Filed pursuant to Rule 424(b)(3)
Registration No. 333-133377
PROSPECTUS SUPPLEMENT NO. 1
TO PROSPECTUS DATED JULY 26, 2006
DEER VALLEY CORPORATION
UP TO 43,556,851 SHARES
COMMON STOCK
This prospectus supplement supplements information contained in the
prospectus dated July 26, 2006 relating to the offer and sale by the selling
shareholders identified in the prospectus of up to 43,556,851 shares of our
common stock. This prospectus supplement includes our attached Quarterly Report
on Form 10-QSB, which was filed with the U.S. Securities and Exchange
Commission on August 14, 2006.
The information contained in such report is dated as of the date of such
report. This prospectus supplement should be read in conjunction with the
prospectus dated July 26, 2006, which is to be delivered with this prospectus
supplement. This prospectus supplement is qualified by reference to the
prospectus except to the extent that the information in this prospectus
supplement updates and supersedes the information contained in the prospectus
dated July 26, 2006, including any supplements or amendments thereto.
INVESTING IN THE SHARES INVOLVES RISKS AND UNCERTAINTIES. SEE "RISK
FACTORS" BEGINNING ON PAGE 10 OF THE PROSPECTUS DATED JULY 26, 2006 AND THE RISK
FACTORS INCLUDED IN OUR ANNUAL REPORT ON FORM 10-KSB FOR THE YEAR ENDED DECEMBER
31, 2005.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The date of this prospectus supplement is August 17, 2006.
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JULY 1, 2006
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to ______
Commission file number 114800
DEER VALLEY CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
FLORIDA 20-5256635
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
4902 EISENHOWER BLVD., SUITE 185, TAMPA, FL 33634
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (813) 885-5998
CYTATION CORPORATION
Former name of Registrant, if changed since last report
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
The Registrant had 6,825,644 shares of Common Stock, par value $0.001 per share,
outstanding as of August 4, 2006.
TABLE OF CONTENTS
PART I FINANCIAL INFORMATION PAGE
Item 1 Financial Statements F-1
Consolidated Balance Sheets
As of July 1, 2006 (unaudited)
As of December 31, 2005 (audited) F-2
Consolidated Statements of Operations
Three Months ended July 1, 2006 (unaudited)
Three Months ended June 30, 2005 (unaudited)
Six Months ended July 1, 2006 (unaudited) and
Six Months ended June 30, 2005 (unaudited) F-3
Consolidated Statements of Cash Flows
Six Months ended July 1, 2006 (unaudited)
Six Months ended June 30, 2005 (unaudited) F-4
Notes to Consolidated Financial Statements F-5 - F-17
Item 2 Management's Discussion and Analysis or Plan of Operation 3
Item 3 Controls and Procedures 10
PART II OTHER INFORMATION
Item 1 Legal Proceedings 11
Item 2 Unregistered Sales of Equity Securities and Use of Proceeds 11
Item 3 Defaults Upon Senior Securities 11
Item 4 Submission of Matters to a Vote of Security Holders 11
Item 5 Other Information 12
Item 6 Exhibits 12
Unless otherwise indicated or the context otherwise requires, all
references below in this filing to "we," "us," the "Company," and "Deer Valley"
are to Deer Valley Corporation, a Florida corporation, together with its
wholly-owned subsidiary, Deer Valley Homebuilders, Inc., an Alabama corporation.
PART I-FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DEER VALLEY CORPORATION
[FORMERLY KNOWN AS CYTATION CORPORATION
THROUGH JULY 24, 2006]
UNAUDITED FINANCIAL STATEMENTS
CONTENT:
Balance Sheets as of July 1, 2006 (unaudited) and December 31, 2005
(audited) F-2
Statements of Operations for the Three and Six month periods ending
July 1, 2006 (unaudited) and June 30, 2005 (unaudited) F-3
Statements of Cash Flows for the Six month periods ending July 1,
2006 (unaudited) and June 30, 2005 (unaudited) F-4
Notes to Financial Statements F-5 - F-17
F-1
DEER VALLEY CORPORATION
[FORMERLY KNOWN AS CYTATION CORPORATION THROUGH JULY 24, 2006]
CONSOLIDATED BALANCE SHEETS
ASSETS
JULY 01, DECEMBER 31,
2006 2005
------------- -------------
(UNAUDITED) (AUDITED)
CURRENT ASSETS:
Cash $ 4,425,919 $ 221
Certificates of Deposit
(more than 90 days) 154,247 -
Accounts Receivable 3,210,143
Notes Receivable, Other 6,000 -
Inventory 2,516,825
Prepaid expenses and
other current assets 155,763 -
------------- -------------
Total Current Assets 10,468,897 221
Property and Equipment, Net 2,532,771 -
Loan Cost 97,298
Goodwill 5,031,699 -
------------- -------------
TOTAL ASSETS $ 18,130,665 $ 221
============= =============
LIABILITIES AND STOCKHOLDERS'EQUITY(DEFICIT)
CURRENT LIABILITIES:
Current Maturities of Long Term Debt $ 38,852 $ -
Accounts payable and Accrued Expenses 2,460,107 48,416
Accounts Payable Under Dealer
Incentive Programs 632,428
Estimated Warranties 1,150,000
Compensation and Related Accruals 896,468
Accrued Shareholder Distributions -
Other Accruals 22,141
Income Tax Payable 601,950 -
Accrued Preferred Dividends 241,784
Notes payable and Accrued Interest - 5,500
------------- -------------
Total Current Liabilities 6,043,730 53,916
LONG TERM LIABILITIES:
Long-Term Debt, Net of Current Maturities 3,284,602 85,000
------------- -------------
TOTAL LIABILITIES 9,328,332 138,916
------------- -------------
STOCKHOLDERS' EQUITY (DEFICIT):
Series A Preferred stock, $0.01 par value,
750,000 shares authorized, 745,622 shares
issued and outstanding 3,329,762 -
Series B Preferred stock, $0.01 par value,
49,451 shares authorized, 49,451 shares
issued and outstanding 495 -
Series C Preferred stock, $0.01 par value,
26,750 shares authorized, 26,750 shares
issued and outstanding 267 -
Series D Preferred stock, $0.01 par value,
132,081 shares authorized, 132,081 shares
issued and outstanding 240,969 -
Common stock, $0.001 par value, 2,000,000
shares authorized, 1,000,000 and 982,622
shares issued and outstanding, respectively 1,000 982
Additional paid-in capital 40,504,049 32,723,371
Retained Earnings and Accumulated deficit (35,274,209) (32,863,048)
------------- -------------
TOTAL STOCKHOLDERS EQUITY (DEFICIT) 8,802,333 (138,695)
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS
EQUITY (DEFICIT) $ 18,130,665 $ 221
============= =============
F-2
DEER VALLEY CORPORATION
[FORMERLY KNOWN AS CYTATION CORPORATION THROUGH JULY 24, 2006]
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND SIX MONTH PERIODS ENDING JULY 1, 2006 (UNAUDITED)
AND JUNE 30, 2005 (UNAUDITED).
JULY 1ST JUNE 30TH JULY 1ST JUNE 30TH
2006 2005 2006 2005
------------ ------------ ------------ -----------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
REVENUE $18,952,394 $ - $31,865,474 $ -
COST OF REVENUE 15,705,760 375 26,601,150 1,557
------------ ------------ ------------ -----------
GROSS PROFIT 3,246,634 (375) 5,264,324 (1,557)
OPERATING EXPENSES:
Depreciation - 525 - 1,037
Selling, general and administrative 1,701,951 106,594 2,983,004 135,404
------------ ------------ ------------ ----------
TOTAL OPERATING EXPENSES 1,701,951 107,119 2,983,004 136,441
------------ ------------ ------------ ----------
OPERATING INCOME/(LOSS) 1,544,683 (107,494) 2,281,320 (137,998)
OTHER INCOME (EXPENSES)
Loss on termination of ARE agreement - - - (5,000)
Loss on sale (4,270) (4,270)
Interest expense, net (21,798) (1,385) (35,664) (3,274)
Other Income 25,002 - 31,245 -
------------ ------------ ------------ ----------
TOTAL OTHER EXPENSES 3,204 (5,655) (4,420) (12,544)
------------ ------------ ------------ ----------
INCOME/(LOSS) BEFORE INCOME TAXES 1,547,887 (113,149) 2,276,900 (150,542)
INCOME TAX EXPENSE (559,422) - (820,595) -
------------ ------------ ------------ ----------
NET INCOME/(LOSS) $ 988,465 $ (113,149) $ 1,456,305 $ 150,542
Dividends to preferred stockholders (128,696) - (241,782) -
Deemed dividend to preferred stockholders
on beneficial conversion feature (2,079,488) - (3,570,731) -
------------ ------------ ------------ ----------
NET (LOSS) AVAILABLE TO COMMON SHAREHOLDERS $(1,219,719) $ (113,149) $(2,356,208) $ (150,542)
NET (LOSS) PER SHARE (BASIC) $ (1.22) $ (0.12) $ (2.36) $ (0.17)
NET (LOSS) PER SHARE (FULLY DILUTED) $ (1.22) $ (0.12) $ (2.36) $ (0.17)
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 1,000,000 922,662* 1,000,000 898,144
WEIGHTED AVERAGE COMMON AND COMMON EQUIVALENT SHARES OUTSTANDING 1,000,000 922,662* 1,000,000 898,144
* REFLECTS 2 FOR 1 STOCK SPLIT
F-3
DEER VALLEY CORPORATION
[FORMERLY KNOWN AS CYTATION CORPORATION THROUGH JULY 24, 2006]
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTH PERIODS ENDING JULY 1, 2006 (UNAUDITED) AND
JUNE 30, 2005 (UNAUDITED).
2006 2005
------------ ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 1,456,305 $(150,542)
Adjustments to reconcile net income (loss) to net cash provided for/used in operating activities:
Depreciation and Amortization 85,372 1,036
Accrued interest on note payable - 2,770
Stock based compensation 8,651 20,333
Loss on Termination of ARE Agreement - 5,000
(Gain) or Loss on Sale of property and equipment (14,624) 4,270
Non-cash consulting fee - 64,830
Changes in assets and liabilities: - -
Increase/Decrease in Receivables (1,069,739) -
Increase/Decrease in Other Receivables 1,500 -
Increase/Decrease in Inventories (1,401,267) -
Increase/Decrease in Prepayments and other assets (103,343) 8,706
Increase/Decrease in Accounts Payable 1,245,672 (47,141)
Increase/Decrease in Accounts Payable under dealer incentives 291,996 -
Increase/Decrease in Income Taxes Payable 820,595 -
Increase/Decrease in estimated warranties 400,000 -
Increase/Decrease in Compensation and related accruals 482,529 -
Increase/Decrease in Accrued shareholder distributions (925,000) -
Increase/Decrease in Accrued Expenses (441,761) -
------------ ----------
CASH FLOW PROVIDED FOR/USED IN OPERATING ACTIVITIES $ 836,886 $ (90,738)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of equipment (990,338) (810)
Purchase of Company (6,475,000) -
Proceeds from sales of marketable securities (2,829) -
------------ ----------
CASH FLOW USED IN INVESTING ACTIVITIES $(7,468,167) $ (810)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds (Repayment) of Notes Payable 495,886 -
Proceeds from Preferred issuances 7,728,780 -
Loan Costs (98,950) -
Proceeds from issuance of common stock - 23,500
Collections (issuance) of note receivable - 5,000
------------ ----------
CASH FLOW PROVIDED BY FINANCING ACTIVITIES $ 8,125,716 $ 28,500
NET INCREASE (DECREASE) IN CASH $ 1,494,435 $ (63,048)
CASH, Beginning 2,931,484 65,644
CASH, Ending 4,425,919 2,596
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the Quarter for:
Interest 47,262 -
Taxes 615,200 828
SUPPLEMENTAL DISCLOSURE OF NON CASH INVESTING AND FINANCING ACTIVITIES:
Additional purchase price accrued under earnout provision $ 1,319,705 $ -
Accrual of dividends on preferred stock $ 241,782 $ -
Deemed dividend on beneficial conversion feature $ 3,570,731 $ -
F-4
DEER VALLEY CORPORATION
[FORMERLY KNOWN AS CYTATION CORPORATION THROUGH JULY 24, 2006]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
- ------------------------
The accompanying unaudited consolidated financial statements for the three and
six month periods ended July 1, 2006 and June 30, 2005 have been prepared in
accordance with accounting principles generally accepted in the United States of
America for interim financial information and pursuant to the rules and
regulations of the Securities and Exchange Commission for Form 10-Q.
Accordingly, they do not include all the information and footnotes required by
accounting principles generally accepted in the United States of America for
complete financial statements.
The unaudited financial information included in this report includes all
adjustments which are, in the opinion of management, necessary to reflect a fair
statement of the results for the interim periods. The operations for the three
and six month periods ended July 1, 2006 and June 30, 2005 are not necessarily
indicative of the results of the full fiscal year.
The condensed consolidated financial statements included in this report should
be read in conjunction with the financial statements and notes thereto included
in the Registrant's December 31, 2005 Annual Report on Form 10-K and subsequent
filings on Form 8-K and Schedule 14C.
2. INVENTORIES
- ---------------
Inventories are stated at the lower of cost (first-in, first-out method) or
market. Work-in-process and finished goods inventories include an allocation for
labor and overhead costs. Inventories at July 1, 2006 and December 31, 2005 are
summarized as follows:
JULY 1, 2006 DECEMBER 31, 2005
------------ -----------------
(UNAUDITED) (AUDITED)
Raw materials $1,436,724 $ -
Work-in-process 424,581 -
Finished goods 655,520 -
------------ -----------------
TOTALS $2,516,825 $ -
============ =================
3. ACCOUNTING FOR STOCK BASED COMPENSATION
- ------------------------------------------
At July 1, 2006, the Company had not yet created a stock incentive plan which
F-5
DEER VALLEY CORPORATION
[FORMERLY KNOWN AS CYTATION CORPORATION THROUGH JULY 24, 2006]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
authorizes the issuance of options to purchase common stock. Prior to January 1,
2006, the Company accounted for Stock Options and Stock Based Compensation under
the recognition and measurement provisions of APB Opinion No. 25, "Accounting
for Stock Issued to Employees", and related Interpretations, as permitted by
FASB Statement No. 123, "Accounting for Stock-Based Compensation". No
stock-based employee compensation cost was recognized in the Statement of
Operations for the three and six months ended June 30, 2005. Effective January
1, 2006, the Company adopted the fair value recognition provisions of SFAS No.
123(R), Share-Based Payment, using the modified-prospective-transition method.
Under that transition method, compensation cost for all share-based payments
granted prior to, but not yet vested as of January 1, 2006 are based on the
grant date fair value estimated in accordance with the original provisions of
SFAS No. 123, and (b) compensation cost for all share-based payments granted
subsequent to January 1, 2006 are based on the grant-date fair value estimated
in accordance with the provisions of SFAS No.123(R). Results for prior periods
have not been restated.
As a result of adopting SFAS No.123(R) on January 1, 2006, this statement did
not have any effect on the Company's net income and earning per share for the
periods ended July 1, 2006 since no options were granted.
STOCK OPTIONS AND WARRANTS:
The following table summarizes the activity related to all Company stock options
and warrants for the three months ended July 1, 2006 and the year ended December
31, 2005:
WEIGHTED AVERAGE
EXERCISE PRICE EXERCISE PRICE
PER SHARE PER SHARE
WARRANTS STOCK OPTIONS WARRANTS OPTIONS WARRANTS OPTIONS
---------- ------------- -------- ------- -------- -------
OUTSTANDING AT JANUARY 1, 2005 - - $ - $ - $ - $ -
Granted - - - - - -
Exercised - - - - - -
Cancelled or expired - - - - - -
---------- ------------- -------- ------- -------- -------
OUTSTANDING AT DECEMBER 31, 2005 - - - - - -
Granted 21,210,368 - $0.75-2.25 - $ 1.52 -
Exercised - - - - - -
Cancelled or expired - - - - - -
---------- ------------- -------- ------- -------- -------
OUTSTANDING AT APRIL 1, 2006 21,210,368 - $0.75-2.25 - $ 1.52 -
Granted 1,609,284 - $0.75-3.00 - $ 2.10 -
Exercised - - - - - -
Cancelled or expired - - - - - -
---------- ------------- -------- ------- -------- -------
OUTSTANDING AT JULY 1, 2006 22,819,652 - $0.75-3.00 - $ 1.58 -
---------- ------------- -------- ------- -------- -------
EXERCISABLE AT JULY 1, 2006 22,819,652 - $0.75-3.00 - $ 1.58 -
---------- ------------- -------- ------- -------- -------
F-6
DEER VALLEY CORPORATION
[FORMERLY KNOWN AS CYTATION CORPORATION THROUGH JULY 24, 2006]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The warrants expire at various dates ranging from January 2011 through March
2013.
4. EARNINGS PER SHARE
- ---------------------
THREE MONTHS ENDED SIX MONTHS ENDED
JULY 1, JUNE 30, JULY 1, JUNE 30,
2006 2005 2006 2005
---------- ------------ ----------- -----------
NET INCOME AVAILABLE TO
COMMON SHAREHOLDERS ($1,219,719) ($113,149) ($2,356,208) ($150,542)
---------- ------------ ----------- -----------
Weighted average shares
outstanding:
Basic 1,000,000 922,622 1,000,000 898,144
EARNINGS PER SHARE:
BASIC ($1.22) ($0.12) ($2.36) ($0.17)
=========== ============ ============ ==========
DILUTED* ($1.22) ($0.12) ($2.36) ($0.17)
=========== ============ ============ ==========
*Diluted weighted average per share outstanding for three and six month periods
ended June 30, 2006 does not include the effect of dilutive Series A,
B, C and D Preferred Stock and Series A, B, C, D, E, BD-1, BD-2, BD-3, BD-4 and
BD-Warrants because to do so would have been antidilutive (see detailed
list of antidiluted shares below). Accordingly, basic and diluted net loss
per share for this period is the same.
SECURITIES COMMON STOCK EQUIVALENTS
- -----------------------------------------------------
Preferred:
Series A Preferred 9,941,620
Series B Preferred 4,945,100
Series C Preferred 2,675,000
Series D Preferred 880,540
Warrants:
Class A Warrants 10,538,137
Class B Warrants 4,970,824
Class C Warrants 2,000,000
Class D Warrants 2,000,000
Class E Warrants 880,540
Class BD-1 Warrants 919,162
Class BD-2 Warrants 919,162
Class BD-3 Warrants 459,581
Class BD-4 Warrants 66,121
Class BD-5 Warrants 66,121
----------------
Total antidilutive shares 41,261,908
================
F-7
DEER VALLEY CORPORATION
[FORMERLY KNOWN AS CYTATION CORPORATION THROUGH JULY 24, 2006]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
5. PRODUCT WARRANTIES
- ---------------------
The Company provides the retail home buyer a one-year limited warranty covering
defects in material or workmanship in home structure, plumbing, and electrical
systems. The Company's estimated warranty costs are accrued at the time of the
sale to the dealer following industry standards and historical warranty costs
incurred. Periodic adjustments to the estimated warranty accrual are made as
events occur which indicate changes are necessary. As of July 1, 2006, the
Company has provided a liability of $1,150,000 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:
JULY 1, DECEMBER 31,
2006 2005
------------ -------------
(unaudited)
BALANCE AT BEGINNING OF
PERIOD $ 860,000 $ -
Warranty Charges 1,242,020 -
Warranty Payments (952,020) -
------------ -------------
BALANCE AT END OF PERIOD $ 1,150,000 $ -
============ =============
6. CRITICAL ACCOUNTING POLICIES AND ESTIMATES
- ---------------------------------------------
The Company applies judgment and estimates, which may have a material effect in
the eventual outcome of assets, liabilities, revenues and expenses, for accounts
receivable, inventory and goodwill. The following explains the basis and the
procedure for each asset account where judgment and estimates are applied.
REVENUE RECOGNITION
The Company recognizes revenues for manufactured homes sold to independent
dealers when all of the following conditions have been met:
- an order for the home has been received from the dealer,
- an agreement with respect to payment terms (usually in the form
F-8
DEER VALLEY CORPORATION
[FORMERLY KNOWN AS CYTATION CORPORATION THROUGH JULY 24, 2006]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
of a written or verbal approval for payment has been received
from the dealer's flooring institution),
- the home has been shipped, and
- risk of loss has passed to the independent dealer.
ADVERTISING COSTS
Advertising costs are charged to operations when incurred and are included in
operating expenses. Advertising costs for the three and six month periods
ending July 1, 2006 and June 30, 2005 were $35,788, $60,233, $0, and $0,
respectively.
GOODWILL
As a result of the acquisition of DeerValley Acquisitions Corp. and Deer Valley
Homebuilders, Inc., on January 18, 2006, goodwill is reflected on the
consolidated balance sheets. A valuation was performed by the Company and it was
determined that the estimated fair value of the goodwill in the accounts
exceeded its book value by $3,611,994. With the accrual for the Earnout
Agreement an additional $496,407 was booked for 2005 and $823,298 has been
booked to goodwill through July 1, 2006. There was an additional $100,000 paid
representing a purchase price adjustment bringing total goodwill as of July 1,
2006 to $5,031,699. There is no assurance that the value of the acquired
entities will not decrease in the future due to changing business conditions.
DEALER INCENTIVE PROGRAMS
The Company provides rebates to dealers based upon a predetermined formula
applied to the volume of homes sold to the dealer during the year. These rebates
are recorded at the time the dealer sales are consummated.
RESERVE FOR REPURCHASE COMMITMENTS
DVH is contingently liable under the terms of repurchase agreements with
financial institutions providing inventory financing for retailers of DVH'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 DVH 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 repurchase agreements is approximately
$13,546,000 at July 1, 2006. As of July 1, 2006 the Company had reserved
$65,275 for future repurchase losses, based on
F-9
DEER VALLEY CORPORATION
[FORMERLY KNOWN AS CYTATION CORPORATION THROUGH JULY 24, 2006]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
prior experience and an evaluation of dealers' financial conditions. DVH 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.
7. RECENT ACCOUNTING PRONOUNCEMENTS
- -----------------------------------
The Financial Accounting Standards Board (FASB) has recently issued the
following accounting standards, which are effective as of January 1, 2007.
FASB Interpretation No. 48 "Accounting for Uncertainty in Income Taxes" (FIN 48)
is an interpretation which clarifies FASB No. 109, "Accounting for Income
Taxes". This Statement addresses uncertainty in income taxes recognized in an
enterprise's financial statements and prescribes a recognition threshold and
measurement of a tax position taken or expected to be taken in a tax return. Any
cumulative impact resulting from the adoption of FIN 48 would be recorded as an
adjustment to beginning retained earnings. The Company is currently evaluating
the impact of FIN 48 on the Company's Consolidated Financial Statements.
SFAS No. 155, "Accounting for Certain Hybrid Financial Instruments-an amendment
of FASB Statements No. 133 and 140" (SFAS No. 155) addresses the application of
beneficial interests in securitized financial assets. The adoption of SFAS No.
155 is not anticipated to have an impact on the Company's Consolidated Financial
Statements.
8. COMMITMENTS AND CONTINGENT LIABILITIES
- -----------------------------------------
LITIGATION
The Company in the normal course of business is subject to claims and
litigation. Management of the Company is of the opinion that, based on
information available, such legal matters will not ultimately have a material
adverse effect on the financial position or results of operation of the Company.
EARNOUT AGREEMENT
On January 18, 2006, the Company's wholly-owned subsidiary, DeerValley
Acquisitions Corp. (dissolved on July 1, 2006), entered into an Earnout
Agreement (the "Earnout Agreement"), between Deer Valley Homebuilders, Inc.,
DeerValley
F-10
DEER VALLEY CORPORATION
[FORMERLY KNOWN AS CYTATION CORPORATION THROUGH JULY 24, 2006]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Acquisitions Corp., and the former owners of Deer Valley Homebuilders, Inc. In
connection with the Capital Stock Purchase Agreement, the Company entered into
the Earnout Agreement, pursuant to which, additional payments may be paid to
the former owners of Deer Valley Homebuilders, Inc., as an earnout, based upon
the Net Income Before Taxes of Deer Valley Homebuilders, Inc. during the next
five (5) years, up to a maximum of $6,000,000. In any given year during the
term of the Earnout Agreement, 50% of the pre-tax profit exceeding $1,000,000
per year will be accrued and become distributable to the prior shareholders. For
the Fourth quarter of 2005, such pre-tax profit shall be reduced to $250,000.
During the six month period ending July 1, 2006 the Company had pre-tax profit
in the amount of $2,646,596, of which $1,646,596 was above the Company's earnout
threshold of $1,000,000. The Company accrued 50% of the amount in excess of
earnout threshold in the amount of $823,298. The maximum remaining potential
accrual under the Earnout Agreement is $4,680,295.
LOAN AND LETTER OF CREDIT
On April 12, 2006, DVH 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
DVH, DeerValley Acquisitions Corp. (a subsidiary of the Company, now dissolved),
and the Company. The purpose of the Loan was to provide working capital, to
provide Letter of Credit support, to replace DVH's previous revolving line of
credit with State Bank and Trust, and to provide interim financing for the
acquisition of the real property on which DVH operates a plant in Sulligent,
Alabama. The Loan has a one year term and has a variable interest rate at 2.60%
above LIBOR. Upon issuance of a letter of credit, DVH 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, DVH, 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.
All of the Letters of Credit above are required under the terms of the
Repurchase
Agreements described below in the section entitled "Reserve for Repurchase
F-11
DEER VALLEY CORPORATION
[FORMERLY KNOWN AS CYTATION CORPORATION THROUGH JULY 24, 2006]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Commitments." As of July 1, 2006, no amounts had been drawn on the above
irrevocable letters of credit by the beneficiaries.
On May 26, 2006, Deer Valley entered into a Loan Agreement with Fifth Third Bank
(the "Lender") providing for a loan of Two Million and No/100 Dollars
($2,000,000.00) (the "Loan") evidenced by a promissory note and secured by a
first mortgage on Deer Valley's properties in Guin, Alabama and Sulligent,
Alabama, including the structures and fixtures located thereon, as well as Deer
Valley's interest in any lease thereof. The purpose of the loan is to pay off an
existing loan from another bank secured by the Guin property and to reduce the
outstanding balance on Deer Valley's revolving credit facility with the Lender.
The net effect of the reduction in the revolving credit balance is to increase
the credit available to the Company for working capital under its revolving
facility. The Loan has a term from May 26, 2006 through June 1, 2011 and has a
variable interest rate at 2.25% above LIBOR. There is no prepayment penalty.
Future advances are available under the Loan Agreement, subject to approval by
the Lender. Also on May 26, 2006, the Company and DVA guaranteed the Loan.
Should Deer Valley default, thereby triggering acceleration of the Loan,
Cytation and DVA would become liable for payment of the Loan.
EXECUTIVE AGREEMENT
On June 29, 2006 the Company elected Charles G. Masters to serve as President,
Chief Executive Officer, and Chief Financial Officer. As compensation for
services rendered relative to the integration of Deer Valley Homebuilders, Inc.
and the ongoing operations of Cytation from January 18, 2006 to June 30, 2006
the Company authorized a lump-sum payment of $60,000 (prior to deductions for
federal or state withholding requirements). In addition the Board of Directors
for the Company authorized $120,000 as annual compensation for services rendered
as President, Chief Executive Officer, and Chief Financial Officer. Mr. Masters
will continue to pay for his own medical insurance, but shall be entitled to be
reimbursed for reasonable business related expenses.
9. EQUITY TRANSACTIONS AND BUSINESS ACQUISITIONS AND DISSOLUTIONS
- -----------------------------------------------------------------
PREFERRED SERIES A, B, C
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
F-12
DEER VALLEY CORPORATION
[FORMERLY KNOWN AS CYTATION CORPORATION THROUGH JULY 24, 2006]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
the issued and outstanding capital stock of Deer Valley Homebuilders, Inc. Upon
completion of the acquisition of the capital stock of Deer Valley Homebuilders,
Inc., Deer Valley Homebuilders, Inc. became an indirectly wholly-owned
subsidiary of the Company. (With the dissolution of DeerValley Acquisitions
Corp., Deer Valley Homebuilders, Inc. is now a wholly-owned subsidiary of the
Company.)
In order to effectuate the Capital Stock Purchase Agreement, Cytation
Corporation completed a series of transactions exempt from the registration
requirements of the Securities Act of 1933, as amended, pursuant to Section 4(2)
of the Act for transactions not involving a public offering and Rule 506
promulgated by the United States Securities and Exchange Commission under the
Securities Act of 1933, as amended. As of the date of these financials, the
Company has closed on a private placement of approximately 745,622 shares of
Series A Preferred Stock. Pursuant to the Securities Purchase and Share Exchange
Agreement, dated as of January 18, 2006, the Company (a) issued and sold to the
Purchasers, and the Purchasers purchased from the Company, (a) Series A
Preferred Stock, (b) Series A Common Stock Purchase Warrants, and (c) Series B
Common Stock Purchase Warrants. Also on January 18, 2006, the Company completed
a share exchange pursuant to which the Company acquired 100% of the issued and
outstanding capital stock of DeerValley Acquisitions, Corp. Pursuant to the
Share Exchange Agreement, in exchange for 100% of the issued and outstanding
common stock of DeerValley Acquisitions, Corp., the Company issued the following
securities to the shareholders of DeerValley 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 a 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 the Note to stock.
Pursuant to the terms of a Debt Exchange Agreement, the Company issued the
Lender its Series A Convertible Preferred Stock, Series A Warrants, and Series B
Warrants to the investor, in exchange for the retirement of its obligations to
repay such promissory note.
In January 2006, the Company issued 17,338 common shares to Sequence Advisors
Corporation, an affiliate of two former directors.
F-13
DEER VALLEY CORPORATION
[FORMERLY KNOWN AS CYTATION CORPORATION THROUGH JULY 24, 2006]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
On January 18, 2006, DeerValley Acquisitions, Corp., a wholly-owned subsidiary
of Cytation Corporation, acquired 100% of the issued and outstanding capital
stock of Deer Valley Homebuilders, Inc. The results of Deer Valley Homebuilders,
Inc. will be included in consolidated financial statements for periods after
January 18, 2006. Deer Valley Homebuilders, Inc. is an Alabama corporation with
its business offices located at 205 Carriage Street, P.O. Box 310, Guin, Alabama
35563 and is engaged in the production, sale and marketing of manufactured homes
in the southeastern and south central U.S. housing market. Cytation Corporation
purchased Deer Valley Homebuilders, Inc. to serve as its primary operating
company and to gain entry into the manufactured home market. Deer Valley
Homebuilders, Inc. comprises substantially all of Cytation Corporation's
operations.
The aggregate purchase price for Deer Valley Homebuilders, Inc. was $6,000,000,
including $5,500,000 cash and $500,000 of Cytation Corporation's Series A
Convertible Preferred Stock, Series A Common Stock Purchase Warrants, and Series
B Common Stock Purchase Warrants. In addition, an Earnout Agreement was entered
into, pursuant to which additional payments may be paid to the former owners of
Deer Valley Homebuilders, Inc., as an earnout, based upon the Net Income Before
Taxes of Deer Valley Homebuilders, Inc. during the next five (5) years, up to a
maximum of $6,000,000. The Company is accounting for the $6,000,000 earnout as
contingent consideration in accordance with paragraphs 25 through 28 of SFAS
141. Because the amount, if any, of contingent consideration was not
determinable at the acquisition date, no amount for the contingency will be
recorded in the Company's financial statements until the contingency is
resolved, or the consideration is issued or becomes issuable.
The Company considered the effect of EITF 95-8 and based its analysis on the
fact that the contingent consideration of a minimum of $0 and a maximum of
$6,000,000 over the next five years was nothing more than a way for the Company
to defer payments of purchase price so that the Company did not have to pay Deer
Valley Homebuilders Inc.'s shareholders the full purchase price up front. Since
Deer Valley Homebuilders, Inc. had a pre-tax profit in 2005 in excess of
$3,000,000, the Company concluded that Deer Valley Homebuilders, Inc.'s business
was worth in excess of $6,000,000, or approximately two times pre-tax profits.
The sellers were interested in receiving all $12 million up front, but the
Company was unwilling to give it to them because Deer Valley Homebuilders,
Inc. had been in business less than two years and it would be too dilutive to
shareholders to raise all monies up front. Therefore the Company and previous
shareholders of Deer Valley Homebuilders, Inc. agreed to the price adjustment
target account ("PATA"). So long as Deer Valley Homebuilders, Inc. continues to
have pre-tax profits in excess of one million dollars over the next five years,
the shareholders, pursuant to their interest sold, will be given a pro-rata
portion of the maximum $6,000,000 PATA. Based on
F-14
DEER VALLEY CORPORATION
[FORMERLY KNOWN AS CYTATION CORPORATION THROUGH JULY 24, 2006]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
this analysis, the Company will account for all of the PATA, when earned, by
recording it as additional consideration for the acquisition of Deer Valley
Homebuilders, Inc. and will not record it as a period expense related to
compensation. The Company will account for this on an ongoing basis and book any
accrued liability in connection with the PATA as incurred.
The value of the Series A Convertible Preferred Stock, Series A Common Stock
Purchase Warrants, and Series B Common Stock Purchase Warrants were determined
in a private offering also completed on January 18, 2006.
In connection with the Series A Convertible Preferred Stock offering the Company
Calculated the effect of EITF 00-27 and EITF 98-5 and determined on a relative
fair value basis that, of the $7,456,215 raised, $5,669,186 was attributable to
the beneficial conversion feature of the warrants and $1,787,029 was
attributable to the beneficial conversion feature of the preferred stock. As
such, the Company adjusted its balance sheet to reflect an increase of
$5,699,186 to additional paid-in capital and $1,787,029 to preferred stock. The
Company also noted that, of the $1,787,029 booked to preferred, 100% was
allocated to the beneficial conversion feature and was recorded as a reduction
to preferred stock and an increase to additional paid-in capital. During the
three month period ending July 1, 2006, $1,838,519 was amortized for the period.
Conversion of the preferred stock can also occur anytime after the SEC declares
effective a registration statement covering the common shares underlying the
preferred stock. When the SEC declares such registration statement effective,
all remaining un-amortized beneficial conversion features (as of July 1, 2006,
$4,126,453) shall be considered a deemed dividend to preferred stockholders
during that period.
TOTAL PREFERRED SERIES A PROCEEDS $7,456,215
Less:
Amount of proceeds allocated to Warrants (5,669,186)
Amount of proceeds allocated to Preferred Series A (1,787,029)
Amortization of Beneficial Conversion Feature 3,329,762
-----------
PREFERRED SERIES A BALANCE AT JULY 1, 2006 $3,329,762
===========
PREFERRED SERIES D
On April 17, 2006, the Company completed a private placement of $1,320,810 of
its Series D Convertible Preferred Stock (the "Series D Offering"). In
connection with the Series D Offering, the Company issued (a) 132,081 shares of
F-15
DEER VALLEY CORPORATION
[FORMERLY KNOWN AS CYTATION CORPORATION THROUGH JULY 24, 2006]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
its Series D Convertible Preferred Stock and (b) Series E Common Stock Purchase
Warrants entitling the holder to purchase up to an aggregate of 880,540 shares
of its Common Stock at an exercise price of three dollars ($3.00) per share.
The issuance of the Series D Convertible Preferred Stock and Series E
Warrants were exempt from the registration requirements of the Securities Act of
1933, as amended, pursuant to Section 4(2) of the Act for transactions not
involving a public offering and Rule 506 promulgated by the United States
Securities and Exchange Commission under the Securities Act of 1933, as amended.
Such securities were issued only to institutional, accredited investors, and a
limited number of non-accredited investors.
In connection with the Series D Convertible Preferred Stock offering, the
Company Calculated the effect of EITF 00-27 and EITF 98-5 and determined on a
relative fair value basis that, of the $1,320,810 raised, $434,945 was
attributable to the beneficial conversion feature of the warrants, and $753,618
was attributable to the beneficial conversion feature of the preferred stock.
As such, the Company adjusted its balance sheet to reflect an increase of
$434,945 to additional paid-in capital and $753,618 to preferred stock. The
Company also noted that, of the $753,618 booked to preferred, 100% was allocated
to the beneficial conversion feature and was recorded as a reduction to
preferred stock and an increase to additional paid-in capital. During the three
month period ending July 1, 2006, $240,969 was amortized for the period.
Conversion of the preferred stock can also occur anytime after the SEC declares
effective a registration statement covering the common shares underlying the
preferred stock. When the SEC declares such registration statement effective,
all remaining un-amortized beneficial conversion features (as of July 1, 2006,
$1,079,841) shall be considered a deemed dividend to preferred stockholders
during that period.
TOTAL PREFERRED SERIES D PROCEEDS $1,320,810
Less:
Amount of proceeds allocated to Warrants (434,945)
Amount of proceeds allocated to Preferred Series D (753,618)
Costs incurred as part of Preferred Series D issuance (132,247)
Amortization of Beneficial Conversion Feature 240,969
-----------
PREFERRED SERIES D BALANCE AT JULY 1, 2006 $ 240,969
===========
DEERVALLEY ACQUISITIONS CORP
DeerValley Acquisitions, Corp., a wholly owned subsidiary of DeerValley
Corporation, was dissolved by filing an Articles of Dissolution with the Florida
Department of State. The dissolution of DeerValley Acquisitions, Corp. was
F-16
DEER VALLEY CORPORATION
[FORMERLY KNOWN AS CYTATION CORPORATION THROUGH JULY 24, 2006]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
effective as of June 30, 2006. On the effective date of dissolution, DeerValley
Acquisitions, Corp. had no assets and no revenues.
10.RELATED PARTY
- ----------------
On July 1, 2006, the Company entered into an oral agreement with a company to
provide accounting services related to the filing of the Company's financial
statements. The service provider is owned and operated by family members of one
of the Company's Board of Directors. Pursuant to the agreement the Company will
pay the service provider $5,000 per month as compensation for services. The
agreement is on a month-to-month basis.
11. SUBSEQUENT EVENT
- ----------------------
On July 24, 2006, the Company held a Special Meeting of Stockholders not in lieu
of an annual meeting. At the Meeting the following actions were taken:
1. The approval of an amendment to the Company's Certificate of
Incorporation to increase the authorized preferred stock, par value
$0.01 per share, of the Company from 1,140,000 shares to 10,000,000
shares;
2. The approval of an amendment to the Company's Certificate of
Incorporation to increase the authorized common stock, par value
$0.001 per share, of the Company from 2,000,000 shares to 100,000,000
shares;
3. The approval of an amendment to the Company's Certificate of
Incorporation to change the name of the Company from Cytation
Corporation to Deer Valley Corporation.; and
4. The approval of a merger with a Florida corporation, solely for
purposes of establishing the Company's domicile in Florida.
On July 18, 2006, a dividend to holders of Series A Preferred Stock became due.
The Company's Series A Preferred stock is not registered with the United States
Securities and Exchange Commission, but ranks prior to the Company's registered
common stock. The dividend amounts to $241,782 in the aggregate.
F-17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
CAUTIONARY NOTICE REGARDING FORWARD LOOKING STATEMENTS
We desire to take advantage of the "safe harbor" provisions of the Private
Securities Litigation Reform Act of 1995. This filing contains a number of
forward-looking statements which reflect management's current views and
expectations with respect to our business, strategies, products, future results
and events, and financial performance. All statements made in this filing other
than statements of historical fact, including statements addressing operating
performance, events, or developments which management expects or anticipates
will or may occur in the future, including statements related to distributor
channels, volume growth, revenues, profitability, new products, adequacy of
funds from operations, statements expressing general optimism about future
operating results, and non-historical information, are forward looking
statements. In particular, the words "believe," "expect," "intend,"
"anticipate," "estimate," "may," variations of such words, and similar
expressions identify forward-looking statements, but are not the exclusive means
of identifying such statements, and their absence does not mean that the
statement is not forward-looking. These forward-looking statements are subject
to certain risks and uncertainties, including those discussed below. Our actual
results, performance or achievements could differ materially from historical
results as well as those expressed in, anticipated, or implied by these
forward-looking statements. We do not undertake any obligation to revise these
forward-looking statements to reflect any future events or circumstances.
Readers should not place undue reliance on these forward-looking
statements, which are based on management's current expectations and projections
about future events, are not guarantees of future performance, are subject to
risks, uncertainties and assumptions (including those described below), and
apply only as of the date of this filing. Our actual results, performance or
achievements could differ materially from the results expressed in, or implied
by, these forward-looking statements. Factors which could cause or contribute
to such differences include, but are not limited to, the risks to be discussed
in our Annual Report on form 10-KSB and in the press releases and other
communications to shareholders issued by us from time to time which attempt to
advise interested parties of the risks and factors which may affect our
business. We undertake no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information, future
events, or otherwise.
OVERVIEW
During the period commencing with the fourth quarter of 2002 and ending in
December 2004, the Company, under the name Cytation Corporation, 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. The
Company discontinued these operations in the first quarter of 2005 and was a
shell company (as defined in Rule 12b-2 of the Exchange Act) from the first
quarter of 2005 through January 18, 2006.
At the end of 2005, the Company 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 the Company's discontinuation of operations
and costs related to identification of an acquisition candidate in contemplation
of a reverse merger, which did not occur.
On January 18, 2006, the Company acquired an operating subsidiary, Deer
Valley Homebuilders, Inc. Deer Valley Homebuilders, Inc. is a wholly-owned
subsidiary of the Company which was formed in January, 2004. Deer Valley
Homebuilders, Inc. manufactures and designs manufactured homes which are sold to
a network of independent dealers located primarily in the southeastern and south
3
central regions of the United States. Deer Valley Homebuilders, Inc. maintains
its business offices in Guin, Alabama and operates manufacturing facilities in
Guin, Alabama and in Sulligent, Alabama. Deer Valley Corporation is not a
holding company for multiple operating companies in several different
businesses. Deer Valley Homebuilders, Inc. is the Company's only operating
company, and the Company is engaged exclusively in the manufactured housing
business.
As a result of the acquisition of Deer Valley Homebuilders, Inc. on January
18, 2006, the Company had gross revenues of $31,865,474 for the six months
ending on July 1, 2006, had assets of $18,130,665 as of the same date, and has
approximately 400 employees. Because the Company discontinued its prior
operations in the first quarter of 2005 and was a shell company (as defined in
Rule 12b-2 of the Exchange Act) from the first quarter of 2005 through January
18, 2006 and because the Company now has significant revenues from a subsidiary
operating in an entirely different industry, management does not believe that it
is informative or useful to compare the Company's results of operations for the
three month and six month periods ended July 1, 2006 to the three month and six
month periods ended June 30, 2005. As a result, the remainder of this
discussion examines only the results of the Company's operations for the three
month and six month periods ended July 1, 2006. In conjunction with this
discussion it is imperative that investors read the footnotes to the financial
statements attached to this filing.
The key performance indicators which management examines are (1) The
Company's production rate, in "floors" produced per day, (2) the cost of sales,
(3) product gross margins, and (4) the size of the Company's sales backlog.
During the quarter ending July 1, 2006, the Company's management focused on
achieving two primary objectives:
1) Obtaining permanent HUD certification for its recently opened plant
in Sulligent, Alabama and increasing production at the Sulligent plant to
four floors per day. This was achieved in May of this year.
2) Increasing sales and adjusting plant production levels to reduce
its sales backlog to a level which is more compatible with the demands of
the retail market. Prior to opening the Sulligent plant, the Company's
backlog frequently reached twelve weeks, resulting in a loss of sales. The
backlog currently stands at approximately seven to eight weeks, which
management feels is near an optimal level.
In order to insure that we maintain the current balance between sales and
production levels, the Company is developing new product offerings which are
compatible with the high product quality standards and production techniques and
systems now in use at its operating facilities. As a result of this ongoing
effort, in July 2006, the Company introduced a new single-wide product series
which is built to the same exacting specifications as its multisection homes.
This single-wide series allows the Company to compete for the lower price retail
buyer by reducing the size but not the quality of the home product.
To sustain the Company's growth rate in an industry which is not
experiencing broad growth, management is seeking to continue to increase its
market share. In addition, we are positioning the Company to take advantage of
our Alabama location and reputation in Mississippi to become a major participant
in the permanent rebuilding of the Gulf Coast area (see Hurricane Katrina
paragraphs below). Toward that end, we are evaluating several new plant sites,
as well as potential corporate acquisitions. As of this date, no definitive
action has been taken to initiate a transaction which would result in such an
expansion.
Management feels that the following areas present significant opportunities
or risks for the Company:
1) Securities Compliance
Deer Valley Homebuilders, Inc. 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 Homebuilders, Inc. and Deer Valley
Corporation are coordinating with legal counsel and auditors to put in place
proper financial controls and procedures necessary to insure full compliance
with and disclosure under all relevant securities laws. Of course, there can be
no guarantee that there will be no significant deficiencies or material
weaknesses in the quality of the Company's financial controls, as defined by
Sarbanes-Oxley. The greatest challenge management foresees in implementing
necessary controls and procedures is the cost to the Company of such compliance
could be substantial, which 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
4
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 and grow our business through efficient
manufacturing and production facilities, 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 our products by selling our
manufactured homes as part of a land-home package which may be financed by a
conventional mortgage. Finally, we focus on the "heavy built", finished drywall
sector of the manufactured housing market, which management feels offers the
greatest potential for growth Homes of this type often have the features and
"feel" of traditional site-built homes, but are often more readily available and
more competitively priced than site-built homes. Note: the term "heavy built"
refers to the use of more closely spaced floor joists, thicker exterior wall
construction, and more closely spaced roof trusses (1) than is strictly required
by the HUD building code and (2) than is standard practice in much of the
manufactured housing industry.
3) Market Adjustment as FEMA Orders from Hurricane Katrina Subside and
Increased Competition as Competitors previously focused on FEMA Contracts
aggressively enter the Higher End Market Segment
Hurricane Katrina created a great need for the rapid provision of temporary
housing in the Gulf Coast Region. The lure of lucrative Federal Emergency
Management Agency ("FEMA") contracts caused suppliers to disrupt or delay normal
shipments to their dealers. Deer Valley Homebuilders, Inc. did not interrupt
its service to its dealers in this way, which resulted in additional dealers
seeking to establish new relationships or increase orders with Deer Valley
Homebuilders, Inc. during the later part of 2005. We continue to cultivate the
dealer relations which emerged from that period In the first quarter of 2006,
virtually all manufacturers completed production under FEMA contracts in the
wake of Hurricane Katrina and are again focused on achieving sales through
dealer channels.
With the FEMA demand "bubble" having passed, management concurs with others
in the industry who believe that the overall market is slightly weaker than at
this point in 2005 and continues to be pressured by a lack of new finance
capacity for wholesale and retail sales. Many manufacturers believed that 2006
would see an increase in HUD-Code home orders, largely because of the need for
more permanent replacement homes along the Gulf Coast, which would offset the
lack of continuing FEMA orders. Unfortunately for the industry, reconstruction
and replacement efforts have not developed at the pace expected, reflecting a
complex and unpredictable interplay of FEMA, insurance claims, and other
rebuilding issues. The industry continues to expect improvement in the second
half of 2006, as these issues are resolved.
As a result of the FEMA demand bubble having passed and the replacement
home demand not having yet materialized, we will likely face increased
competition in our market segment as other producers increase their focus on the
commercial supply market. Specifically, traditional producers of lower priced
HUD-Code manufactured homes have recently begun to offer finished drywall
products which are more nearly competitive with our product line.
4) Rising Interest Rates and "Floor Plan" Credit Available to Manufactured
Home Dealers
Interest rates have a marked effect upon the manufactured housing market.
Management feels that rising interest rates will drive buyers from new,
traditional, "site built" homes toward the upper end of the manufactured housing
market, where our products are positioned. As a counter effect, the increased
interest rates have resulted in an increased inventory of site-built homes on
the market, which, in turn, has increased pressure on the manufactured housing
industry, leading to plant slowdowns, closings, and bankruptcies. This will
likely increase competition in the industry. Moreover, additional increases in
interest rates could eventually adversely affect buyers of our products and
could cause dealers to reduce inventories because of "Floor-Plan" expenses.
Reduced availability of floor plan financing for manufactured home dealers
could negatively impact our business. Sources of this financing are highly
concentrated, with a few companies dominating the market. If one of the four
largest providers were to discontinue floor plan financing programs for
5
manufactured home dealers, approximately one-fourth of the floor plan financing
available to manufactured home dealers would disappear. An occurrence of this
type could have a material, adverse impact upon our business, since dealers
would have additional difficulty in procuring funds to inventory homes based on
floor plan financing. As of the date of this filing, the dealers to whom we
sell have not experienced any disruption in their floor plan financing.
RESULTS OF OPERATIONS
The following discussion examines the results of the Company's operations
for the three month and six month periods ended July 1, 2006. This 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 three month and six month
periods ended July 1, 2006 is that of the Company on a consolidated basis with
Deer Valley Homebuilders, Inc. and Deer Valley Acquisitions Corp., which
reflects the Company's acquisition of Deer Valley Homebuilders, Inc. on January
18, 2006, retroactive to January 1, 2006. Deer Valley Acquisitions Corp. was
dissolved on July 1, 2006.
HISTORICAL RESULTS - PERIODS ENDED JULY 1, 2006
REVENUES. Overall gross revenue for the three month and six month periods ended
July 1, 2006 was $18,952,394 and $31,865,474, respectively. Our second plant in
Sulligent Alabama (the "Sulligent Plant") began operations on or about March 1,
2006. Revenues for the three months ended July 1, 2006 reflect the first full
quarter of operations for the Sulligent Plant.
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 three month and
six month periods ended July 1, 2006 were $1,701,951 and $2,983,004,
respectively. These general and administrative costs have increased at our
operating subsidiary, Deer Valley Homebuilders, Inc., primarily due to increased
production, sales, and operating expenses. The production direct cost of goods
has remained generally in the same ratio to sales, with increased quantity
discounts being offset by a rise in material cost.
NET INCOME (LOSS). The net income for the three month and six month periods
ended July 1, 2006 was $988,465 and $1,456,305, respectively. After accounting
for the dividend payable to preferred shareholders and the deemed dividend to
preferred shareholders on beneficial conversion features, the loss to common
stockholders for the three month and six month periods ended July 1, 2006 was
$1,219,719 and $2,356,208, respectively. Increased production and sales of our
products have bolstered net income.
LIQUIDITY AND CAPITAL RESOURCES
Management believes that the Company currently has sufficient cash flow
from operations, available bank borrowings, cash, and cash equivalents to meet
its short-term working capital requirements. As of July 1, 2006, the Company
had $4,425,919 in cash and cash equivalents. Because of the current profits
generated by operations and lack of significant capital demand under our current
business plan, our cash reserves are expected to continue to grow each month.
Should our costs and expenses prove to be greater than we currently
anticipate, or should we change our current business plan in a manner which will
increase or accelerate our anticipated costs or capital demand, such as through
the acquisition of new products, our working capital could be depleted at an
accelerated rate.
The Company spends its cash to fund increases in production capacity at its
operating subsidiary, Deer Valley Homebuilders, Inc., for special legal,
accounting, and audit services necessary to meet SEC reporting requirements, and
to pay expenses. To the extent that it becomes necessary to raise
additional cash in the future as our current cash and working capital resources
are depleted, we will seek to raise it through the public or private sale of
debt or equity securities, the procurement of advances on contracts or licenses,
funding from joint-venture or strategic partners, debt financing or short-term
loans, or a combination of the foregoing. We also may seek to satisfy
indebtedness without any cash outlay through the private issuance of debt or
equity securities.
The net cash provided by operating activities for the six month period
ending July 1, 2006 was $836,886. The net cash used in investing activities for
the six month period ending July 1, 2006 was $7,468,167, which primarily
6
reflects the amount related to the purchase of Deer Valley Homebuilders, Inc.,
which was $6,475,000, net of cash acquired in the purchase, as well as purchases
of equipment. The net cash provided by financing activities for the six month
period ending July 1, 2006 was $8,125,716, the majority of which resulted from
the issuance of Series A and D preferred stock.
We are contingently liable under the terms of repurchase agreements with
financial institutions providing inventory financing for retailers of our
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 we are 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 repurchase agreements is approximately
$13,546,000 at July 1, 2006. As of July 1, 2006 the Company had reserved
$65,275 for future repurchase losses, based on prior experience and an
evaluation of dealers' financial conditions. We to date have not experienced
significant losses under these agreements, and management does not expect any
future losses to have a material effect on the accompanying financial
statements.
FINANCING
On April 12, 2006, Deer Valley Homebuilders, Inc. 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 Homebuilders, Inc., Deer Valley Acquisitions
Corp. (a subsidiary of the Company, now dissolved), and the Company. The purpose
of the Loan was to provide working capital, to provide Letter of Credit support,
to replace Deer Valley Homebuilders, Inc.'s previous revolving line of credit
with State Bank and Trust, and to provide interim financing for the acquisition
of the real property on which we operate a plant in Sulligent, Alabama. The
Loan has a one year term and has a variable interest rate at 2.60% above LIBOR.
Upon issuance of a letter of credit, Deer Valley Homebuilders, Inc. is charged a
letter of credit fee equal 1.00% of the face amount of the letter of credit.
The Loan provides for conditions to meet prior to each advance, including
financial ratios.
In addition to the revolving line of credit described in the preceding
paragraph, Deer Valley Homebuilders, Inc., 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.
As of July 1, 2006, the following letters of credit were issued and in
force:
A letter of credit issued through State Bank & Trust in the amount of
$400,000 to the favor of beneficiary GE Commercial issued on January 27,
2006 and expiring January 27, 2007. Personally guaranteed by Joel Logan,
President and General Manager of Deer Valley.
A letter of credit issued through State Bank & Trust in the amount of
$150,000 to the favor of beneficiary Textron.
A letter of credit issued through Fifth Third Bank in the amount of
$380,000 to the favor of beneficiary Universal Insurance, on a bond.
A letter of credit issued through Fifth Third Bank in the amount of
$50,000 to the favor of beneficiary Lincoln General, on a Florida bond.
A letter of credit issued through Fifth Third Bank in the amount of
$350,000 to the favor of beneficiary 21st Mortgage.
All of the Letters of Credit above are required under the terms of the
Repurchase Agreements described below in the section entitled "Reserve for
Repurchase Commitments." As of July 1, 2006, no amounts had been drawn on the
above irrevocable letters of credit by the beneficiaries.
On May 26, 2006, Deer Valley Homebuilders, Inc. entered into a Loan
Agreement with Fifth Third Bank (the "Lender") providing for a loan of Two
Million and No/100 Dollars ($2,000,000.00) (the "Loan") evidenced by a
promissory note and secured by a first mortgage on Deer Valley Homebuilders,
Inc.'s properties in Guin, Alabama and Sulligent, Alabama, including the
structures and fixtures located thereon, as well as its interest in any lease
thereof. The purpose of the loan is to pay off an existing loan from another
7
bank secured by the Guin property and to reduce the outstanding balance on Deer
Valley Homebuilders, Inc.'s revolving credit facility with the Lender. The net
effect of the reduction in the revolving credit balance is to increase the
credit available to Deer Valley Homebuilders, Inc. for working capital under its
revolving facility. The Loan has a term from May 26, 2006 through June 1, 2011
and has a variable interest rate at 2.25% above LIBOR. There is no prepayment
penalty. Future advances are available under the Loan Agreement, subject to
approval by the Lender. Also on May 26, 2006, the Company guaranteed the Loan.
Should Deer Valley Homebuilders, Inc. default, thereby triggering acceleration
of the Loan, the Company would become liable for payment of the Loan.
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 which 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 6, Critical
Accounting Policies and Estimates, contained in the explanatory notes to the
Company's financial statements for the quarter ended July 1, 2006, contained in
this filing. On an ongoing basis, we evaluate our estimates, including those
related to reserves, deferred tax assets, valuation allowances, impairment of
long-lived assets, fair value of equity instruments issued to consultants
for services, and estimates of costs to complete contracts. We base our
estimates on historical experience and on various other assumptions which we
believe to be reasonable under the circumstances, the results of which
form the basis for making judgments about the carrying value of assets
and liabilities which are not readily apparent from other sources. Actual
results may differ from these estimates under different assumptions or
conditions. However, we believe that our estimates, including those for the
above-described items, are reasonable.
CRITICAL ACCOUNTING ESTIMATES
Management is aware that certain changes in accounting estimates employed
in generating financial statements can have the effect of making the Company
look more or less profitable than it actually is. Management does not believe
that either the Company or its auditors have made any such changes in accounting
estimates. A summary of the most critical accounting estimates employed by the
Company in generating financial statements follows below.
WARRANTIES
We provide our retail buyers with a one-year limited warranty covering
defects in material or workmanship, including plumbing and electrical systems.
We record a liability for estimated future warranty costs relating to homes
sold, based upon our assessment of historical experience and industry trends.
In making this estimate, we evaluate historical sales amounts, warranty costs
related to homes sold and timing in which any work orders are completed. We had
a reserve for estimated warranties of $1,150,000 as of July 1, 2006. Although
we maintain reserves for such claims, there can be no assurance that warranty
expense levels will remain at current levels or that the reserves that we have
set aside will continue to be adequate. A large number of warranty claims which
exceed our current warranty expense levels could have a material adverse affect
upon our results of operations.
VOLUME INCENTIVES PAYABLE
We have relied upon volume incentive payments to our independent dealers
who retail our products. These volume incentive payments are accounted for as a
reduction to gross sales, and are estimated and accrued when sales of our
manufactured homes are made to our independent dealers. Volume incentive
reserves are recorded based upon the annualized purchases of our independent
dealers who purchase a qualifying amount of home products from us. We accrue a
liability to our dealers, based upon estimates derived from historical payout
rates. We had a reserve for volume incentives payable of $632,428 as of July 1,
2006.
RESERVE FOR REPURCHASE COMMITMENTS
Most of our independent dealers finance their purchases under a wholesale
floor plan financing arrangement under which a financial institution provides
the dealer with a loan for the purchase price of the home and maintains a
security interest in the home as collateral. When entering into a floor plan
arrangement, the financial institution routinely requires that we enter into a
separate repurchase agreement with the lender, under which we are obligated,
upon default by the independent dealer, to repurchase the manufactured home at
8
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
repurchase agreements is approximately $13,546,000 at July 1, 2006. As of July
1, 2006 the Company had reserved $65,275 for future repurchase commitments,
based upon our prior experience and evaluation of our independent dealers'
financial conditions. Because Deer Valley Homebuilders, Inc. 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 is generally recorded
when all of the following conditions have been met: (i) an order for the home
has been received from the dealer, (ii) an agreement with respect to payment
terms has been received, and (iii) the home has been shipped and risk of loss
has passed to the dealer.
RECENT ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board (FASB) has recently issued the
following accounting standards, which are effective as of January 1, 2007.
FASB Interpretation No. 48, "Accounting for Uncertainty in Income Taxes"
(FIN 48) is an interpretation which clarifies FASB Statement No. 109,
"Accounting for Income Taxes." This Statement addresses uncertainty in income
taxes recognized in an enterprise's financial statements and prescribes a
recognition threshold and measurement of a tax position taken or expected to be
taken in a tax return. Any cumulative impact resulting from the adoption of FIN
48 would be recorded as an adjustment to beginning retained earnings. The
Company is currently evaluating the impact of FIN 48 on the Company's
Consolidated Financial Statements.
Statement of Financial Accounting Standards (SFAS) No. 156, "Accounting for
Servicing of Financial Assets - an amendment of FASB Statement No. 140" (SFAS
No. 156) simplifies the accounting for servicing assets and liabilities. The
adoption of SFAS No. 156 is not anticipated to have an impact on the Company's
Consolidated Financial Statements.
SFAS No. 155, "Accounting for Certain Hybrid Financial Instruments - an
amendment of FASB Statements No. 133 and 140" (SFAS No. 155) addresses the
application of beneficial interests in securitized financial assets. The
adoption of SFAS No. 155 is not anticipated to have an impact on the Company's
Consolidated Financial Statements.
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 Homebuilders, Inc.'s
9
principal manufacturing plant and offices are located at 205 Carriage Street,
Guin, Alabama 35563, and its telephone number is (205) 468-8400. Deer Valley
Homebuilders, Inc.'s principal manufacturing plant and company offices consists
of a manufacturing plant with 107,511 square feet, a frame shop with 10,800
square feet, material shed of 23,172 square feet and offices with 11,250 square
feet of space. Deer Valley Homebuilders, Inc. owns the buildings and 25.5 acres
underlying these facilities. Deer Valley Homebuilders, Inc.'s second
manufacturing plant is located at 7668 Highway 278 in Sulligent, Alabama (the
"Sulligent Plant"). The Sulligent Plant consists of a 65,992 square foot
manufacturing plant located on approximately 13 acres of land.
Deer Valley Homebuilders, Inc. does not invest in real estate or real
estate mortgages except for those necessary to support the company's normal
business purposes.
WEBSITE
Deer Valley Homebuilders, Inc. maintains a website at www.deervalleyhb.com.
The information contained on this website is not a part of this filing, nor is
it incorporated by reference into this filing.
OFF-BALANCE SHEET ARRANGEMENTS
In connection with the purchase of Deer Valley Homebuilders, Inc. on
January 18, 2006, the Company entered into the Earnout Agreement, pursuant to
which additional payments, up to a maximum of $6,000,000, 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. 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 Deer Valley Homebuilders, Inc. and the Company could
not agree on an outright purchase price
During the term of the Earnout Agreement, 50% of the pre-tax profit
exceeding $1,000,000 per year will be accrued and become distributable to the
former owners of Deer Valley Homebuilders, Inc. For the fourth quarter of 2005,
such pre-tax profit target was reduced to a quarterly figure of $250,000.
During the quarter ended April 1, 2006, Deer Valley Homebuilders, Inc. did not
achieve $1,000,000 in pre-tax profit, so the Company did not accrue any earnout
attributable to the quarter ending April 1, 2006.
Deer Valley Homebuilders, Inc. had pre-tax profit in the fourth quarter of
2005 in the amount of $1,242,814, of which $992,814 was above the quarterly
earnout threshold of $250,000. Accordingly, the Company accrued 50% of the
amount in excess of earnout threshold in the amount of $496,407. Deer Valley
Homebuilders, Inc. had pre-tax profit in the six months ended July 1, 2006 in
the amount of $2,646,596, of which $1,646,596 was above the earnout threshold of
$1,000,000. Accordingly, the Company accrued 50% of the amount in excess of
earnout threshold in the amount of $823,298. The maximum remaining potential
accrual under the Earnout Agreement is $4,680,295.
ITEM 3. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
The Company's Chief Executive Officer and Chief Financial Officer has
evaluated the effectiveness of the Company's disclosure controls and procedures
(as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the
fiscal period ending July 1, 2006 covered by this Report on Form 10-QSB. Based
upon such evaluation, the Chief Executive Officer and Chief Financial Officer
has concluded that, as of the end of such period, the Company's disclosure
controls and procedures were not effective as required under Rules 13a-15(e) and
15d-15(e) under the Exchange Act. This conclusion by the Company's Chief
Executive Officer and Chief Financial Officer does not relate to reporting
periods after July 1, 2006 or to the controls and procedures in place at the
Company's subsidiary.
Several individuals were recently elected to the Board of Directors of the
Company. It is anticipated that the new Board of Directors will establish
various committees, including an audit committee. In addition, the Company's
Chief Executive and Chief Financial Officer is devoting considerable effort to
continue to develop and implement a system of disclosure controls and procedures
to ensure that information required to be disclosed in our reports filed under
the Securities Exchange Act of 1934 is accumulated and communicated to
management and its officers, as appropriate, to allow timely decisions regarding
required disclosure.
10
CHANGES IN INTERNAL CONTROLS OVER FINANCIAL REPORTING
Beginning after the year ending December 31, 2007, Section 404 of the
Sarbanes-Oxley Act of 2002 will require us to include management's report on our
internal control over financial reporting in our Annual Report on Form 10-K.
The internal control report must contain (1) a statement of management's
responsibility for establishing and maintaining adequate internal control over
our financial reporting, (2) a statement identifying the framework used by
management to conduct the required evaluation of the effectiveness of our
internal control over financial reporting, (3) management's assessment of the
effectiveness of our internal control over financial reporting as of the end of
our most recent fiscal year, including a statement as to whether or not our
internal control over financial reporting is effective, and (4) a statement that
our registered independent public accounting firm has issued an attestation
report on management's assessment of our internal control over financial
reporting.
In order to achieve compliance with Section 404 within the prescribed
period, management is planning to commence a Section 404 compliance project to
assess the adequacy of our internal control over financial reporting, remediate
any control deficiencies that may be identified, validate through testing that
controls are functioning as documented, and implement a continuous reporting and
improvement process for internal control over financial reporting. Except as
described above, during the second quarter of fiscal year 2006, there have been
no changes in our internal control over financial reporting that have materially
affected, or are reasonably likely to materially affect our internal control
over financial reporting.
INHERENT LIMITATIONS OF THE EFFECTIVENESS OF INTERNAL CONTROL
A control system, no matter how well conceived and operated, can provide
only reasonable, not absolute, assurance that the objectives of the internal
control system are met. Because of the inherent limitations of any internal
control system, no evaluation of controls can provide absolute assurance that
all control issues within a company, if any, have been detected.
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Although the Company in the normal course of business is subject to claims
and litigation, the Company is not a party to any material legal proceeding nor
is the Company aware of any circumstance which may reasonably lead a third party
to initiate legal proceeding against the Company.
As of the date of this filing, there are no material pending legal or
governmental proceedings relating to our Company or properties to which we are a
party, and to our knowledge there are no material proceedings to which any of
our directors, executive officers, or affiliates are a party adverse to us or
which have a material interest adverse to us.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Unregistered Sales of Equity Securities
Other than the sales reported on Form 8-K, there were no unregistered sales
of equity securities.
Issuer Purchases of Equity Securities
The Company did not repurchase any equity securities during the fiscal
quarter ended July 1, 2006.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
On July 22, 2006, aggregate accrued dividends of approximately $241,782
became due and payable on the Company's issued and outstanding Series A
Preferred Stock. As of the date of this filing, the Company has not paid the
dividends due on July 22, 2006. Such dividends are payable by the Company in
cash or with registered common stock.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On July 24, 2006 at 2:00 p.m., Eastern Daylight Savings Time, at the
Company's offices, located at 4902 Eisenhower Blvd., Suite 185, Tampa, Florida
33634, the Company held a Special Meeting of Stockholders not in lieu of an
annual meeting, (the "Meeting"), which had previously been announced by the
Company's Definitive Information Statement on Schedule 14C, filed with the
11
United States Securities and Exchange Commission on June 27, 2006 and mailed to
shareholders on June 30, 2006 (the "Information Statement"). At the Meeting,
the following actions were taken as previously reported in the Company's Current
Report on Form 8-K, filed with the United States Securities and Exchange
Commission ("SEC") on July 28, 2006:
1. The election of each of Hans Beyer, John Giordano, and Dale
Phillips as directors to serve until the next annual meeting of the
shareholders in the years in which their terms expire and until their
successors are elected and qualified, or until their earlier
resignation, removal from office, or death;
2. The approval of an amendment to the Company's Certificate of
Incorporation to increase the authorized preferred stock, par value
$0.01 per share, of the Company from 1,140,000 shares to 10,000,000
shares;
3. The approval of an amendment to the Company's Certificate of
Incorporation to increase the authorized common stock, par value
$0.001 per share, of the Company from 2,000,000 shares to 100,000,000
shares;
4. The approval of an amendment to the Company's Certificate of
Incorporation to change the name of the Company from Cytation
Corporation to Deer Valley Corporation.; and
5. The approval of a merger with a Florida corporation, solely for
purposes of establishing the Company's domicile in Florida.
In addition, the term of office of Charles G. Masters continued after the
Meeting.
Votes cast in the election of directors were as follows:
Number of Number of
Name of Nominee Votes Cast For Votes Withheld
- --------------- -------------- --------------
Hans Beyer 4,772,300 0
- --------------- -------------- --------------
John Giordano 4,772,300 0
- --------------- -------------- --------------
Dale Phillips 4,772,300 0
- --------------- -------------- --------------
None of the brokers for the 692 shareholders who held in street name as of
the record date indicated that they had received voting instructions. There
were no abstentions.
Vote totals for the remaining actions were identical to one another.
Therefore, only one table presenting results for all of the remaining actions
follows:
Number of Number of Number of
Votes Cast For Votes Cast Against Votes Withheld
- -------------- ------------------ --------------
4,772,300 0 0
- -------------- ------------------ --------------
None of the brokers for the 692 shareholders who held in street name as of
the record date indicated that they had received voting instructions. There
were no abstentions.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS
EXHIBIT NO. DESCRIPTION
- ----------- -----------
3.01 Articles of Incorporation of Deer Valley Corporation. (1)
3.02 Bylaws of Deer Valley Corporation. (1)
4.01 Certificate of Designation, Rights, and Preferences of Series A Convertible
Preferred Stock. (1)
4.02 Certificate of Designation, Rights, and Preferences of Series B Convertible
Preferred Stock. (1)
12
4.03 Certificate of Designation, Rights, and Preferences of Series C Convertible
Preferred Stock. (1)
4.04 Certificate of Designation, Rights, and Preferences of Series D Convertible
Preferred Stock. (1)
10.01 Securities Purchase and Share Exchange Agreement dated January 18, 2006,
by and among the Company, Richard A. Fisher, Kevin J. High, certain
purchasers of the Company's Series A Convertible Preferred Stock,
DeerValley Acquisitions Corp., and certain other persons a party thereto.
(2)
10.02 Investor Rights Agreement, by and among the Company, each of the
purchasers of the Company's Series A Convertible Preferred Stock, and
certain other persons a party thereto. (2)
10.03 Earnout Agreement. (2)
10.04 Form of Series A Common Stock Purchase Warrant. (2)
10.05 Form of Series B Common Stock Purchase Warrant. (2)
10.06 Form of Series C Common Stock Purchase Warrant. (3)
10.07 Form of Series D Common Stock Purchase Warrant. (3)
10.08 Form of Series E Common Stock Purchase Warrant. (3)
10.09 Form of Series BD-1 Common Stock Purchase Warrant. (3)
10.10 Form of Series BD-2 Common Stock Purchase Warrant. (3)
10.11 Form of Series BD-3 Common Stock Purchase Warrant. (3)
10.12 Form of Series BD-4 Common Stock Purchase Warrant. (3)
10.13 Form of Series BD-5 Common Stock Purchase Warrant. (3)
10.14 Interest Bearing Non-Convertible Installment Promissory Note. (2)
10.15 Placement Agent Agreement between Cytation Corporation and
Midtown Partners, LLC. (2)
10.16 Debt Exchange Agreement between Vicis Capital Master Fund and Cytation
Corporation. (3)
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)
10.21 Agreement and Plan of Merger between Cytation Corp., a Delaware
corporation, and Deer Valley Corporation, a Florida corporation. (1)
10.22 Sales Contract for Sulligent Property. (5)
10.23 Form of Loan Agreement (6)
10.24 Form of Commercial Promissory Note (6)
10.25 Form of Mortgage, Assignment of Leases and Rents, Security Agreement and
Fixture Filing (6)
10.26 Form of Guaranty of Loan, Cytation Corp. (6)
10.27 Form of Guaranty of Loan, DeerValley Acquisitions Corp. (6)
21.01 List of Subsidiaries of the Company. (7)
31.01 Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and
15d-14(a) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002, dated March 3, 2006. (7)
31.02 Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and
15d-14(a) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002, dated March 3, 2006. (7)
13
32.01 Certification of Chief Executive Officer pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002, dated March 3, 2006. (7)
32.02 Certification of Chief Financial Officer pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002, dated March 3, 2006. (7)
(1) Previously filed as an exhibit to the Form 8-K, filed with the
SEC on July 28, 2006 and incorporated herein by reference.
(2) Previously filed as an exhibit to the Form 8-K filed with the SEC
on January 25, 2006 and incorporated herein by reference.
(3) Previously filed as an exhibit to the Registration Statement on
Form SB-2 filed with the SEC on April 19, 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.
(5) Previously filed as an exhibit to the Form 8-K filed with the SEC
on April 24, 2006 and incorporated herein by reference.
(6) Previously filed as an exhibit to the Form 8-K filed with the SEC
on June 1, 2006 and incorporated herein by reference.
(7) Filed herewith.
14
SIGNATURE
---------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Deer Valley Corporation
-------------------------
(Registrant)
Dated: August 14, 2006 By: /s/ Charles G. Masters
-------------------------
Charles G. Masters
President & Chief Executive Officer
15