EXHIBIT 99.2
DEER VALLEY HOMEBUILDERS, INC.
FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 2004
AND
NINE MONTHS ENDED OCTOBER 1, 2005 AND SEPTEMBER 25, 2004
DEER VALLEY HOMEBUILDERS, INC.
FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 2004, AND
NINE MONTHS ENDED OCTOBER 1, 2005, AND SEPTEMBER 25, 2004
TABLE OF CONTENTS
Page
Audit Report of Independent Registered Public Accounting Firm 1
Review Report of Independent Registered Public Accounting Firm 2
Balance Sheets at December 31, 2004, and October 1, 2005 (Unaudited) 3
Statements of Operations for the Year Ended December 31, 2004, and
Nine Months Ended October 1, 2005, and September 25, 2004 (Unaudited)
with Supplemental Unaudited Pro forma Statements of Operations
Information 4
Statement of Stockholders' Equity for the Year Ended December 31, 2004 5
Statements of Stockholders' Equity for the Nine Months Ended
October 1, 2005, and September 25, 2004 (Unaudited) 6
Statements of Cash Flows for the Year Ended December 31, 2004,
and Nine Months Ended October 1, 2005, and September 25, 2004
(Unaudited) 7
Notes to Financial Statements 8-15
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, 2004, and the related statements of operations,
stockholders' equity and cash flows 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 the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. The Company is not
required to have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audit included consideration of internal
control over financial reporting as a basis for designing audit procedures that
are appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Deer Valley Homebuilders, Inc.
as of December 31, 2004, and the results of its operations and its cash flows
for year then ended in conformity with accounting principles generally accepted
in the United States of America.
Tampa, Florida
November 17, 2005
1
REVIEW REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Deer Valley Homebuilders, Inc.
We have reviewed the accompanying balance sheet of Deer Valley Homebuilders,
Inc. as of October 1, 2005, and the related statements of operations,
stockholders' equity, and cash flows for the nine months ended October 1, 2005,
and September 25, 2004. These financial statements are the responsibility of
the Company's management.
We conducted our reviews in accordance with the standards of the Public Company
Accounting Oversight Board (United States). A review of interim financial
information consists principally of applying analytical procedures and making
inquiries of persons responsible for financial and accounting matters. It is
substantially less in scope than an audit conducted in accordance with standards
of the Public Company Accounting Oversight Board (United States), the objective
of which is the expression of an opinion regarding the financial statements
taken as a whole. Accordingly, we do not express such an opinion.
Based on our reviews, we are not aware of any material modifications that should
be made to the accompanying interim financial statements for them to be in
conformity with accounting principles generally accepted in the United States of
America.
Tampa, Florida
November 17, 2005
2
DEER VALLEY HOMEBUILDERS, INC.
BALANCE SHEETS
OCTOBER 1, DECEMBER 31,
2005 2004
----------- -------------
(UNAUDITED)
---------
ASSETS
CURRENT ASSETS:
Cash and Cash Equivalents $ 2,142,891 $ 1,563,818
Certificate of Deposit 150,000
Accounts Receivable 2,359,341 1,064,518
Other Receivable 4,005 1,000
Inventories 1,235,497 687,110
Prepayments and Other Current Assets 52,904 48,916
----------- -------------
Total Current Assets 5,944,630 3,365,362
----------- -------------
Property, Plant and Equipment
Property, Plant and Equipment at Cost 1,778,167 1,705,470
Less: Accumulated Depreciation (171,537) (84,211)
----------- -------------
Net Property, Plant and Equipment 1,606,629 1,621,259
----------- -------------
TOTAL ASSETS $ 7,551,268 $ 4,986,621
=========== =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current Maturities of Long-Term Debt $ 14,690 $ 58,190
Accounts Payable 1,654,605 496,821
Accounts Payable under Dealer Incentive Programs 297,846 108,056
Estimated Warranties 690,000 550,000
Compensation and Related Accruals 481,553 271,121
Accrued Stockholder Distributions 375,000 545,540
Other Accrued Expenses 170,963 67,967
----------- -------------
Total Current Liabilities 3,684,657 2,097,695
----------- -------------
Long-Term Debt, Net of Current Maturities 1,421,419 1,442,578
----------- -------------
Total Long-Term Debt 1,421,419 1,442,578
----------- -------------
Commitments and Contingencies (Note 9)
Stockholders' Equity
Common Stock, $1.00 Par Value, 1,000 shares authorized,
issued, and outstanding 1,000 1,000
Paid-In Capital 1,099,000 1,099,000
Treasury Stock, at Cost; 60 Shares (66,000) (66,000)
Retained Earnings 1,411,192 412,348
----------- -------------
Total Stockholders' Equity 2,445,192 1,446,348
----------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 7,551,268 $ 4,986,621
=========== =============
See Reports of Independent Registered Public Accounting Firm and Notes to
Financial Statements
3
DEER VALLEY HOMEBUILDERS, INC.
STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED FOR THE YEAR
------------------------------- ENDED
OCTOBER 1, SEPTEMBER 25, DECEMBER 31,
2005 2004 2004
-------------- --------------- ---------------
(UNAUDITED) (UNAUDITED)
-------------- ---------------
Net Revenue $ 24,023,661 $ 8,820,069 $ 15,394,215
Cost of Sales 19,740,677 7,339,160 12,769,267
-------------- ---------------- ---------------
Gross Profit 4,282,984 1,480,909 2,624,948
-------------- ---------------- ---------------
Selling, General and Administrative 2,108,285 1,023,204 1,559,333
-------------- ---------------- ---------------
Operating Income 2,174,700 457,705 1,065,615
-------------- ---------------- ---------------
Other Income (Expense)
Interest Expense (56,864) (36,939) (55,109)
Other 6,008 0 0
-------------- ---------------- ---------------
(50,856) (36,939) (55,109)
Net Income $ 2,123,844 $ 420,767 $ 1,010,506
============== ================ ===============
Basic and Diluted Net Income Per Share $ 2,124 $ 421 $ 1,011
============== ================ ===============
Weighted Average Shares Outstanding 1,000 1,000 1,000
============== ================ ===============
SUPPLEMENTAL UNAUDITED PRO FORMA STATEMENTS OF OPERATIONS INFORMATION
FOR THE NINE MONTHS ENDED FOR THE YEAR
--------------------------------- ENDED
OCTOBER 1, SEPTEMBER 25, DECEMBER 31,
2005 2004 2004
--------------- ---------------- ---------------
(UNAUDITED) (UNAUDITED)
--------- ---------
PRO FORMA INCOME TAXES:
Net income, as reported $ 2,123,844 $ 420,767 $ 1,010,506
--------------- ---------------- ---------------
Pro forma provision for income taxes:
Current income taxes 1,003,610 331,192 584,328
Deferred income taxes (296,358) (175,258) (266,828)
--------------- ---------------- ---------------
Total income taxes 707,252 155,934 317,500
--------------- ---------------- ---------------
Pro forma net income $ 1,416,592 $ 264,833 $ 693,006
=============== ================ ===============
Pro forma basic and diluted net income per share $ 1,417 $ 265 $ 693
=============== ================ ===============
Weighted average shares outstanding 1,000 1,000 1,000
=============== ================ ===============
See Reports of Independent Registered Public Accounting Firm and Notes to
Financial Statements
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 (598,158) (598,158)
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
========= ========== ========== ========== ========== ==========
See Reports of Independent Registered Public Accounting Firm and Notes to
Financial Statements
5
DEER VALLEY HOMEBUILDERS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
COMMON STOCK ADDITIONAL
------------------- PAID-IN TREASURY RETAINED
SHARES AMOUNT CAPITAL STOCK EARNINGS TOTAL
------------ ------------- ---------- ----------- ---------- ----------
As of January 1, 2005 1,000 $ 1,000 $1,099,000 $ (66,000) $ 412,348 $1,446,348
Cash Distributions (750,000) (750,000)
Accrual of Distributions (375,000) (375,000)
Net Income 2,123,844 2,123,844
------------ ------------- ---------- ----------- ---------- ----------
As of October 1,
2005 1,000 $ 1,000 $1,099,000 $ (66,000) $1,411,192 $2,445,192
============ ============= =========== =========== ========== ==========
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)
Net Income 420,767 420,767
-------- ------------ ---------- ---------- ---------- ----------
As of September 25,
2004 1,000 $ 1,000 $1,099,000 $ (66,000) $ 420,767 $1,454,767
======== ============ ========== ========== ========== ==========
See Reports of Independent Registered Public Accounting Firm and Notes to
Financial Statements
6
DEER VALLEY HOMEBUILDERS, INC.
STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
FOR THE NINE MONTHS ENDED FOR THE YEAR
------------------------------ ENDED
OCTOBER 1, SEPTEMBER 25, DECEMBER 31,
2005 2004 2004
----------- -------------- --------------
(UNAUDITED) (UNAUDITED)
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 2,123,844 $ 420,767 $ 1,010,506
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation on property, plant and equipment 87,327 56,570 84,211
Changes in assets and liabilities:
(Decrease) in receivables (1,294,823) (994,296) (1,064,518)
(Decrease) in other receivables (3,005) (3,000) (1,000)
(Decrease) in inventories (548,387) (764,895) (687,110)
(Decrease) in prepayments and other assets (3,989) (51,010) (48,916)
Increase in accounts payable (1,157,784) 602,246 496,821
Increase in accounts payable under dealer incentives 189,790 72,350 108,056
Increase in estimated warranties 140,000 344,000 550,000
Increase in compensation and related accruals 210,432 253,987 271,121
Increase (Decrease) in accrued stockholder distributions (545,540) 545,540
Increase in accrued expenses 102,996 68,450 67,967
----------- -------------- --------------
Net cash provided by operating activities 1,616,429 5,169 1,332,679
----------- -------------- --------------
Cash Flows from Investing Activities:
Purchase of capital assets (72,697) (1,680,609) (1,705,470)
Purchase of certificate deposit (150,000) 0 0
------------ -------------- --------------
Net cash (used in) investing activities (222,697) (1,680,609) (1,705,470)
------------ -------------- --------------
Cash Flows from Financing Activities:
Proceeds from notes payable $ 1,543,314 $ 1,543,314
Repayments of notes payable $ (64,659) (32,397) (42,546)
Purchase of treasury stock (66,000)
Issuance of common stock 1,100,000 1,100,000
Payment of cash distributions (750,000) 0 (598,158)
Net cash (used in) financing activities (814,659) 2,610,917 1,936,610
------------ -------------- --------------
Net Increase in Cash and Cash Equivalents 579,073 935,477 1,563,818
Cash and Cash Equivalents at Beginning of Year 1,563,818 0 0
------------ -------------- --------------
Cash and Cash Equivalents at End of Year $ 2,142,811 $ 935,477 $ 1,563,818
============ ============== ==============
Supplemental Cash Flows Information:
Cash Paid for Interest $ 57,310 $ 32,494 $ 50,099
============ ============== ==============
Cash Paid for Income Taxes $ 0 $ 0 $ 0
============ ============== ==============
See Reports of Independent Registered Public Accounting Firm and Notes to
Financial Statements
7
DEER VALLEY HOMEBUILDERS, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE PERIOD ENDED DECEMBER 31, 2004
1. NATURE OF BUSINESS, BASIS OF PRESENTATION, UNAUDITED PRO FORMA
FINANCIAL INFORMATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
THE COMPANY - Deer Valley Homebuilders, Inc. (the Company) was
organized and incorporated in January 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.
BASIS OF PRESENTATION - The unaudited balance sheet as of October 1,
2005, and the accompanying unaudited statements of operations,
stockholders' equity and cash flows for the nine months ended October 1,
2005, and September 25, 2004, are unaudited. These unaudited interim
financial statements have been prepared in accordance with accounting
principles generally accepted in the United States of America for interim
financial statements. In the opinion of management, the unaudited interim
financial statements include all adjustments necessary for the fair
presentation of the Company's financial position as of October 1, 2005, and
the results of its operations and its cash flows for the nine months ended
October 1, 2005, and September 25, 2004. The results of operations for the
nine months ended October 1, 2005, are not necessarily indicative of the
results to be expected for the year ending December 31, 2005.
UNAUDITED PRO FORMA FINANCIAL INFORMATION - The accompanying unaudited
pro forma statement of operations information gives effect to net income
and net income per share as if the Company were subject to State and
Federal income taxes for all periods presented. For purposes of unaudited
pro forma financial information the Company has applied the asset and
liability method prescribed in Statements of Financial Accounting Standards
No. 109, Accounting for Income Taxes.
---------------------------
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
ACCOUNTING ESTIMATES - The Company's consolidated 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
consolidated 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.
8
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 $84,211 for the year ended December 31, 2004, and
$87,327 and $56,570 for the nine months ended October 1, 2005, and
September 25, 2004, respectively.
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 flowing
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, 2004, the Company
has provided a liability of $550,000 for estimated warranty costs relating
to homes sold, based upon management's assessment of historical experience
factors and current industry trends.
Management reviews its warranty requirements at the close of each
reporting period and adjusts the reserves accordingly. The following
tabular presentation reflects activity in warranty reserves during the
periods presented:
NINE MONTHS ENDED FOR THE
----------------------------- YEAR ENDED
OCTOBER 1, SEPTEMBER 25, DECEMBER 31,
2005 2004 2004
----------- ------------ -------------
(UNAUDITED) (UNAUDITED)
--------- ---------
Balance at Beginning of Period $ 550,000 $ 0 $ 0
Warranty Charges 1,186,546 418,563 798,164
Warranty Payments (1,046,546) (74,563) (248,164)
----------- ------------ -------------
Balance at End of Period $ 690,000 $ 344,000 $ 550,000
=========== ============ =============
9
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.
NEW ACCOUNTING PRONOUNCEMENTS - In December 2004, the Financial
Accounting Standards Board ("FASB") issued Statement of Financial
Accounting Standard ("SFAS") No. 123R, "Share-Based Payment." Under
previous practice, the reporting entity could account for share-based
payment under the provisions of APB Opinion No. 25 and disclose share-based
compensation as accounted for under the provisions of SFAS No. 123. Under
the provisions of SFAS No. 123R, a public entity is required to measure the
cost of employee services received in exchange for an award of equity
instruments based on the grant-date fair value of the award. That cost is
recognized over the period during which an employee is required to provide
service in exchange for the award. The Company will early adopt SFAS No.
123R, which is effective June 15, 2005, in January 2005. Once the standard
is adopted, we currently expect full-year 2005 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 2005 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.
2. CASH AND CASH EQUIVALENTS
Cash and cash equivalents at December 31, 2004, are held in one
financial institution in Guin, Alabama, and exceed the FDIC limits of
insurability.
3. INVENTORIES
Inventories consisted of the following components:
OCTOBER 1, 2005 DECEMBER 31, 2004
----------------- -------------------
(UNAUDITED)
-----------
Raw Materials $ 787,232 $ 408,821
Work-in-Process 213,734 156,718
Finished Goods 234,531 121,571
----------------- -------------------
Total Inventory $ 1,235,497 $ 687,110
================= ===================
10
4. PROPERTY, PLANT AND EQUIPMENT
Property, Plant and Equipment consisted of the following:
OCTOBER 1, 2005 DECEMBER 31, 2004
----------------- -------------------
(UNAUDITED)
-----------
Land and Improvements $ 296,915 $ 277,500
Buildings 822,500 822,500
Machinery and Equipment 533,596 495,145
Furniture and Fixtures 125,156 110,325
---------------- -------------------
Total Property, Plant
and Equipment $ 1,778,167 $ 1,705,470
================= ===================
5. CREDIT ARRANGEMENTS
REVOLVING LINE OF CREDIT - The Company has 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 can 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 matures March 25, 2005, and is secured by
inventory and accounts receivable of the Company. As of December 31, 2004,
no amounts were drawn and outstanding under the line of credit arrangement.
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, 2004, the following letters of credit were issued and in
force:
Letter of Credit No. 91 issued through State Bank & Trust in the
amount of $2,500 to the favor of beneficiary Northwest Alabama Gas
District, issued March 2, 2004, and expiring March 2, 2005, pending
renewal.
Letter of Credit No. 92 issued through State Bank & Trust in the
amount of $225,000 to the favor of beneficiary Bombardier Capital,
Inc., issued April 20, 2004, and expiring April 20, 2005, pending
renewal. Personally guaranteed by the three largest stockholders 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, 2004. Personally guaranteed by the three
largest stockholders of the Company. (See Note 9.)
Letter of Credit No. 96 issued through State Bank & Trust in the
amount of $112,500 to the favor of beneficiary Bombardier Capital,
Inc., issued September 3, 2004, and expiring September 3, 2005,
pending renewal. (See Note 9.)
Letter of Credit No. 97 issued through State Bank & Trust in the
amount of $150,000 to the favor of Textron Financial Corporation,
issued September 21, 2004, and expiring September 21, 2005, pending
renewal. (See Note 9.)
As of December 31, 2004, no amounts had been drawn on the above
irrevocable letters of credit by the beneficiaries. Subsequent to
December 31, 2004, letters of credit No. 92 and No. 96 in favor of
Bombardier Capital, Inc., were replaced and made void effective
January 27, 2005. Replacement letter of credit No. 98 issued through
State Bank & Trust in the amount of $400,000 to the favor of
Bombardier Capital, Inc., issued January 27, 2005, and expiring
January 27, 2006 voided No. 92 and No. 96. (See Note 9.)
11
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 YEAR
FOR THE NINE MONTHS ENDED ENDED
----------------------------- DECEMBER 31,
OCTOBER 1, SEPTEMBER 25, 2004
2005 2004
---------- -------------- --------------
(UNAUDITED) (UNAUDITED)
--------- ---------
Current:
United States Federal $ 961,179 $ 301,513 $ 523,698
States 42,431 29,679 60,630
Deferred Income Taxes (296,358) (175,258) (266,828)
---------- ------------- --------------
Pro Forma Income Tax Provision $ 707,252 $ 155,934 $ 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 for the nine months ended
October 1, 2005, and September 25, 2004, 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 YEAR
FOR THE NINE MONTHS ENDED ENDED
----------------------------- --------------
OCTOBER 1, SEPTEMBER 25, DECEMBER 31,
2005 2004 2004
------------ -------------- -------------
(UNAUDITED) (UNAUDITED)
--------- ---------
Warranty and Other Reserves $ 266,000 $ 144,900 $ 266,351
Depreciation Methods 30,358 30,358 40,477
------------ -------------- --------------
Deferred Tax Assets, Net $ 296,358 $ 175,258 $ 266,828
============ ============== ==============
Current Deferred Assets $ 296,358 $ 175,258 $ 266,828
Net Non-current Deferred Tax Assets - - -
------------ -------------- --------------
Deferred Tax Assets, Net $ 296,358 $ 175,258 $ 266,828
============ ============== ==============
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 35%. 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:
12
FOR THE YEAR
FOR THE NINE MONTHS ENDED ENDED
----------------------------- --------------
OCTOBER 1, SEPTEMBER 25, DECEMBER 31,
2005 2004 2004
--------- -------------- --------------
(UNAUDITED) (UNAUDITED)
--------- ---------
United States Federal Statutory Rate 35.0% 35.0% 35.0%
State Income Tax Rate, Net of Federal Benefit 1.9% 1.9% 1.9%
Non-deductible Items -3.6% -5.4% -5.5%
--------- -------------- --------------
Pro Forma Effective Income Tax Rate 33.3% 31.5% 31.4%
========= ============== ==============
7. LONG-TERM DEBT
Long-term debt of the Company as of December 31, 2004, was as follows:
OCTOBER 1, DECEMBER 31,
2005 2004
----------- -------------
(UNAUDITED)
---------
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 $ 1,428,495 $ 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 0 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 3,931 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 3,683 5,358
----------- -------------
Total 1,436,109 1,500,768
Less: Current portion of long-term debt (14,690) (58,190)
----------- -------------
Total Long-Term Debt, net of current portion $ 1,421,419 $ 1,442,578
========== =============
Total interest costs for the nine months ended October 1, 2005, and
September 25, 2005 (unaudited), and for the year ended December 31, 2004,
amounted to $56,683, $36,939, and $55,109, respectively, as reflected on
the face of the accompanying statement of income.
13
At December 31, 2004, principal repayment requirements on long-term debt were as
follows:
YEAR ENDING DECEMBER 31 AMOUNT
-------------------------- ----------
2005 $ 58,190
2006 61,728
2007 60,368
2008 1,318,654
2009 1,828
----------
Total 1,500,768
Less: Current portion of long-term debt (58,190)
----------
Total Long-Term Debt, net of current portion $1,442,578
==========
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.
During the year ended December 31, 2004, the Company's board of
directors authorized stockholder distributions payable to stockholders' of
record in the cumulative amount of $598,158. At December 31, 2004,
approximately $545,540 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 $4,516,365 at
December 31, 2004 and $7,828,334 at October 1, 2005. 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 and, accordingly, has recorded no
liability.
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.
14
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 in 2004 amounted to $75,000. This agreement expires in 2008.
Management asserts that these transactions are arms length transactions
between the Company and the related party.
The Company has various Irrevocable Standby Letters of Credit in force
as of December 31, 2004. One letter of credit in the amount of $225,000 is
personally guaranteed by three of the Company's largest stockholders, as
more fully described in Note 5 Credit Arrangements.
The Company has a note payable to State Bank & Trust in the amount of
$1,462,992 at December 31, 2004, which is secured in part by the personal
guaranty of two of the Company's largest stockholders, as more fully
described in Note 6 Long-Term Debt.
Stockholder distributions approximating $598,158 were declared payable
to the stockholders of the Company during 2004 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 2004 and was paid employee compensation
based on negotiated arm's length employment agreements.
11. SUBSEQUENT EVENTS
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 exceeds $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.
Deer Valley Homebuilders, Inc. ("Deer Valley") has entered into a
letter of intent with Cytation Corporation ("Cytation") to effect a reverse
merger transaction. The reverse merger requires the approval of both the
boards of directors of Cytation and Deer Valley and is subject to the
negotiation and execution of definitive documents. If consummated, Cytation
would expect to issue to Deer Valley's stockholders securities constituting
approximately 94% of the total issued and outstanding equity of Cytation
immediately after the closing, exclusive of warrants. Deer Valley has
agreed to assume approximately $120,000 of Cytation's liabilities at the
closing of the transaction.
15