corp. Homebuilders, Inc. Acquisitions Corp. Adjustments Consolidated
(Unaudited) (Unaudited) (Unaudited) (Unaudited) (Unaudited)
------------------- ------------------- ---------------- ----------------- ---------------
NET REVENUE $ 59,114 $ 35,717,073 $ - $ - $ 35,776,187
COST OF REVENUE 1,738 29,292,051 - - 29,293,789
------------------- ------------------- ---------------- ----------------- ---------------
GROSS PROFIT 57,376 6,425,022 - - 6,482,398
OPERATING EXPENSES:
Depreciation 1,037 118,941 - - 119,978
Selling, general
and administrative 246,533 2,877,082 50,615 - 3,174,230
------------------- ------------------- ---------------- ----------------- ---------------
TOTAL OPERATING EXPENSES 247,570 2,996,023 50,615 - 3,294,208
------------------- ------------------- ---------------- ----------------- ---------------
OPERATING INCOME/(LOSS) (190,194) 3,428,999 (50,615) - 3,188,190
OTHER INCOME (EXPENSES)
Gain on sale and distribution
of investment 31,902 - - - 31,902
Loss on sale of property
and equipment (4,270) - - - (4,270)
Loss on termination of
ARE agreement (5,000) - - - (5,000)
Interest income (expenses), net (6,043) (62,340) - - (68,383)
Other Income - - - - -
------------------- ------------------- ---------------- ----------------- ---------------
TOTAL OTHER INCOME 16,589 (62,340) - - (45,751)
INCOME/(LOSS) BEFORE INCOME TAXES (173,605) 3,366,659 (50,615) - 3,142,439
INCOME TAX EXPENSE - - - 1,132,535 (1) 1,132,535
------------------- ------------------- ---------------- ----------------- ---------------
NET INCOME(LOSS) $ (173,605) $ 3,366,659 $ (50,615) $ (1,132,535) $ 2,009,904
Dividend to Preferred
Stockholders - - - 521,935 (4) 521,935
------------------- ------------------- ---------------- ----------------- ---------------
NET INCOME(LOSS)
Available to Common
Shareholders $ (173,605) $ 3,366,659 $ (50,615) $ (1,654,470) $ 1,487,969
r Share
(Basic) $ (0.18) $ 3,574 $ (0.01) $ 1.58
Net (Loss) Income Per Share
(Fully Diluted) $ (0.18) $ 3,574 $ (0.01) $ 0.04
=================== =================== ================ ================= ===============
Weighted Average Common
Shares Outstanding 944,306 942 7,620,100 944,306 (2)
Weighted Average Common and
Common Equivalent Shares
Outstanding 944,306 942 7,620,100 39,716,660 (3)
=================== =================== ================ ================= ===============
129
(1) Pro forma income tax expense (Please see balance sheet for more details)
Net Income(Loss) Cytation Corp. $ (173,605)
Net Income(Loss) Deer Valley Homebuilders, Inc.
3,366,659
Net Income(Loss) Deer Valley Acquisitions Corp.
(50,615)
------------
Net Income(Loss) Consolidated Group before taxes
3,142,439
Pro forma effective Income Tax Rate 36.04%
------------
Pro forma income tax expense 1,132,535
============
(2) Weighted Average Common Shares Outstanding :
Number of Common Shares Fraction of Period Outstanding Weighted Average Shares
------------------------ ------------------------------ -----------------------
Common stock:
Cytation Corp 31-Dec-04 872,330 1.00 872,330
Cytation Corp 14-Feb-05 30,000 0.88 26,400
Cytation Corp 14-Feb-05 3,332 0.88 2,932
Cytation Corp 4-Mar-05 47,000 0.83 39,010
Cytation Corp 14-Nov-05 20,000 0.13 2,600
Cytation Corp 14-Nov-05 10,000 0.13 1,300
31-Dec-05 944,306
Net Income Available to
Common Shareholders $ 1,487,969
Weighted Average Common
Shares Outstanding 944,306
---------------
Net Income Per Share
(Basic) $ 1.58
(3) Weighted Average Common and Common Equivalent Shares Outstanding:
Number of Common and
Common Stock Equivalent Fraction of Period Outstanding Weighted Average Shares
----------------------- ------------------------------ -----------------------
Common stock:
Cytation Corp 31-Dec-04 872,330 1.00 872,330
Pro forma Consolidated Series B
and Series C Preferred Shares* 31-Dec-04 7,620,100 1.00 7,620,100
Pro forma Consolidated Series A
Preferred Shares 31-Dec-04 9,941,620 1.00 9,941,620
Pro forma Consolidated Warrants 31-Dec-04 21,210,368 1.00 21,210,368
Cytation Corp 14-Feb-05 30,000 0.88 26,400
Cytation Corp 14-Feb-05 3,332 0.88 2,932
Cytation Corp 4-Mar-05 47,000 0.83 39,010
Cytation Corp 14-Nov-05 20,000 0.13 2,600
Cytation Corp 14-Nov-05 10,000 0.13 1,300
31-Dec-05 39,716,660
130
Series A Preferred Stock issued in connection with acquisition - Face amount
7,456,215 (745,626 shares at $10.00 per share) convertible at $.75 = 9,941,620
shares
Warrants issued in connection with acquisition 21,210,368
Net Income Available to Common Shareholders $ 1,487,969
Weighted Average Common and Common Equivalent
Shares Outstanding
39,716,660
----------------
Net Income Per Share (Fully Diluted) $ 0.04
(4)Preferred Stock Dividends
Face Value of preferred outstanding 7,456,215
Dividend rate per annum 7%
-----------------
Dividend to Preferred Stockholders 521,935
=================
* Pursuant to the Securities Purchase and Share Exchange Agreement dated January
18, 2006, (a) 4,945,100 shares of Common Stock of Deer Valley Acquisitions Corp.
were exchanged for 49,451 shares of Cytation's Series B Preferred Stock, which
are convertible into 4,945,100 shares of Cytation's Common Stock, and (b)
2,675,000 shares of Common Stock of Deer Valley Acquisitions Corp. were
exchanged for 26,750 shares of Cytation's Series C Preferred Stock, which are
convertible into 2,675,000 shares of Cytation's Common Stock.
131
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 121,195 -
---------------- -------------
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 1,491,243 -
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 39,314,238 32,723,371
Accumulated deficit (34,054,490) (32,863,048)
---------------- -------------
TOTAL STOCKHOLDERS' EQUITY (DEFICIT) 6,752,753 (138,695)
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) $ 14,908,667 $ 221
================ =============
132
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 2,017,690 (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 (7,624) (6,889)
INCOME/(LOSS) BEFORE INCOME TAXES 724,674 (37,393)
INCOME TAX EXPENSE 261,173 -
------------ ----------------
NET INCOME (LOSS) 463,501 (37,393)
Dividends to preferred stockholders 113,086 -
Deemed dividend to preferred stockholders on
Beneficial conversion feature 1,491,243 -
------------ ----------------
NET INCOME (LOSS) AVAILABLE TO COMMON STOCKHOLDERS (1,140,828) (37,393)
Net Income/(Loss) Per Share (Basic) (1.14) (0.04)
Net Income/(Loss) Per Share (Fully Diluted) (1.14) (0.04)
Weighted Average Common Shares Outstanding 1,000,000 873,996 *
Weighted Average Common and Common Equivalent Shares Outstanding 1,000,000 873,996 *
* Reflects 2 for 1 stock split
133
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 0 1,385
Loss on termination of ARE Agreement 0 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) 0
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 0
Taxes 0 828
SUPPLEMENTAL DISCLOSURE OF NON CASH INVESTING AND FINANCING ACTIVITIES:
Additional purchase price accrued under earnout provision 496,407 0
Accrual of dividends on preferred stock 113,086 0
Deemed dividend on beneficial conversion feature 1,491,243
134
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.
135
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.
136
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 $(1,140,828) $(37,393)
----------- ------------
Weighted average shares outstanding:
Basic 1,000,000 873,996
Earnings per share:
Basic $ (1.14) $ (0.04)
----------- ------------
Diluted* $ (1.14) $ (0.04)
----------- ------------
* Diluted weighted average per share outstanding for three months ended April
1, 2006 does not include the effect of dilutive Series A, B, and C
Preferred Stock and Series A, B, C, D, BD-1, BD-2, and BD-3 Warrants
because to do so would have been antidilutive (see detailed list of
antidiluted shares below). Accordingly, basic and diluted net loss per
share for this period is the same.
COMMON STOCK
SECURITIES EQUIVALENT
----------------------------------------
PREFERRED:
Series A Preferred 9,941,620
Series B Preferred 4,945,100
Series C Preferred 2,675,000
WARRANTS:
Class A Warrants 9,941,639
Class B Warrants 4,970,824
Class C Warrants 2,000,000
Class D Warrants 2,000,000
Class BD-1 Warrants 919,162
Class BD-2 Warrants 919,162
Class BD-3 Warrants 459,581
-----------
Total antidilutive shares 38,772,088
===========
5. Product Warranties
---------------------
The Company provides the retail home buyer a one-year limited warranty covering
defects in material or workmanship in home structure, plumbing and electrical
systems. The Company estimated warranty costs are accrued at the time of the
sale to the dealer following industry standards and historical warranty cost
incurred. Periodic adjustments to the estimated warranty accrual are made as
events occur which indicate changes are necessary. As of April 1, 2006, the
Company has provided a liability of $860,000 for estimated warranty costs
relating to homes sold, based upon management's assessment of historical
experience factors and current industry trends.
Management reviews its warranty requirements at the close of each reporting
period and adjusts the reserves accordingly. The following tabular presentation
reflects activity in warranty reserves during the periods presented:
April 1, December 31,
2006 2005
---------------------------
(Unaudited)
Balance at Beginning of Period $ 750,000 $ 0
Warranty Charges 744,712 0
Warranty Payments (634,712) 0
---------- ----
Balance at End of Period $ 860,000 0
===========================
137
6. 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.
138
CYTATION CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
7. 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.
8. 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.
9. 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.
139
CYTATION CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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.
140
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.
In connection with the Series A Convertible Preferred Stock offering the Company
Calculated the effect of EITF 00-27 and EITF 98-5 and determined on a relative
fair value basis that of the $7,456,215 raised $5,699,186 was attributable to
the beneficial conversion feature of the warrants and $1,787,029 was
attributable to the beneficial conversion feature of the preferred stock. As
such, the Company adjusted its balance sheet to reflect an increase of
$5,699,186 to additional paid-in capital and $1,787,029 to preferred stock. The
Company also noted that of the $1,787,029 booked to preferred that 100% was
allocated to the beneficial conversion feature and was recorded as a reduction
to preferred stock and an increase to additional paid-in capital. During the
period, $1,491,243 was amortized from the date of issuance through the earliest
conversion date allowed pursuant to the stated rights of the preferred currently
contemplated as a year from issuance. Conversion can also occur anytime after
the SEC declares the registration statement effective. When the SEC declares the
registration statement effective all remaining un-amortized beneficial
conversion feature (as of April 1, 2006 $5,964,972) shall be considered a deemed
dividend to preferred stockholders during that period.
141
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
INDEMNIFICATION OF DIRECTORS AND OFFICERS
Our Certificate of Incorporation, as amended, provides that we shall,
subject to certain limitations, indemnify our directors and officers against
judgments, fines, settlements and other amounts, including expenses such as
attorneys' fees, actually and reasonably incurred in connection with any
proceeding, arising by reason of the fact that such person is or was an agent of
the corporation.
The foregoing indemnification obligations could result in our company
incurring substantial expenditures to cover the cost of settlement or damage
awards against directors, officers and employees, which we may be unable to
recoup. These provisions and resultant costs also may discourage our Company
from bringing a lawsuit against directors, officers and employees for breaches
of their fiduciary duties, including breaches resulting from negligent or
grossly negligent behavior, except under certain situations defined by statute,
and may similarly discourage the filing of derivative litigation by our
shareholders against our directors, officers and employees, even though such
actions, if successful, might otherwise benefit our company and the
shareholders. We believe that the indemnification provisions in our Articles of
Incorporation are necessary to attract and retain qualified persons as directors
and officers.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 (the "Securities Act") may be permitted to our directors and officers
pursuant to the foregoing provisions or otherwise, we have been advised that, in
the opinion of the SEC, such indemnification is against public policy as
expressed in the Securities Act and is, therefore, unenforceable. No pending
material litigation or proceeding involving our directors, executive officers,
employees or other agents as to which indemnification is being sought exists,
and we are not aware of any pending or threatened material litigation that may
result in claims for indemnification by any of our directors or executive
officers.
OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The estimated costs of this offering are as follows:
Securities and Exchange Commission registration fee $13,229.90
Federal Taxes None.
State Taxes and Fees None.
Transfer Agent Fees $ 5,000
Accounting fees and expenses $ 5,000
Legal fees and expenses $ 40,000
Printing and engraving expenses $ 1,000
------------------------------- -----------
Total $ 64,229.90
===========
The figures above relate to the resale of the common stock underlying
Series A Convertible Preferred Stock, Series B Convertible Preferred Stock,
Series C Convertible Preferred Stock, Series D Convertible Preferred Stock,
Series A Common Stock Purchase Warrants, Series B Common Stock Purchase
Warrants, Series C Common Stock Purchase Warrants, Series D Common Stock
Purchase Warrants, Series E Common Stock Purchase Warrants, Series BD-1 Common
Stock Purchase Warrants, Series BD-2 Common Stock Purchase Warrants, Series BD-3
Common Stock Purchase Warrants, Series BD-4 Common Stock Purchase Warrants, and
Series BD-5 Common Stock Purchase Warrants not to the original issuance, which
was a private offering. All amounts are estimates, other than the Commission's
registration fee.
142
We are paying all expenses of the offering listed above. No portion of
these expenses will be borne by the selling shareholders. The selling
shareholders, however, will pay any other expenses incurred in selling their
common stock, including any brokerage commissions or costs of sale.
RECENT SALES OF UNREGISTERED SECURITIES
SERIES A PREFERRED STOCK OFFERING AND DEBT FINANCING
On January 18, 2006, the Company closed on a private placement of
approximately $5,202,735 of Series A Preferred Stock. Pursuant to the Securities
Purchase and Share Exchange Agreement, dated as of January 18, 2006, the Company
issued and sold to the Purchasers, and the Purchasers purchased from the
Company, (a) 520,274 shares of Series A Preferred Stock, (b) Series A Common
Stock Purchase Warrants entitling the holders to purchase up to an aggregate of
6,936,980 shares of Common Stock at an exercise price of one dollar and fifty
cents ($1.50) per share, and (c) Series B Common Stock Purchase Warrants
entitling the holders to purchase up to an aggregate of 3,468,490 shares of
Common Stock at an exercise price of two dollars and twenty five cents ($2.25)
per share (the "Series A Preferred Stock Offering"). See, "Description of
Securities" above for a fuller description of Series A Preferred Stock, Series A
Common Stock Purchase Warrants, and Series B Common Stock Purchase Warrants.
Also, on January 18, 2006, the Company issued its Interest Bearing
Non-Convertible Installment Promissory Note (the "Promissory 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. In March 2006, Vicis Capital Master Fund,
Inc. (the "Lender") agreed to convert the Promissory Note into 150,000 shares of
Series A Preferred Stock, Series A Common Stock Purchase Warrants entitling the
holder to purchase 2,000,000 shares of Common Stock at an exercise price of one
dollar and fifty cents ($1.50) per share, and Series B Common Stock Purchase
Warrants entitling the holder to purchase 1,000,000 shares of Common Stock at an
exercise price of two dollars and twenty five cents ($2.25) (the "Debt
----
Conversion").
----------
The issuance of the Series A Preferred Stock, Series A Warrants, and Series
B Warrants were 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.
Such securities were issued to institutional or accredited investors.
Since January 18, 2006, Cytation Corporation has sold an additional
$1,728,480 (or 172,848 shares) of Series A Preferred Stock, Series A Warrants
exercisable for 2,304,640 shares of common stock, and Series B Warrants
exercisable for 1,152,320 shares of common stock (inclusive of amounts issued in
connection with the Debt Conversion). Cytation has sold the Series A Preferred
Stock and warrants to institutional, accredited, and a limited number of
non-accredited investors pursuant to Rule 506 promulgated by the United States
Securities and Exchange Commission under the Securities Act of 1933, as amended.
Midtown Partners & Co., LLC ("Midtown Partners"), an SEC and NASD
registered broker dealer, acted as the placement agent for the Company in
connection with the Series A Preferred Stock Offering. Midtown Partners is
located in Tampa, Florida. In connection with the Series A Preferred Stock
Offering, the Company paid Midtown Partners a cash commission equal to
$674,371.50 and issued (a) Series BD-1 Common Stock Purchase Warrants to Midtown
Partners entitling Midtown Partners to purchase 919,169 shares of the Company's
common stock at an exercise price of seventy five cents ($.75) per share, (b)
Series BD-2 Common Stock Purchase Warrants to Midtown Partners entitling Midtown
Partners to purchase 919,169 shares of the Company's common stock at an exercise
price of one dollar and fifty cents ($1.50) per share, and (c) Series BD-3
Common Stock Purchase Warrants to Midtown Partners entitling Midtown Partners to
purchase 459,581 shares of the Company's common stock at an exercise price of
two dollars and twenty five cents ($2.25) per share. See, "Description of
Securities" above for a fuller description of Series BD-1, BD-2, and BD-3
Warrants.
143
The issuance of the Series B Warrants to Midtown Partners was 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. Such securities were
issued to institutional or accredited investors.
Except for the matters discussed immediately below, to Cytation's
knowledge, no holder of Series A Preferred Stock was an affiliate of, or was a
party to a material contact with, any holder of Series B Preferred Stock, any
holder of Series C Preferred Stock, or the former owners of Deer Valley
Homebuilders, Inc. The former owners of Deer Valley Homebuilders, Inc. acquired
$500,000, in the aggregate, of Series A Preferred Stock using a portion of the
proceeds from the $6,000,000 cash purchase price received upon completion of the
sale of 100% of the issued and outstanding capital stock of Deer Valley
Homebuilders, Inc. In addition, the father of Joel Logan, a former owner and
current officer of Deer Valley Homebuilders, Inc., purchased 15,000 shares of
Series A Preferred Stock (and related Series A and Series B warrants) for
$150,000. Edwin McGusty, an employee of Midtown Partners & Co., LLC, the
placement agent for the Series A Preferred Offering, purchased 10,000 shares of
Series A Preferred Stock (and related Series A and Series B warrants) for
$100,000. Hans Beyer, an owner of Daedalus Consulting, an owner of 3,425 shares
of Series B Preferred Stock, purchased 1,000 shares of Series A Preferred Stock
(and related Series A and Series B warrants) for $10,000. Max Frye, an
employee of Deer Valley Homebuilders, Inc. purchased 3,750 shares of Series A
Preferred Stock (and related Series A and Series B warrants) for $37,500.
The proceeds from the Series A Preferred Stock Offering and the Loan
referenced above were used as follows: (a) $6,000,000 to purchase 100% of the
issued and outstanding capital stock of Deer Valley Homebuilders, Inc., (b)
$674,371.50 as payment of commissions to Midtown Partners & Co., LLC, and (c)
$781,843.50 for working capital and payment of accountant, legal, consulting and
miscellaneous offering expenses.
SHARE EXCHANGE
On January 18, 2006, the Company completed a share exchange pursuant to
which the Company acquired 100% of the issued and outstanding capital stock of
Deer Valley Acquisitions, Corp. (the "Share Exchange"). Pursuant to the Share
Exchange Agreement, in exchange for 100% of the issued and outstanding common
stock of Deer Valley Acquisitions, Corp., the Company issued the following
securities to the shareholders of Deer Valley Acquisitions, Corp.: (a) issued
49,451 shares of the Company's Series B Preferred Stock, (b) 26,750 shares of
the Company's Series C Preferred Stock, and (c) Series C Common Stock Purchase
Warrants to Midtown Partners entitling Midtown Partners to purchase 2,000,000
shares of the Company's common stock at an exercise price of seventy five cents
($.75) per share. See, "Description of Securities" above for a fuller
description of Series B Preferred Stock, Series C Preferred Stock and Series C
Common Stock Purchase Warrants.
The issuance of the Series B Preferred Stock, Series C Preferred Stock and
Series C Common Stock Purchase Warrants to the shareholders of Deer Valley
Acquisitions, Corp. was 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. Such securities were issued to institutional or accredited
investors.
ADDITIONAL WARRANT
In connection with its issuance of an Interest Bearing Non-Convertible
Installment Promissory Note, having an original principal balance of One Million
Five Hundred Thousand and No/100 Dollars ($1,500,000), the Company, pursuant to
the Securities Purchase and Share Exchange Agreement, issued to the Lender a
Series D Common Stock Purchase Warrant to purchase 2,000,000 shares of Common
Stock at an exercise price per share equal to Seventy Five Cents ($.75). See,
"Description of Securities" above for a fuller description of the Series D
Common Stock Purchase Warrants.
The issuance of the Series D Common Stock Purchase Warrants was 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. Such securities were
issued to institutional or accredited investors.
144
SERIES D PREFERRED STOCK OFFERING
On April 17, 2006, the Company closed on a private placement of
approximately $1,320,810 of Series D Preferred Stock. The Company issued (a)
132,081 shares of Series D Preferred Stock and (b) Series E Common Stock
Purchase Warrants entitling the holders to purchase up to an aggregate of
880,544 shares of Common Stock at an exercise price of three dollars ($3.00) per
share (the "Series D Preferred Stock Offering"). See, "Description of
Securities" above for a fuller description of Series D Preferred Stock and
Series E Common Stock Purchase Warrants.
The issuance of the Series D Preferred Stock and Series E Warrants was
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. Such
securities were issued to institutional investors, accredited investors, and a
limited number of non-accredited investors.
Midtown Partners & Co., LLC ("Midtown Partners"), an SEC and NASD
registered broker dealer, acted as the placement agent for the Company in
connection with the Series A Preferred Stock Offering. Midtown Partners is
located in Tampa, Florida. In connection with the Series D Preferred Stock
Offering, the Company paid Midtown Partners a cash commission equal to $99,181,
plus a fee for non-accountable expenses equal to $19,836 and issued (a) Series
BD-4 Common Stock Purchase Warrants to Midtown Partners entitling Midtown
Partners to purchase 61,120 shares of the Company's common stock at an exercise
price of one dollar and fifty cents ($1.50) per share and (b) Series BD-5 Common
Stock Purchase Warrants to Midtown Partners entitling Midtown Partners to
purchase 61,120 shares of the Company's common stock at an exercise price of
three dollars ($3.00) per share. See, "Description of Securities" above for a
fuller description of Series BD-4 and BD-5 Warrants.
145
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)
5.01 Opinion of legality. (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. (4)
10.18 Revolving Credit Note. (4)
10.19 Continuing Guaranty of Cytation Corporation. (4)
10.20 Continuing Guaranty of Deer Valley Acquisitions Corp. (4)
21.01 List of Subsidiaries of Cytation Corporation. (3)
23.01 Consent of Certified Public Accountants Wheeler, Herman,
Hopkins & Lagor (1)
23.02 Consent of Certified Public Accountants Radin, Glass & Co.,
LLP. (1)
23.03 Consent of Counsel, Bush Ross, P.A. See Exhibit 5.01 to this
filing.
(1) Filed herewith.
(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 10-KSB filed with the
SEC on March 30, 2006 and incorporated herein by reference.
(4) Previously filed as an exhibit to the Form 8-K filed with the SEC on
April 18, 2006 and incorporated herein by reference.
146
UNDERTAKINGS
The undersigned registrant hereby undertakes:
1. To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement;
(a) to include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(b) to reflect in the prospectus any facts or events arising after
the effective date of this registration statement, or most recent
post-effective amendment, which, individually or in the aggregate,
represent a fundamental change in the information set forth in this
registration statement, and;
(c) to include any material information with respect to the plan of
distribution not previously disclosed in this registration statement
or any material change to such information in the registration
statement.
2. That, for the purpose of determining any liability under the Securities
Act, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered herein, and the
offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
3. To remove from registration by means of a post-effective amendment any of
the securities being registered hereby which remain unsold at the
termination of the offering.
Insofar as indemnification for liabilities arising under the Securities Act of
1933 may be permitted to our directors, officers and controlling persons
pursuant to the provisions above, or otherwise, we been advised that in the
opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act of 1933, and is,
therefore, unenforceable.
In the event that a claim for indemnification against such liabilities, other
than the payment by us of expenses incurred or paid by one of our directors,
officers, or controlling persons in the successful defense of any action, suit
or proceeding, is asserted by one of our directors, officers, or controlling
persons in connection with the securities being registered, we will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification is against public policy as expressed in the Securities Act of
1933, and we will be governed by the final adjudication of such issue.
147
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements of filing on Form SB-2 and authorized this registration
statement to be signed on its behalf by the undersigned in the City of Tampa,
State of Florida, on July 26, 2006.
(Registrant) CYTATION CORPORATION
By /s/ Charles G. Masters
----------------------------
Charles G. Masters
President & Chief Executive Officer
In accordance with the requirements of the Securities Act of 1933, this
registration statement was signed by the following persons in the capacities and
on the dates stated.
By: /s/ Charles G. Masters
-----------------------------------
Name: Charles G. Masters
Title: Sole Member of the Board of Directors
Date: July 26, 2006
148