Cytation Corporation
4902 Eisenhower Blvd.
Suite 185
Tampa, Florida 33634
(813) 885-5998
May 5, 2006
United States Securities and Exchange Commission
Division of Corporation Finance
Attn: Pamela Long, Assistant Director
100 F Street, N.E.
Washington, D.C. 20549-7010
RE: CYTATION CORPORATION
INFORMATION STATEMENT ON SCHEDULE 14C
FILED APRIL 7, 2006
FILE # 000-05388
FORM 10-KSB FOR YEAR ENDED DECEMBER 31, 2005
FORM 8-K FILED FEBRUARY 21, 2006
Dear Ms. Long,
We received your letter commenting on the Revised Information Statement on
Schedule 14C ("Schedule 14C") filed on April 7, 2006 by Cytation Corporation
(the "Company"). In connection with your comments, we have made necessary
changes suggested in your letter and filed them in an amended Schedule 14C,
filed via EDGAR on May 5, 2006. In addition, we have filed a copy of this
letter as correspondence on EDGAR. We have placed revision marks at the
beginning and end of each material change in the Schedule 14C (punctuation and
spelling changes are not marked). Changes to tables are denoted by revision
marks at the beginning and end of each table.
Our responses to your comments follow below.
General
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1. We have appropriately marked all changes in our revised Schedule 14C, with
page numbers included.
2. Please note the following disclosure on pages 12-13 of the Schedule 14C,
under the heading "Certain Relationships And Related Transactions," related
to Item 1005(b) of Regulation M-A.
Charles G. Masters, the current President of Cytation, and
several potential investors met with the officers and principals of
Deer Valley Homebuilders, Inc. during the fall 2004 for the purpose of
exploring a variety of potential investment relationships in or with
Deer Valley Homebuilders, Inc. Over the course of the next year,
numerous possible relationships were discussed primarily by Mr.
Masters and Joel S. Logan II, the President of Deer Valley. The
founders of Deer Valley desired to be bought out by an acquisition
company, preferably public, but also desired to continue to operate
the company. Toward this end, Mr. Masters formed Deer Valley
Acquisitions Corp. in July of 2005. The aforementioned discussions
ultimately led to an agreement for Deer Valley Acquisitions Corp. to
purchase 100% of the outstanding shares of Deer Valley. This agreement
was formalized as the Securities Purchase and Share Exchange
Agreement. Subsequent to the signing of the document, DVA negotiated a
merger with Cytation Corporation, and entered into a agreement with
Midtown Partners to raise approximately $7,500,000 from accredited
investors to allow the consolidated Cytation/DVA to fulfill the cash
obligations of the Securities Purchase and Share Exchange Agreement.
The entire transaction was completed as a series of contemporaneous
closings which occurred January 18, 2006 and which are more fully
described under "Change in Control and Acquisition" below. During the
past two years, other than the negotiations described above, there
were no negotiations, transactions, or material contracts between
Cytation Corporation and Deer Valley Homebuilders, Inc.
Management
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3. We apologize for the omission of this material in our revised Schedule 14C.
A combination of computer malfunction and user error resulted in the
inadvertent deletion of the material inserted in response to comment number
14 of your March 1, 2006 letter.
On pages 10-11 of the Schedule 14C, we have noted that (a) Ranger
Industries engages in business consulting, due diligence research and oil
and gas exploration and development, (b) Daedalus Consulting, Inc. provides
Internet research and business consulting services, primarily for start-up
and small companies, (c) Mirabilis Ventures, Inc. is a diversified,
privately-held holding company with interests in a variety of companies in
industries including construction, business consulting, and software
development, and (d) Clayton Homes, Inc., Cavalier Homes, Inc., and
Southern Energy Homes, Inc. are all producers of manufactured housing.
Additional Warrant
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4. You had indicated that the Series D Warrants are not reflected on the Table
of Security Ownership of Certain Beneficial Owners and Management on page
20.
The holder of the Series D Warrant is not reflected on the Table of
Security Ownership of Certain Beneficial Owners and Management because the
holder is not a director, officer or beneficial owner of greater than 4.99%
of the capital stock of the Company. We have determined that the holder of
the Series D Warrant is not a beneficial owner of greater than 4.99% of the
capital stock of the Company because the conversion and voting rights of
each holder of outstanding shares of Series A Preferred Stock, and the
exercise rights of the Series A Warrants, the Series B Warrants, the Series
D Warrants, and Series BD Warrants are limited, so, in each instance, the
holder is not entitled to convert any Series A Preferred Stock, or exercise
any warrants (inclusive of Series D Warrants), to the extent that, after
such conversion or exercise, the sum of the number of shares of common
stock beneficially owned by such holder and its affiliates, will result in
beneficial ownership of more than 4.99% of the outstanding shares of common
stock. Due to such limitations on conversion, voting, and exercise rights,
we have not included the holder of the Series D Warrants. We have revised
our description of the capital stock to reflect the exercise cap of 4.99%
on each of the Series A Warrants, Series B Warrants, Series D Warrants, and
Series BD Warrants. The holder of the Series D Warrant is a hedge fund
that, except for its ownership of Series A Preferred Stock, Series A
Warrants, Series B Warrants, Series D Warrant, is unaffiliated with the
Company or its affiliates.
Audit Fees
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5. On page 19 of the Schedule 14C, we have included the audit fees and tax
fees for fiscal year 2004, as well an explanation that at the time the tax
services were rendered, the Board of Directors determined that the
provision of those services was compatible with maintaining the principal
accountant's independence.
Manufactured Homes - Industry Overview
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6. We apologize for the omission of this material in our revised Schedule 14C.
A combination of computer malfunction and user error resulted in the
inadvertent deletion of the material inserted in response to comment number
20 of your March 1, 2006 letter.
We have revised the disclosure related to 2005 and, with respect to
the request for recent negative trends for sales of multi-section homes, we
have added the following paragraph on page 32 of the Schedule 14C.
The manufactured housing market entered into a steep decline that
began in 1999 before stabilizing at or near historical lows in 2003
and 2004. Although industry wide shipments overall increased in 2005,
such overall increase was, in large part, a result of homes made to
FEMA specifications and sold for disaster relief. In addition, because
the FEMA specifications are for single-wide homes, the percentage of
multisection homes being produced relative to the total number of
manufactured homes being produced also has dipped. Management believes
that the dip in the percentage of multisection homes being produced
relative to the total manufactured home industry is likely a temporary
trend, and will reverse as FEMA sales slow-down. Management continues
to be encouraged by its continued back-log, now at over 300 homes, and
the excellent reviews for its regionally designed homes received from
dealers and consumers.
Property
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7. We have revised our disclosure on page 28 of the Schedule 14C to reflect
that Deer Valley Homebuilders, Inc. manufactures its homes in two
facilities in Guin, Alabama and Sulligent, Alabama. In addition, we have
disclosed that, on April 18, 2006, Deer Valley Homebuilders, Inc. purchased
property in Sulligent, Alabama on page 13 under the caption "Certain
Relationships and Related Transactions" and on page 51 under the caption
"Property."
Capital Structure
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8. FAS 150; FAS 133; and EITF 00-19 Discussion
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The Company has issued and outstanding Series A Convertible Preferred
Stock, Series B Convertible Preferred Stock, Series C Convertible Preferred
Stock, and Series D Convertible Preferred Stock (the "Preferred Stock"). In
addition, the Company has issued and outstanding Series A Purchase
Warrants, Series B Purchase Warrants, Series C Common Stock Purchase
Warrants, Series D Purchase Warrants, and Series E Purchase Warrants (the
"Warrants").
Upon conversion of each Series of Preferred Stock, or upon exercise of
each Series of Warrants, by the holder, the Company can settle its
obligations upon such conversion or exercise, as applicable, by delivering
registered or unregistered common stock. The Series A Convertible Preferred
Stock, and Series A, B, C, D, and E Warrants are convertible or
exercisable, upon the early of either (1) the date on which the Securities
and Exchange Commission declares effective the Company's registration
statement filed pursuant to the Investor Rights Agreement dated January 18,
2006 (the "Investor Rights Agreement"), or (2) the date that the holder of
the Series A Convertible Preferred Stock has satisfied the minimum one (1)
year holding requirements set forth in Rule 144(d). The Series B, C, and D
Preferred Stock automatically convert into unregistered shares of common
stock upon shareholder approval of an increase in the authorized capital
stock of the Company.
Pursuant to the Investor Rights Agreement , if the Company does not
file a registration statement by certain target dates, registering the
common shares issuable upon conversion of the Series A Convertible
Preferred Stock, and issuable upon exercise of the Series A Warrants and
Series B Warrants, and such registration statement is not declared
effective by certain additional target dates, then the Company is required
to issue, as a penalty, its unregistered Series A Warrants to the holders
of the Series A Convertible Preferred Stock.
Under the Investor Rights Agreement, the maximum aggregate penalty
incurred by the Company for failure to timely file the registration
statement, and have the registration statement declared effective, is the
issuance of Series A Warrants exercisable for the number of common shares
equal to eighteen (18%) percent of the sum of (a) the number of shares
issuable upon conversion of the Series A Convertible Preferred Stock, and
(b) the number of shares issuable upon conversion of the Series A Warrants
(the "Penalty Warrants"). The Penalty Warrants may be unregistered
securities, and, as liquidated damages, is the sole penalty available upon
failure to file or have the registration statement declared effective. The
Penalty Warrants would have an exercise price of $1.50, without a cash-less
exercise provision.
The Series B Convertible Preferred Stock, Series C Convertible
Preferred Stock, Series D Convertible Preferred Stock, Series C Warrants,
Series D Warrants, and Series E Warrants have piggy-back registration
rights and are not entitled to receive the Penalty Warrants referenced
above.
Under the terms and conditions of each Series of Preferred Stock, and
each Series of Warrants, the Company is not obligated to cash settle such
securities or otherwise make cash payments (other then accrued dividends),
including if (a) the company fails to make timely filings with the SEC
(including failure to file or have the registration statement declared
effective), or (b) if the shares initially delivered upon conversion or
exercise are subsequently sold and the sales proceeds are insufficient to
provide the counterparty with a full return.
No Series of Preferred Stock, and no Series of Warrants have mandatory
redemption feature, or allow the holder to put the security to the Company
for cash payment. Upon certain designated mergers or consolidations, or a
sale of substantially all of the Company's assets, a deemed liquidation
occurs and company is required to distribute net proceeds. Under the terms
of each Series Preferred Stock, and each Series of Warrants, a change in
control is not deemed a liquidation event.
In addition, no Series of Preferred Stock, and no Series of Warrants,
(a) give the holder the rights of a creditor in the event of the Company's
bankruptcy, or (b) contemplate granting a security interest or posting of
collateral.
The number of shares of common stock issuable upon conversion of the
Series A, B, C, and D Preferred Stock, or exercise of the Series A, B, C,
D, and E Warrants, are based on a fixed stated conversion price in the
designations of the Preferred Stock. None of the Series A, B, C, and D
Preferred Stock, or related warrants, provide for a variable conversion
price tied to the trading price of the Company's stock in the public or
private market. In addition, none of the Series A, B, C, D, and E Warrants
allow for cash-less exercise.
Additional discussion regarding the dividends, conversion features,
and voting rights of the preferred stock are set forth in the description
of our Capital Structure in the 14C Information Statement.
The Financial Accounting Standards Board issued the Statement of
Financial Accounting Standard No. 150 to establish standards how an issuer
classifies and measures certain financial instruments with characteristics
of both liabilities and equity. In reviewing the term and conditions of the
Company's outstanding Preferred Stock and Warrants, the Company has
concluded that such outstanding Preferred Stock and Warrants would not be
classified as a liability under FAS No. 15O. We have reached this
conclusion due to (a) the absence of redemption features in the Preferred
Stock and Warrants, and (b) because the conversion price of the Preferred
Stock and the exercise price of the Warrants are based on a fixed
conversion or exercise price, as applicable.
In addition, the Financial Accounting Standards Board issued the
Statement of Financial Accounting Standard No. 133, establishing guidelines
for accounting for derivative instruments, and EITF 00-19, "Accounting for
Derivative Financial Instruments Indexed To, and Potentially Settled In, a
Company's Own Stock," providing guidance regarding the classification and
measurement of warrants and instruments with embedded conversion features.
In reviewing FAS 133 and EITF 00-19, the Company believes that the
Preferred Stock and Warrants would be classified as equity on its balance
sheet. We have reached this conclusion, in part, because: (a) upon
conversion of the Preferred Stock or exercise of the Warrants the Company
can settle with unregistered common shares; (b) the conversion price of the
Preferred Stock and exercise price of the Warrants are based upon fixed
prices and do not fluctuate based upon changes in the trading price of its
stock, (c) such securities do not have "top-of" or other "make-whole"
provisions, and (d) such securities do not have redemption features.
In making such a conclusion, the Company has analyzed the potential
issuance of Penalty Warrants, and has concluded that the issuance of the
Penalty Warrants represents the most economical settlement alternative in
the event of failure to have the registration statement declared effective.
In addition, although the Company currently does not have enough stock
to issue upon the conversion or exercise of such securities, management
believes that it meets the requirements of EITF 00-19 for the following
reasons:
(1) A shareholder holding proxies to vote no less than 50.01% of
the voting capital stock of the Company has acknowledged and
agreed to vote their shares to increase our authorized common
stock from 2,000,000 shares to 100,000,000 share at our
shareholder meeting currently scheduled to occur on May 15, 2006.
Upon the occurrence of such proposed increase, we will have
sufficient common stock to issue upon conversion or exercise, as
applicable, of all issued Series A Preferred Stock, Series B
Preferred Stock, Series C Preferred Stock, Series D Preferred
Stock, Series A Warrants, Series B Warrants, Series C Warrants,
Series D Warrant, Series E Warrants, and Series BD Warrants.
(2) No Series A Preferred Stock, Series B Preferred Stock,
Series C Preferred Stock, or Series D Preferred Stock is
convertible before the earlier of (a) the effective date of our
registration statement, or (b) one (1) year from the date of
issuance. In addition, no Series A Warrants, Series B Warrants,
Series C Warrants, Series D Warrant, Series E Warrants, or Series
BD Warrants are exercisable before the effective date of our
registration statement. Because the date that our registration
statement is filed is solely within our control, we do not
believe that we are required to book such securities as debt
under EITF-00-19 and to do so would be misleading.
9. On page 37 of the Schedule 14C under the heading "Preferred Shares," we
have noted that none of our preferred stock has a redemption date. In
addition, on page 36 we have disclosed that, on April 17, 2006, Cytation
Corporation completed an offering of Series D Convertible Preferred Stock.
Please note that because the Company did not complete the placement of its
Series D Preferred Stock until April 17, 2006, which is after the Record
Date of April 6, 2006, holders of our Series D Preferred Stock are not
entitled to vote on the proposals contained in the Schedule 14C. We have
noted this fact on pages 4 and 36 of the Schedule 14C.
Options and Warrants Convertible Into Common Shares
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10. On page 42, we have updated the chart to reflect that the Series D Warrant
has a seven year life. We have also increased the volatility of the
warrants from 10% to 32%. In determining the volatility of the warrants, we
calculated the historical volatility of three of our closest competitors in
the manufactured home industry. We then calculated the average of the
volatility of such industry competitors to estimate the volatility of
Cytation's warrants. Because Cytation, prior to January 18, 2006, was a
shell company, we have not considered the historical volatility of
Cytation's common stock in determining the volatility of the warrants.
Management's Discussion and Analysis of Financial Condition and Results of
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Operations
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Please note that, on page 48 under the caption entitled "Financing,"
we have disclosed that, on April 12, 2006, Cytation Corporation secured a
revolving line of credit in an amount not to exceed $2,500,000.00.
Liquidity and Capital Resources
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11. On pages 47 of the Schedule 14C, we have revised the discussion related to
Liquidity and Capital Resources to reflect that the Company made a cash
distribution to shareholders of $1,125,000 and a cash distribution of
$52,619 in 2004. Such discussion is now consistent with the amounts shown
in the statement of cash flows.
Exhibits
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12. We have attached our Certificates of Designation, Preferences and Rights of
our Convertible Preferred Stock, Series A, B, C, and D, as exhibits 99.7,
99.8, 99.9, and 99.10, respectively, to the Schedule 14C.
Exhibit 99.1
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Cytation Corporation Financial Statements.
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General
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13. The Company is accounting for the $6,000,000 earnout as contingent
consideration in accordance with paragraphs 25 through 28 of SFAS 141.
Because the amount, if any, of contingent consideration was not
determinable at the acquisition date, no amount for the contingency will be
recorded in the Company's financial statements until the contingency is
resolved, or the consideration is issued or becomes issuable. The Company
expects that, should any amount of contingent consideration be issuable,
such amount would result in an additional element of the cost of acquiring
Deer Valley Homebuilders, Inc.
The Company considered the effect of EITF 95-8 and based its analysis
on contingent consideration of a minimum of $0 and a maximum of $6,000,000
over the next five years. The Company views the earnout as nothing more
than a way for the Company to defer payments of the purchase price so the
Company did not have to pay Deer Valley Homebuilders Inc.'s shareholders
the entire amount on January 18, 2006. 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. However, the Company was
unwilling to do so, due to the fact that Deer Valley Homebuilders Inc. had
been in business less than two years and since it would be too dilutive to
the 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 former owners of Deer Valley Homebuilders Inc.
will be given a pro-rata portion of the maximum $6,000,000 PATA. Therefore,
based on this analysis the Company will account for all of the PATA, when
earned, by recording it as additional consideration for the acquisition of
Deer Valley Homebuilders, Inc. and will not record it as a period expense
related to compensation. The Company will account for this on an ongoing
basis and book any accrued liability in connection with the PATA as
incurred.
Audit Report of Independent Registered Public Accounting Firm, page F-1 and F-2
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14. The references to "auditing" have been removed as requested.
Statements of Changes in Stockholders' Deficit, page F-5
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15. Changes to retroactively reflect the 2-for-1 stock dividend have been made
throughout the financial statement as requested.
Exhibit 99.3
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Deer Valley Homebuilders Financial Statements
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Balance Sheets, page 3
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16. Changes as suggested were made to reflect the correct amount issued and
outstanding as of December 31, 2004.
Statements of Stockholders' Equity, page 5
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17. We have included on Deer Valley Homebuilders, Inc.'s Statement of
Stockholder's Equity a column that shows the changes during each period in
the number of shares held as treasury stock.
Note 1 - Income Taxes, page 8
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18. Changes have been made to the financials to reflect an adjustment for the
undistributed retained earnings to APIC as requested.
Note 9 - Repurchase Agreements, page 13
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19. In determining the estimate for repurchase reserves the company looked at a
combination of risk factors via specific identification of each dealer and
by examining the total potential liability including all dealerships (total
potential liability of $9,228,515 or 165 homes).
Using this methodology we looked at the anticipated loss on a per unit
basis as well as through a discounted invoice deduction.
1. On a per unit basis using a 5% default rate (which is 7.5
times our historical % of less than 1%) it was estimated that 8
homes could come under repurchase. Assuming a $3,000 cost per
unit to move inventory to another location it is estimated that
the potential liability of $24,000 should be reserved for
repurchases.
2. Using a 5% default rate on the total possible repurchase and
an anticipated 10% discount it is estimated that the potential
liability of $46,143 should be reserved for repurchases.
The average of the two methods was $35,071.
Using the specific identification methodology we categorized customers as
follows:
1. Dealerships located in Hurricane Katrina zone, where
manufactured housing shipments are expected to see substantial
increase in the next 24 months.
2. Dealerships rated in top 10 shipments for 2005
3. Dealerships rated in top 20 shipments for 2005
4. All others not meeting criteria above.
Dealerships falling under both criteria 1 and 2 were assigned a
zero default risk for the next 12 months.
Dealerships falling under criteria 1 were assigned a 2.5% default
risk for the next 12 months.
Dealerships falling under criteria 2 were assigned a 2.5% default
risk for the next 12 months.
Dealerships falling under criteria 1 and 3 were assigned a 2.5%
default risk for the next 12 months.
Dealerships falling under criteria 3 were assigned a 5% default
risk for the next 12 months.
Dealerships falling under criteria 4 were assigned a 7.5% default
risk for the next 12 months.
1. On a per unit basis using the above-mentioned default rates it
was estimated that 6 homes could come under repurchase. Assuming a
$3000 cost per unit to move inventory to another location it is
estimated that the potential liability of $18,000 should be reserved
for repurchases
2. Using the above-mentioned default rate on the total possible
repurchase and an anticipated 10% discount it is estimated that the
potential liability of $34,905 should be reserved for repurchases.
The average of the two methods was $26,452.
After considering the above information a reserve for repurchases was
established in the amount of $35,000.
In addition, management feels that due to its limited product
offering, only providing homes in the upper price point market segment, the
Company has further reduced its potential liability compared to other
manufactures in the industry. With dealerships stocking, on average, 2.3
Deer Valley homes, the risk of a large repurchase by a customer or a
geographic downturn is considered to be less than that of our competitors.
Exhibit 99.4
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General
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20. As discussed on our conference call, the audited financial statements of
Cytation corporation do not reflect the activity of DeerValley
Acquisitions, Corp. Cytation's acquisition of the ownership of DeerValley
Acquisitions Corp. occurred on January 18, 2006, immediately prior to the
acquisition of Deer Valley Homebuilders, Inc. Because DeerValley
Acquisitions, Corp. has had minimal activity, and historically was not
owned by Cytation Corp., we have shown DeerValley Acquisitions, Corp
separately to properly reflect the activity of that entity.
Pro Forma Balance Sheet as of December 31, 2005
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21. The Company issued 520,274 shares of Series A Convertible Preferred Stock
in connection with the transactions of January 18, 2006. Subsequently, the
Company issued additional shares of Series A Convertible Preferred Stock.
In the aggregate, the shares of Series A Convertible Preferred Stock issued
number 745,622. We have clarified our disclosure in "Change in Control and
Acquisition" accordingly.
22. We agree that merger related expenses should be capitalized as additional
purchase price and have changed the financials to properly reflect the
financial accounting treatment. Please see the detail provided in the pro
forma financial statements to answer what legal and investment banking fees
associated with the raise have been included as a reduction of APIC.
Consistent with financial accounting treatment, all associated fees in
connection with the preferred equity raise, investment banking commissions
payable to the NASD licensed broker dealer and legal fees, have been netted
with APIC.
23. As requested, we have presented the purchase price adjustments in a
separate column from the other pro forma adjustments.
24. As discussed on our conference call, Deer Valley Homebuilders, Inc. does
not have any patents, trademarks, customer contracts, or the like. The
Company does, however, have proven management who remained in place after
the acquisition. As such, the Company was unable to separately identify
specific intangibles and the Company believes it would be nearly impossible
to do so. Therefore, the Company booked such excess value to goodwill.
25. As discussed on our conference call, we have adjusted our pro forma balance
sheet and statement of operations in conformity with SFAS 109.
Pro Forma Consolidated Statements of Operations
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26. We previously did not include warrants in fully diluted earnings per share.
We have since, changed such calculation to include warrants.
27. We have removed the pro forma statement of operations for the year ended
December 31, 2004 per your request and pursuant to Rule 11-02( c)(2)(i) of
Regulation S-X.
28. Please see changes made to the pro forma statement of operations to
incorporate the correct disclosure of Preferred Stock dividends.
29. Please see changes made to the calculation of weighted average number of
shares outstanding.
30. Please see additional disclosure in footnote 2 and 3 to the statement of
operations.
31. Please see additional disclosure in footnote 2 and 3 to the statement of
operations.
Form 10-KSB for the Year Ended December 31, 2005
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32. We plan to similarly amend our Form 10-KSB for each comment above which
also impacts disclosures in our Form 10-KSB, after we are certain that
these disclosures are acceptable to the SEC.
Form 8-K/A filed February 21, 2006
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33. We plan to similarly amend our Form 8-K for each comment above which also
impacts disclosures in our Form 8-K, after we are certain that these
disclosures are acceptable to the SEC.
If you should have any questions regarding our amended Schedule 14C, please
do not hesitate to contact me.
Sincerely,
/s/ Charles G. Masters
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Charles G. Masters
President & Chief Executive Officer
Cytation Corporation
Cc: Bush Ross, P.A.