EXHIBIT 99.3
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 2
Balance Sheets at December 31, 2005 and 2004 3
Statements of Operations for the Years Ended December 31, 2005 and 2004 4
Statement of Stockholders' Equity for the Years Ended December 31, 2004 5
Statements of Cash Flows for the Years Ended December 31, 2005 and 2004 6
Notes to Financial Statements 7-16
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
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
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
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
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
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
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.
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.
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.)
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:
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.
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.
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
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.
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.
16