SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_____________________
FORM SB-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) 880,540(7) $ 2.83 $ 2,487,525.50 $ 266.17
Common Stock, $0.001 par value (6) 22,163,153(7) $ 2.83 $ 62,639,157.23 $ 6,699.37
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) 2,385,993(7) $ 2.83 $ 6,740,430.23 $ 721.23
Total Registration Fee $ 13,232.92
(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 April 18, 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 April 18, 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 April 18, 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 April 18, 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; 880,540 warrant shares
underlying Series E Warrants; 899,162 warrant shares underlying Series BD-1
Warrants; 899,162 warrant shares underlying Series BD-2 Warrants; 449,581
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.
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.
PRELIMINARY PROSPECTUS (SUBJECT TO COMPLETION), DATED APRIL 18, 2006
---------------------------
43,767,756 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 43,767,756 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 April 18, 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 April 18, 2006 upon the
increase in authorized common stock at the proposed shareholders meeting;
- 2,675,00 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 April 18, 2006, at the
election of the holders of the Series C Preferred Stock;
- 880,540 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 April 18, 2006, upon the increase
in authorized common stock at the proposed shareholders meeting;
- 22,163,153 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;
880,540 warrant shares underlying Series E Warrants; 899,162 warrant shares
underlying Series BD-1 Warrants; 899,162 warrant shares underlying Series
BD-2 Warrants; 449,581 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;
- 2,385,993 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.
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 9 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 April 18, 2006
TABLE OF CONTENTS
PAGE
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Prospectus Summary 6
Risk Factors 10
Use of Proceeds 18
Determination of Offering Price 18
Dilution 18
Selling Security Holders 18
Plan of Distribution 25
Legal Proceedings 27
Directors, Executive Officers, Promoters and Control Persons 27
Certain Relationships and Related Transactions 31
Corporate Governance 32
Executive Compensation 34
Security Ownership of Certain Beneficial Owners and Management 36
Description of Securities 43
Market for Common Equity and Related Stockholder Matters 49
Interest of Named Experts and Counsel 50
Disclosure of Commission Position on Indemnification for
Securities Act Liabilities 50
Organization Within Last Five Years 50
Description of Business 51
Management's Discussion and Analysis or Plan of Operation 60
Description of Property 68
Financial Statements 69
PART II. INFORMATION NOT REQUIRED IN THE PROSPECTUS
Indemnification of Directors and Officers 70
Other Expenses of Issuance and Distribution 71
Recent Sales of Unregistered Securities 71
Exhibits 73
Undertakings 74
Signatures 76
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 April 18, 2006, we had issued and outstanding 1,000,00 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 22,163,153 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 May15, 2006, pending approval by the SEC:
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 1,400,000 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.
8
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 43,767,756 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 April 18,
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 April 18, 2006
upon the increase in authorized common stock at the proposed
shareholders meeting;
- 2,675,00 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 April 18, 2006,
at the election of the holders of the Series C Preferred Stock;
9
- 880,540 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 April 18,
2006 upon the increase in authorized common stock at the proposed
shareholders meeting;
- 22,163,153 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; 880,540 warrant shares underlying Series E
Warrants; 899,162 warrant shares underlying Series BD-1 Warrants;
899,162 warrant shares underlying Series BD-2 Warrants; 449,581
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;
- 2,385,993 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
the SB-2 Registration Statement within the specified time requirements
set forth in the Securities Purchase Agreement or the failure of the
Registration Statement to be declared effective within the specified
time. This amount reflects the maximum amount of common stock purchase
warrants that may be incurred as a penalty.
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.
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
10
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.
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.
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;
11
- 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
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.
12
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
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.
13
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
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
14
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.
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.
15
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.
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.
16
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;
- 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."
17
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
43,767,756 shares of our Common Stock, as follows:
- 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 April 18,
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 April 18, 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 April 18, 2006,
at the election of the holders of the Series C Preferred Stock;
18
- 880,540 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 April 18,
2006 upon the increase in authorized common stock at the proposed
shareholders meeting;
- An aggregate of 22,163,153 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; 880,540 warrant shares underlying Series
E Warrants; 899,162 warrant shares underlying Series BD-1 Warrants;
899,162 warrant shares underlying Series BD-2 Warrants; 449,581
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 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;
- 2,385,992 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
the SB-2 Registration Statement within the specified time requirements
set forth in the Securities Purchase Agreement or for the failure of
the Registration Statement to be declared effective within the
specified time. This amount reflects the maximum amount of common
stock purchase warrants that may be incurred as a penalty.
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. 0 625 0 0 0 12,501 0 20,835 0 *
Tolan
David Di 0 800 0 0 0 16,001 0 26,668 0 *
Tomasso
Delmont J. 0 1,000 500 0 0 20,001 0 83,335 0 *
Monarch, III
Hans C. 0 1,000 0 0 0 20,001 0 33,335 0 *
Beyer
M. Lewis 0 1,850 0 0 0 37,001 0 61,668 0 *
Temaraes &
Louise
Temares
Joseph J. 0 1,250 0 0 0 25,001 0 41,668 0 *
Jacob
Lester E. 0 1,250 0 0 0 25,001 0 41,668 0 *
Segal
19
Jason J. 0 1,250 0 0 0 25,001 0 41,668 0 *
Palumbo
Donald G. 0 1,250 0 0 0 25,001 0 41,668 0 *
Sproat
Chad B. 0 1,250 0 0 0 25,001 0 41,668 0 *
Garrett
Frederick S. 0 1,350 0 0 0 27,000 0 45,000 0 *
Freer
Shahid Q. 0 1,500 0 0 0 30,000 0 50,000 0 *
Din
Anthony J. 0 2,250 0 0 0 45,000 0 75,000 0 *
Sgambati
John Boos & 0 2,500 0 0 0 50,001 0 83,335 0 *
Eileen Boos
Muhammad 0 2,500 0 0 0 50,001 0 83,335 0 *
Hamed
Farooqi
Robert 0 2,500 0 0 0 50,001 0 83,335 0 *
Zenner
Jess G. 0 2,500 100 0 0 50,001 0 93,335 0 *
Tucker
Carmine D. 0 2,500 0 0 0 50,001 0 83,335 0 *
D'Amico
Thomas T. 0 2,500 0 0 0 50,001 0 83,335 0 *
Sproat
Michael B. 0 3,750 0 0 0 75,000 0 125,000 0 *
Wellikoff
James C. 0 10,000 0 0 0 200,001 0 333,335 0 *
McGusty Jr.
Thunderbird 0 2,500 0 0 0 50,001 0 83,335 0 *
Global
Corporation,
Contact
Person:
Mark Baum
Firle 0 2,500 0 0 0 50,001 0 83,335 0 *
Trading,
S.A., Contact
Person:
James
Pnather
Farid 0 10,000 0 0 0 200,001 0 333,335 0 *
Kolaleh
Tabibzadeh
Equity Trust 0 10,000 0 0 0 200,001 0 333,335 0 *
Company
Custodian
FBO Gary
K. Chandler
Double U 0 9,999 0 0 0 199,971 0 333,285 0 *
Master Fund
LP, Contact
Person: Shad
Stastney
Majid 0 18,000 0 0 0 360,000 0 600,000 0 *
Tabibzadeh
& Debbie
Elghanayan
20
Gilda Sierra 0 25,000 0 0 0 500,001 0 833,335 0 *
deAlejo
2005 Trust
U/A dated
4/13/2005
Alberto A.
deAlejo Jr.,
Trustee
Shahab 0 25,000 0 0 0 500,001 0 833,335 0 *
Emrani
Nite 0 40,000 0 0 0 800,001 0 1,333,335 0 *
Capital, LP
Contact
Person:
Keith
Goodman
Vicis 0 450,000 0 0 0 11,000,000 0 17,000,000 0 *
Capital Master
Fund, Contact
Person:
Shad
Stastney
Jules 0 2,500 0 0 0 50,001 0 83,335 0 *
Ghedina
Jeffrey 0 5,000 0 0 0 100,001 0 166,668 0 *
Benton
PP57, LLC 0 5,000 0 0 0 100,001 0 166,668 0 *
Contact
Person:
Robert M.
Snibbe, Jr.
William N. 0 2,500 200 0 0 50,001 0 103,335 0 *
& Jean S.
Hagler Trust
Max R. Frye 0 3,750 0 0 0 75,000 0 125,000 0 *
Gary K. 0 5,000 0 0 0 100,001 0 166,668 0 *
Chandler
Steve J. 0 15,000 0 0 0 300,000 0 500,000 0 *
Logan
Edwin A. 0 10,000 6,850 0 0 200,001 0 1,018,335 0 *
McGusty
Dan 0 1,000 0 0 0 20,001 0 33,335 0 *
Crawford
King Capital 0 4,998 0 0 0 99,960 0 166,600 0 *
Corporation
Contact
Person:
Cameron
King-
President
Mario 0 0 25 0 0 0 0 2,500 0 *
Scarpa
Donald J. 0 0 100 0 0 0 0 10,000 0 *
Grissom
Terry N. 0 0 150 0 0 0 0 15,000 0 *
Williams
Natalie P. 0 0 200 0 0 0 0 20,000 0 *
Collins
Brian 0 0 200 0 0 0 0 20,000 0 *
Thornton
21
Robert 0 0 250 0 0 0 0 25,000 0 *
McPhail
ZTZ Trust 0 0 300 0 0 0 0 30,000 0 *
Corp.
Contact
Person:
Lucien
Lallouz
D. Gregg 0 0 400 0 0 0 0 40,000 0 *
Diamond
Joy Melton 0 0 500 0 0 0 0 50,000 0 *
Mark R. 0 0 800 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
Robert W. 0 0 1,000 0 0 0 0 100,000 0 *
Christian
Apogee 0 0 1,901 0 0 0 0 190,100 0 *
Financial
Investments,
Inc.
Attn:
Richard
Diamond,
VP
Richard B. 0 0 2,500 0 0 0 0 250,000 0 *
Masters
Famalom, 0 0 3,025 0 0 0 0 302,500 0 *
LLC
attn: Chris
Phillips,
Managing
Member
Daedalus 0 0 3,425 0 0 0 0 342,500 0 *
Consulting,
Inc.
attn: Hans
Beyer
Stacy L. 0 0 5,975 0 0 0 0 597,500 0 *
Bagley
Decembra 0 0 6,750 0 0 0 0 675,000 0 *
Diamond
Charles G. 0 0 14,300 0 0 0 0 1,430,000 0 *
Masters
Nancy S. 0 2,500 0 0 0 50,001 83,335
Masters
22
Total CFO, 0 0 0 26,750 0 2,000,000 0 4,675,000 0 *
LLC
attn: Chris
Phillips,
Managing
Member
Midtown 0 0 0 0 0 2,370,145 0 2,370,145 0 *
Partners &
Co., LLC
Bruce Jordan,
Managing Director
Joel Logan 0 15,000 0 0 0 300,000 0 500,000 0 *
Charles 0 10,000 0 0 0 200,001 0 333,335 0 *
Murphree
John Steven 0 5,000 0 0 0 100,001 0 166,668 0 *
Lawler
James David 0 7,500 0 0 0 150,000 0 250,000 0 *
Shaw
William 0 6,000 0 0 0 120,000 0 200,000 0 *
Joseph
Aycock, Jr.
Jerry Ray 0 2,500 0 0 0 50,001 0 83,335 0 *
Cooper, Jr.
Timm Gann 0 2,000 0 0 0 40,001 0 66,668 0 *
Jimmy Ray 0 2,000 0 0 0 40,001 0 66,668 0 *
Hawkins
Fred and 0 0 0 0 2,001 13,340 0 26,680 0 *
Joan Halbig
Paul T. 0 0 0 0 1,000 6,667 0 13,334 0 *
Green
Ricky A. 0 0 0 0 5,250 35,000 0 75,000 0 *
and Tina L.
Martin
Douglas 0 0 0 0 3,000 20,000 0 40,000 0 *
Greenway
Sr.
Scott 0 0 0 0 10,050 67,000 0 134,000 0 *
Strickland
Gary R. 0 0 0 0 4,500 30,000 0 60,000 0 *
Martin &
Valerie A.
Martin
Eddie M. 0 0 0 0 5,250 35,000 0 70,000 0 *
Wilson
Jimmy O. 0 0 0 0 5,460 36,400 0 72,800 0 *
Smith
Dudley H. 0 0 0 0 4,470 29,800 0 59,600 0 *
Dinkins
Richey C. 0 0 0 0 4,500 30,000 0 60,000 0 *
Swinney
Wayne N. 0 0 0 0 750 5,000 0 10,000 0 *
Spillers
James 0 0 0 0 3,000 20,000 0 40,000 0 *
Bradford
Bishop
Albert D. 0 0 0 0 3,000 20,000 0 40,000 0 *
Aycock
Larry L. 0 0 0 0 3,000 20,000 0 40,000 0 *
Wiginton
and
Jan H.
Wiginton,
JTWROS
23
Harold K. 0 0 0 0 10,000 66,667 0 133,334 0 *
Wilson
Ken Wilson 0 0 0 0 7,500 50,000 0 100,000 0 *
Dennis A. 0 0 0 0 2,250 15,000 0 30,000 0 *
Wilson
DD Growth 0 0 0 0 25,000 166,667 0 333,334 0 *
Premium
Fund
Alberto
Micalizzi,
Chairman
Charles R. 0 0 0 0 5,000 33,334 0 66,668 0 *
Barber, Jr.
Michael E. 0 0 0 0 8,100 54,000 0 108,000 0 *
Stephens
Matt
Clayton 0 0 0 0 5,000 33,334 0 66,668 0 *
David H. 0 0 0 0 2,500 16,667 0 33,334 0 *
Silvertooth
Mickey 0 0 0 0 1,500 10,000 0 20,000 0 *
Hankins
Robert 0 0 0 0 3,000 20,000 0 40,000 0 *
Leighton
Gibens
Ruby 0 0 0 0 2,000 13,334 0 26,668 0 *
E.Lawhon
Geraldine 0 0 0 0 2,000 13,334 0 26,668 0 *
Shaw
Steve N. 0 0 0 0 1,500 10,000 0 20,000 0 *
Bostic
Family 0 0 0 0 1,500 10,000 0 20,000 0 *
Home
Center, Inc.
attn:Charles
Stricklin,
President
Allison 20,000 0 0 0 0 0 20,000 0 0 *
Investment
Corp.,
Contact
Person
Raymond
Burke
Sequence 17,338 0 0 0 0 0 17,338 0 0 *
Advisors
Corp.,
Richard
Fisher
Contact
Person
* Less than 1%
24
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 18 as a pledge,
gift, partnership distribution or other non-sale related transfer.
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 43,767,756 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 information
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
25
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.
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.
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
26
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 43,767,756 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.
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 March 31, 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 39 Class I Director July 2001 to Present; term as
Class I Director expires in 2006
27
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.
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. 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 in the second quarter of 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
28
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. 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.
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. 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. In addition, Mr. Beyer is President and
Founder for Daedalus Consulting, Inc. Daedalus Consulting, Inc. has an ownership
interest in Apogee Financial Investments, Inc. 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
29
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
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 May 15, 2006,
pending approval by the SEC:
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 1,400,000 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 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
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.
30
MAJORITY VOTE FOR ALL PROPOSALS
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 April 6, 2006, the aggregate shares available to be
voted on the proposals included in this Information Statement are 10,644,342.
Fifty percent of the aggregate shares available to be voted on the proposals
amounts to 5,322,171 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 Bagly 597,500
Daedalus Consulting 342,500
Hans Beyer 13,333
Richard Masters 250,000
Robert Christian 100,000
Famalom, LLC and Total CFO, LLC 531,152
Vicis Capital Master Fund 531,152
TOTAL 5,345,737
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.
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
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.
31
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 purchase price for the Sulligent Property is
$725,000, which is to be financed, and the closing is currently scheduled to
occur on April 30, 2006. In addition, Steve J. Logan and Deer Valley have
agreed to enter into a short term lease of the Sulligent Property, for nominal
consideration, to allow early occupancy and commencement of operations pending
the expected purchase on April 30, 2006. Steve J. Logan is the father of Joel
Stephen Logan, II, a Member of the Board of Directors, President, and General
Manager of Deer Valley.
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."
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
32
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
Information 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.
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 Information
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.
33
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 - -
34
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.
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.
35
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
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 April 18, 2006 for (i) any person whom we
36
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(11)
TITLE OF CLASS NAME AND ADDRESS AMOUNT AND NATURE PERCENTAGE OF CLASS(1)
OF BENEFICIAL OWNER OF
BENEFICIAL OWNERSHIP
Common Stock issuable Charles G. Masters, Director of 1,513,335 (4) 7.8%
upon conversion of Series Cytation Corp., Chief Executive
B Preferred Stock; Officer & President of Cytation
Common Stock issuable Corp.(2)
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(2) Direct Ownership
Common Stock issuable Joel Stephen Logan, II, Member 500,000 2.6%
upon conversion of Series of the Board of Directors of Direct Ownership(5)
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.(3)
Common Stock issuable Charles L. Murphree, Jr., 333,335 1.7%
upon conversion of Series Member of the Board of Direct Ownership(6)
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.(3)
Common Stock issuable John Steven Lawler, Member of 166,668 *
upon conversion of Series the Board of Directors of Deer D irect Ownership(7)
A Preferred Stock; Valley Homebuilders, Inc.,
Common Stock issuable Director of Finance, Deer Valley
upon exercise of Series A Homebuilders, Inc.(3)
and Series B Warrants
Common Stock issuable Deecembra Diamond(2) 865,100(8) 4.5%
upon conversion of Series
B Preferred Stock
37
Common Stock issuable Christopher Phillips(2) 5,357,700(9) 27.6%
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) 2.9%
upon conversion of Series Director Nominee (2)
A and B Preferred Stock;
Common Stock issuable
upon exercise of Series A
and Series B Warrants
All Officers and Directors 3,117,603 16.0%
as a group (5 persons)
* Less than 1%.
(1) Applicable percentage of ownership is based on (i) 1,000,000 shares of
common stock being issued and outstanding as of March 24, 2006, (ii) an
aggregate of 9,941,620 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 880,540 shares of common stock which
are issuable upon the conversion of 132,081 shares of the Company's Series
D Convertible Preferred Stock currently issued and outstanding.
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 currently exercisable or exercisable within 60 days
of January 20, 2006 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.
(2) Unless otherwise indicated, the mailing address of the shareholder is 4902
Eisenhower Blvd., Suite 185, Tampa, FL 33634.
(3) Unless otherwise indicated, the mailing address of the shareholder is 205
Carriage St., Guin, Alabama 35563.
(4) Includes (a) 1,430,000 common shares issuable upon conversion of 14,300
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.
38
(5) 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.
(6) 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.
(7) 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.
(8) Includes (a) 675,000 common shares issuable upon conversion of 6,750 shares
of the Company's Series B Preferred Stock directly owned by Deecembra
Diamond, and (b) 190,100 common shares issuable upon conversion of 1,901
shares of the Company's Series B Preferred Stock indirectly owned by nature
of Deecembra Diamond's ownership of Apogee Financial Investments, Inc.
Deecembra Diamond disclaims beneficial ownership of securities owned by
Apogee Financial Investments, Inc., except to the extent of her 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.
(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 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 1,901 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 warrants 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 warrants, 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. As a result, the inclusion of Series C Preferred Stock 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 342.5 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.
(11) Nominees for director Dale Phillips and John Giordano own no securities of
Cytation Corporation.
39
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.
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 $490,274
and issued (a) Series BD-1 Common Stock Purchase Warrants to Midtown Partners
entitling Midtown Partners to purchase 899,162 shares of the Company's common
stock at an exercise price of seventy five cents ($.75) per share, (b) Series
BD-2 Common Stock Purchase Warrants to Midtown Partners entitling Midtown
Partners to purchase 899,162 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 899,162 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 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.
40
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)
$636,871 as payment of commissions to Midtown Partners & Co., LLC, and (c)
$294,344 for working capital and payment of accountant, legal, consulting and
miscellaneous offering expenses.
SHARE EXCHANGE
On January 18, 2006, the Company completed a share exchange pursuant to
which the Company acquired 100% of the issued and outstanding capital stock of
Deer Valley Acquisitions, Corp. (the "Share Exchange"). Pursuant to the Share
Exchange Agreement, in exchange for 100% of the issued and outstanding common
stock of Deer Valley Acquisitions, Corp., the Company issued the following
securities to the shareholders of Deer Valley Acquisitions, Corp.: (a) issued
49,451 shares of the Company's Series B Preferred Stock, (b) 26,750 shares of
the Company's Series C Preferred Stock, and (c) Series C Common Stock Purchase
Warrants to Midtown Partners entitling Midtown Partners to purchase 2,000,000
shares of the Company's common stock at an exercise price of seventy five cents
($.75) per share. See, "CAPITAL STRUCTURE" below for 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,
"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 Capital Stock Purchase Agreement dated November 1, 2005, as
amended, Deer Valley 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
41
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. 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.
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
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 Information 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.
42
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
880,540 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
"common stock"), and 1,400,000 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, (c) 26,750 of the preferred shares as Series C Convertible Preferred
Stock (these shares are referred to herein as "Series C Preferred Stock"), and
(d) 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 April
18, 2006, there were issued and outstanding 1,000,000 shares of Common Stock,
520,274 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 330
stockholders of record as of that date.
We currently do not have enough common stock to issue upon the conversion
of all or a material portion of our issued and outstanding Series A Preferred
Stock, Series B Preferred Stock, Series C Preferred Stock and the issued and
outstanding Series A Warrants, Series B Warrants, and Series BD Warrants
described below. Although we currently do not have enough stock to issue upon
the conversion or exercise of such securities, management currently intends to
record such securities as equity on our balance sheet as of March 31, 2006 for
the following reasons:
(1) A shareholder holding proxies to vote no less than 50.01% of the
voting capital stock of the Company has acknowledged and agreed to
vote their shares to increase our authorized common stock from
2,000,000 shares to 100,000,000 share at our shareholder meeting
currently scheduled to occur on May 15, 2006. Upon the occurrence of
43
such proposed increase, we will have sufficient common stock to issue
upon conversion or exercise, as applicable, of all issued Series A
Preferred Stock, Series B Preferred Stock, Series C Preferred Stock,
Series D Preferred Stock, Series A Warrants, Series B Warrants, Series
C Warrants, Series D Warrants, and Series E Warrants.
(2) No Series A Preferred Stock, Series B Preferred Stock, Series C
Preferred Stock, or Series D Preferred Stock is convertible before the
earlier of (a) the effective date of our registration statement, or
(b) one (1) year from the date of issuance. In addition, no Series A
Warrants, Series B Warrants, Series C Warrants, Series D Warrants, and
Series E Warrants or Series BD Warrants are exercisable before the
effective date of our registration statement. Because the date that
our registration statement is filed is solely within our control, we
do not believe that we are required to book such securities as debt
under EITF-00-19 and to do so would be misleading.
(3) The shareholder meeting to increase the authorized capital stock
is currently scheduled for May 15, 2006. As a result, we anticipate
that our capital stock will have been increased prior to the filing of
our first quarter 10-QSB for 2006.
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.
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 $10 per share, together with any accrued and unpaid
dividends, is convertible at the option of the holder at any time
after the Conversion Date (as defined below) into Common Stock at a
44
price of Seventy Five Cents ($.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;
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).
45
"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.
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.
46
- 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
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 April 18, 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
47
($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 April 18, 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
($2.25) per share. A Series B warrant is exercisable, in whole or in part, at
any time after the earlier of (a) the date a registration statement covering
such Series B warrants and underlying warrant shares is declared effective, or
(b) twelve (12) months from the date of grant and before the close of business
on the date seven (7) years from the initial exercise date.
As of April 18, 2006, there were outstanding Series C Common Stock Purchase
Warrants entitling the holders to purchase up to an aggregate of 2,000,000
shares of Common Stock at an exercise price of seventy five cents ($.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 April 18, 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 April 18, 2006, there were outstanding Series E Common Stock Purchase
Warrants entitling the holders to purchase up to an aggregate of 880,540 shares
of Common Stock at an exercise price of three dollars ($3.00) per share. The
Series E warrant is exercisable, in whole or in part, at any time after the
earlier of (a) the date a registration statement covering such Series E warrants
and underlying warrant shares is declared effective, or (b) twelve (12) months
from the date of grant and before the close of business on the date three (3)
years from the initial exercise date.
As of April 18, 2006, there were outstanding Series BD-1 Common Stock
Purchase Warrants entitling the holders to purchase up to an aggregate of
889,162 shares of Common Stock at an exercise price of seventy five cents ($.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 April 18, 2006, there were outstanding Series BD-2 Common Stock
Purchase Warrants entitling the holders to purchase up to an aggregate of
889,162 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
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 April 18, 2006, there were outstanding Series BD-3 Common Stock
Purchase Warrants entitling the holders to purchase up to an aggregate of
449,581 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 April 18, 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
48
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 April 18, 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.
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. Except for the prices listed for the quarter which ended on
December 31, 2005, the prices in the following table reflect pre-dividend sales.
As of March 22, 2006, there were 332 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 $1.50 $.50
June 30, 2005 $1.75 $.35
March 31, 2005 $1.00 $.25
2004 QUARTER ENDED
------------------
December 31, 2004 $3.00 $1.79
September 30, 2004 $5.00 $2.30
June 30, 2004 $10.25 $0.60
March 31, 2004 $.60 $.60
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.
49
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.
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.
50
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, assist in applying, and provide 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;
- 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
attached hereto as Exhibit 99.1.
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
51
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
attached hereto as Exhibit 99.2.
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 attached hereto as Exhibit 99.3. In addition, the Pro Forma condensed
Financial Statements as of December 31, 2005 for Cytation, DVA, and Deer Valley
are attached hereto as Exhibit 99.4. 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
United States. As of the date of this Information Statement, 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 Information 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 Information Statement, we have not delivered any FEMA-related
orders nor have we been contracted to do so.
52
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. This
facility normally functions 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
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 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.
53
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
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.
54
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.
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:
55
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.
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.
As acceptance of manufactured housing has increased among higher-income
buyers and as financing for single-section homes has become more scarce, demand
has shifted toward larger, multi-section homes, which accounted for 74% of
industry shipments in calendar year 2004, up from 47% in calendar year 1991,
according to data published by the Manufactured Housing Institute (MHI).
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.
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
56
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.
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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.
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
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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.
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.
59
EMPLOYEES
We currently have approximately 350 employeess, 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.
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
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.
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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. 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 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
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.
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 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 the company's lines of
business and principal products and services, please see the section of this
filing entitled "Description of Business."
Deer Valley operates its manufacturing facility and business offices in
Guin, Alabama. Also, on January 25 2006, the Company approved Deer Valley
Homebuilders, Inc., an indirectly wholly-owned subsidiary of the Company,
entering into a Sales Contract with Steve J. Logan to purchase real property
located at 7668 Highway 278 in Sulligent, Alabama (the "Sulligent Property").
The purchase price for the Sulligent Property is $725,000 and the closing is
currently scheduled to occur on or before April 30, 2006. The Company will
finance the Sulligent Property. As of the date of this filing, the details of
the financing have not been finalized. The Sales Contract is subject to certain
contingencies, including a standard title contingency. 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. Deer Valley currently
occupies the Sulligent Property under a short-term lease for nominal
consideration. For more information on floors and rates of production, please
see the section of this filing entitled "Description of Business."
When evaluating the Company's financial condition and operating
performance, the most important matters on which the company's executives are
currently focusing are raising additional capital and establishing a new credit
line with a larger bank, in order to facilitate growth. Management is currently
negotiating with bankers to secure such a credit line and feels that the
availability of the current financial data presented in the financial statements
attached hereto may expedite that process. The key performance indicators
management examines are (1) the Company's production rate, in "floors" produced
per day, (2) the cost of sales, and (3) the size of the Company'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.
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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 forsees 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
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 has created a huge need for the rapid replacement of
houses in the Gulf Coast Region. The lure of lucrative "FEMA" contracts has
caused other suppliers to disrupt or delay normal shipments to their dealers.
This has created a rush by dealers to establish new relationships or increase
orders with Deer Valley, which has not interrupted its service in this way. The
hurricane effect could increase even further this summer, as landowners in
hurricane-damaged areas receive government permission to rebuild, new storms
destroy existing housing, and Gulf Coast residents return to their home towns.
However, hurricane-related disruptions in the availability of the raw materials
we use to construct our products could have a material adverse impact upon our
business.
4) "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,
62
approximately one-third of the floor plan financing available to manufactured
home dealers would disappear. An occurrence of this type could have a material,
adverse impact upon Deer Valley's business, since dealers would have additional
difficulty in procuring funds to inventory homes based on floor plan financing.
RESULTS OF OPERATIONS
The following discussion of our financial condition and results of
operations should be read in conjunction with our financial statements, included
herewith. This discussion should not be construed to imply that the results
discussed herein will necessarily continue into the future, or that any
conclusion reached herein will necessarily be indicative of actual operating
results in the future. Such discussion represents only the best present
assessment by our management. Historical financial information presented for
the 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.
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.
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LIQUIDITY AND CAPITAL RESOURCES
Management believes that the Company 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 March 4,
2006, Deer Valley's unaudited monthly balance sheet indicated that it had
approximately $2,711,954 in cash and cash equivalents. In addition, Deer
Valley's sales of manufactured homes generate an average positive cash flow in
excess of $281,000 per month. Should our costs and expenses prove to be
greater than we currently anticipate, or should we change our current business
plan in a manner which will increase or accelerate our anticipated costs and
expenses, such as through the acquisition of new products, the depletion of our
working capital would be accelerated. Management believes that the Company
will need additional working capital to sustain its present rate of growth in
the long term. Accordingly, the Company may seek additional equity financing to
facilitate acquisition of property and expansion of production facilities.
The company spends its cash to pay expenses and to fund increases in
production capacity. 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 $1,125,000. These distributions were more substantial in 2005 than
the $598,158 distributed in 2004 because Deer Valley was more profitable.
The Company is contingently liable under the terms of repurchase agreements
with financial institutions providing 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. The risk of loss under these agreements is spread over
numerous retailers. The price the Company 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 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. 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
Company 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."
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FINANCING
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. The line of credit matured on March 25,
2005 and was not renewed.
On April 12, 2006, Deer Valley entered into a Loan and Security Agreement
providing for a revolving line of credit in an amount not to exceed Two Million
Five Hundred Thousand and No/100 Dollars ($2,500,000.00) (the "Loan") evidenced
by a revolving credit note (the "Note") and secured by accounts receivable,
inventory, equipment and all other tangible and intangible personal property of
Deer Valley, DVA, and Cytation. The purpose of the loan is to provide working
capital, to provide Letter of Credit support, to replace Deer Valley's existing
revolving line of credit currently with another bank, and to provide interim
financing for the potential acquisition of the real property on which one of
Deer Valley's plants is currently operating 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, 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 to cover obligations under repurchase agreements. Please
see "Reserve for Repurchase Commitments" below for more information on our
repurchase agreements.
As of October 1, 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 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.
Letter of Credit No. 93 issued through State Bank & Trust in the
amount of $100,000 to the favor of beneficiary 21st Mortgage Corporation,
issued May 3, 2005 and expiring May 3, 2006, pending renewal. Personally
guaranteed by the three largest 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 December 31, 2005, no amounts had been drawn on
the above irrevocable letters of credit by the beneficiaries.
The Company is also obligated under a Promissory Note having a principal
balance of approximately $1,416,499 as of December 31, 2005, payable to State
Bank & Trust of Guin, Alabama (the "B&T Note"). 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 the Guin Property and is
personally guaranteed by two major stockholders of the Company.
65
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 1, Nature of
Business , Basis of Presentation, and Summary of Significant Accounting
Policies, contained in the explanatory notes to Deer Valley Homebuilders, Inc.'s
financial statements for the fiscal year ended December 31, 2005, contained in
this filing. On an ongoing basis, we evaluate our estimates, including those
related to reserves, deferred tax assets and valuation allowance, impairment of
long-lived assets, fair value of equity instruments issued to consultants for
services, and estimates of costs to complete contracts. We base our estimates on
historical experience and on various other assumptions which we believe to be
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying value of assets and liabilities which are
not readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions. However, we believe that
our estimates, including those for the above-described items, are reasonable.
CRITICAL ACCOUNTING ESTIMATES
Management is aware that certain changes in accounting estimates employed
in generating financial statements can have the effect of making the Company
look more or less profitable than it actually is. Management does not believe
that either the Company or its auditors have made any such changes in accounting
estimates. A summary of the most critical accounting estimates employed by the
Company in generating financial statements follows below.
WARRANTIES
We provide our retail buyers with a one-year limited warranty covering
defects in material or workmanship, including plumbing and electrical systems.
We record a liability for estimated future warranty costs relating to homes
sold, based upon our assessment of historical experience and industry trends.
In making this estimate, we evaluate historical sales amounts, warranty costs
related to homes sold and timing in which any work orders are completed. We
have a reserve for estimated warranties of $750,000 as of December 31, 2005,
compared to $550,000 as of December 31, 2004. Although we maintain reserves for
such claims, there can be no assurance that warranty expense levels will remain
at current levels or that the reserves that we have 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.
66
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. 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 our 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.
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
67
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. Once the standard is
adopted, we currently expect full-year 2006 diluted net earnings per share to be
reduced by approximately $.01 for stock option. Application of this
pronouncement requires significant judgment regarding the inputs to an option
pricing model, including stock price volatility and employee exercise behavior.
Most of these inputs are either highly dependent on the current economic
environment at the date of grant or forward-looking over the expected term of
the award. As a result, the actual impact of adoption on earnings for 2006 could
differ significantly from our current estimate. We are currently considering the
modified prospective method of transition, which would be first effective for
our 2006 fiscal first quarter.
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.
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 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., an indirectly wholly-owned subsidiary of the Company,
entering into a Sales Contract with Steve J. Logan to purchase real property
located at 7668 Highway 278 in Sulligent, Alabama. Deer Valley's plant on the
Sulligent Property opened on February 20, 2006 under a short-term lease. In the
opinion of management, each of its properties is adequately covered by
insurance.
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.
68
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:
69
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 F-1
AUDIT REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM -
RADIN, GLASS & CO., LLP F-2
FINANCIAL STATEMENTS:
BALANCE SHEET AS OF DECEMBER 31, 2005 AND 2004 F-3
STATEMENT OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2005
AND 2004 F-4
STATEMENT OF STOCKHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31,
2005 AND 2004 F-5
STATEMENT OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2005
AND 2004 F-6
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS F-7-F-14
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 auditing 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
Wheeler, Herman, Hopkins & Lagor
Certified Public Accountants
Tampa, Florida
March 24, 2006
F-1
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 auditing 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
F-2
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' DEFICIT:
Common stock, $0.001 par value, 2,000,000 shares
authorized, 982,662 and 436,165 shares issued and
outstanding respectively 982 436
Additional paid-in capital 32,723,371 32,608,451
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.
F-3
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)
---------- ----------
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) $ (1.74)
Net (Loss) Income Per Share (Fully Diluted) $ (0.18) $ (1.74)
========== ==========
Weighted Average Common Shares Outstanding 944,306 399,915
Weighted Average Common and Common Equivalent Shares Outstanding 944,306 399,915
========== ==========
SEE REPORTS OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM AND NOTES TO
FINANCIAL STATEMENTS
F-4
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 Capital Subscribed For Deficit Total
---------------- --------------- -------------- -------------- -----------
Balance - December 31, 2003 291,165 $291 $33,118,901 $ - $(31,969,255) $1,149,937
Exercise of options 25,000 25 - - - 25
Issuance of common stock for services 120,000 120 71,880 - - 72,000
Distributions - non cash - (582,330) - - (582,330)
Net loss - - - (696,689) (696,689)
------------------------------------------------------------------------------
Balance - December 31, 2004 436,165 $436 $32,608,451 $ - $(32,665,944) $ (57,057)
Exercise of options - - - - - -
Issuance of common stock 55,166 55 115,411 - - 115,466
Shares subscribed (not issued) - - - (23,500) - (23,500)
Stock dividend 491,331 491 (491) - - -
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
F-5
Cytation Corporation
Statements of Cash Flows
For the Years Ended December 31,
2005 2004
---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(173,605) $(696,689)
Adjustments to reconcile net 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 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
Repayment of notes payable (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
F-6
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 $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 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.
F-7
CYTATION CORPORATION
NOTES TO FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2005 AND 2004
(AUDITED)
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. Common stock
equivalents.
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 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,
F-8
CYTATION CORPORATION
NOTES TO FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2005 AND 2004
(AUDITED)
"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 demand without -- 5,000
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.
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.
F-9
CYTATION CORPORATION
NOTES TO FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2005 AND 2004
(AUDITED)
ISSUANCE OF COMMON STOCK - On February 14, 2005, the Company authorized the
issuance for no consideration of 1,666 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 15,000 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 23,500 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 10,000 restricted shares of its common
stock for $1.00 a share to an unaffiliated third party and issued 5,000
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 1,466 990.00
Granted --
Exercised --
Expired or cancelled (1,466) (990.00)
-------
Outstanding at December 31, 2005 --
=======
F-10
CYTATION CORPORATION
NOTES TO FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2005 AND 2004
(AUDITED)
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.
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.
F-11
CYTATION CORPORATION
NOTES TO FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2005 AND 2004
(AUDITED)
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
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 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 7,456,215 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
F-12
CYTATION CORPORATION
NOTES TO FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2005 AND 2004
(AUDITED)
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. 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 value of the Series A Convertible Preferred Stock,
Series A Common Stock Purchase Warrants, and Series B Common Stock Purchase
Warrants were determined in a private offering also completed on January 18,
2006.
F-13
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 3,236,994
---------
Total assets acquired $11,247,087
-----------
Current liabilities (3,879,939)
Long-term debt (1,367,148)
------------
Total liabilities assumed ($ 5,247,087)
-------------
Net assets acquired $ 6,000,000
=============
The $3,236,994 of goodwill is expected to be deductible for tax purposes.
F-14
DEERVALLEY ACQUISITIONS CORP.
FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2005
(AUDITED)
TABLE OF CONTENTS:
AUDIT REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM F-1
FINANCIAL STATEMENTS:
BALANCE SHEET AS OF DECEMBER 31, 2005 F-2
STATEMENT OF OPERATIONS FOR THE PERIOD FROM DATE OF INCEPTION
(JUNE 22, 2005) THROUGH DECEMBER 31, 2005 F-3
STATEMENT OF STOCKHOLDERS' DEFICIT FROM DATE OF INCEPTION
(JUNE 22, 2005) THROUGH DECEMBER 31, 2005 F-4
STATEMENT OF CASH FLOWS FROM DATE OF INCEPTION (JUNE 22, 2005)
THROUGH DECEMBER 31, 2005 F-5
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS F-6-F-10
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
Wheeler, Herman, Hopkins & Lagor
Certified Public Accountants
Tampa, Florida
March 24, 2006
F-1
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
F-2
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
F-3
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
F-4
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
F-5
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.
F-6
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
F-7
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.
F-8
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
7,456,215 shares of Series A Preferred Stock. Pursuant to the Securities
F-9
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.
AT DECEMBER 31, 2005
--------------------
Current assets $ 6,398,562
Property, plant, and equipment 1,611,531
Goodwill 3,236,994
---------
Total assets acquired $11,247,087
-----------
F-10
Current liabilities (3,879,939)
Long-term debt (1,367,148)
------------
Total liabilities assumed ($5,247,087)
-------------
Net assets acquired $ 6,000,000
=============
The $3,236,994 of goodwill is expected to be deductible for tax purposes.
F-11
DEER VALLEY HOMEBUILDERS, INC.
FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2005 AND 2004
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 F-2
Balance Sheets at December 31, 2005 and 2004 F-3
Statements of Operations for the Years Ended December 31, 2005 and 2004 F-4
Statement of Stockholders' Equity for the Years Ended December 31, 2004 F-5
Statements of Cash Flows for the Years Ended December 31, 2005 and 2004 F-6
Notes to Financial Statements F-7-F-16
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
Wheeler, Herman, Hopkins & Lagor
Tampa, Florida
February 8, 2006
F-2
DEER VALLEY HOMEBUILDERS, INC.
BALANCE SHEETS
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 and 1,000 shares issued, and outstanding, respectively 940 1,000
Paid-In Capital 1,033,060 1,099,000
Retained Earnings 1,729,006 412,348
------------- --------------
2,763,006 1,512,348
Treasury Stock, at Cost; 60 shares -- ( 66,000)
------------- --------------
Total Stockholders' Equity 2,763,006 1,446,348
------------- --------------
TOTAL LIABILITES AND STOCKHOLDERS' EQUITY $ 8,010,093 $ 4,986,621
============= ==============
See Reports of Independent Registered Public Accounting Firm and Notes to
Financial Statements
F-3
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
F-4
DEER VALLEY HOMEBUILDERS, INC.
STATEMENT OF STOCKHOLDERS' EQUITY
COMMON STOCK ADDITIONAL
------------------- PAID-IN TREASURY RETAINED
SHARES AMOUNT CAPITAL STOCK EARNINGS TOTAL
------- -------- ----------- --------- ------------ ------------
As of January 7, 2004 1,000 $ 1,000 $1,099,000 $ -- $ -- $ 1,100,000
Purchase of Treasury
Stock (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 (66,000) 412,348 1,446,348
Purchase of Treasury
Stock (60) (60) (65,940) 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
------- -------- ----------- --------- ------------ ------------
As of December 31,
2005 940 $ 940 $1,033,060 $ -- $ 1,729,006 $ 2,763,006
======= ======== =========== ========= ============ ============
See Reports of Independent Registered Public Accounting Firm and Notes to
Financial Statements
F-5
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
F-6
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
F-7
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.
F-8
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.
F-9
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.)
F-10
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:
F-11
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.
F-12
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.
F-13
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
F-14
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
7,456,215 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.
F-15
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 3,236,994
------------
Total assets acquired $ 11,247,087
-------------
Current liabilities (3,879,939)
Long-term debt (1,367,148)
------------
Total liabilities assumed ($5,247,087)
-------------
Net assets acquired $ 6,000,000
=============
THE $3,236,994 OF GOODWILL IS EXPECTED TO BE DEDUCTIBLE FOR TAX PURPOSES.
F-16
Cytation Corporation
Consolidated Pro Forma Balance Sheet
As of December 31, 2005
Cytation DeerValley DeerValley Pro Forma Pro Forma
Corp. Homebuilders, Inc. Acquisitions Corp. Adjustments Consolidated
(Unaudited) (Unaudited) (Unaudited) (Unaudited) (Unaudited)
CURRENT ASSETS:
Cash $ 220 $ 2,931,263 $ 36 $ 697,728 (10) $ 3,629,247
Certificate of Deposit - 151,418 - - 151,418
Accounts Receivable - 2,140,404 - - 2,140,404
Other Receivable 7,500 7,500
Inventories 1,115,558 1,115,558
Prepaid expenses and other
current assets - 52,419 - - 52,419
---------------------------------------------------------------- -----------
Total Current Assets 220 6,398,562 36 697,728 7,096,546
PROPERTY AND EQUIPMENT, Net - 1,611,531 - - 1,611,531
OTHER ASSETS:
Goodwill - - - 3,236,994 (6) 3,236,994
---------------------------------------------------------------- -----------
Total Other Assets - - - 3,236,994 3,236,994
TOTAL ASSETS $ 220 $ 8,010,093 $ 36 $3,934,722 $11,945,071
============== ================== =============== =========== ===========
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 Related
Accruals 413,939 - 413,939
Accrued Stockholder
Distributions 925,000 - 925,000
Income Tax Payable 1,137,249 (8) 1,137,249
Loan from Stockholder 195 195
Other Accrued Expenses 90,500 228,832 - - 319,332
---------------------------------------------------------------- -----------
Total Current
Liabilities 138,916 3,879,939 6,641 1,749,008 5,774,504
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 268 (5) 268
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)(9) 982
Additional paid-in capital (APIC) 32,723,371 1,033,060 44,010 3,315,685 (9) 37,116,126
Retained Earnings and Accumulated deficit (32,863,049) 1,729,006 (50,615) (1,137,249)(8) (32,321,907)
---------------------------------------------------------------- -----------
TOTAL STOCKHOLDERS' EQUITY (DEFICIT) (138,696) 2,763,006 (6,605) 2,185,714 4,803,419
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY (DEFICIT) $ 220 $ 8,010,093 $ 36 $3,934,722 $11,945,071
============== ================== =============== =========== ===========
(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 (745,626 shares at $10.00 per share) Par Value $7,456,
APIC $7,448,759 prior to transaction costs.
F--
(3) Reduction in Series A Preferred stock's APIC due to transaction costs
- Comittment fee $60,000
- Merger related expenses 280,000
- Legal fees in connection with transaction 203,000
- Investment banking fees 827,245
----------
Total Transaction related costs $1,370,245
==========
(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
- Net book value of acquisition 2,763,006
----------
- Purchase price in excess of book value (Goodwill)3,236,994
==========
(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 36.19%
----------
Pro forma income tax payable 1,137,249
==========
(9) Reconciliation of APIC
APIC in connection with Series A Preferred Stock $7,448,759 (See (2) above)
Total transaction related costs 1,370,245 (See (3) above)
----------
APIC recorded net of transaction costs 6,078,514
Purchase price 6,000,000
----------
APIC after purchase and costs 78,514
Goodwill related to acquisition 3,236,994
Series B Preferred Stock (495)
Series C Preferred Stock (268)
Purchase of Deer Valley Homebuilder's Stock 940
----------
Adjustment related to APIC 3,315,685
==========
(10)Cash
Total Raise Series A Preferred Stock $7,456,215
Transaction purchase price 6,000,000
----------
Available funds prior to transactions fees 1,456,215
Transaction fees paid 758,487
----------
Cash remaining 697,728
==========
F-2
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 - - - 1,137,249 (1) 1,137,249
-----------------------------------------------------------------------------------
NET INCOME(LOSS) $(173,605) $ 3,366,659 $ (50,615) $(1,137,249) $ 2,005,190
===================================================================================
Net (Loss) Income Per Share (Basic) $ (0.18) $ 3,574 $ (0.01) $ 0.23
Net (Loss) Income Per Share
(Fully Diluted) $ (0.18) $ 3,574 $ (0.01) $ 0.11
============ =========== ========== ============ =============
Weighted Average Common
Shares Outstanding 944,306 942 7,620,100 8,564,672 (2)
Weighted Average Common
and Common Equivalent Shares
Outstanding 944,306 942 7,620,100 18,506,292 (3)
============ =========== ========== ============ =============
(1) Pro forma income tax expense
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 36.19%
-----------
Pro forma income tax expense 1,137,249
===========
(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
Deer Valley Acquisitions Corp.
(Share Conversion to Cytation) 31-Dec-04 7,620,100 1.00 7,620,100
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
F-3
(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
Deer Valley Acquisitions Corp.
(Share Conversion to Cytation) 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
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 18,506,292
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.
F-4
Cytation Corporation
Pro Forma Consolidated Statements of Operations
For The Twelve Months Ended December 31, 2004
(Unaudited)
Cytation DeerValley DeerValley Pro Forma Pro Forma
Corp. Homebuilders, Inc. Acquistions Corp. Adjustments Consolidated
(Unaudited) (Unaudited) (Unaudited) (Unaudited) (Unaudited)
NET REVENUE $ 240,368 $ 15,394,215 $ - $ - $ 15,634,583
COST OF REVENUE 746,896 12,769,267 - - 13,516,163
GROSS PROFIT (506,528) 2,624,948 - - 2,118,420
OPERATING EXPENSES:
Depreciation 3,857 84,211 - - 88,068
Selling, general and
administrative 367,007 1,475,122 - - 1,842,129
TOTAL OPERATING EXPENSES 370,864 1,559,333 - - 1,930,197
OPERATING INCOME/(LOSS) (877,392) 1,065,615 - - 188,223
OTHER INCOME (EXPENSES)
Gain on sales of Marketable
Securities 187,976 - - - 187,976
Interest income (expenses),
net (5,298) (55,109) - - (60,407)
TOTAL OTHER INCOME 182,678 (55,109) - - 127,569
INCOME/(LOSS) BEFORE
INCOME TAXES (694,714) 1,010,506 - - 315,792
INCOME TAX EXPENSE 1,975 - - 98,539 (1) 100,514
NET LOSS $ (696,689) $ 1,010,506 $ - $ (98,539) $ 215,278
=========== ============== ============= ============ =============
Net (Loss) Income Per
Share (Basic) $ (1.74) $ 1,011 $ - $ 0.54
Net (Loss) Income Per
Share (Fully Diluted) $ (1.74) $ 1,011 $ - $ 0.54
=========== ============== ============= ============ =============
Weighted Average Common
Shares Outstanding 399,915 1,000 - 399,915 (2)
Weighted Average Common and
Common Equivalent Shares
Outstanding 399,915 1,000 - 399,915 (2)
=========== ============== ============= ============ =============
(1) Pro forma income tax expense
Net Income(Loss) Cytation Corp. $(696,689)
Net Income(Loss) Deer Valley Homebuilders, Inc. 1,010,506
Net Income(Loss) Deer Valley Acquisitions Corp. -
-----------
Net Income(Loss) Consolidated Group before taxes 313,817
Pro forma effective Income Tax Rate 31.40%
-----------
Pro forma income tax expense 98,539
===========
(2) Weighted Average Shares
On a pro forma basis Cytation Corp would be the only shares outstanding on
December 31, 2004.
F-5
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.
70
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.
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, "Descripton 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.
71
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 $490,274
and issued (a) Series BD-1 Common Stock Purchase Warrants to Midtown Partners
entitling Midtown Partners to purchase 899,162 shares of the Company's common
stock at an exercise price of seventy five cents ($.75) per share, (b) Series
BD-2 Common Stock Purchase Warrants to Midtown Partners entitling Midtown
Partners to purchase 899,162 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 449,581 shares of the Company's common stock at an exercise price of
two dollars and twenty five cents ($2.25) per share. See, "Descripton of
Securities" above for a fuller description of Series BD-1, BD-2, and BD-3
Warrants.
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)
$636,871 as payment of commissions to Midtown Partners & Co., LLC, and (c)
$294,344 for working capital and payment of accountant, legal, consulting and
miscellaneous offering expenses.
SHARE EXCHANGE
On January 18, 2006, the Company completed a share exchange pursuant to
which the Company acquired 100% of the issued and outstanding capital stock of
Deer Valley Acquisitions, Corp. (the "Share Exchange"). Pursuant to the Share
Exchange Agreement, in exchange for 100% of the issued and outstanding common
stock of Deer Valley Acquisitions, Corp., the Company issued the following
securities to the shareholders of Deer Valley Acquisitions, Corp.: (a) issued
49,451 shares of the Company's Series B Preferred Stock, (b) 26,750 shares of
the Company's Series C Preferred Stock, and (c) Series C Common Stock Purchase
Warrants to Midtown Partners entitling Midtown Partners to purchase 2,000,000
shares of the Company's common stock at an exercise price of seventy five cents
($.75) per share. See, "Descripton of Securities" above for a fuller description
of Series B Preferred Stock, Series C Preferred Stock and Series C Common Stock
Purchase Warrants.
72
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,
"Descripton 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.
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
880,540 shares of Common Stock at an exercise price of three dollars ($3.00) per
share (the "Series D Preferred Stock Offering"). See, "Descripton 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, "Descripton of Securities" above for a
fuller description of Series BD-4 and BD-5 Warrants.
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)
73
5.01 Opinion of legality. To be filed by Amendment to this
Registration Statement on Form SB-2.
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 Bearin Non-Convertibl 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)
(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.
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;
74
(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.
75
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 April 18, 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: Member of the Board of Directors
Date: April 18, 2006
By: /s/ Christopher Portner
------------------------------------
Name: Christopher Portner
Title: Member of the Board of Directors
Date: April 18, 2006
76