Deer Valley Corporation Form 10-KSB 12-31-2006
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D. C. 20549
FORM
10-KSB
(Mark
One)
[ü]
|
ANNUAL
REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF
1934
|
For
the fiscal year ended
December
30, 2006
[
] TRANSITION
REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For
the transition period from ____________ to
_________________
Commission
file number: 001-14800
DEER
VALLEY CORPORATION
(Name
of
small business issuer 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)
|
Issuer’s
telephone number: (813)
885-5998
Securities
registered under 12(b) of the Exchange Act: None
Securities
registered under 12 (g) of the Exchange Act:
Common
Stock, par value $0.001
(Title
of
Class)
Check
whether the issuer is not required to file reports pursuant to Section 13
or
Section 15(d) of the Exchange Act. Yes
No
✔
Check
whether the issuer (1) filed all reports required to be filed by Section
13 or
15(d) of the Securities Exchange Act of 1934 during the past 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
✔
No
Check
if
there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B and no disclosure will be contained, to the best of registrant’s
knowledge, in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB.
[
]
Indicate
by check mark whether the Registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes
No
✔
The
issuer’s revenues for its most recent fiscal year were $65,460,735. The
aggregate market value of the voting and non-voting common equity held by
non-affiliates as of March 23, 2007 was $7,659,617.1 For
purposes of the foregoing calculation only, directors and executive officers
and
holders of 10% or more of the issuer’s common capital stock have been deemed
affiliates. The number of shares outstanding of the Registrant’s common stock as
of March 23, 2007 was 8,461,854.
Transitional
Small Business Disclosure Format: Yes
___
No ✔
1
Market value based upon sales occurring on that date. Calculation does
not
account for common shares issuable upon conversion of convertible preferred
stock.
DEER
VALLEY CORPORATION
2006
FORM 10-KSB
PART
I
Special
Note Regarding Forward-Looking Statements
Information
included or incorporated by reference in this Annual Report on Form 10-KSB
may
contain forward-looking statements. This information may involve known and
unknown risks, uncertainties, and other factors which may cause our actual
results, performance, or achievements to be materially different from the
future
results, performance, or achievements expressed or implied by any
forward-looking statements. Forward-looking statements, which involve
assumptions and describe our future plans, strategies, and expectations,
are
generally identifiable by use of the words “may,” “should,” “expect,”
“anticipate,” “estimate,” “believe,” “intend,” or “project” or the negative of
these words or other variations on these words or comparable
terminology.
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.
Business
Development
The
Company, under the name Cytation Corporation, was incorporated under the
laws of
Delaware on November 1, 1999. Until June 20, 2001, the Company provided an
extensive range of in-school and online services directed at high school
students and their parents, high school counselors, college admissions officers,
and corporations which target the teen marketplace. On June 20, 2001, the
Company sold all of its assets associated with these activities to TMP Worldwide
Inc. for approximately $7.2 million in cash and debt assumed.
During
the period commencing with the fourth quarter of 2002 and ending in December
2004, the Company engaged in the business of providing consulting and related
services to private companies wishing to become reporting companies under
the
Securities Exchange Act of 1934. In the first quarter of 2005, the Company
discontinued all business operations except finding an appropriate private
entity with which it could acquire or merge.
On
January 18, 2006, the Company entered into the Securities Purchase and
Share Exchange Agreement, which, among other matters, resulted in (a) the
Company’s issuance of approximately $5,202,735 (or 520,274 shares) of its Series
A Convertible Preferred Stock, $.001 Par Value (“Series A Preferred Stock”),
Series A Common Stock Purchase Warrants exercisable for 6,936,980 shares
of
common stock (the “Series A Warrants”), and Series B Common Stock Purchase
Warrants exercisable for 3,468,490 shares of common stock (the “Series B
Warrants”) (the “Series A Preferred Offering”), and (b) the Company’s issuance
of its Interest Bearing Non-Convertible Installment Promissory Note, in the
original principal amount of One Million Five Hundred Thousand and No/100
Dollars ($1,500,000) (the “Debt Offering”). After January 18, 2006, the Company
closed on the sale of an additional $2,253,480 (or 225,348 shares) of Series
A
Preferred Stock.
In
addition, on January 18, 2006, the Company acquired 100% of the issued and
outstanding capital stock of Deer Valley Acquisitions Corp. (“DVA”), in exchange
for the issuance of (a) 49,451 shares of the Company’s Series B Preferred
Stock, $.001 Par Value (“Series B Preferred Stock”), (b) 26,750 shares of the
Company's Series C Preferred Stock, $.001 Par Value (the “Series C
Preferred Stock”), and (c) Series C Common Stock Purchase Warrants exercisable
for 2,000,000 shares of common stock of the Company. (the “Share Exchange”). DVA
was a Florida corporation formed in July 2005.
Immediately
after completion of the Series A Preferred Offering and Share Exchange, DVA,
a
wholly owned subsidiary of the Company, acquired 100% of the issued and
outstanding capital stock of Deer Valley Homebuilders, Inc. (“DVH”). DVH is an
Alabama corporation formed in January 2004.
In
connection with the Securities Purchase and Share Exchange Agreement, on
January
18, 2006, the Company issued an Interest Bearing Non-Convertible Installment
Promissory Note, in the original principal amount of One Million Five Hundred
Thousand and No/100 Dollars ($1,500,000), together with interest accruing
thereon at
an
annual
rate of twelve percent (12%) per annum (the “Promissory Note”). In March 2006,
the lender of these funds agreed to convert the Promissory Note into 150,000
shares of Series A Preferred Stock, Series
A
Common Stock Purchase Warrants entitling the holder to purchase 2,000,000
shares
of Common Stock at an exercise price of one dollar and fifty cents ($1.50)
per share, and Series
B
Common Stock Purchase Warrants entitling the holder to purchase 1,000,000
shares
of Common Stock at an exercise price of two dollars and twenty five cents
($2.25).
On
June
30, 2006, DVA filed Articles of Dissolution with the State of Florida and
completed transactions which resulted in the Company directly owning
DVH.
On
July
24, 2006 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
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 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.
In
early
November 2006, a shareholder approached the Company about exchanging registered
shares of the Company’s common stock for shares of the Company’s preferred stock
and “out of the money” warrants. On November 16, 2006, the Company entered into
a Share Exchange Agreement with that holder of the Company’s common stock, par
value $0.01 (the “Common Stock”) whereby the shareholder agreed to exchange
750,000 shares of Common Stock for 750,000 shares of the Company’s Series E
Convertible Preferred Stock (the “Series E Preferred Stock”) and Series F
Warrants (the “Series F Warrants”). The Series E Preferred Stock is convertible
into the Company’s Common Stock at the option of the holder any time after the
date of issuance on a one-for-one basis. The conversion rights of the holder
of
Series E Preferred Stock are limited so that the holder cannot convert
any
Series E Preferred Stock if, after such conversion, the number of shares
of
Common Stock beneficially owned by the holder and its affiliates, will
exceed
4.99% of the outstanding shares of Common Stock. Pursuant to the Share
Exchange
Agreement, the Company also issued the Series F Warrants. The Series F
Warrants
entitle the holder to purchase 750,000 shares of the Company’s Common Stock at
an exercise price of two dollars and twenty five cents ($2.25) per share.
The
Series F Warrants are exercisable, in whole or in part, at any time from
the
date of grant, November 16, 2006, and expire on the fifth anniversary of
the
grant date. Similar to the Series E Preferred Stock, the exercise rights
of the
Series F Warrants are limited so that the holder is not entitled to exercise
the
warrants if, after such exercise, the number of shares of common stock
beneficially owned by the holder and its affiliates, will exceed 4.99%
of the
outstanding shares of common stock. The Series E Preferred Stock and Series
F
Warrants were issued pursuant to the exemption from registration found
in
Section 3(a)(9) of the Securities Act of 1933. As a result of the
Share
Exchange Agreement, the 750,000 shares of registered Common Stock tendered
by
the shareholder to the Company were returned to the pool of authorized
but
unissued shares of the Company’s Common Stock.
Business
of the Issuer
Overview
The
Company, through its wholly-owned subsidiary, DVH, an Alabama corporation
with
its business offices located at 205 Carriage Street, P.O. Box 310, Guin,
Alabama
35563, is engaged in the production, sale and marketing of factory-built
homes
in the southeastern and south central U.S. housing market. As of the date
of
this filing, we manufacture all of our factory-built homes in two manufacturing
facilities, one located in Guin, Alabama and one located in Sulligent,
Alabama.
We rely upon a team of regional sales directors and approximately 80 independent
dealers to market our factory-built homes in over 100 retail locations.
As of
the date of this filing, we are selling our factory-built homes in 13 states
through our network of independent dealers and retail centers. On March
28, 2007,
we
showcased our new modular homes at the South Central Manufactured Housing
Institute Show in Tunica, Mississippi. The new modular units are “on-frame”
modular units designed to be sold through the Company’s existing dealer
network.
A
modular
home is a home comprised of sections, known as modules, which are built
in a
factory and transported to a site to be joined together on a permanent
foundation. Modular homes are distinct from factory-built homes constructed
in
accordance with the Federal Manufactured Home Construction and Safety Standards
(“HUD Code homes”). Unlike HUD Code homes, modular homes generally do not have
integrated frames and axles. On a HUD Code home, the metal frame on which
the
house is hauled is also the structural floor support of the home and remains
a
part of the home after installation. In most cases, a modular home, after
being
transported to a site, is hoisted off of a metal-frame trailer and attached
to a
foundation. The structural portion of the house is similar to typical
"stick-built" construction and the architectural freedom of the exterior
presents a “site-built” appearance.
Modular
homes are not new. Factory-built, timber-framed houses have been produced
for a
century. As an example, Sears, Roebuck and Co. sold approximately 100,000
factory-built, mail-order homes from 1908 to 1940 (the popular “Craftsman”
home). Over time, modular technology and quality has improved to the point
where, after installation, it is often almost impossible to tell the difference
between a traditional, stick-built home and a modular home. Additionally,
because of the greater quality control possible in a factory setting, the
quality of factory-built homes is often superior to site-built
homes.
Our
modular homes must be constructed in accordance with the local building
codes in
effect at the point of delivery. These codes vary from state to state and
also
within states. Such variance in standards is not conducive to standardized
factory construction of a quality home. Accordingly, we build our modular
homes
to the standards of the International Residential Code (“IRC”), which is
generally more stringent than local building codes. The IRC has been adopted
wholesale by several states and by selected localities in many
others.
Each
of
our HUD Code homes is constructed in accordance with the Federal Manufactured
Home Construction and Safety Standards promulgated by the U.S. Department
of
Housing and Urban Development, better known as the “HUD Code.” Our production
and marketing efforts have concentrated on multi-section homes and, as
of the
date of this filing, we have not delivered any hurricane-related Federal
Emergency Management Agency (“FEMA”) orders nor have we been contracted to do
so.
In
recent
years, the factory-built housing industry has suffered a downturn in sales
as a
result of a tightening of credit standards, restricted availability of
retail
and wholesale financing, and excessive inventory levels. Despite this industry
decline, which commenced in calendar year 1999, we have been able to
successfully launch our business through efficient manufacturing at our
production facilities, flexible product designs, an experienced and capable
sales team, stringent cost controls, and attention to dealer relations,
customer
satisfaction, and service efforts. Our HUD Code homes are often sold as
part of
a land-home package and may be financed by a conventional mortgage. Our
multi-section HUD Code homes have an interior, and often an exterior, appearance
indistinguishable from more traditional site-built homes. In addition,
the
exteriors of our modular homes can be customized to match the appearance
of
virtually any site-built home, with brick and stone facings
available.
Manufacturing
Operations
We
currently produce all of our factory-built homes at two manufacturing facilities
consisting of an approximately 118,000 square foot facility located in
Guin,
Alabama and a 65,992 square foot plant in Sulligent, Alabama. Our facilities
normally function on a single-shift, five-day work week basis. As of December
30, 2006, we were producing 10 floors per day or approximately 2,300 floors
on
an annual basis. A “floor” is a section of a HUD Code home. Our HUD Code homes
are constructed in accordance with the Federal Manufactured Home Construction
and Safety Standards (“HUD Standards”). In 2006, 100% of the HUD Code homes we
produced were built to HUD Standards.
We
plan
to continue operating on a single shift, five day work week basis. During
the
fiscal year which ended December 30, 2006, the Company produced an average
of 48
floor sections per week. This represented a 72% increase in floor section
production from the average of 28 floor sections per week we produced in
the
fiscal year ended December 31, 2005.
Because
all of our HUD Code homes are constructed in accordance with HUD Standards,
our
manufacturing facility is subject to strict oversight and monitoring by
the U.S.
Department of Housing and Urban Development, using independent third-party
inspection agencies for enforcement. Each home we manufacture complies
with the
HUD Standards and has a special label affixed to the exterior of the home
indicating that the home has been designed, constructed, tested, and inspected
to comply with stringent federal standards set forth in these HUD Standards.
As
required by the National Manufactured Home Construction and Safety Standards
Act
of 1974, each home that we manufacture may not be shipped from our factory
unless it complies with HUD Standards and receives a certification label
from an
independent third-party inspector. Our manufacturing facilities must meet
performance standards for heating, plumbing, air conditioning, thermal
and
electrical systems, structural design, fire safety, and energy efficiency.
We
also conduct our own in-plant inspection and quality assurance
program.
We
manufacture homes which are designed as primary residences ready for immediate
occupancy. The homes, many of which are customized at our factory to the
home
buyer’s specifications, are constructed in one or more sections and transported
by independent trucking companies to dealer locations or to a customer’s
site.
Our
homes
are manufactured under controlled conditions in an indoor facility located
on
25.5 acres in Guin, Alabama, which has approximately 107,516 square feet
of
floor space, a frame shop with 10,800 square feet, a material shed with
23,172
square feet of space and an office facility consisting of 11,250 square
feet of
space. In addition, the Company manufactures homes in a 65,992 square foot
plant
in Sulligent, Alabama. Please see “Description of Property” below for a fuller
description of the Guin and Sulligent plants. At the two plants we employ
an
average of 420 employees who generally work one shift per day, five days
per
week. Construction of our HUD Code homes is based upon an assembly line
system,
commencing by moving a unit through the plant, stopping at a number of
work
stations where various components and sub-assemblies are attached. Each
section
is permanently attached to a steel support chassis, and various components
are
later added, including floors, interior and exterior walls, roof, cabinets,
ceilings, and windows. It takes approximately 2 and 1/2 days to complete
construction of a HUD Code home at our manufacturing facilities. As of
December
30, 2006, we had the capacity to produce an aggregate of approximately
12 floors
per day. Once a HUD Code home has been assembled and quality review testing
has
been completed, the home is ready to be transported to a dealer location
or for
installation and connection to utility systems.
While
our
HUD Code homes are constructed with many of the same components and building
materials used in site-built homes, we utilize a cost-efficient assembly
line
manufacturing process which enables us to produce a quality home at a much
lower
cost per square foot than a traditional, site-built home. A Deer Valley
HUD Code
home is built with residential features, including 1/2 inch drywall, Thermopane™
brand windows, enhanced insulation, oak cabinets, cultured marble vanities,
and
two inch by six inch exterior wall construction standards.
The
extent of customization of our HUD Code homes varies to a significant degree
with the price of the homes. In the higher price range of the market, the
home
buyer is often less sensitive to the price increase associated with significant
design modifications. Our experience in producing a customized home on
a
cost-effective basis has allowed us to offer customized homes, factory-provided
trim-out services, and walk-through inspections of the home.
Because
the cost of transporting a factory-built home is significant, substantially
all
of our homes are sold to dealers within a 500 mile radius of our manufacturing
facility. DVH arranges, at dealers’ expense, for the transportation of finished
homes to dealer locations using independent trucking companies. Customary
sales
terms are cash--on-delivery or guaranteed payment from a floor-plan financing
source. Dealers or other independent installers are responsible for placing
the
home on site and connecting utilities.
Backlog
of Orders and Sales Policies
Substantially
all production of our factory-built homes is initiated against specific
orders.
As of December 30, 2006, our backlog of orders stood at two (2) weeks.
Dealer
orders are subject to cancellation prior to commencement of production,
and we
do not consider our backlog to be firm orders. Because we operate in an
industry
where order lead times are extremely short, we do not view backlog at any
point
in time to be indicative of the level of our future revenues.
Our
sales
are made to dealers either through floor-plan financing arrangements with
a
financial institution or on a cash basis. When a factory-built home is
purchased, we receive payment either directly from the dealer or from a
financial institution which has agreed to finance dealer purchases of our
factory-built homes. As is customary in our industry, many financial
institutions which finance dealer purchases require that we execute a repurchase
agreement which provides that, in the event a dealer defaults on its repayment
of the financing arrangement, we agree to repurchase the factory-built
home from
the financing institution, in accordance with a declining repurchase price
schedule that is mutually agreed upon. Because we do not build significant
inventories of either finished goods or raw materials and because we initiate
production against a specific product order, we do not have significant
inventories or a backlog of product orders.
Components
The
principal raw materials used in the production of HUD Code and modular
homes
include wood, wood products, panels, steel, sheetrock, vinyl siding, gypsum
wallboard, fiberglass insulation, carpet, appliances, electrical items,
windows,
roofing materials, electrical supplies, roof trusses, and plumbing fixtures.
We
believe that the raw materials used in the production of our factory-built
homes
are readily available from a wide variety of suppliers and that the loss
of any
single supplier would not have a material adverse effect on our business.
Although we rely upon Odyssey Group (sheet rock, plumbing, and other assembly
items), WoodPerfect (lumber supplies), Morris Sales Company (lumber and
siding,
panels), General Electric (appliances), and Owens Corning (insulation)
in
purchasing materials to assemble our homes, we are not dependent on a single
source or supplier for component purchases.
Products
In
March
2007, the Company continued to expand its product offerings with a new
modular
home line. The company initially constructed three floor plans between
1,770 and
1,980 square feet. The homes are constructed to IRC (International Residential
Code) standards and are currently offered in three states: Alabama, Mississippi,
and Louisiana. These modular homes include front load porch designs to
accommodate the narrow lot lines typical in coastal areas. Our modular
homes
will be constructed standard to a 110 mile per hour wind load and an optional
140 mile per hour wind load. The Company is seeking to expand into other
states
with new designs to fulfill the growing demand among builders and developers
for
factory-built structures. Typical features in our modular homes include
“heavy
built” construction very similar to Deer Valley Homebuilders, Inc.’s other
offerings. The Company will perform customization in this line of modular
homes,
as each builder has different needs.
We
currently offer 31 different models of HUD Code homes, with a variety of
decors
that are marketed under our Deer Valley brand name. We currently manufacture
and
sell single-section and multi-section HUD Code homes, with 97%of the HUD
Code
homes we produced in 2006 consisting of multi-section units. We offer over
31
different floor plans, ranging in size from approximately 840 to 2,580
square
feet. Many of our homes are customized to homebuyers’ specifications. We believe
that our willingness to offer factory trim-out services and customize floor
plans and design features to match homebuyers’ preferences is a principal factor
which differentiates us from our competitors.
Each
HUD
Code home typically includes three to five bedrooms, a great room which
functions as a living room, family room, and dining room, a kitchen, and
two or
three bathrooms and features central air conditioning and heating, a water
heater, a dishwasher, a refrigerator, a microwave, a cook top/range, and
an
oven. We offer a wide range of colors, moldings, and finishes and provide
optional features including fireplaces, wood floors, and modern kitchen
counter-tops. We continue to modify and improve the design of our HUD Code
homes
in consultation with our sales representatives and independent dealer network.
We also utilize computer-aided and other design methods in an effort to
continuously improve the design of our HUD Code homes and to permit our
customers to customize their purchases.
Deer
Valley has traditionally focused on designing factory-built homes with
features
comparable to site-built homes. In addition to offering the consumer options
specified in the preceding paragraph, Deer Valley generally offers extensive
customization of floor plan designs and exterior elevations to meet specific
customer preferences.
Once
a
HUD Code home has been completed at our manufacturing facility, we utilize
an
independent trucking company to transport the home to either a retail sales
center or a customer’s site. All transportation costs are borne by the
independent retailer or other independent installer, who is responsible
for
placing the HUD Code home on the customer’s site, joining the interior and
exterior seams and providing utility connections.
The
following table sets forth the total factory homes built and sold, square
footage, and retail price range in 2006:
Number
of Homes Sold:
Multi-section
Homes
|
2,311
floors or 1,151 units
|
Total
Homes
|
2,343
floors or 1,183 units
|
Type
of Homes
|
|
Square
Feet
|
|
Retail
Price Range (excluding land)
|
Multi-floor
Homes
|
|
1,560
to 2,580
|
|
$59,000
to $119,000
|
Single-floor
Homes
|
|
840
to 1,140
|
|
$39,000
to $59,000
|
Independent
Dealer Network
As
of the
date of this Filing, we had approximately 80 participating independent
dealers
marketing our factory-built homes at 100 locations. Our independent
dealers are
not required to exclusively sell our homes and will typically choose
to offer
the products of other manufacturers in addition to ours. We do not
have written
exclusive agreements with our independent dealers and do not have
any control
over the operations of, or financial interest in, any of our independent
dealers. We are not dependent on any single dealer, and in 2006,
our largest
dealer location accounted for approximately 12% of our sales.
We
believe that our independent dealer network enables us to avoid the
substantial
investment in management, capital, and overhead associated with company-owned
sales centers. Although we do not rely upon exclusive dealer arrangements,
we
typically rely upon a single dealer within a given geographical market
to
distribute our products. We believe our strategy of selling our homes
through
independent dealers helps to ensure that our homes are competitive
with those of
other companies in terms of quality, consumer acceptability, product
design, and
price.
Markets
Served
During
the fiscal year ended December 30, 2006, we estimate that the percentage
of our
revenues by region was as follows:
Regions
|
Primary
States
|
Percentage
of Revenue by Region
|
Southeast
|
Alabama,
Florida, Georgia, Kentucky, Mississippi, and Tennessee
|
60%
|
South
Central
|
Louisiana,
Oklahoma, Texas, Illinois, Arkansas, Missouri, and Indiana
|
40%
|
Our
manufacturing facility currently serves approximately 80 dealers and our
sales
staff maintains and monitors our relationships with each independent retailer
in
an effort to maintain excellent relationships with our network of independent
dealers.
Our
Sales Force
At
December 30, 2006, Deer Valley sold factory-built homes through approximately
80
independent dealers at approximately 100 retail locations in 13 states,
principally in the southeastern and south-central United States.
Deer
Valley markets its homes through product promotions tailored to specific
dealer
needs. In addition, Deer Valley advertises in local media and participates
in
regional factory-built housing shows.
Continuing
Operations
Factory-Built
Homes - Industry Overview
Our
HUD
Code homes are built entirely in our factories, in accordance with national
HUD
Standards specified by the U.S. Department of Housing and Urban Development
(HUD) through its Federal Manufactured Home Construction and Safety
Standards.
Factory-built
homes are constructed in a factory environment, utilizing assembly line
techniques, which allows for volume purchases of materials and components
and
more efficient use of labor. The quality of factory-built homes has increased
significantly, as producers generally build with the same materials as
site-built homes. Many features associated with site-built homes are included
in
factory-built homes, such as central heating, name-brand appliances, carpeting,
cabinets, walk-in closets, wall coverings, and porches. Also, many of our
independent dealers offer optional features including central air conditioning,
carports, garages, and furniture packages.
With
respect to the retail financing of HUD Code housing, interest rates are
generally higher and the terms of loans shorter than for site-built homes.
In
recent years, some lenders stopped extending loans to finance the purchase
of
HUD Code homes. This has had the effect of making financing for HUD Code
homes
even more expensive and more difficult to obtain relative to financing for
site-built homes.
Due
to
the difficult financing environment for chattel financing nationwide, the
industry has been trending toward more conventional mortgage financing for
land
and homes. Chattel financing is personal property financing secured only
by the
home and not by the underlying land on which the home is sited. In contrast,
“land and home” financing is real property financing secured by the home and by
the underlying land on which the home is placed.
Because
a
variety of products are described as “modular,” including educational and
commercial facilities, as well as single-family homes, accurate information
on
modular home sales is difficult to obtain. However, it is widely accepted
that
HUD Code home sales are trending downward largely due to being zoned out
of
certain urban and coastal areas. In addition, HUD Code sales are periodically
affected by financing shortages. Conversely, modular home shipments have
been
rising, as the availability of on-site labor decreases and the demand for
affordable housing increases.
Warranties,
Quality Control, and Service
We
endeavor to adhere to strict quality standards and continuously refine our
production procedures. In addition, in accordance with the construction codes
promulgated by HUD, an independent HUD-approved, third-party inspector inspects
each HUD Code home for compliance during construction at our manufacturing
facilities.
We
provide initial home buyers with a one-year limited warranty against
manufacturing defects in the home’s construction. In addition, direct warranties
are often provided by the manufacturers of components and
appliances.
We
have
experienced quality assurance personnel at each of our manufacturing facilities
who provide on-site service to dealers and home buyers. We continuously work
to
enhance our quality assurance systems, placing high emphasis on improving
the
value and appeal of our homes and reducing consumer warranty
claims.
Independent
Dealer Financing
Substantially
all of our independent dealers finance their purchases through “floor-plan”
arrangements under which a financial institution provides the dealer with
a loan
for the purchase price of the home and maintains a security interest in the
home
as collateral. In connection with a floor-plan arrangement, the financial
institution which provides the independent dealer financing customarily requires
DVH to enter into a separate repurchase agreement with the financial
institution, under which DVH is obligated, upon default by the independent
dealer, to repurchase the home at the original invoice price less the cost
of
all damaged/missing items, plus certain administrative and shipping expenses.
The repurchase agreement relates to homes located on an authorized dealer's
lot
and in new, sellable condition. As a result, the potential repurchase liability
may be offset by the value of the repurchased house. The risk of loss which
we
face under these repurchase agreements is also lessened by additional factors
listed under Item 6 of this filing, at “Reserve for Repurchase
Commitments.”
As
of
December 30, 2006, DVH’s contingent repurchase liability under floor plan
financing arrangements through independent dealers was approximately
$15,765,000. While homes repurchased by DVH under floor-plan financing
arrangements are usually sold to other dealers, no assurance can be given
that
DVH will be able to sell to other dealers homes which it may be obligated
to
repurchase in the future or that DVH will not suffer more losses with respect
to, and as a consequence of, those arrangements than we have accrued in our
financial statements.
Competition
The
factory-built housing industry is highly competitive at both the manufacturing
and retail levels, with competition based upon numerous factors, including
total
price to the dealer, customization to homeowners’ preferences, product features,
quality, warranty repair service, and the terms of dealer and retail customer
financing. We have many competitors, ranging from very large, experienced,
and
well-financed companies to small, specialized manufacturers. Numerous firms
produce HUD Code and modular homes in the southeastern and south central
United
States, many of which are in direct competition with us. In addition, certain
of
our competitors provide retail customers with financing from captive finance
subsidiaries.
HUD
Code
and modular homes also compete with other forms of housing, including site-built
and prefabricated homes. Historically, HUD Code housing has had a price
advantage over these other forms of housing. That advantage has deteriorated,
however, as the credit market in the HUD Code housing industry has, at both
the
retail and wholesale levels, continued to tighten, while interest rates for
site-built houses in recent years have been at historic lows, thus increasing
the competitive pressures on HUD Code housing.
The
capital requirements for entry as a producer in the factory-built housing
industry are relatively small. However, we believe that the qualifications
for
obtaining inventory financing, which are based upon the financial strength
of
the manufacturer and each of its dealers, have recently become more difficult
to
meet due to the departure of financial institutions from the market and efforts
of our competitors to add dealers to their sales network.
We
believe that our willingness to customize floor plans and design features
to
match customer preferences, offer factory-provided trim-out and installation
services, and provide efficient customer service differentiate us from most
of
our competitors in the factory-built housing industry.
Competitive
Niche
We
believe that we have certain competitive advantages in our market as described
below.
We
concentrate our efforts on manufacturing and marketing top-quality HUD Code
homes.
By
focusing our manufacturing efforts exclusively on HUD Code homes on a
cost-effective basis and by relying upon our strong network of regional
independent dealers within our geographical market, we have been able to
minimize our administrative and marketing expenses while providing our customers
with a competitively priced product which maximizes value for the purchase
price
paid for the home.
We
focus upon producing a superior quality home, with attention to detail, quality
materials, and service to our customers.
By
focusing our manufacturing efforts on the fastest-growing sector of the
factory-built housing industry, and by paying attention to manufacturing
details, procuring quality components and raw materials, and offering
factory-provided trim-out options and service capabilities to our customers,
we
have focused upon serving our customers who purchase a factory-built home
from
us. By providing factory trim-out services and walk-through services to
customers, we have been able to respond quickly to customer inquiries to
ensure
that our retail customers are satisfied with the quality of our home
products.
We
produce a quality factory-built home product which is competitively
priced.
By
focusing our efforts on controlling costs and maintaining a high quality
manufacturing facility, we have been able to provide a high-quality product
at
an attractive value. Our multi-section HUD Code homes sold for an average
retail
price ranging from $59,000 to $119,000 in 2006, excluding land costs. Our
single-section homes sold for an average retail price ranging from $39,000
to
$59,000 in 2006, excluding land costs.
We
have an experienced management team which has extensive experience in the
factory-built housing business.
Our
management team is made up of seasoned industry veterans in key leadership
positions whose interests are closely aligned with those of our shareholders.
Some of our senior management team members will receive substantial additional
payments from the acquisition of DVH by the Company, depending upon the future
success and profitability of DVH.
We
have a strong network of independent dealers.
We
have a
strong network of independent dealers who operate in a highly fragmented
industry consisting of approximately 8,000 dealers in the United States.
We do
not own any company retail stores and do not provide any financial or
insurance-related services which could significantly increase our administrative
expenses. We maintain close relationships with each of our independent dealers
and carefully monitor our service responsibilities to the customers who purchase
a factory-built home from us. We also provide significant volume discounts
to
our dealers in an effort to maintain a strong network of independent
dealers.
Regulation
Deer
Valley’s HUD Code homes are subject to a number of federal, state and local
laws. Construction of HUD Code housing is governed by the National Manufactured
Housing Construction and Safety Standards Act of 1974 (“1974 Act”). In 1976, HUD
issued regulations under the 1974 Act establishing comprehensive national
construction standards. The HUD regulations cover all aspects of HUD Code
home
construction, including structural integrity, fire safety, wind loads, thermal
protection, plumbing, and electrical work. Such regulations preempt conflicting
state and local regulations. Our manufacturing facilities and the plans and
specifications of our HUD Code homes have been approved by a HUD-designated
inspection agency. An independent, HUD-approved, third-party inspector checks
each of our HUD Code homes for compliance during at least one phase of
construction. In 1994, HUD amended construction safety standards to improve
the
wind force resistance of HUD Code homes sold for occupancy in coastal areas
prone to hurricanes. Failure to comply with the HUD regulations could expose
us
to a wide variety of sanctions, including closing our manufacturing plants.
We
believe that our HUD Code homes meet or surpass all present HUD
requirements.
HUD
Code,
modular, and site-built homes are all built with particleboard, paneling,
and
other products which contain formaldehyde resins. Since February 1985, HUD
has
regulated the allowable concentration of formaldehyde in certain products
used
in factory-built homes and requires manufacturers to warn purchasers concerning
formaldehyde-associated risks. We currently use materials in our factory-built
homes which meet HUD standards for formaldehyde emissions and which otherwise
comply with HUD regulations in this regard. In addition, certain components
of
factory-built homes are subject to regulation by the Consumer Product Safety
Commission (“CPSC”) which is empowered to ban the use of component materials
believed to be hazardous to health and to require the manufacturer to repair
defects in components of its homes. The CPSC, the Environmental Protection
Agency, and other governmental agencies are evaluating the effects of
formaldehyde. In February 1983, the Federal Trade Commission adopted regulations
requiring disclosure of HUD Code home’s insulation specifications.
Our
HUD
Code and modular homes are also subject to local zoning and housing regulations.
Utility connections are subject to state and local regulation, which must
be
followed by the dealer or other person installing the home. A number of states
require HUD Code and modular home producers to post bonds to ensure the
satisfaction of consumer warranty claims. Several states have adopted procedures
governing the installation of HUD Code and modular homes. We have complied
with
these requirements in Alabama, Mississippi, Louisiana, Arkansas, Georgia,
Florida, Tennessee, Kentucky, Indiana, Illinois, Missouri, Oklahoma, and
Texas.
Many of these states require that companies renew their compliance or notify
the
state after a change in ownership. We are taking the steps necessary to remain
in compliance with these state laws.
Regulatory
Approval
Other
than the regulations described above, no federal or state regulatory approvals
are required for our principal products and services.
Patents
and Licenses
We
do not
rely upon any significant patent rights, licenses or franchises under the
trademarks or patents of any other person or entity in conducting our business.
While DVH utilizes the mark “Deer Valley” and “Deer Valley Homebuilders” as
Company trademarks in marketing its factory-built homes, we do not own any
trademarks or patents registered with the United States Patent and Trademark
Office. However, we have applied for trademark protection for “Deer Valley
Homebuilders, Inc.” with the United States Patent and Trademark
Office.
Research
and Development
Due
to the nature of our business, we do not have a
significant formal research and development program and we do not allocate
significant funds for research and development activities.
Costs
and Effects of Compliance with Environmental Laws
There
are
no special or unusual environmental laws or regulations which require us
to make
material expenditures or which can be expected to materially impact the
operation of our business.
Employees
We
currently have approximately 420 employees, all of whom are full-time. None
of
our employees are represented by a labor union and we consider our relationships
with our employees to be good.
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. DVH’s principal manufacturing plant and offices are
located at 205 Carriage Street, Guin, Alabama 35563 (the “Guin Property”), and
its telephone number is (205) 468-8400. DVH’s principal manufacturing plant and
company offices consist 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. DVH owns the buildings and 25.5
acres
underlying these facilities. DVH has executed a mortgage on the Guin
Property
in favor of a national bank.
In
addition, DVH owns a satellite manufacturing facility with a 65,992 square
foot
manufacturing plant located on approximately 13 acres of land in Sulligent,
Alabama (the “Sulligent Property”). The purchase price for the Sulligent
Property was $725,000, subdivided as follows. DVH assumed the seller’s mortgage
of approximately $610,000 and agreed to pay the remaining $115,000 to the
seller
in equal monthly payments of $5,000 for twenty-three months. The seller of
the
Sulligent Property was Steven J. Logan, the father of DVH's President and
General Manager, Joel Logan. The Sales Contract was approved by the
disinterested members of DVH's Board of Directors and the Chief Executive
Officer of the Company.
We
believe that the general physical condition of our manufacturing facilities
and
executive offices is adequate to satisfy our current production needs.
Accordingly, there are no present plans to improve or develop any of the
unimproved or undeveloped portions of the Guin or Sulligent
Properties.
Except
for ownership of the manufacturing facilities we occupy or intend to occupy,
we
do not invest in real estate or real estate mortgages. It is not our policy
to
acquire properties for capital gain or rental income. In our opinion, we
have
sufficient property insurance for our property.
ITEM
3. 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
4. SUBMISSION
OF MATTERS TO A VOTE OF SECURITY HOLDERS
During
the fourth quarter of the fiscal year which ended on December 30, 2006,
no
matter was submitted to a vote of security holders.
PART
II
|
MARKET
FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND SMALL BUSINESS
ISSUER
REPURCHASES OF SECURITIES
|
Market
Information
Our
common stock trades on the OTC Bulletin Board under the trading symbol “DVLY.”
The figures set forth below reflect the quarterly high and low bid information
for shares of our common stock during the last two fiscal years, as reported
by
the OTC Bulletin Board. These quotations reflect inter-dealer prices without
retail markup, markdown, or commission, and may not represent actual
transactions. Please note that the board of directors approved a two-for-one
stock dividend on November 4, 2005, payable to shareholders of record as
of
November 14, 2005, which doubled the numbers of shares outstanding. Except
for
the prices listed for the quarter which ended on December 31, 2005, the 2005
prices in the following table reflect pre-dividend sales.
2005
Quarter Ended
|
|
High
|
|
Low
|
|
December
31, 2005
|
|
$
|
4.25
|
|
$
|
0.60
|
|
September
30, 2005
|
|
$
|
1.50
|
|
$
|
0.50
|
|
June
30, 2005
|
|
$
|
1.75
|
|
$
|
0.35
|
|
March
31, 2005
|
|
$
|
1.00
|
|
$
|
0.25
|
|
2006
Quarter Ended
|
|
|
|
|
|
|
|
December
30, 2006
|
|
$
|
2.35
|
|
$
|
1.45
|
|
September
30, 2006
|
|
$
|
2.90
|
|
$
|
1.11
|
|
July
1, 2006
|
|
$
|
3.90
|
|
$
|
2.25
|
|
April
1, 2006
|
|
$
|
2.97
|
|
$
|
1.10
|
|
Our
common stock is covered by an SEC rule imposing additional sales practice
requirements on broker-dealers who sell such securities to persons other
than
established customers and accredited investors, which are generally institutions
with assets in excess of $5,000,000, or individuals with net worth in excess
of
$1,000,000 or annual income exceeding $200,000, or $300,000 jointly with
a
spouse. For transactions covered by the rule, the broker-dealer must make
a
special suitability determination for the purchaser and transaction prior
to the
sale. Consequently, the rule may affect the ability of broker-dealers to
sell
our securities, and also may affect the ability of purchasers of our stock
to
sell their shares in the secondary market. The rule may also cause fewer
broker-dealers to be willing to make a market in our common stock, and it
may
affect the level of news coverage we receive.
Holders
Of Common Stock
On
March
23, 2007, there were 364 registered holders or persons otherwise entitled
to
hold our common shares pursuant to a shareholders’ list provided by our transfer
agent, Computershare Investor Services, N.A. The number of registered
shareholders excludes any estimate by us of the number of beneficial owners
of
common shares held in street name.
Dividends
We
have
not declared or paid any cash dividends on our common stock since our inception,
and our Board of Directors currently intends to retain all earnings for use
in
the business for the foreseeable future. Any future payment of dividends
to
holder of common stock will depend upon our results of operations, financial
condition, cash requirements, and other factors deemed relevant by our Board
of
Directors.
Securities
Authorized For Issuance Under Equity Compensation Plans
The
Company did not have an equity compensation plan in place as of December
30,
2006.
Recent
Sales of Unregistered Securities
Except
as
reported in previous filings, we did not sell any securities in transactions
which
were not registered under the Securities Act in the quarter ended December
30,
2006.
ITEM
6. MANAGEMENT’S
DISCUSSION
AND ANALYSIS OR PLAN OF
OPERATION
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
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 next Annual Report
on
form 10-KSB and in the press releases and other communications to shareholders
issued by us from time to time which attempt to advise interested parties
of the
risks and factors which may affect our business. We undertake no obligation
to
publicly update or revise any forward-looking statements, whether as a result
of
new information, future events, or otherwise.
Overview
At
the
end of 2005, the Company had nominal operations. The Company had revenues
of
$65,460,735 in fiscal year 2006, as compared to $59,114 in fiscal year 2005.
The
Company had a net profit of $2,798,543 in fiscal year 2006, as compared to
a net
loss of $173,605 in fiscal year 2005. The differences in the foregoing figures
are the result of the purchase of DVH.
As
a
result of the acquisition of Deer Valley Homebuilders, Inc. (“DVH”) on January
18, 2006, the Company now has gross revenues of approximately
$4,000,000 per
month
and significant assets. 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 of the fiscal year which ended
December 30, 2006 with the results of operations of the fiscal year which
ended
December 31, 2005. As a result, the remainder of this discussion examines
only
the results of the Company's operations for the fiscal year which ended December
30, 2006. In conjunction with this discussion it is imperative that investors
read the footnotes to the financial statements attached to this
filing.
DVH,
a
wholly-owned subsidiary of the Company, was formed in January, 2004, and
its
offices and principal manufacturing plant are located in Guin, Alabama. DVH
also
operates a manufacturing plant in Sulligent, Alabama. DVH manufactures and
designs factory-built homes which are sold to a network of independent dealers
located primarily in the southeastern and south central regions of the United
States. For more information on the company’s lines of business and principal
products and services, please see the section of this filing entitled
“Description of Business.” As of the date of this filing, DVH is producing
approximately 40 floors per week. For more information on floors and rates
of
production, please see the section of this filing entitled “Description of
Business.”
When
evaluating the Company’s financial condition and operating performance, the key
performance indicators management examines are (1) the Company’s production
rate, in “floors” produced per day, (2) the cost of sales, and (3) the size of
the Company’s sales backlog. For more information on these performance
indicators, please see the attached financial statements and notes thereto
and
the section of this document entitled “Description of Business.”
The
Company’s executives are currently focusing on two matters. First, management is
addressing the well-publicized slowdown in the housing industry with a focus
on
sales. Second, in recognition of an important trend in the housing market
toward
modular homes, management plans
to
rapidly increase the Company’s involvement in the modular segment of the
factory-built housing industry. Management
feels that the following areas present significant opportunities or risks
for
the Company:
1)
Entry into the Modular Housing Market
On
March
28, 2007,
the
Company showcased its new modular homes at the South Central Manufactured
Housing Institute Show in Tunica, Mississippi. The specific modular units
shown
in Tunica were “on frame” modular homes designed to be sold through the
Company’s existing dealer network.
As
part
of a strategic plan to extend its growth, the Company plans to rapidly increase
its involvement in the modular segment of the factory-built housing industry.
To
accelerate its entry into the modular housing industry, the Company is also
currently considering the potential acquisition of one or more well-established
modular home manufacturers. The products of such targeted acquisition candidates
are frequently sold to developers and established contractors, whereby the
manufacturer essentially acts as a major subcontractor. In addition to modular
homes to be sold under its own labels through locally based channels or directly
to developers, the Company also plans to enter into contracts to fabricate
a
series of private-label modular homes to be sold through specialized regional
and national sales channels.
Despite
the current downturn in the domestic housing market, the Company notes that,
on
a worldwide basis the demand for factory-built homes is increasing. This
growth
is the result of the industry’s ability to achieve more uniform quality, better
cost control, more reliable completion dates, and reduced vulnerability to
adverse weather, as compared to traditional, site-built houses. Management
hopes
that the Company’s entry into the modular housing market will leverage Deer
Valley’s reputation for exceptional expertise and service in factory-built
homebuilding into increased market share and profits. Additionally, opening
an
entirely new market for the Company’s products is intended to advance Deer
Valley as a key player in the factory-built housing industry. Of course,
there
can be no guarantee that the Company’s initial foray into the modular housing
market will be successful, since competition in this industry is
intense.
2)
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.
3)
Downturn in the HUD Code Housing Industry
In
recent
years, the HUD Code housing industry experienced a prolonged and significant
downturn as consumer lenders began to tighten underwriting standards and
curtail
credit availability in response to higher than anticipated rates of loan
defaults and significant losses upon the repossession and resale of homes
securing defaulted loans. According to the Manufactured Housing Institute,
domestic shipments of HUD Code homes peaked in calendar year 1998 with the
shipment of 372,843 homes, before declining to a total of 130,802 HUD Code
homes
in calendar year 2004. Shipment
levels of all types of HUD Code homes in 2006 were the lowest since 1962,
and
some analysts fear that 2007 shipments could be even lower. HUD-Code home
sales
numbered 146,800 in 2005, and 2006 HUD-Code sales are projected to be
approximately 118,000. Management estimates that 2007 will see aggregate
HUD-Code sales in the industry of 115,000 to 120,000 homes, which would place
2007 roughly on a par with 2006 sales. Most growth in the factory-built housing
industry for calendar year 2007 is expected to be in the modular home segment,
which several large manufacturers are aggressively targeting as a source
of
increased sales, especially in the hurricane-ravaged Gulf Coast
market.
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 factory-built 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 HUD Code
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 HUD Code housing industry.
4)
Changing Dynamics in the Gulf Coast Market in the wake of Hurricane Katrina.
Hurricane
Katrina created a great need for the rapid provision of temporary housing
in the
Gulf Coast Region, prompting the Federal Emergency Management Agency (“FEMA”) to
order large numbers of FEMA houses, which are similar to small, single-wide
HUD-Code homes. With the FEMA demand “bubble” having passed, management concurs
with others in the industry who believe that the overall market is weaker
than
at this point in 2006 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. Through December 30, 2006, reconstruction
and
replacement efforts had not yet developed at the pace expected, reflecting
a
complex and unpredictable interplay of FEMA, insurance claims, and other
rebuilding issues.
In
the
weeks subsequent to September
30, 2006, FEMA began releasing new guidelines related to reconstruction in
storm
damaged areas along the Gulf Coast. As a result of having the new
guidelines, local authorities can now begin issuing new building permits,
and
insurance companies can quote and issue new
homeowner
policies in the affected areas. Furthermore, federal, state, and local
funding programs for rebuilding appear to be closer to disbursing funds,
and
insurance claims are reportedly being resolved at a slightly quicker pace.
Finally, both modular and HUD Code housing is being permitted in certain
areas
where only site-built houses were previously allowed. As a result of all
of these factors, Management believes that, beginning in the second half
of
calendar year 2007, there will be an upswing in production for the portion
of
the industry serving the Gulf Coast to meet a long-delayed demand for
factory-built housing, particularly for modular homes, along
the
Gulf coast. The Company believes that it is well-positioned geographically
to serve the target area. Because the Company exclusively builds a “heavy
built” version of the HUD Code house with finished drywall interiors, the
inclusion of modular homes in our product line presents few challenges to
our
existing manufacturing operations. Nevertheless, modular homes require more
on-site erection and finishing. Consequently, the Company expects to augment
its
distribution and dealer support system to facilitate delivery of this new
product series.
5)
Rising Interest Rates, “Floor Plan” Credit Available to HUD Code Home Dealers,
and Chattel Financing.
Interest
rates have a marked effect upon the housing market. Management feels that
an
upward trend in interest rates could drive buyers from new, traditional,
“site
built” homes toward the upper end of the HUD Code housing market, where our
products are positioned. In fact, increasing numbers of delinquencies on
sub-prime loans to purchasers of site-built homes has led to a recent tightening
of credit standards, which could make HUD Code housing a more attractive
option
to home buyers. As a countereffect, increased interest rates have resulted
in an
increased inventory of site-built homes on the market, which, in turn, has
increased pressure on the HUD Code 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 HUD Code 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 HUD Code home dealers,
approximately one-fourth of the floor plan financing available to HUD Code
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.
Recently,
a major provider of HUD Code housing chattel financing, Green Tree Servicing,
LLC (“Green Tree”), announced that it would no longer offer chattel financing
but would instead focus on servicing existing loans. The effect of Green
Tree’s
exit from the market remains to be seen. Other providers have indicated their
ability to handle additional business, and it is possible that Green Tree’s
departure may bolster the business of other chattel finance providers and
thereby strengthen the overall chattel finance industry. Conversely, purchasers
of HUD Code homes will have less choice among chattel finance
providers.
Management
expects the recent “sub-prime” mortgage debacle to affect the typical purchaser
of our homes less than the purchasers of lower-priced HUD-Code units because
purchasers of our homes are typically more creditworthy or can pay cash.
Nevertheless, the perceived crash in the mortgage market is causing a temporary
glut of site-built homes, which affects the entire housing market, including
the
Company.
Results
of Operations
The
following discussion of our financial condition and results of operations
should
be read in conjunction with our financial statements, included herewith.
This
discussion should not be construed to imply that the results discussed herein
will necessarily continue into the future, or that any conclusion reached
herein
will necessarily be indicative of actual operating results in the future.
Such
discussion represents only the best present assessment by our management.
As
explained above, historical financial information is presented only for the
year
ended December 30, 2006. Information for the year ended December 30, 2006
is
that of the Company on a consolidated
basis
with Deer Valley Homebuilders, Inc., which reflects the Company’s acquisition of
Deer Valley Homebuilders, Inc. on January
18, 2006, pursuant to the terms of the Securities Purchase and Share Exchange
Agreement.
HISTORICAL
RESULTS - FISCAL YEAR ENDED DECEMBER 30, 2006.
INTRODUCTORY
EXPLANATORY NOTE. 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 of the fiscal year which ended
December 30, 2006 with the results of operations of the fiscal year which
ended
December 31, 2005. As a result, the remainder of this discussion examines
only
the results of the Company's operations for the fiscal year which ended December
30, 2006. In conjunction with this discussion it is imperative that investors
read the footnotes to the financial statements attached to this
filing.
Revenues.
Overall
net revenues for the year ended December 30, 2006 were $65,460,735.
Selling,
General, and Administrative Expenses. General
and administrative expenses consisted of payroll and related expenses for
executive, accounting, and administrative personnel, professional fees, and
other general corporate expenses. Selling, general, and administrative expenses
for the year ended December 30, 2006 were $6,078,914. These general and
administrative costs have increased at
our
operating subsidiary
primarily due to increased production, sales, and operating expenses.
The production direct cost of goods was generally in the same
ratio to sales (production
direct cost increased from 82% of sales to 84.5% of sales).
All
of the
increase was a result of higher warranty costs
during
the year ended December 30, 2006, with increased quantity discounts being
offset
by a rise in material cost.
Net
Income (Loss). The
net
income for the year ended December 30, 2006 was $2,798,543. 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 year ended December 30, 2006 was $6,456,956. Increased
production and sales of our products have bolstered net income. The effect
of
the beneficial conversion features were fully realized as of the end of the
quarter ended September 30, 2006 and, consequently, will not affect future
financial statements.
Liquidity
and Capital Resources
Management
believes that the Company has sufficient cash flow from operations, available
bank borrowings, cash, and cash equivalents to meet its short-term working
capital requirements for the next 12 months. The Company’s sales of HUD
Code homes generate an average positive cash flow in excess of $321,000 per
month. Should our costs or expenses prove to be greater than we currently
anticipate, should sales drop significantly, or should we change our current
business plan in a manner which will increase or accelerate our anticipated
costs and expenses, such as through the acquisition of new products, the
depletion of our working capital would be accelerated.
Management
believes that the Company will need additional production capacity in order
to
sustain the Company’s historical rate of growth. Accordingly, the Company may
seek to acquire or construct additional manufacturing facilities, which would
require additional capital inputs Consequently, the Company may seek additional
equity or debt financing. However, because the probability of expansion of
the
Company’s production capacity is currently indeterminate, the Company cannot
ascertain the amount of any such additional financing.
During
2006, the company spent its cash to pay expenses and to fund increases in
production capacity. During 2007, the Company also must begin to meet the
payment obligations related to the Earnout Agreement described in Item 12
of
this filing. In 2007, the parties to the Earnout Agreement may demand payment
of
$1,232,275
which is
one-half of the funds accrued thus far, $2,464,550.. 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
Company is contingently liable under the terms of repurchase agreements with
financial institutions providing inventory financing for retailers of the
Company’s products. These arrangements, which are customary in the industry,
provide for the repurchase of products sold to retailers in the event of
default
by the retailer. The risk of loss under these agreements is spread over numerous
retailers. The price the Company is obligated to pay generally declines over
the
period of the agreement (typically 18 to 24 months) and the risk of loss
is
further reduced by the sale value of repurchased homes. The maximum amount
for
which the Company is contingently liable under such agreements amounted to
approximately
$15,765,000
at December 30, 2006. As of December 30, 2006 the Company has reserved $77,500
for future repurchase losses, based on prior experience and an evaluation
of
dealers’ financial conditions. The Company to date has not experienced
significant losses under these agreements, and management does not expect
any
future losses to have a material effect on the accompanying financial
statements. The risk of loss which we face under these repurchase agreements
is
also lessened by additional factors listed below under “Reserve for Repurchase
Commitments.”
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 to 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
December 30, 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 which expired
on
January 27, 2007 and was not renewed. Personally guaranteed by Joel Logan,
President
and General Manager of Deer Valley Homebuilders, Inc.
A
letter
of credit issued through a national bank in the amount of $150,000 to the
favor
of beneficiary Textron, which has since expired and not been
renewed.
A
letter
of credit issued through a national bank in the amount of $380,000 to the
favor
of beneficiary Universal Insurance, on a bond.
A
letter
of credit issued through a national bank in the amount of $50,000 to the
favor
of beneficiary Lincoln General, on a Florida bond.
A
letter
of credit issued through a national 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 December
30,
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
a
national 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 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 that affect the reported amounts of assets, liabilities,
revenues and expenses, and related disclosures of contingent assets and
liabilities. For a description of those estimates, see Note 3, Summary of
Significant Accounting Policies, contained in the explanatory notes to our
financial statements for the fiscal year ended December 30, 2006, contained
in
this filing. On an ongoing basis, we evaluate our estimates, including those
related to reserves, deferred tax assets and valuation allowance, impairment
of
long-lived assets, fair value of equity instruments issued to consultants
for
services, and estimates of costs to complete contracts. We base our estimates
on
historical experience and on various other assumptions which we believe to
be
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying value of assets and liabilities which
are
not readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions. However, we believe
that
our estimates, including those for the above-described items, are
reasonable.
Critical
Accounting Estimates
Management
is aware that certain changes in accounting estimates employed in generating
financial statements can have the effect of making the Company look more
or less
profitable than it actually is. Management does not believe that either the
Company or its auditors have made any such changes in accounting estimates.
A
summary of the most critical accounting estimates employed by the Company
in
generating financial statements follows below.
Beneficial
Conversion Features
In
connection with the Company’s Series A and Series D Convertible Preferred Stock
Offerings, the Company determined that the securities issued had beneficial
conversion features. Therefore, during the first three quarters of the fiscal
year which ended December 30, 2006, the Company amortized the attributed
value
of the beneficial conversion features. With the realization of the deemed
dividend to shareholders in the third quarter, the impact of the beneficial
conversion features upon the Company’s financial statements ceased.
Consequently, the earnings per share for the fourth quarter of the fiscal
year
which ended December 30, 2006 appear disproportionately higher than the earnings
per share for the three prior quarters. However, the discrepancy between
quarterly results should be viewed as a result of the discontinuation of
the
impact of the beneficial conversion features rather than as an indicator
of
improved manufacturing performance or sales.
Warranties
We
provide our retail buyers with a one-year limited warranty covering defects
in
material or workmanship, including plumbing and electrical systems. We record
a
liability for estimated future warranty costs relating to homes sold, based
upon
our assessment of historical experience and industry trends. In making this
estimate, we evaluate historical sales amounts, warranty costs related to
homes
sold and timing in which any work orders are completed. We have a reserve
for
estimated warranties of $2,000,000 as of December 30, 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 factory-built
homes
are made to our independent dealers. Volume incentive reserves are recorded
based upon the annualized purchases of our independent dealers who purchase
a
qualifying amount of home products from us. We accrue a liability to our
dealers, based upon estimates derived from historical payout rates. Volume
incentive costs represent a significant expense to us, and any significant
changes in actual payouts could have an adverse affect on our financial
performance. We had a reserve for volume incentives payable of $791,928 as
of
December 30, 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 factory-built home at our original
invoice price less the cost of administrative and shipping expenses. Our
potential loss under a repurchase obligation depends upon the estimated net
resale value of the home, as compared to the repurchase price that we are
obligated to pay. This amount generally declines on a predetermined schedule
over a period that usually does not exceed 24 months.
The
risk
of loss that we face under these repurchase agreements is lessened by several
factors, including the following:
|
(i) |
the
sales of our products are spread over a number of independent
dealers,
|
|
(ii) |
we
have had only isolated instances where we have incurred a repurchase
obligation,
|
|
(iii)
|
the
price we are obligated to pay under such repurchase agreements
declines
based upon a predetermined amount over a period which usually does
not
exceed 24 months, and
|
|
(iv)
|
we
have been able to resell homes repurchased from lenders at current
market
prices, although there is no guarantee that we will continue to
be able to
do so.
|
The
maximum amount for which the Company is contingently liable under such
agreements amounted to approximately
$15,765,000
at
December 30, 2006. As of December 30, 2006 we had a reserve of $77,500,
respectively, established for future repurchase commitments, based upon our
prior experience and evaluation of our independent dealers’ financial
conditions. Because Deer Valley to date has not experienced any significant
losses under these agreements, management does not expect any future losses
to
have a material effect on our accompanying financial
statements.
Revenue
Recognition
Revenue
for our products sold to independent dealers are generally recorded when
all of
the following conditions have been met: (i) an order for the home has been
received from the dealer, (ii) an agreement with respect to payment terms
has
been received, and (iii) the home has been shipped and risk of loss has passed
to the dealer.
Recent
Accounting Pronouncements
|
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.
|
In
February 2007, the FASB issued SFAS No. 159, The
Fair Value Option for Financial Assets and Financial
Liabilities.
SFAS
No. 159 permits entities to choose to measure many financial instruments
and
certain other items at fair value. SFAS No. 159 will be effective at the
beginning of fiscal year 2008. We are presently evaluating the impact of
the
adoption of SFAS No. 159 on our results of operations and financial
position.
In
September 2006, the SEC issued Staff Accounting Bulletin No. 108 (“SAB No.
108”), Considering
the Effects of Prior Year Misstatements When Quantifying Misstatements in
Current Year Financial Statements.
SAB No.
108 provides guidance to registrants for assessing materiality. SAB No. 108
states that registrants should use both a balance sheet approach and income
statement approach when quantifying and evaluating the materiality of a
misstatement. SAB No. 108 also provides guidance on correcting errors under
the
dual approach as well as transition guidance for correcting previously
immaterial errors that are now considered material. We adopted SAB No. 108
as of
January 1, 2007 without any impact on our 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. DVH’s principal manufacturing plant and offices are
located at 205 Carriage Street, Guin, Alabama 35563, and its telephone number
is
(205) 468-8400. DVH’s principal manufacturing plant and company offices consists
of 25.5 acres, on which are a manufacturing plant with 107,511 square feet,
a
frame shop with 10,800 square feet, a material shed of 23,172 square feet,
and
offices with 11,250 square feet of space. In addition, DVH owns a satellite
manufacturing facility with a 65,992 square foot manufacturing plant located
on
approximately 13 acres of land in Sulligent, Alabama. DVH owns the buildings
land underlying these facilities, subject to mortgages. Please see the section
of this filing entitled “Description of Property” for more information on our
manufacturing facilities.
Deer
Valley Homebuilders, Inc. maintains a website at www.deervalleyhb.com.
The
information contained on Deer Valley’s website is not a part of this filing, nor
is it incorporated by reference into this filing.
The
Company does not invest in real estate or real estate mortgages.
Off-Balance
Sheet Arrangements
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 DVH, as an earnout, based upon the Net Income Before Taxes
of
DVH during the next five (5) years, up to a maximum of $6,000,000. The business
purpose of executing the Earnout Agreement was to set the purchase price
of Deer
Valley Homebuilders, Inc. by an objective standard, given that the owners
of DVH
and the Company could not agree on an outright purchase price. The Company’s
obligations under the Earnout Agreement could negatively affect earnings
per
share, liquidity, capital resources, market risk, and credit risk.
During
the term of the Earnout Agreement, 50% of the Pre-Tax Profit, as defined
in the
Earnout Agreement, exceeding $1,000,000 per year will be accrued and become
distributable to the former owners of DVH. DVH had Pre-Tax Profit in the
fiscal
year ended December 30, 2006 in the amount of $4,936,287
of which
$3,936,287
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 $1,968,143
The
maximum remaining potential accrual under the Earnout Agreement is $3,539,450.
At
the
end of 2005, the Company had nominal operations and was a shell company (as
defined in Rule 12b-2 of the Exchange Act). As a result of the acquisition
of
Deer Valley Homebuilders, Inc. on January 18, 2006, the Company now has
significant assets and gross revenues of approximately
$4,000,000
per
month. To facilitate understanding of the financial effect of this acquisition
and for clarity of presentation, the following financial statements are included
in this report on Form 10-KSB. It is imperative that investors read the
footnotes to the financial statements.
DEER
VALLEY CORPORATION & SUBSIDARY
(KNOWN
AS CYTATION CORPORTATION PRIOR
TO JULY 26, 2006)
CONSOLIDATED
FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2006 AND 2005
CONTENTS:
|
|
|
|
|
|
Report
of Independent Registered Public Accounting Firm
|
|
F-1
|
|
|
|
Consolidated
Balance Sheets as of December 31, 2006 and 2005
|
|
F-2
|
|
|
|
Consolidated
Statements of Operations for the years ended December 31, 2006
and
2005
|
|
F-3
|
|
|
|
Consolidated
Statements of Stockholders' Equity (Deficit) for the years ended
December
31, 2006 and 2005
|
|
F-4
|
|
|
|
Consolidated
Statements of Cash Flows for the for the years ended December 31,
2006 and
2005
|
|
F-7
|
|
|
|
Notes
to Consolidated Financial Statements
|
|
F-8 |
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The
Board
of Directors and Stockholders
Deer
Valley Corporation
Tampa,
Florida
We
have
audited the consolidated accompanying balance sheets of Deer Valley Corporation
and Subsidiary as of December 31, 2006 and 2005 and the related consolidated
statements of operations, stockholders' equity (deficit), and cash flows
for the
years then ended. These consolidated financial statements are the responsibility
of the company's management. Our responsibility is to express an opinion
on
these financial statements based on our audit.
We
conducted our audits in accordance with auditing standards of the Public
Company
Accounting Oversight Board (United States). Those standards require that
we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that
our
audits provide a reasonable basis for our opinion.
In
our
opinion, the consolidated financial statements referred to above present
fairly,
in all material respects, the financial position of Deer Valley Corporation
and
Subsidiary at December 31, 2006 and 2005, and the results of operations and
cash
flows for the years then ended, in conformity with accounting principles
generally accepted in the United States.
/s/
Herman, Lagor, Hopkins & Meeks, P.A.
Herman,
Lagor, Hopkins & Meeks, P.A.
Tampa,
Florida
March
24,
2007
DEER
VALLEY CORPORATION & SUBSIDIARY
(KNOWN
AS CYTATION CORPORTATION PRIOR
TO JULY 26, 2006)
CONSOLIDATED
BALANCE SHEETS
ASSETS
|
|
|
|
December
31,
|
|
December
31,
|
|
|
|
2006
|
|
2005
|
Current
Assets:
|
|
|
|
|
|
|
|
|
Cash
|
|
|
$
|
7,431,152
|
|
$
|
221
|
|
Accounts
receivable
|
|
|
|
2,174,998
|
|
|
-
|
|
Employee
advances
|
|
|
|
16,600
|
|
|
-
|
|
Inventory
|
|
|
|
1,297,643
|
|
|
-
|
|
Deferred
tax asset
|
|
|
|
742,853
|
|
|
-
|
|
Prepaid
expenses
|
|
|
|
103,969
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Total
current assets
|
|
|
|
11,767,215
|
|
|
221
|
|
|
|
|
|
|
|
|
|
|
Property,
plant and equipment, net
|
|
|
|
3,207,269
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
|
5,721,413
|
|
|
|
|
Other
assets
|
|
|
|
140,162
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Total
Assets
|
|
|
$
|
20,836,059
|
|
$
|
221
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS'EQUITY (DEFICIT)
|
|
|
|
|
|
|
|
|
|
Current
Liabilities:
|
|
|
|
|
|
|
|
|
Current
maturities of long term debt
|
|
|
$
|
1,308,363
|
|
$
|
-
|
|
Accounts
payable
|
|
|
|
780,023
|
|
|
48,416
|
|
Accrued
expense
|
|
|
|
2,651,786
|
|
|
|
|
Accrued
warranties
|
|
|
|
2,000,000
|
|
|
|
|
Income
taxes payable
|
|
|
|
307,430
|
|
|
-
|
|
Accrued
preferred dividends
|
|
|
|
217,507
|
|
|
|
|
Other
liabilities
|
|
|
|
-
|
|
|
5,500
|
|
Total
current liabilities
|
|
|
|
7,265,109
|
|
|
53,916
|
|
|
|
|
|
|
|
|
|
|
Long
Term Liabilities:
|
|
|
|
|
|
|
|
|
Long-term
debt, net of current maturities
|
|
|
|
3,121,084
|
|
|
85,000
|
|
|
|
|
|
|
|
|
|
|
Total
Liabilities
|
|
|
|
10,386,193
|
|
|
138,916
|
|
|
|
|
|
|
|
|
|
|
Stockholders'
Equity (Deficit):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series
A Preferred stock, $0.01 par value, 750,000 shares authorized,
657,525 and
0 shares issued and outstanding, respectively
|
|
|
|
6,575,245
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Series
B Preferred stock, $0.01 par value, 49,451 shares authorized,
0 shares
issued and outstanding
|
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
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,
0 shares
issued and outstanding
|
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Series
E Preferred stock, $0.01 par value, 750,000 shares authorized,
750,000
shares issued and outstanding
|
|
|
|
7,500
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Common
stock, $0.001 par value, 100,000,000 shares authorized, 8,186,572
and
982,622 shares issued and outstanding, respectively
|
|
|
|
8,186
|
|
|
982
|
|
|
|
|
|
|
|
|
|
|
Additional
paid-in capital
|
|
|
|
43,233,623
|
|
|
32,723,371
|
|
|
|
|
|
|
|
|
|
|
Shares
subscribed (not issued)
|
|
|
|
-
|
|
|
(23,500
|
)
|
|
|
|
|
|
|
|
|
|
Accumulated
deficit
|
|
|
|
(39,374,956
|
)
|
|
(32,839,548
|
)
|
|
|
|
|
|
|
|
|
|
Total
Stockholders' Equity (Deficit)
|
|
|
|
10,449,865
|
|
|
(138,695
|
)
|
|
|
|
|
|
|
|
|
|
Total
Liabilities and Stockholders' Equity (Deficit)
|
|
|
$
|
20,836,059
|
|
$
|
221
|
|
SEE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DEER
VALLEY CORPORATION & SUBSIDIARY
(KNOWN
AS CYTATION CORPORTATION PRIOR
TO JULY 26, 2006)
CONSOLIDATED
STATEMENTS OF OPERATIONS
|
For
the Years Ended December 31,
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
|
Revenue
|
$
|
65,460,735
|
|
$
|
59,114
|
|
|
|
|
|
|
|
|
Cost
of Revenue
|
|
55,191,471
|
|
|
1,738
|
|
|
|
|
|
|
|
|
Gross
Profit
|
|
10,269,264
|
|
|
57,376
|
|
|
|
|
|
|
|
|
Operating
Expenses
|
|
|
|
|
|
|
Depreciation
|
|
194,688
|
|
|
1,037
|
|
Selling,
general and administrative
|
|
6,078,914
|
|
|
246,533
|
|
|
|
|
|
|
|
|
Total
Operating Expenses
|
|
6,273,602
|
|
|
247,570
|
|
|
|
|
|
|
|
|
Operating
Income/(Loss)
|
|
3,995,662
|
|
|
(190,194
|
)
|
|
|
|
|
|
|
|
Other
Income (Expenses)
|
|
|
|
|
|
|
Gain
on sale and distribution of investment
|
|
-
|
|
|
31,902
|
|
Loss
on termination of ARE agreement
|
|
-
|
|
|
(5,000
|
)
|
Gain
(loss) on sale of property and equipment
|
|
14,540
|
|
|
(4,270
|
)
|
Interest
income
|
|
131,476
|
|
|
(6,043
|
)
|
Interest
expense
|
|
(130,857
|
)
|
|
-
|
|
|
|
|
|
|
|
|
Total
Other Income (Expenses)
|
|
15,159
|
|
|
16,589
|
|
|
|
|
|
|
|
|
Income
(Loss) Before Income Taxes
|
|
4,010,821
|
|
|
(173,605
|
)
|
|
|
|
|
|
|
|
Income
Tax Expense
|
|
(1,212,278
|
)
|
|
-
|
|
|
|
|
|
|
|
|
Net
Income/(Loss)
|
|
2,798,543
|
|
|
(173,605
|
)
|
|
|
|
|
|
|
|
Dividends
to preferred stockholders
|
|
(478,474
|
)
|
|
-
|
|
Deemed
dividend to preferred stockholders on beneficial conversion
feature
|
|
(8,777,025
|
)
|
|
-
|
|
|
|
|
|
|
|
|
Net
Income/(Loss) Available to Common Shareholders
|
$
|
(6,456,956
|
)
|
$
|
(173,605
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Income/(Loss) Per Share (Basic)
|
$
|
(1.59
|
)
|
$
|
(0.18
|
)
|
Net
Income/(Loss) Per Share (Fully Diluted)
|
$
|
(1.59
|
)
|
$
|
(0.18
|
)
|
|
|
|
|
|
|
|
Weighted
Average Common Shares Outstanding
|
|
4,069,129
|
|
|
944,306
|
|
Weighted
Average Common and Common Equivalent Shares Outstanding
|
|
4,069,129
|
|
|
944,306
|
|
SEE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DEER
VALLEY CORPORATION & SUBSIDIARY
(KNOWN
AS CYTATION CORPORTATION PRIOR
TO JULY 26, 2006)
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY
FOR
THE YEARS ENDED DECEMBER 31, 2006 AND 2005
|
Preferred
A
|
|
Preferred
B
|
|
Preferred
C
|
|
|
Shares
|
|
|
Amount
|
|
Shares
|
|
|
Amount |
|
Shares |
|
|
Amount |
|
Balance
- December 31, 2004
|
-
|
|
$
|
-
|
|
-
|
|
$
|
-
|
|
-
|
|
$
|
-
|
|
Exercise
of options
|
-
|
|
|
-
|
|
-
|
|
|
-
|
|
-
|
|
|
-
|
|
Issuance
of common stock
|
-
|
|
|
-
|
|
-
|
|
|
-
|
|
-
|
|
|
-
|
|
Shares
subscribed (not issued)
|
-
|
|
|
-
|
|
-
|
|
|
-
|
|
-
|
|
|
-
|
|
Stock
dividend
|
-
|
|
|
-
|
|
-
|
|
|
-
|
|
-
|
|
|
-
|
|
Net
loss
|
-
|
|
|
-
|
|
-
|
|
|
-
|
|
-
|
|
|
-
|
|
Balance
- December 31, 2005
|
-
|
|
$
|
-
|
|
-
|
|
$
|
-
|
|
-
|
|
$
|
-
|
|
Adjustment
for shares subscribed (not issued)
|
-
|
|
|
-
|
|
-
|
|
|
-
|
|
-
|
|
|
-
|
|
Sequence
Advisors Corporation issuance
|
-
|
|
|
-
|
|
-
|
|
|
-
|
|
-
|
|
|
-
|
|
Series
A Preferred issuance
|
545,622
|
|
|
-
|
|
-
|
|
|
-
|
|
-
|
|
|
-
|
|
Series
A Preferred issuance to "DVH" owners as part of purchase
price
|
50,000
|
|
|
-
|
|
-
|
|
|
-
|
|
-
|
|
|
-
|
|
Exchange
of debentures for Series A Preferred
|
150,000
|
|
|
-
|
|
-
|
|
|
-
|
|
-
|
|
|
-
|
|
Amortization
of Series A Preferred-beneficial conversion feature
|
-
|
|
|
7,456,215
|
|
-
|
|
|
-
|
|
-
|
|
|
-
|
|
Conversion
of Series A Preferred
|
(88,097
|
)
|
|
(880,970
|
) |
-
|
|
|
-
|
|
-
|
|
|
-
|
|
Exercise
of Series A warrants
|
-
|
|
|
-
|
|
-
|
|
|
-
|
|
-
|
|
|
-
|
|
Common
stock dividend to Series A Preferred
|
-
|
|
|
-
|
|
-
|
|
|
-
|
|
-
|
|
|
-
|
|
Accrued
Series A Preferred dividend
|
-
|
|
|
-
|
|
-
|
|
|
-
|
|
-
|
|
|
-
|
|
Acquisition
of Deer Valley Acquisition ("DVA")
|
-
|
|
|
-
|
|
49,451
|
|
|
495
|
|
26,750
|
|
|
267
|
|
Conversion
of Series B Preferred
|
-
|
|
|
-
|
|
(49,451
|
) |
|
(495
|
)
|
-
|
|
|
-
|
|
Series
D Preferred issuance
|
-
|
|
|
-
|
|
-
|
|
|
-
|
|
-
|
|
|
-
|
|
Amortization
of Series D Preferred-beneficial conversion feature
|
-
|
|
|
-
|
|
-
|
|
|
-
|
|
-
|
|
|
-
|
|
Conversion
of Series D Preferred
|
-
|
|
|
-
|
|
-
|
|
|
-
|
|
-
|
|
|
-
|
|
Fees
associated with equity raise
|
-
|
|
|
-
|
|
-
|
|
|
-
|
|
-
|
|
|
-
|
|
Exchange
of Series E Preferred for common stock
|
-
|
|
|
-
|
|
-
|
|
|
-
|
|
-
|
|
|
-
|
|
Cashless
exercise of BD-1 warrants
|
-
|
|
|
-
|
|
-
|
|
|
-
|
|
-
|
|
|
-
|
|
Net
income (loss)
|
-
|
|
|
-
|
|
-
|
|
|
-
|
|
-
|
|
|
-
|
|
Balance
- December 31, 2006
|
657,525
|
|
$
|
6,575,245
|
|
-
|
|
$
|
-
|
|
26,750
|
|
$
|
267
|
|
SEE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DEER
VALLEY CORPORATION & SUBSIDIARY
(KNOWN
AS CYTATION CORPORTATION PRIOR
TO JULY 26, 2006)
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY
FOR
THE YEARS ENDED DECEMBER 31, 2006 AND 2005
|
|
Preferred
D
|
|
Series
E
|
|
Common
|
|
|
Shares
|
|
|
|
Amount
|
|
Shares
|
|
Amount
|
|
|
|
|
Amount
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
- December 31, 2004
|
|
|
-
|
|
|
|
$
|
-
|
|
|
-
|
|
|
$
|
-
|
|
|
436,165
|
|
|
$
|
436
|
|
Exercise
of options
|
|
|
-
|
|
|
|
|
-
|
|
|
-
|
|
|
|
-
|
|
|
-
|
|
|
|
-
|
|
Issuance
of common stock
|
|
|
-
|
|
|
|
|
-
|
|
|
-
|
|
|
|
-
|
|
|
55,166
|
|
|
|
55
|
|
Shares
subscribed (not issued)
|
|
|
-
|
|
|
|
|
-
|
|
|
-
|
|
|
|
-
|
|
|
-
|
|
|
|
-
|
|
Stock
dividend
|
|
|
-
|
|
|
|
|
-
|
|
|
-
|
|
|
|
-
|
|
|
491,331
|
|
|
|
491
|
|
Net
loss
|
|
|
-
|
|
|
|
|
-
|
|
|
-
|
|
|
|
-
|
|
|
-
|
|
|
|
-
|
|
Balance
- December 31, 2005
|
|
|
-
|
|
|
|
$
|
-
|
|
|
-
|
|
|
$
|
-
|
|
|
982,662
|
|
|
$
|
982
|
|
Adjustment
for shares subscribed (not issued)
|
|
|
-
|
|
|
|
|
-
|
|
|
-
|
|
|
|
-
|
|
|
-
|
|
|
|
-
|
|
Sequence
Advisors Corporation issuance
|
|
|
-
|
|
|
|
|
-
|
|
|
-
|
|
|
|
-
|
|
|
54,838
|
|
|
|
56
|
|
Series
A Preferred issuance
|
|
|
-
|
|
|
|
|
-
|
|
|
-
|
|
|
|
-
|
|
|
-
|
|
|
|
-
|
|
Series
A Preferred issuance to "DVH" owners as part of purchase
price
|
|
|
-
|
|
|
|
|
-
|
|
|
-
|
|
|
|
-
|
|
|
-
|
|
|
|
-
|
|
Exchange
of debentures for Series A Preferred
|
|
|
-
|
|
|
|
|
-
|
|
|
-
|
|
|
|
-
|
|
|
-
|
|
|
|
-
|
|
Amortization
of Series A Preferred-beneficial conversion feature
|
|
|
-
|
|
|
|
|
-
|
|
|
-
|
|
|
|
-
|
|
|
-
|
|
|
|
-
|
|
Conversion
of Series A Preferred
|
|
|
-
|
|
|
|
|
-
|
|
|
-
|
|
|
|
-
|
|
|
1,174,491
|
|
|
|
1,174
|
|
Exercise
of Series A warrants
|
|
|
-
|
|
|
|
|
-
|
|
|
-
|
|
|
|
-
|
|
|
150,481
|
|
|
|
150
|
|
Common
stock dividend to Series A Preferred
|
|
|
-
|
|
|
|
|
-
|
|
|
-
|
|
|
|
-
|
|
|
106,412
|
|
|
|
106
|
|
Accrued
Series A Preferred dividend
|
|
|
-
|
|
|
|
|
-
|
|
|
-
|
|
|
|
-
|
|
|
-
|
|
|
|
-
|
|
Acquisition
of Deer Valley Acquisition ("DVA")
|
|
|
-
|
|
|
|
|
-
|
|
|
-
|
|
|
|
-
|
|
|
-
|
|
|
|
-
|
|
Conversion
of Series B Preferred
|
|
|
-
|
|
|
|
|
-
|
|
|
-
|
|
|
|
-
|
|
|
4,945,100
|
|
|
|
4,945
|
|
Series
D Preferred issuance
|
|
|
132,081
|
|
|
|
|
-
|
|
|
-
|
|
|
|
-
|
|
|
-
|
|
|
|
-
|
|
Amortization
of Series D Preferred-beneficial conversion feature
|
|
|
-
|
|
|
|
|
1,320,810
|
|
|
-
|
|
|
|
-
|
|
|
-
|
|
|
|
-
|
|
Conversion
of Series D Preferred
|
|
|
(132,081
|
)
|
|
|
|
(1,320,810
|
)
|
|
-
|
|
|
|
-
|
|
|
880,540
|
|
|
|
881
|
|
Fees
associated with equity raise
|
|
|
-
|
|
|
|
|
-
|
|
|
-
|
|
|
|
-
|
|
|
-
|
|
|
|
-
|
|
Exchange
of Series E Preferred for common stock
|
|
|
-
|
|
|
|
|
-
|
|
|
750,000
|
|
|
|
7,500
|
|
|
(750,000
|
)
|
|
|
(750
|
)
|
Cashless
exercise of BD-1 warrants
|
|
|
-
|
|
|
|
|
-
|
|
|
-
|
|
|
|
-
|
|
|
642,048
|
|
|
|
642
|
|
Net
income (loss)
|
|
|
-
|
|
|
|
|
-
|
|
|
-
|
|
|
|
-
|
|
|
-
|
|
|
|
-
|
|
Balance
- December 31, 2006
|
|
|
-
|
|
|
|
$
|
-
|
|
|
750,000
|
|
|
$
|
7,500
|
|
|
8,186,572
|
|
|
$
|
8,186
|
|
SEE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DEER
VALLEY CORPORATION & SUBSIDIARY
(KNOWN
AS CYTATION CORPORTATION PRIOR
TO JULY 26, 2006)
CONSOLIDATED
STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
FOR
THE YEARS ENDED DECEMBER 31, 2006 AND 2005
|
Shares
|
|
Additional
|
|
Accumulated
|
|
|
|
|
Subscribed
|
|
Paid
in Capital
|
|
Deficit
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
- December 31, 2004
|
$
|
-
|
|
$
|
32,608,451
|
|
$
|
(32,665,943
|
)
|
$
|
(57,056
|
)
|
Exercise
of options
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Issuance
of common stock
|
|
-
|
|
|
115,411
|
|
|
-
|
|
|
115,466
|
|
Shares
subscribed (not issued)
|
|
(23,500
|
)
|
|
-
|
|
|
-
|
|
|
(23,500
|
)
|
Stock
dividend
|
|
-
|
|
|
(491
|
)
|
|
-
|
|
|
-
|
|
Net
loss
|
|
-
|
|
|
-
|
|
|
(173,605
|
)
|
|
(173,605
|
)
|
Balance
- December 31, 2005
|
$
|
(23,500
|
)
|
$
|
32,723,371
|
|
$
|
(32,839,548
|
)
|
$
|
(138,695
|
)
|
Adjustment
for shares subscribed (not issued)
|
|
23,500
|
|
|
-
|
|
|
(23,500
|
)
|
|
-
|
|
Sequence
Advisors Corporation issuance
|
|
-
|
|
|
101,618
|
|
|
-
|
|
|
101,674
|
|
Series
A Preferred issuance
|
|
-
|
|
|
5,456,215
|
|
|
-
|
|
|
5,456,215
|
|
Series
A Preferred issuance to "DVH" owners as part of purchase
price
|
|
-
|
|
|
500,000
|
|
|
-
|
|
|
500,000
|
|
Exchange
of debentures for Series A Preferred
|
|
-
|
|
|
1,500,000
|
|
|
-
|
|
|
1,500,000
|
|
Amortization
of Series A Preferred-beneficial conversion feature
|
|
-
|
|
|
-
|
|
|
(7,456,215
|
)
|
|
-
|
|
Conversion
of Series A Preferred
|
|
-
|
|
|
879,796
|
|
|
-
|
|
|
-
|
|
Exercise
of Series A warrants
|
|
-
|
|
|
203,000
|
|
|
-
|
|
|
203,150
|
|
Common
stock dividend to Series A Preferred
|
|
-
|
|
|
260,862
|
|
|
-
|
|
|
260,968
|
|
Accrued
Series A Preferred dividend
|
|
-
|
|
|
-
|
|
|
(478,474
|
)
|
|
(478,474
|
)
|
Acquisition
of Deer Valley Acquisition ("DVA")
|
|
-
|
|
|
44,009
|
|
|
(54,952
|
)
|
|
(10,181
|
)
|
Conversion
of Series B Preferred
|
|
-
|
|
|
(4,450
|
)
|
|
-
|
|
|
-
|
|
Series
D Preferred issuance
|
|
-
|
|
|
1,189,811
|
|
|
-
|
|
|
1,189,811
|
|
Amortization
of Series D Preferred-beneficial conversion feature
|
|
-
|
|
|
-
|
|
|
(1,320,810
|
)
|
|
-
|
|
Conversion
of Series D Preferred
|
|
-
|
|
|
1,319,929
|
|
|
-
|
|
|
-
|
|
Fees
associated with equity raise
|
|
-
|
|
|
(933,146
|
)
|
|
-
|
|
|
(933,146
|
)
|
Exchange
of Series E Preferred for common stock
|
|
-
|
|
|
(6,750
|
)
|
|
-
|
|
|
-
|
|
Cashless
exercise of BD-1 warrants
|
|
-
|
|
|
(642
|
)
|
|
-
|
|
|
-
|
|
Net
income (loss)
|
|
-
|
|
|
-
|
|
|
2,798,543
|
|
|
2,798,543
|
|
Balance
- December 31, 2006
|
$
|
-
|
|
$
|
43,233,623
|
|
$
|
(39,374,956
|
)
|
$
|
10,449,865
|
|
SEE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DEER
VALLEY CORPORATION & SUBSIDIARY
(KNOWN
AS CYTATION CORPORTATION PRIOR
TO JULY 26, 2006)
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
For
the Years Ended December 31,
|
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
|
Cash
Flows from Operating Activities
|
|
|
|
|
|
|
Net
income (loss)
|
$
|
2,798,543
|
|
$
|
(173,605
|
)
|
Adjustments
to reconcile net income (loss) to net cash provided for/used in
operating
activities:
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
206,232
|
|
|
1,036
|
|
Gain
on sale and distribution of investment
|
|
-
|
|
|
(31,902
|
)
|
Accrued
interest on note payable
|
|
-
|
|
|
9,155
|
|
Stock
based compensation
|
|
101,650
|
|
|
49,601
|
|
Loss
on termination of ARE agreement
|
|
-
|
|
|
5,000
|
|
(Gain)
or loss on sale of property and equipment
|
|
(14,540
|
)
|
|
4,270
|
|
Non-cash
consulting income
|
|
-
|
|
|
(49,114
|
)
|
Non-cash
consulting fee
|
|
-
|
|
|
113,944
|
|
Changes
in assets and liabilities:
|
|
|
|
|
|
|
(Increase)/Decrease
in receivables
|
|
(34,594
|
)
|
|
-
|
|
(Increase)/Decrease
in other receivables
|
|
(9,100
|
)
|
|
-
|
|
(Increase)/Decrease
in inventories
|
|
(182,085
|
)
|
|
-
|
|
(Increase)/Decrease
in deferred asset
|
|
(742,853
|
)
|
|
-
|
|
Increase/(Decrease)
in income taxes payable
|
|
307,432
|
|
|
-
|
|
(Increase)/Decrease
in prepayments and other assets
|
|
(104,306
|
)
|
|
10,506
|
|
Increase/(Decrease)
in accounts payable
|
|
256,645
|
|
|
(38,390
|
)
|
Increase/(Decrease)
in accounts payable under dealer incentives
|
|
451,496
|
|
|
-
|
|
Increase/(Decrease)
in estimated warranties
|
|
1,250,000
|
|
|
-
|
|
Increase/(Decrease)
in compensation and related accruals
|
|
258,168
|
|
|
-
|
|
Increase/(Decrease)
in accrued expenses
|
|
136,014
|
|
|
-
|
|
Cash
Flow Provided for/Used in Operating Activities
|
|
4,678,701
|
|
|
(99,499
|
)
|
|
|
|
|
|
|
|
Cash
Flows from Investing Activities:
|
|
|
|
|
|
|
Purchases
of equipment
|
|
(1,226,605
|
)
|
|
(812
|
)
|
Proceeds
from sale of property and equipment
|
|
36,274
|
|
|
3
|
|
Purchase
of company, net of cash acquired
|
|
(3,543,737
|
)
|
|
-
|
|
Proceeds
from sales of marketable securities
|
|
151,418
|
|
|
-
|
|
Cash
Flow Used in Investing Activities
|
|
(4,582,651
|
)
|
|
(809
|
)
|
|
|
|
|
|
|
|
Cash
Flows from Financing Activities:
|
|
|
|
|
|
|
Proceeds
(Repayment) of notes payable
|
|
457,033
|
|
|
-
|
|
Proceeds
from preferred issuances
|
|
7,698,648
|
|
|
-
|
|
Loan
costs
|
|
(98,950
|
)
|
|
-
|
|
Proceeds
from the exercise of warrants
|
|
203,150
|
|
|
-
|
|
Distributions
to former shareholders
|
|
(107,206
|
)
|
|
-
|
|
Payment
of accrued shareholder distributions
|
|
(817,794
|
) |
|
- |
|
Proceeds
from issuance of common stock
|
|
-
|
|
|
74,267
|
|
Collections
(issuance) of note receivable
|
|
-
|
|
|
(39,382
|
)
|
Cash
Flow Provided by Financing Activities
|
|
7,334,882
|
|
|
34,885
|
|
|
|
|
|
|
|
|
Net
Increase (Decrease) in Cash
|
|
7,430,931
|
|
|
(65,423
|
)
|
Cash,
Beginning
|
|
221
|
|
|
65,644
|
|
Cash,
Ending
|
$
|
7,431,152
|
|
$
|
221
|
|
|
|
|
|
|
|
|
Supplemental
Disclosure of Cash Flow Information:
|
|
|
|
|
|
|
Cash
paid during the year for:
|
|
|
|
|
|
|
Interest
|
$
|
130,857
|
|
$
|
14,345
|
|
Taxes
|
$
|
1,647,000
|
|
$
|
-
|
|
|
|
|
|
|
|
|
Supplemental
Disclosure of Noncash Investing and Financing
Activities:
|
|
|
|
|
|
|
Additional
purchase price accrued under earnout provision
|
$
|
2,464,550
|
|
$
|
-
|
|
Accrual
of dividends on preferred stock
|
$
|
478,474
|
|
$
|
-
|
|
Deemed
dividend on beneficial conversion feature
|
$
|
8,777,025
|
|
$
|
-
|
|
SEE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DEER
VALLEY CORPORATION & SUBSIDIARY
(KNOWN
AS CYTATION CORPORTATION PRIOR
TO JULY 26, 2006)
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2006 AND 2005
NOTE
1- BACKGROUND AND NATURE OF OPERATIONS
The
Company
Cytation
Corporation was incorporated under the laws of Delaware on November 1, 1999.
Until June 20, 2001, the Company provided an extensive range of in-school
and
online services directed at high school students and their parents, high
school
counselors, college admissions officers and corporations which target the
teen
marketplace. On June 20, 2001, the Company sold all of its assets associated
with these activities to TMP Worldwide Inc. for approximately $7.2 million
in
cash and debt assumed.
During
the period commencing with the fourth quarter of 2002 and ending in December
2004, Cytation Corporation engaged in the business of providing consulting
and
related services to private companies that wish to become reporting companies
under the Securities Exchange Act of 1934. In the first quarter of 2005,
Cytation Corporation discontinued all business operations except for finding
an
appropriate private entity with which it could engage in a reverse merger
or
similar transaction. On January 18, 2006, Cytation Corporation entered into
the
Securities Purchase and Share Exchange Agreement (See
Note
10 -Equity Transactions-"Capital Stock Purchase Agreement" for
further details),
which
resulted in the acquisition of Deer Valley Homebuilders, Inc.
Pursuant
to the Capital Stock Purchase Agreement dated November 1, 2005, as amended,
DeerValley Acquisitions Corp. (a wholly owned subsidiary of the Company)
acquired, immediately after completion of the Series A Financing and the
Share
Exchange, one hundred percent (100%) of the issued and outstanding capital
stock
of Deer Valley Homebuilders, Inc. (“DVH”). Upon completion of the acquisition of
the capital stock of Deer Valley Homebuilders, Inc., Deer Valley Homebuilders,
Inc. became an indirect wholly owned subsidiary of the Company. The Company
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 Deer Valley Corporation's
operations. The results of Deer Valley Homebuilders, Inc. will be included
in
consolidated financial statements for periods after January 18, 2006.
We
have
treated the transaction using purchase accounting methods, and have not treated
the transaction as a "reverse acquisition" or "reverse merger" for accounting
purposes.
Effective
June 30, 2006 DeerValley Acquisitions, Corp. was dissolved by filing
an Articles of Dissolution with the Florida Department of State.
With
the
dissolution of DeerValley Acquisitions Corp., Deer Valley Homebuilders, Inc.
is
now a wholly-owned subsidiary of the Company. On
the
effective date of dissolution, DeerValley Acquisitions, Corp. had no assets
and
no revenues.
On
July
24, 2006, Cytation Corporation entered into an agreement to merge with Deer
Valley Corporation (the “Company”), a newly formed Florida corporation. Pursuant
to the terms of the Agreement of Merger, Cytation Corporation merged with
and
into Deer Valley Corporation. As a result of the merger, Cytation Corporation
is
now governed by the laws of the State of Florida and is now named Deer Valley
Corporation, which more accurately reflects the nature of the operations
conducted by the Company's operating subsidiary, DVH. Deer Valley Corporation
was incorporated for the purpose of facilitating the Company's change of
domicile to Florida.
Nature
of Operations
Deer
Valley Homebuilders, Inc. (“DVH”) was organized and incorporated as an Alabama
corporation on January 7, 2004 and is headquartered in Guin, Alabama. Deer
Valley Homebuilders, Inc. operates on a 52-53 week year end.
DVH
designs and produces manufactured homes which are sold to a network of dealers
located primarily in the southeastern and south-central regions of the United
States. Deer Valley Homebuilders, Inc. operates out of manufacturing facilities
located in and around the Guin, Alabama region (the northwestern region of
Alabama). Business is seasonal and cyclical with the potential for significant
fluctuations in quarterly earnings as a result of factors impacting the broader
housing market, including but not limited to changes in the availability
and
cost of customer financing, changes in the cost of construction materials,
and
changes in the economic conditions within the market regions served by the
Company.
NOTE
2- BASIS OF PRESENTATION
This
summary of significant accounting policies is presented to assist in
understanding the financial statements. The financial statements and notes
are
representations of the Company’s management, which is responsible for their
integrity and objectivity. These accounting policies conform to accounting
principles generally accepted in the United States of America and have been
consistently applied in the preparation of the financial
statements.
NOTE
3- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Accounting
Estimates
- The
Company's financial statements are prepared in conformity with accounting
principles generally accepted in the United States of America which require
management to make estimates and assumptions that affect the reported amounts
of
assets and liabilities and disclosure of contingent assets and liabilities
at
the date of the financial statements and the reported amounts of revenues
and
expenses during the reporting period. Actual results could differ from those
estimates.
Principles
of Consolidation -
The
consolidated financial statements include the accounts of the Company and
its
wholly owned subsidiaries. Intercompany accounts and transactions have been
eliminated in consolidation.
Fiscal
Year- The
Company operates on a 52-53 week fiscal year end. For presentation purposes,
the
periods have been presented as ending on December 31.
Fair
Value of Financial Instruments
- The
carrying value of the Company's cash equivalents, accounts receivable, accounts
payable and accrued expenses approximates fair value because of the short-term
nature of these instruments.
Cash
Equivalents
- The
Company considers all highly liquid investments with original maturities
of
three months or less to be cash equivalents.
Accounts
Receivable
-
Accounts receivable represent balances due from dealers. Credit risk associated
with balances due from dealers is evaluated by management relative to financial
condition and past payment experience. As a result of management's reviews
no
reserves for uncollectible amounts have been recorded in the accompanying
financial statements.
Inventories
-
Inventories are stated at the lower of cost (first-in, first-out method)
or
market. Work-in-process and finished goods inventories include an allocation
for
labor and overhead costs.
Property,
Plant, and Equipment
-
Property, plant and equipment is stated at cost and depreciated over the
estimated useful lives of the related assets ranging from 5 to 40 years
primarily using the straight-line method. Maintenance and repairs are expensed
as incurred.
|
Useful
|
Category
|
Life
|
|
|
Land
and improvements
|
10
years
|
Buildings
|
40
years
|
Machinery
and equipment
|
5-10
years
|
Furniture
and fixtures
|
5-10
years
|
Impairment
of Long-Lived Assets
- In
accordance with SFAS No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets, the Company evaluates the carrying value of long-lived
assets
to be held and used when events and circumstances warrant such a review.
The
carrying value of long-lived assets is considered impaired when the anticipated
undiscounted cash flow from such assets is less than its carrying value.
In that
event, a loss is recognized based on the amount by which the carrying value
exceeds the fair market value of the long-lived assets. Fair market value
is
determined primarily using the anticipated cash flows discounted at a rate
commensurate with the risk involved. Losses on long-lived assets to be disposed
of are determined in a similar manner, except that the fair market values
are
primarily based on independent appraisals and preliminary or definitive
contractual arrangements less costs to dispose.
Income
Taxes
- The
Company utilizes the liability method of accounting for income taxes as set
forth in SFAS 109, "Accounting for Income Taxes." Under the liability method,
deferred taxes are determined based on the difference between the financial
statement and tax bases of assets and liabilities using enacted tax rates
in
effect in the years in which the differences are expected to
reverse.
Revenue
Recognition
-
Revenue for manufactured homes sold to independent dealers generally is recorded
when all of the following conditions have been met; (a) an order for the
home
has been received from the dealer, (b) an agreement with respect to payment
terms (usually in the form of a written or verbal approval for payment has
been
received from the dealer's flooring institution), and (c) the home has been
shipped and risk of loss has passed to the dealer.
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.
Advertising
Costs - Advertising
costs are charged to operations when incurred and are included in operating
expenses. Advertising costs for the periods ending December 31, 2006 and
2005
were $68,086 and $0, respectively.
Stock
Based Compensation -
In
December 2004, the FASB issued SFAS No.123 (revised 2004), "Share-Based
Payment". SFAS
123(R)
will provide investors and other users of financial statements with more
complete and neutral financial information by requiring that the compensation
cost relating to share-based payment transactions be recognized in financial
statements. That cost will be measured based on the fair value of the equity
or
liability instruments issued. SFAS 123(R) covers a wide range of share-based
compensation arrangements including share options, restricted share plans,
performance-based awards, share appreciation rights, and employee share purchase
plans. SFAS 123(R) replaces FASB Statement No. 123, "Accounting for Stock-Based
Compensation", and supersedes APB Opinion No. 25, "Accounting for Stock Issued
to Employees". SFAS 123, as originally issued in 1995, established as preferable
a fair-value-based method of accounting for share-based payment transactions
with employees. However, that statement permitted entities the option of
continuing to apply the guidance in Opinion 25, as long as the footnotes
to
financial statements disclosed what net income would have been had the
preferable fair-value-based method been used. Public entities (other than
those
filing as small business issuers) will be required to apply SFAS 123(R) as
of
the first interim or annual reporting period that begins after June 15, 2005.
For public entities that file as small business issuers SFAS 123(R) is
applicable as of the beginning of the first interim or annual reporting period
that begins after December 15, 2005.
At
September 30, 2006, the Company had not yet created a stock incentive plan
which
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 nine 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 (a)
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 September 30, 2006 since no options were granted.
The
following table summarizes the activity related to all Company stock options
and
warrants for the years ended December 31, 2006 and 2005:
|
|
|
|
|
|
Exercise
Price
Per
Share
|
|
Weighted
Average
Exercise
Price
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
|
|
|
23,576,620
|
|
|
-
|
|
$
|
0.75-3.00
|
|
|
-
|
|
$
|
1.60
|
|
|
|
|
-
|
Exercised
|
|
|
(1,069,643
|
)
|
|
-
|
|
$
|
0.75-$1.50
|
|
|
-
|
|
$
|
0.86
|
|
|
|
|
-
|
Cancelled
or expired
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
|
-
|
Outstanding
at December 31, 2006
|
|
|
22,506,977
|
|
|
-
|
|
$
|
0.75-3.00
|
|
|
-
|
|
$
|
1.64
|
|
|
|
|
-
|
Exercisable
at December 31, 2006
|
|
|
22,506,977
|
|
|
-
|
|
$
|
0.75-3.00
|
|
|
-
|
|
$
|
1.64
|
|
|
|
|
-
|
The
warrants expire at various dates ranging from January 2011 through November
2016. See Note
10-Equity Transactions-Warrants
for
further details on the Company’s warrants.
Net
Income Per Share
- The
Company uses SFAS No. 128, “Earnings
Per Share”
for
calculating the basic and diluted loss per share. Basic loss per share is
computed by dividing net loss and net loss attributable to common shareholders
by the weighted average number of common shares outstanding. Diluted loss
per
share is computed similar to basic loss per share except that the denominator
is
increased to include the number of additional common shares that would have
been
outstanding if the potential shares had been issued and if the additional
shares
were dilutive. Common equivalent shares are excluded from the computation
of net
loss per share as they would be anti-dilutive.
|
|
For
the Period Ended
December
31,
|
|
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
Net
income available to common shareholders
|
|
|
($6,456,956
|
)
|
|
($173,605
|
)
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding:
|
|
|
|
|
|
|
|
Basic
|
|
|
4,069,129
|
|
|
944,306
|
|
|
|
|
|
|
|
|
|
Earnings
per share:
|
|
|
|
|
|
|
|
Basic
|
|
|
($1.59
|
)
|
|
($0.18
|
)
|
Diluted*
|
|
|
($1.59
|
)
|
|
($0.18
|
)
|
*Diluted
weighted average per share outstanding for period ended December 31, 2006
does
not include the effect of dilutive Series A, C and E Preferred Stock and
Series
A, B, C, D, E, F, BD-2, BD-3, BD-4 and BD-5 Warrants because to do so would
have
been anti-dilutive (see detailed list of anti-diluted shares below).
Accordingly, basic and diluted net loss per share for this period is the
same.
|
Common
|
|
Stock
|
Securities
|
Equivalents
|
|
|
Preferred:
|
|
|
|
Series
A Preferred
|
8,766,993
|
Series
C Preferred
|
2,675,000
|
Series
E Preferred
|
750,000
|
|
|
Warrants:
|
|
|
|
Class
A Warrants
|
10,394,624
|
Class
B Warrants
|
4,970,824
|
Class
C Warrants
|
2,000,000
|
Class
D Warrants
|
2,000,000
|
Class
E Warrants
|
880,544
|
Class
F Warrants
|
750,000
|
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
|
34,698,970
|
FASB
Interpretation No 47, “Accounting for Conditional Asset Retirement Obligations”
(“FIN 47”) was issued in March 2005 and clarifies the accounting prescribed
in SFAS No. 143, “Accounting for Asset Retirement Obligations”. FIN 47
requires the recognition of a liability for the fair value of a conditional
asset retirement obligation if the fair value can be reasonably estimated,
even
though uncertainty exists as to the timing and method of settlement. Management
is currently evaluating the requirements of FIN 47 and has not yet determined
the impact on the financial statements.
FASB
Interpretation No 48, “Accounting for Uncertainty in Income Taxes -- an
interpretation of FASB Statement No. 109” (“FIN
48”),
was
issued in July 2006. This interpretation clarifies the accounting for
uncertainty in income taxes recognized in an entity's financial statements
in
accordance with SFAS No. 109, “Accounting for Income Taxes.” It prescribes
a recognition threshold and measurement attribute for financial statement
disclosure of tax positions taken, or expected to be taken, on a tax return.
The
Company will be required to adopt FIN 48 in the first quarter of fiscal 2008.
Management is currently evaluating the requirements of FIN 48 and has not
yet
determined the impact on the financial statements.
In
September 2006, the SEC issued Staff Accounting Bulletin No. 108 (“SAB No.
108”), Considering
the Effects of Prior Year Misstatements When Quantifying Misstatements in
Current Year Financial Statements.
SAB No.
108 provides guidance to registrants for assessing materiality. SAB No. 108
states that registrants should use both a balance sheet approach and income
statement approach when quantifying and evaluating the materiality of a
misstatement. SAB No. 108 also provides guidance on correcting errors under
the
dual approach as well as transition guidance for correcting previously
immaterial errors that are now considered material. We adopted SAB No. 108
as of
January 1, 2007 without any impact on our financial statements.
In
September 2006, the FASB issued SFAS No. 157, “Fair Value Measurement”
(“SFAS 157”), which defines fair value, establishes a framework for measuring
fair value and expands disclosures about assets and liabilities measured
at fair
value. The Company will be required to adopt SFAS 157 in the first quarter
of
fiscal 2009. Management is currently evaluating the requirements of SFAS
157 and
has not yet determined the impact on the financial statements.
In
September 2006, the FASB issued SFAS No. 158 (“SFAS 158”), “Employers'
Accounting for Defined Benefit Pension and Other Postretirement Plans --
an
amendment of FASB Statements No. 87, 88, 106, and 132(R).” SFAS 158
requires an employer to recognize a plan's funded status in its statement
of
financial position, measure a plan's assets and obligations as of the end
of the
employer's fiscal year and recognize the changes in a defined benefit
postretirement plan's funded status in comprehensive income in the year in
which
the changes occur. The Company will be required to recognize the funded status
of benefit plans and adopt the new disclosure requirements effective
August 31, 2007. The Company will be required to measure plan assets and
benefit obligations as of the date of the fiscal year-end statement of financial
position effective August 31, 2009. Management is currently evaluating the
requirements of SFAS 158, but based on the current funded status of the plans,
management does not anticipate SFAS 158 will have a material impact on the
Company's financial statements
In
February 2007, the FASB issued SFAS No. 159, The
Fair Value Option for Financial Assets and Financial
Liabilities.
SFAS
No. 159 permits entities to choose to measure many financial instruments
and
certain other items at fair value. SFAS No. 159 will be effective at the
beginning of fiscal year 2008. We are presently evaluating the impact of
the
adoption of SFAS No. 159 on our results of operations and financial
position.
NOTE
4 - INVENTORY
Inventory
consisted of the following components:
|
|
December
31,
|
|
|
|
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
Raw
Materials
|
|
|
819,480
|
|
|
-
|
Work-in-Process
|
|
|
379,540
|
|
|
-
|
Finished
Goods
|
|
|
98,623
|
|
|
-
|
Total
Inventory
|
|
$
|
1,297,643
|
|
$
|
-
|
NOTE
5 - PROPERTY, PLANT, AND EQUIPMENT
Property,
Plant and Equipment consisted of the following:
|
|
December
31,
|
Category
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
Land
and improvements
|
|
|
381,962
|
|
|
-
|
Buildings
|
|
|
1,910,539
|
|
|
-
|
Machinery
and equipment
|
|
|
938,050
|
|
|
-
|
Furniture
and fixtures
|
|
|
164,368
|
|
|
-
|
|
|
|
3,394,919
|
|
|
|
Accumulated
depreciation
|
|
|
(187,650
|
)
|
|
-
|
Total
Property, Plant, and Equipment
|
|
$
|
3,207,269
|
|
$
|
-
|
Depreciation
expense amounted to $194,688 and $1,037 for the years ended December 31,
2006
and 2005, respectively.
NOTE
6 - 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 $3,148,177. Additional adjustments to Goodwill
have
been booked since that time bringing the total balance to $5,721,413 as of
December 31, 2006. The adjustments which have been included are an additional
$100,000 which was paid and represented a purchase price adjustment and accruals
related to the Earnout Agreement (See Note
9-Long-Term Debt-“Earnout Agreement”
for
further details) totaling: $496,407 for 2005 and $1,976,829 for 2006. There
is
no assurance that the value of the acquired entities will not decrease in
the
future due to changing business conditions.
Purchased
Goodwill
|
|
$
|
3,156,863
|
Purchase
Price Adjustment
|
|
|
100,000
|
Earnout
for 2005
|
|
|
496,407
|
Earnout
for 2006
|
|
|
1,968,143
|
Total
Goodwill as of December 31, 2006
|
|
$
|
5,721,413
|
NOTE
7 - ACCRUED EXPENSES
Accrued
expenses consisted of the following:
|
|
December
31,
|
Category
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
Accrued
dealer incentive program
|
|
|
791,928
|
|
|
-
|
Accrued
third party billings
|
|
|
701,983
|
|
|
-
|
Accrued
compensation
|
|
|
672,163
|
|
|
-
|
Accrued
insurance
|
|
|
147,324
|
|
|
-
|
Accrued
shareholder tax cost
|
|
|
107,206
|
|
|
-
|
Accrued
interest
|
|
|
94,983
|
|
|
-
|
Accrued
repurchase commitment
|
|
|
77,500
|
|
|
-
|
Other
|
|
|
58,699
|
|
|
-
|
Total
Accounts Payable and Accrued Expenses
|
|
$
|
2,651,786
|
|
$
|
-
|
NOTE
8 - PRODUCT WARRANTIES
The
Company provides the retail home buyer a one-year limited warranty covering
defects in material or workmanship in home structure, plumbing and electrical
systems. The Company estimated warranty costs are accrued at the time
of the
sale to the dealer following industry standards and historical warranty
cost
incurred. Periodic adjustments to the estimated warranty accrual are
made as
events occur which indicate changes are necessary. As of December 31,
2006 and
2005, the Company has provided a liability of $2,000,000 and $0, respectively
for estimated warranty costs relating to homes sold, based upon management's
assessment of historical experience factors and current industry trends.
The Company's subsidiary, Deer Valley Homebuilders, Inc., had provided
for a
warranty liability of $750,000 as of December 31, 2005.
Management
reviews its warranty requirements at the close of each reporting period
and
adjusts the reserves accordingly. The following tabular presentation
reflects
activity in warranty reserves during the periods presented:
|
|
For
the years ended
|
|
December
31,
|
|
|
|
2006
|
|
|
2005
|
Balance
at beginning of period
|
|
$
|
750,000
|
|
$
|
-
|
Warranty
charges
|
|
|
5,876,159
|
|
|
-
|
Warranty
payments
|
|
|
(4,626,159
|
)
|
|
-
|
Balance
at end of period
|
|
$
|
2,000,000
|
|
$
|
-
|
NOTE
9 - LONG-TERM DEBT
Earnout
Agreement
On
January 18, 2006, the Company's wholly-owned subsidiary, DeerValley Acquisitions
Corp. (dissolved on June 30, 2006), entered into an Earnout Agreement (the
"Earnout Agreement"), between Deer Valley Homebuilders, Inc., DeerValley
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 as defined in Section 2.1 of the Earnout Agreement 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 was reduced to $250,000. During the period ending December
31,
2006 the Company’s wholly owned subsidiary, Deer Valley Homebuilders, Inc., had
pre-tax profit in the amount of $4,936,287, of which $3,936,287 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 $1,968,143. The maximum
remaining potential accrual under the Earnout Agreement is
$3,539,450.
|
|
December
31,
|
|
Fourth
Quarter
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
Total
|
|
"DVH"
Pretax Profit
|
|
$
|
4,936,287
|
|
$
|
1,242,814
|
|
$
|
6,179,101
|
|
Pre-tax
Profit Limitation amount
|
|
|
(1,000,000
|
)
|
|
(250,000
|
)
|
|
(1,250,000
|
)
|
Eligible
amount
|
|
$
|
3,936,287
|
|
$
|
992,814
|
|
$
|
4,929,101
|
|
Earnout
Percentage
|
|
|
50
|
%
|
|
50
|
%
|
|
50
|
%
|
Total
Earnout Payable
|
|
$
|
1,968,143
|
|
$
|
496,407
|
|
$
|
2,464,550
|
|
|
|
|
|
|
|
|
|
|
|
|
Maximum
Potential Payout-Beginning
|
|
$
|
5,503,593
|
|
$
|
6,000,000
|
|
$
|
6,000,000
|
|
Current
amount payable under Earnout
|
|
|
(1,968,143
|
)
|
|
(496,407
|
)
|
|
(2,464,550
|
)
|
Maximum
Potential Payout-Ending
|
|
$
|
3,535,450
|
|
$
|
5,503,593
|
|
$
|
3,535,450
|
|
Loans
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) (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 (See Note
12-Commitments and Contingencies-“Reserve for Repurchase Commitments”
for
further details). As of December 31, 2006, no amounts had been drawn
on the
above irrevocable letters of credit by the beneficiaries.
On
May
26, 2006, DVH 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) (the
"Loan")
evidenced by a promissory note and secured by a first mortgage on DVH’s
properties in Guin, Alabama and Sulligent, Alabama, including the structures
and
fixtures located thereon, as well as DVH’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 DVH’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, the Company would become liable for payment
of the
Loan.
Long-term
debt of the Company was as follows:
|
|
December
31,
|
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
Earnout
payable - see "Earnout Agreement" above
|
|
$
|
2,464,550
|
|
$
|
-
|
|
|
|
|
|
|
|
Note
payable to Fifth Third Bank, payable in monthly installments
of $11,111.11
including accrued interest at Libor plus 2.25%, maturing on June 1,
2011, secured by all assets of the Company.
|
|
|
1,964,897
|
|
|
-
|
Total
|
|
|
4,429,447
|
|
|
-
|
Less:
Current portion of long-term debt
|
|
|
(1,308,363
|
)
|
|
|
Total
long-term debt, net of current portion
|
|
$
|
3,121,084
|
|
$
|
-
|
Total
interest costs for the years ended December 31, 2006 and 2005, amounted
to
$130,857 and $6,043, respectively, as reflected on the face of the
accompanying
statement of income.
At
December 31, 2006, principal repayment requirements on long-term
debt were as
follows:
For
year ended December 31,
|
Amount
|
|
|
|
|
2007
|
|
1,308,363
|
2008
|
|
81,331
|
2009
|
|
88,055
|
Thereafter
|
|
2,951,698
|
Total
|
|
4,429,447
|
Less:
Current portion
|
|
(1,308,363
|
Total
long-term debt, net of current portion
|
$
|
3,121,084
|
NOTE
10 - EQUITY TRANSACTIONS
Capital
Stock Purchase Agreement
On
January 18, 2006, in connection with the Securities Purchase and
Share Exchange
Agreement, the Company issued to a Lender an Interest Bearing Non-Convertible
Installment Promissory Note, in the original principal amount of
One Million
Five Hundred Thousand and No/100 Dollars ($1,500,000), together
with interest
accruing thereon at an annual rate of twelve percent (12%) per
annum. As part of
the agreement the Lender received Series D Common Stock Purchase
Warrants
allowing the holder the right to purchase up to 2,000,000 shares
of common stock
at an exercise price of $.75 per share for a term of 7 years. The
business
purpose of executing the Note was to fund the acquisition of Deer
Valley
Homebuilders, Inc.
Pursuant
to the Securities Purchase and Share Exchange Agreement dated January
18, 2006
the Company issued and sold (a) 545,622 shares of Series A Convertible
Preferred
Stock which can be converted into 7,274,960 common shares (b) Series
A Common
Stock Purchase Warrants which allows the holder the right to purchase
up to
7,274,960 shares of common stock at an exercise price of $1.50
per share for a
term of 5 years, and (c) Series B Common Stock Purchase Warrants
which gives the
holder the right to purchase up to 3,637,488 shares of common stock
at an
exercise price of $2.25 per share for a term of 7 years. The Company
received
$5,456,215 in gross proceeds related to this issuance.
In
addition, 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) 49,451 shares
of Series B
Convertible Preferred Stock which is convertible into 4,945,100
common shares,
(b) 26,750 shares of Series C Convertible Preferred Stock which
is convertible
into 2,675,000 common shares, and (c) 2,000,000 Series C Common
Stock Purchase
Warrants which allows the holder the right to purchase up to 2,000,000
shares of
common stock at an exercise price of $.75 per share for a term
of 5
years.
On
January 18, 2006 after completion of the share exchange and financing
arrangements listed above, the Company through its wholly-owned
subsidiary,
DeerValley Acquisitions Corp., acquired 100% of the issued and
outstanding
capital stock of Deer Valley Homebuilders, Inc. The aggregate purchase
price for
Deer Valley Homebuilders, Inc. was $6,000,000, including $5,500,000
cash and
securities with an aggregate value of $500,000 comprised of the
following:
50,000 of Deer Valley Corporation's Series A Convertible
Preferred
Stock which is convertible into 666,667 shares of common stock,
Series A Common
Stock Purchase Warrants which allows the holder the right to purchase
up to
666,669 shares of common stock at an exercise price of $1.50 per
share for a
term of 5 years, and Series B Common Stock Purchase Warrants which
allows the
holder the right to purchase up to 333,336 shares of common stock
at an exercise
price of $2.25 per share for a term of 7 years.
In
addition to the $6,000,000 purchase price listed above, the former
owners of
Deer Valley Homebuilders, Inc. maybe entitled to additional compensation
through
an Earnout Agreement entered into as part of the purchase. Pursuant
to the
Earnout Agreement 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 pay in this fashion because Deer Valley Homebuilders,
Inc. had been
in business less than two years and because to do so 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 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.
On
March
17, 2006 in satisfaction of the Interest Bearing Non-Convertible
Installment
Promissory Note and accrued interest, the Company issued the Lender
(a) 150,000
shares of its Series A Convertible Preferred Stock which is convertible
into
2,000,000 common shares, (b) Series A Common Stock Purchase Warrants
which
allows the holder the right to purchase up to 2,000,000 shares
of common stock
at an exercise price of $1.50 per share for a term of 5 years,
and (c) Series B
Common Stock Purchase Warrants which allows the holder the right
to purchase up
to 1,000,000 shares of common stock at an exercise price of $2.25
per share for
a term of 7 years. In addition, the Lender retained the Series
D Common Stock
Purchase Warrants as part of the satisfaction of the Note. The
Series D Common
Stock Purchase Warrants allows the holder the right to purchase
up to 2,000,000
shares of common stock at an exercise price of $.75 per share for
a term of 7
years.
Series
A Convertible Preferred Stock
In
connection with the Capital Stock Purchase Agreement the Company
issued in
aggregate 745,622 shares of Series A Convertible Preferred stock,
which is
convertible into 9,941,620 shares of common stock, for $7,456,215.
The holders
of the Series A Convertible Preferred Stock also received Series
A Common Stock
Purchase Warrants allowing them to purchase up to 9,941,639 shares
of common
stock at an exercise price of $1.50 per share for a term of 5 years
and; Series
B Common Stock Purchase Warrants allowing them to purchase up to
4,970,824
shares of common stock at an exercise price of $2.25 per share
for a term of 7
years.
In
addition, the Lender of the $1,500,000 Interest Bearing Non-Convertible
Installment Promissory Note was permitted to retain the Series
D
Common
Stock Purchase Warrants as part of the Series A Convertible Preferred
Stock
issued as satisfaction for the Note. The Series D Stock Purchase
Warrants allow
the holder the right to purchase up to 2,000,000 shares of common
stock at an
exercise price of $.75 per share for a term of 7 years.
The
market value of the Company’s common stock on the date the Series A Convertible
Preferred was issued and sold was $2.48 per share. In accordance
with EITF Issue
98-5 “Accounting for Convertible Securities with Beneficial Conversion
Features
or Contingently Adjustable Conversion Ratios”, as amended by EITF
00-27“Application
of Issue No. 98-5 to certain Convertible Instruments”, the Company evaluated the
Series A Convertible Preferred stock and determined it had a beneficial
conversion feature. Pursuant to EITF 98-5 and EITF 00-27 a beneficial
conversion
feature occurs when the conversion price of a security is less
than the fair
value of the Company's common stock on the measurement date. The
Company
calculated the effect of EITF 00-27 and EITF 98-5 on the issuance
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 Series
A
Convertible Preferred Stock. As a result, on the date of issuance
the Company
adjusted its balance sheet to reduce the value of the Series A
Convertible
Preferred stock by $1,787,029 and the warrants by $5,669,186 and
increased
additional paid-in capital by $7,456,215. The Company used the
Black-Scholes
model to value the Series A Common Stock Purchase warrants, Series
B Common
Stock Purchase warrants, and Series D Common Stock Purchase warrants.
For
purposes of calculating the fair value of the warrants the Company
used a risk
free rate of return of 4.82% and a volatility percentage of 32%.
In
accordance with EITF 98-5 and EITF 00-27 the intrinsic value of
the beneficial
conversion feature is considered a deemed dividend to the preferred
shareholders
and is to be amortized over the period of the security’s earliest conversion
date. To amortize the beneficial conversion feature the Company
reduced the
retained earnings account and increased the Series A Preferred
Convertible Stock
for the amount of deemed dividend. During the quarters ended April
1, 2006 and
July 1, 2006 the Company recognized a deemed dividend related to
the Series A
Preferred Convertible Stock and warrants of $1,491,243 and $1,838,519,
respectively. On August 11, 2006 the Company’s registration statement
registering all the common stock associated with these shares and
warrants
became effective. As a result, the securities became convertible
at the option
of the holder, and the remaining $4,126,453 of un-amortized beneficial
conversion feature was recognized as a deemed dividend.
In
addition, during the period ending December 31, 2006 certain shareholders
converted 88,097 shares of Series A Preferred stock, par value
$880,970, into
1,174,491 shares of the Company’s common stock.
Total
Preferred Series A Proceeds
|
|
$
|
7,456,215
|
|
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
|
|
|
1,491,243
|
|
Preferred
Series A balance at April 1, 2006
|
|
$
|
1,491,243
|
|
Amortization
of Beneficial Conversion Feature
|
|
|
1,838,519
|
|
Preferred
Series A balance at July 1, 2006
|
|
$
|
3,329,762
|
|
Amortization
of Beneficial Conversion Feature
|
|
|
4,126,453
|
|
Preferred
Series A balance at August 11, 2006
|
|
|
7,456,215
|
|
Conversion
of Series A Preferred
|
|
|
(880,970
|
)
|
Preferred
Series A balance at December 31, 2006
|
|
|
6,575,245
|
|
Midtown
Partners & Co., LLC ("Midtown Partners"), an SEC and NASD registered broker
dealer, acted as the placement agent for the Company in connection
with the
Series A Preferred Stock Offering. Midtown Partners is located
in Tampa,
Florida. In connection with the Series A Preferred Stock Offering,
the Company
paid Midtown Partners a cash commission equal to $674,371.50
and issued (a)
Series BD-1 Common Stock Purchase Warrants to Midtown Partners
entitling Midtown
Partners to purchase 919,162 shares of the Company's common
stock at an exercise
price of seventy five cents ($.75) per share for a term of
5 years, (b) Series
BD-2 Common Stock Purchase Warrants to Midtown Partners entitling
Midtown
Partners to purchase 919,162 shares of the Company's common
stock at an exercise
price of one dollar and fifty cents ($1.50) per share for a
term of 5 years, and
(c) Series BD-3 Common Stock Purchase Warrants to Midtown Partners
entitling
Midtown Partners to purchase 459,581 shares of the Company's
common stock at an
exercise price of two dollars and twenty five cents ($2.25)
per share for a term
of 7 years.
Our
Series A Preferred Stock has the following rights, preferences,
privileges and
restrictions. Each share of Series A Preferred Stock, at its
stated value of $10
per share, together with any accrued and unpaid dividends,
is convertible at the
option of the holder at any time after the Conversion Date
(as defined below)
into Common Stock at a price of Seventy Five Cents ($.75) per
share of Common
Stock. "Conversion Date" shall mean either (1) the date on
which the United
States Securities and Exchange Commission declares effective
the Company's
registration statement registering the Series A Preferred Stock
for resale, or
(2) the date that the holder of the Series A Convertible Preferred
Stock has
satisfied the minimum one (1) year holding requirements set
forth in Rule 144(d)
promulgated by the United States Securities and Exchange Commission
under the
Securities Act, as amended. A holder of Series A Preferred
Stock is entitled to
receive a dividend at a rate per annum equal to seven percent
(7%), payable
semi-annually, at the option of the company, (i) in cash, to
the extent funds
are legally available therefore, or (ii) in shares of registered
Common Stock at
a ten percent (10%) discount to the "Market Price" (as such
term is defined in
the designations for the Series A Preferred Stock. The Series
A Preferred Stock
ceases to accrue the seven percent (7%) fixed dividend on the
earliest of (a)
the payment of the liquidation preference on each share of
Series A Preferred
Stock upon the liquidation, dissolution or winding-up of the
Corporation, (b)
the conversion of the Series A Preferred Stock in common stock,
or (c) the date
two (2) years from the date of issuance of the share of Series
A Preferred
Stock. After the date two (2) years from the date of issuance
of a share of
Series A Preferred Stock, the holders of such Series A Preferred
Stock
participates ratably, on an as-converted basis, with our common
stock as to the
payment of dividends. Our Series A Preferred Stock ranks senior
to our Common
Stock, Series B Preferred Stock, Series C Preferred Stock,
Series D Preferred
Stock and any other securities we may issue. In the event of
any liquidation,
dissolution or winding up of the Company, either voluntary
or involuntary, our
Series A Preferred shareholders are entitled to receive an
amount per share
equal to the greater of $10 for each outstanding share plus
accrued and unpaid
dividends, as adjusted for stock dividends, stock distributions,
splits,
combinations or recapitalizations, or the amount such shareholders
would be
entitled to receive had they converted their Series A Preferred
shares into
common shares. These rights are prior and in preference to
any distribution of
any of our assets to our common shareholders, holders of Series
B Preferred
Stock, holders of Series C Preferred Stock, or holders of any
other series or
class of preferred shares. The holders of Series A Preferred
stock have the
right to vote on an as-converted basis, with our common shareholders
on all
matters submitted to a vote of our shareholders. In addition,
we cannot, without
the prior approval of the holders of at least fifty percent
(50%) of our then
issued and Series A Preferred Stock voting as a separate class:
·
liquidate,
dissolve, or wind-up the business and affairs of the company,
or consent to any
of the foregoing;
|
·
|
effectuate
any merger, reorganization, or recapitalization of
the company, or enter
into any agreement to do any of the foregoing
;
|
|
·
|
purchase
or redeem or pay or declare any dividend or make
any distribution on, any
shares of stock other than the Series A Preferred
Stock so long as an
accrued dividend on the Series A Preferred Stock
is unpaid, or permit any
subsidiary of the
|
Company
to take any such action, except for certain securities repurchased
from former
employees, officers, directors, consultants;
·
increase
the authorized number of shares of Preferred Stock or Series
A Preferred
Stock;
|
·
|
alter
or change the voting or other powers, preferences,
or other rights,
privileges, or restrictions of the Series A Preferred
Stock contained
herein (by merger, consolidation, or otherwise);
and
|
|
·
|
issue
any securities senior to the Series A Preferred Stock,
except certain
Qualified Financings (as defined below), or incur
any new debt, except
certain Permitted Debt (as defined below). "Qualified
Financing" means an
equity offering that (a) the gross aggregate proceeds
raised and
liquidation preferences is no more than $3,000,000;
(b) the dividend rate
does not exceed ten percent (10%); and (c) the holders
of the new
securities do not have voting rights more favorable
than voting rights
granted to the Series A Preferred Stock. "Permitted
Debt" means (w) trade
payables, inventory financing, and the accounts receivable
factoring, all
incurred in the ordinary course of business; (x)
surety bonds and letters
of credit issued or obtained in the ordinary course
of business; (y)
refinancing of the Company's existing debt facilities
(including a
$1,500,000 loan incurred on January 18, 2006); and
(z) up to $3,000,000 of
new indebtedness.
|
The
conversion rights of each holder of Series A Preferred Stock
is limited in the
certificate of designations, preferences and rights of such
stock, so that the
holder is not entitled to convert any Series A Preferred Stock
to the extent
that, after such conversion, the sum of the number of shares
of common stock
beneficially owned by such holder and its affiliates, will
result in beneficial
ownership of more than 4.99% of the outstanding shares of common
stock. The
voting rights of each holder of Series A Preferred Stock is
limited in the
certificate of designations, preferences and rights of such
stock, so that the
holder is not entitled to vote any Series A Preferred Stock
to the extent that
such voting will allow such holder to vote more than 4.99%
of the outstanding
voting securities of the Company.
Investor
Rights Agreement
In
connection with the Series A Preferred Stock financing, pursuant
to an Investor
Rights Agreement dated January 18, 2006, if the Company did
not file a
registration statement registering the resale of the Series
A Preferred Stock
and related warrants within sixty days after January 18, 2006,
then, in lieu of
monetary damages or specific performance, the Company agreed
to issue to each
purchaser of Series A Convertible Preferred Stock (a "Series
A Investor") an
additional Series A Common Stock Purchase Warrant exercisable
for the number of
shares of Common Stock equal to 1.5% of the sum of (i) the
number of shares of
Common Stock issuable upon conversion of the Series A Preferred
Stock held by
each such Series A Investor, and (ii) the number of shares
of common stock
issuable upon exercise of the Series A Warrant held by each
such Series A
Investor (a "Filing Penalty").
Also,
pursuant to an Investor Rights Agreement dated January 18,
2006, the Company
agreed that if this registration statement was not declared
effective by the
United States Securities and Exchange Commission (the "SEC")
within one hundred
eighty days after January 18, 2006 (the "Effective Date"),
then, in lieu of
monetary damages or specific performance, and for each additional
thirty (30)
day period after the Effective Date that this registration
statement is not
declared effective, the Company is required to issue to each
Series A Investor
an additional Series A Warrant exercisable for the number of
shares of common
stock equal to 1.5% of the sum of (i) the number of shares
of common stock
issuable upon conversion of the Series A Preferred Stock into
common stock held
by each such Series A Investor, and (ii) the number of shares
of common stock
issuable upon exercise of the Series A Warrants held by each
such Series A
Investor; provided, however, in no event shall the aggregate
number of shares of
common stock issuable upon exercise of the Series A Warrants
issued in
connection with the effectiveness of the Registration Statement
exceed nine
percent (9.0%) of the common stock issuable upon conversion
of the Series A
Preferred Stock and upon exercise of the Series A Warrants
originally issued on
January 18, 2006 (the "Effective Date Penalty").
The
Company’s registration statement did not become effective until August
11, 2006.
As result, Series A Common Stock Purchase Warrants exercisable
into 603,466
shares of Common Stock had accrued as a penalty. Because the
Registration
Statement has been declared effective no additional penalties
will accrue.
Series
B Convertible Preferred Stock
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
the Company issued
49,451 shares of Series B Convertible Preferred Stock which
converts into
4,945,100 common shares.
On
July
24, 2006, the Company held a Special Meeting of Stockholders
where the Company’s
directors proposed increasing the Company’s authorized shares of common stock in
order to facilitate the conversion or exercise of derivative
securities which
are convertible to common stock, such as the Company’s convertible preferred
stock. Until the increase, the Company did not have sufficient
common stock to
satisfy the conversion provisions of its outstanding convertible
securities.
Upon the increase in authorized shares of common stock, 49,451
shares of Series
B Convertible Preferred Stock automatically converted to 4,945,100
shares of
common stock.
Our
Series B Convertible Preferred Stock has the following rights,
preferences,
privileges and restrictions. Each share of Series B Convertible
Preferred Stock
automatically converts into one hundred (100) shares of Common
Stock upon the
Shareholder’s approval of an increase in the authorized shares of common
stock
of the Company. Holders of Series B Convertible Preferred Stock
participate
ratably, on an as-converted basis, with our Common Stock as
to the payment of
dividends. Our Series B Preferred Stock ranks junior to our
Series A Convertible
Preferred Stock, ranks pari passu with our Series C Convertible
Preferred Stock
and Series D Convertible Preferred Stock as to an initial aggregate
liquidation
preference of $100,000, and ranks pari passu, on an as converted
basis, with
our
common
stock, as to all other matters, including voting rights, payment
of dividends,
and liquidation, after payment of the initial liquidation preference
of
$100,000. In the event of any liquidation, dissolution or winding-up
of the
Company, either voluntary or involuntary, after payment of
any liquidation
preference to the holders of Series A Preferred Stock, the
holders of Series B
Preferred Stock are entitled to receive an initial aggregate
liquidation
preference of $100,000, and then the holders of Series B Preferred
Stock are
entitled to participate ratably, on an as-converted basis,
with our common stock
as to any distribution of assets. The holders of Series B Preferred
stock have
the right to vote on an as-converted basis, with our common
shareholders on all
matters submitted to a vote of our shareholders.
Series
C Convertible Preferred Stock
On
January 18, 2006 the Company completed a share exchange pursuant
to which the
Company acquired 100% of the issued and outstanding capital
stock of DeerValley
Acquisitions, Corp. Pursuant to the Share Exchange Agreement
the Company issued
26,750 shares of Series C Convertible Preferred Stock which
is convertible into
2,675,000 common shares. In addition, the Company issued Series
C Common Stock
Purchase Warrants to Midtown Partners, an SEC and NASD registered
broker dealer
who acted as the placement agent for the Company in connection
with this
transaction. The warrants entitle Midtown Partners to purchase
up to 2,000,000
shares of the Company's common stock at an exercise price of
seventy five cents
($.75) per share for a term of 5 years.
Our
Series C Preferred Stock has the following rights, preferences,
privileges and
restrictions. Each share of Series C Preferred Stock converts
into one hundred
(100) shares of Common Stock, at the option of the holder.
Holders of Series C
Preferred Stock participate ratably, on an as-converted basis,
with our Common
Stock as to the payment of dividends. Our Series C Preferred
Stock ranks junior
to our Series A Preferred Stock, ranks pari passu with our
Series B Preferred
Stock and Series D Preferred Stock as to an initial aggregate
liquidation
preference of $100,000, and ranks pari passu, on an as converted
basis, with our
common stock, as to all other matters, including voting rights,
payment of
dividends, and liquidation, after payment of the initial liquidation
preference
of $100,000. In the event of any liquidation, dissolution or
winding-up of the
Company, either voluntary or involuntary, after payment of
any liquidation
preference to the holders of Series A Preferred Stock, the
holders of Series C
Preferred Stock are entitled to receive an initial aggregate
liquidation
preference of $100,000, and then the holders of Series C Preferred
Stock are
entitled to participate ratably, on an as-converted basis,
with our common stock
as to any distribution of assets. The holders of Series C Preferred
stock have
the right to vote on an as-converted basis, with our common
shareholders on all
matters submitted to a vote of our shareholders. The conversion
rights of each
holder of Series C Preferred Stock is limited in the certificate
of
designations, preferences and rights of such stock, so that
the holder is not
entitled to convert any Series C Preferred Stock to the extent
that, after such
conversion, the sum of the number of shares of common stock
beneficially owned
by such holder and its affiliates, will result in beneficial
ownership of more
than 4.99% of the outstanding shares of common stock. The voting
rights of each
holder of Series C Preferred Stock is limited in the certificate
of
designations, preferences and rights of such stock, so that
the holder is not
entitled to vote any Series C Preferred Stock to the extent
that such voting
will allow such holder to vote more than 4.99% of the outstanding
voting
securities of the Company.
Series
D Convertible Preferred Stock
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
its Series D
Convertible Preferred Stock which converts into 880,540 shares
of common 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 for a term of 3 years.
The
market value of the Company’s common stock on the date the Series D
Convertible Preferred was issued and sold was $3.25 per share.
In accordance
with EITF Issue 98-5 “Accounting for Convertible Securities with Beneficial
Conversion Features or Contingently Adjustable Conversion Ratios”, as amended by
EITF 00-27“Application
of Issue No. 98-5 to certain Convertible Instruments”, the Company evaluated the
Series D Convertible Preferred stock and determined it had
a beneficial
conversion feature. Pursuant to EITF 98-5 and EITF 00-27 a
beneficial conversion
feature occurs when the conversion price of a security is less
than the fair
value of the Company's common stock on the measurement date.
The Company
calculated the effect of EITF 00-27 and EITF 98-5 on the issuance
and determined
on a relative fair value basis that, of the $1,188,563 ($1,320,810
net of
$132,247 of issuance costs) 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 Series A Convertible Preferred
Stock. As a
result, on the date of issuance the Company adjusted its balance
sheet to reduce
the value of the Series D Convertible Preferred stock by $753,618
and the
warrants by $434,945 and increased additional paid-in capital
by $1,188,563. The
Company used the Black-Scholes model to value the Series E
Common Stock Purchase
warrants. For purposes of calculating the fair value of the
warrants the Company
used a risk free rate of return of 5.00% and a volatility percentage
of 31.5%.
In
accordance with EITF 98-5 and EITF 00-27 the intrinsic value
of the beneficial
conversion feature is considered a deemed dividend to the preferred
shareholders
and is to be amortized over the period of the security’s earliest conversion
date. To amortize the beneficial conversion feature the Company
reduced the
retained earnings account and increased the Series D Preferred
Convertible Stock
for the amount of deemed dividend. During the quarter ended
April 1, 2006 the
Company recognized a deemed dividend related to the Series
D Preferred
Convertible Stock and warrants of $240,969.
On
July
24, 2006, the Company held a Special Meeting of Stockholders
where the Company’s
directors proposed increasing the Company’s authorized shares of common stock in
order to facilitate the conversion or exercise of derivative
securities which
are
convertible
to common stock, such as the Company’s convertible preferred stock. Until the
increase, the Company did not have sufficient common stock
to satisfy the
conversion provisions of its outstanding convertible securities.
Upon the
increase in authorized shares of common stock, 132,081 shares
of Series D
Convertible Preferred Stock automatically converted to 880,544
shares of common
stock. As
a
result of the conversion, the remaining $1,079,841 of un-amortized
beneficial
conversion feature was recognized as a deemed dividend on July
24,
2006.
Total
Preferred Series D Proceeds
|
|
$
|
1,320,810
|
|
Issuance
Costs
|
|
|
($132,247
|
)
|
Amount
of proceeds allocated to Warrants
|
|
|
(434,945
|
)
|
Amount
of proceeds allocated to Preferred Series D
|
|
|
(753,618
|
)
|
Amortization
of Beneficial Conversion Feature
|
|
|
240,969
|
|
Preferred
Series D balance at July 1, 2006
|
|
$
|
240,969
|
|
Amortization
of Beneficial Conversion Feature
|
|
|
1,079,841
|
|
Conversion
of Series D Preferred
|
|
|
(1,320,810
|
)
|
Preferred
Series D balance at December 31, 2006
|
|
$
|
0
|
|
Midtown
Partners & Co., LLC ("Midtown Partners"), an SEC and NASD registered
broker
dealer, acted as the placement agent for the Company in
connection with the
Series D Preferred Stock Offering. Midtown Partners is
located in Tampa,
Florida. In connection with the Series D Preferred Stock
Offering, the Company
paid Midtown Partners a cash commission equal to $99,180,
and payment of $19,836
for non-accountable expenses, and issued (a) Series BD-4
Common Stock Purchase
Warrants to Midtown Partners entitling Midtown Partners
to purchase 61,120
shares of the Company's common stock at an exercise price
of one dollar and
fifty cents ($1.50) per share for a term of 3 years and
(b) Series BD-5 Common
Stock Purchase Warrants to Midtown Partners entitling Midtown
Partners to
purchase 61,120 shares of the Company's common stock at
an exercise price of
three dollars ($3.00) per share for a term of 3 years.
Our
Series D Preferred Stock has the following rights, preferences,
privileges and
restrictions. Each 1.5 outstanding shares of Series D Convertible
Preferred
Stock shall automatically be converted into ten (10) shares
of Common Stock upon
the shareholders' approval of an increase in the authorized
shares of common
stock of the Company. Holders of Series D Preferred Stock
participate ratably,
on an as-converted basis, with our Common Stock as to the
payment of dividends.
Our Series D Preferred Stock ranks junior to our Series
A Preferred Stock, ranks
pari passu with our Series B Preferred Stock and Series
C Preferred Stock as to
an initial aggregate liquidation preference, and ranks
pari passu, on an as
converted basis, with our common stock, as to all other
matters, including
voting rights, payment of dividends, and liquidation, after
payment of the
initial liquidation preference of $100,000 to the holders
of Series B Preferred
Stock and Series C Preferred Stock and of $30,000 to holders
of Series D
Preferred Stock. In the event of any liquidation, dissolution
or winding-up of
the Company, either voluntary or involuntary, after payment
of any liquidation
preference to the holders of Series A Preferred Stock,
the holders of Series D
Preferred Stock are entitled to receive an initial aggregate
liquidation
preference of $30,000, and then the holders of Series D
Preferred Stock are
entitled to participate ratably, on an as-converted basis,
with our common stock
as to any distribution of assets. The holders of Series
D Preferred stock have
the right to vote on an as-converted basis, with our common
shareholders on all
matters submitted to a vote of our shareholders.
Series
E Convertible Preferred Stock
In
early
November of 2006, a shareholder approached the Company
about exchanging
registered shares of the Company’s common stock for shares of the Company’s
preferred stock and “out of the money” warrants. On November 16, 2006, the
Company entered into a Share Exchange Agreement with that
holder of the
Company’s common stock, par value $0.01 (the “Common Stock”) whereby the
shareholder agreed to exchange 750,000 shares of Common
Stock for 750,000 shares
of the Company’s Series E Convertible Preferred Stock (the “Series E Preferred
Stock”) and Series F Warrants (the “Series F Warrants”). The Series E Preferred
Stock is convertible into the Company’s Common Stock at the option of the holder
any time after the date of issuance on a one-for-one basis.
The conversion
rights of the holder of Series E Preferred Stock is limited
so that the holder
cannot convert any Series E Preferred Stock if, after such
conversion, the
number of shares of Common Stock beneficially owned by
the holder and its
affiliates, will exceed 4.99% of the outstanding shares
of Common Stock.
Pursuant to the Share Exchange Agreement, the Company also
issued the Series F
Warrants. The Series F Warrants entitle the holder to purchase
750,000 shares of
the Company’s Common Stock at an exercise price of two dollars and
twenty five
cents ($2.25) per share. The Series F Warrants are exercisable,
in whole or in
part, at any time from the date of grant, November 16,
2006, and expire on the
fifth anniversary of the grant date. Similar to the Series
E Preferred Stock,
the exercise rights of the Series F Warrants are limited
so that the holder is
not entitled to exercise the warrants if, after such exercise,
the number of
shares of common stock beneficially owned by the holder
and its affiliates, will
exceed 4.99% of the outstanding shares of common stock.
The Series E Preferred
Stock and the Series F Warrants were issued pursuant to
the exemption from
registration found in Section 3(a)(9) of the Securities
Act of
1933.
Warrants
Below
is
a list of the Company’s Common Stock Purchase Warrants which have been granted
and exercised during the years ended December 31, 2006
and 2005.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
|
|
|
|
|
Strike
|
|
|
|
Balance
|
|
Number
|
|
Number
|
|
Balance
|
|
Stock
|
|
Cash
|
Description
|
|
Price
|
|
Term
|
|
12/31/2005
|
|
Granted
|
|
Exercised
|
|
12/31/2006
|
|
Issued
|
|
Received
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class
A
|
|
$
|
1.50
|
|
|
5.00
|
|
|
-
|
|
|
10,545,105
|
|
|
(150,481
|
)
|
|
10,394,624
|
|
|
150,481
|
|
$
|
203,150
|
Class
B
|
|
$
|
2.25
|
|
|
7.00
|
|
|
-
|
|
|
4,970,824
|
|
|
|
|
|
4,970,824
|
|
|
-
|
|
$
|
-
|
Class
C
|
|
$
|
0.75
|
|
|
5.00
|
|
|
-
|
|
|
2,000,000
|
|
|
|
|
|
2,000,000
|
|
|
-
|
|
$
|
-
|
Class
D
|
|
$
|
0.75
|
|
|
7.00
|
|
|
-
|
|
|
2,000,000
|
|
|
|
|
|
2,000,000
|
|
|
-
|
|
$
|
-
|
Class
E
|
|
$
|
3.00
|
|
|
3.00
|
|
|
-
|
|
|
880,544
|
|
|
|
|
|
880,544
|
|
|
-
|
|
$
|
-
|
Class
F
|
|
$
|
2.25
|
|
|
5.00
|
|
|
-
|
|
|
750,000
|
|
|
|
|
|
750,000
|
|
|
-
|
|
$
|
-
|
Class
BD-1
|
|
$
|
0.75
|
|
|
5.00
|
|
|
-
|
|
|
919,162
|
|
|
(919,162
|
)
|
|
-
|
|
|
642,048
|
|
$
|
-
|
Class
BD-2
|
|
$
|
1.50
|
|
|
5.00
|
|
|
-
|
|
|
919,162
|
|
|
|
|
|
919,162
|
|
|
-
|
|
$
|
-
|
Class
BD-3
|
|
$
|
2.25
|
|
|
7.00
|
|
|
-
|
|
|
459,581
|
|
|
|
|
|
459,581
|
|
|
-
|
|
$
|
-
|
Class
BD-4
|
|
$
|
1.50
|
|
|
3.00
|
|
|
-
|
|
|
66,121
|
|
|
|
|
|
66,121
|
|
|
-
|
|
$
|
-
|
Class
BD-5
|
|
$
|
3.00
|
|
|
3.00
|
|
|
-
|
|
|
66,121
|
|
|
|
|
|
66,121
|
|
|
-
|
|
$
|
-
|
Totals
|
|
|
|
|
|
|
|
|
-
|
|
|
23,576,620
|
|
|
(1,069,643
|
)
|
|
22,506,977
|
|
|
792,529
|
|
$
|
203,150
|
*During
the period ended December 31, 2006,
certain holders of the Company’s BD-1 warrants, pursuant to the cashless
provisions contained in such warrants, converted 919,162
warrants into 642,048
shares of the Company’s common stock.
**Class
A Common Stock Purchase Warrants includes the 603,466 penalty
warrants accrued
pursuant to the Investor Rights Agreement discussed above.
Common
Stock Dividends
A
holder
of Series A Preferred Stock is entitled to receive a dividend
at a rate per
annum equal to seven percent (7%), payable semi-annually,
at the option of the
company, (i) in cash, to the extent funds are legally available
therefore, or
(ii) in shares of registered Common Stock at a ten percent
(10%) discount to the
"Market Price" (as such term is defined in the designations
for the Series A
Preferred Stock). On July 18, 2006, a dividend to holders
of Series A Preferred
Stock became due. On September 20, 2006 the Company issued
106,412 shares of the
Company’s common stock to Series A Preferred shareholders as payment
for
$260,968 of dividends.
Miscellaneous
Equity Transactions
In
January 2006, the Company issued 17,338 common shares to
Sequence Advisors
Corporation, an affiliate of two former directors. In addition,
the Company
entered into a consulting agreement with Sequence Advisors
Corporation on
January 18, 2006. Pursuant to the agreement Sequence Advisors
received 37,500
shares of the Company’s stock on October 23, 2006 as compensation for services.
The Company has recognized $93,000 of expense related to
this agreement.
On
July
24, 2006 the board of directors approved 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
and; approved 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. The Company’s directors proposed
increasing the Company’s authorized shares of common stock in order to
facilitate the conversion or exercise of derivative securities
which are
convertible to common stock, such as the Company’s convertible preferred stock.
Until the increase, the Company did not have sufficient
common stock to satisfy
the conversion provisions of its outstanding convertible
securities. Upon the
increase in authorized shares of common stock, 49,451 shares
of Series B
Convertible Preferred Stock automatically converted to
4,945,100 shares of
common stock, and 132,081 shares of Series D Convertible
Preferred Stock
automatically converted to 880,544 shares of common stock.
NOTE
11 - INCOME TAXES
The
Internal Revenue Code limits the future availability of
net operating loss
carryforwards that arose prior to certain cumulative changes
in a corporation’s
ownership. Due to the ownership change in January 2006
and prior years, the
pre-change net operating loss carryforwards are limited
by IRC Section 382 in
their annual utilization. If the corporation fails to meet
certain business
continuity requirements, the carryforwards may be eliminated
entirely. As of
December 31, 2005, the remaining 1999 pre-change federal
net operating loss
carryforwards of
$19,000,000 are subject to the Sec 382 limitation. We
have
not updated our IRC Section 382 study analysis for the
tax year ended December
31, 2006. The extent of the limitation on the availability
to use net operating
losses is not known at this time.
The
income tax provision (benefit) consists of the following:
Income
Taxes:
The
components of the provision for income taxes are as follows:
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
taxes
|
|
1,955,131 |
|
|
-
|
|
Deferred
taxes
|
|
(742,853
|
)
|
|
-
|
|
Provision
for income taxes
|
|
1,212,278
|
|
|
-
|
|
The
items
accounting for the difference between income taxes computed at the federal
statutory rate and the provision for income taxes are as follows:
|
|
|
|
2006
|
|
|
|
|
2005
|
|
|
|
|
|
Amount
|
|
|
|
|
Impact
on
Rate
|
|
|
Amount
|
|
|
|
Impact
on
Rate
|
Income
tax at federal rate
|
|
|
1,363,679
|
|
|
|
|
34.00
|
%
|
|
-
|
|
|
|
-
|
State
tax, net of Federal effect
|
|
|
172,064
|
|
|
|
|
4.29
|
%
|
|
-
|
|
|
|
-
|
Permanent
Differences:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Meals
& Entertainment
|
|
|
20,353
|
|
|
|
|
0.51
|
%
|
|
-
|
|
|
|
-
|
Officers
Life Insurance
|
|
|
3,203
|
|
|
|
|
0.08
|
%
|
|
-
|
|
|
|
-
|
S
Corp to C Corp
|
|
|
(91,322
|
)
|
|
|
|
-2.28
|
%
|
|
-
|
|
|
|
-
|
Domestic
Production Deduction
|
|
|
(64,481
|
)
|
|
|
|
-1.61
|
%
|
|
-
|
|
|
|
-
|
Effect
of 338(h)10 election
|
|
|
(88,515
|
)
|
|
|
|
-2.21
|
%
|
|
-
|
|
|
|
-
|
Total
Permanent Differences
|
|
|
(220,762
|
)
|
|
|
|
-5.50
|
%
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Tax Credits
|
|
|
(102,703
|
)
|
|
|
|
-2.56
|
%
|
|
-
|
|
|
|
-
|
True
Up to Tax Return - Deferred Assets
|
|
|
(0
|
)
|
|
|
|
0.00
|
%
|
|
-
|
|
|
|
-
|
Total
Provision
|
|
|
1,212,278
|
|
|
|
|
30.23
|
%
|
|
-
|
|
|
|
-
|
Deferred
income taxes reflect the net tax effects of temporary differences
between
the carrying amount of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant
components of the Company's net deferred income taxes are as
follows:
|
|
2006
|
|
2005
|
|
Current
Deferred Tax Assets:
|
|
|
|
|
|
|
Warranty
Reserve
|
|
737,083
|
|
|
-
|
|
Repurchase
Reserve
|
|
16,981
|
|
|
-
|
|
Allowance
for Doubtful Accounts
|
|
1,915
|
|
|
-
|
|
Total
Current Deferred Tax Asset
|
|
755,979
|
|
|
-
|
|
|
|
|
|
|
|
|
Non-Current
Deferred Tax Assets:
|
|
|
|
|
|
|
Net
Operating Loss Carryforwards
|
|
-
|
|
|
6,895,000
|
|
Accelerated
Depreciation
|
|
(13,125
|
)
|
|
-
|
|
Valuation
allowance
|
|
-
|
|
|
(6,895,000
|
)
|
Total
Non-Current Deferred Tax Assets
|
|
(13,125
|
)
|
|
-
|
|
Total
Deferred Tax Assets (Net)
|
|
742,854
|
|
|
-
|
|
The
estimated Tax Credit for the State of Alabama of 102,703 is estimated
based on the annual capital credit available for qualifying projects
within the state of Alabama and is determined by multiplying the
total
actual project costs by 5% and is limited to Alabama income tax
liability
attributable to income generated by or arising out of the qualifying
project. Any remainder of unused capital credit available cannot
be
carried forward or back.
|
NOTE
12 - COMMITMENTS AND CONTINGENCIES
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.
Reserve
for Repurchase Commitments
Deer
Valley Homebuilders, Inc. (“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 $15,765,000 at December 31, 2006. As of December 31, 2006
the Company had reserved $77,500 for future repurchase losses, based on 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.
Earnout
Agreement
On
January 18, 2006, the Company's wholly-owned subsidiary, DeerValley Acquisitions
Corp. (dissolved on June 30, 2006), entered into an Earnout Agreement (the
"Earnout Agreement"), between Deer Valley Homebuilders, Inc., DeerValley
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. 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
will be recorded in the Company's financial statements until the contingency
is
resolved, or the consideration is issued or becomes issuable. The maximum
remaining potential accrual under the Earnout Agreement is $3,526,764. See
Note
9-Long-Term Debt-“Earnout Agreement”
for
further details on the Earnout Agreement.
Employment
Agreements
On
January 18, 2006, Deer Valley Homebuilders, Inc. entered into a seven year
employment agreement with Joel Stephen Logan, II. Under the terms of Mr.
Logan's
Employment Agreement, Mr. Logan is (a) entitled to receive a fixed annual
salary
of $52,000, (b) entitled to receive a monthly "hitch bonus" of $60 per "floor"
produced by the Company, and (c) is eligible to participate and receive 4.6%
of
the net income before taxes of the Company, and (d) entitled to receive health
benefits and coverage, as provided by the Company.
On
January 18, 2006, Deer Valley Homebuilders, Inc. entered into a seven year
employment agreement with Charles L. Murphree, Jr. Under the terms of Mr.
Murphree's Employment Agreement, Mr. Murphree is (a) entitled to receive
a fixed
annual salary of $52,000, (b) entitled to receive a monthly "hitch bonus"
of
$33.33 per "floor" produced by the Company, (c) is eligible to participate
and
receive 2.2% of the net income before taxes of the Company, and (d) entitled
to
receive health benefits and coverage, as provided by the Company.
On
January 18, 2006, Deer Valley Homebuilders, Inc. entered into a seven year
employment agreement with John Steven Lawler. Under the terms of Mr. Lawler's
Employment Agreement, Mr. Lawler is (a) entitled to receive a fixed annual
salary of $52,000, (b) entitled to receive a monthly "hitch bonus" of $35
per
"floor" produced by the Company, and (c) is eligible to participate and receive
2% of the net income before taxes of the Company, and (d) entitled to receive
health benefits and coverage, as provided by the Company.
On
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 Deer Valley Corporation 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.
Dividends
Payable
A
holder
of Series A Preferred Stock is entitled to receive a dividend at a rate per
annum equal to seven percent (7%), payable semi-annually, at the option of
the
company, (i) in cash, to the extent funds are legally available therefore,
or
(ii) in shares of registered Common Stock at a ten percent (10%) discount
to the
"Market Price" (as such term is defined in the designations for the Series
A
Preferred Stock). As of December 31, 2006 the total accrued dividend payable
to
Series A Preferred shareholders is $217,506.
NOTE
13 - RELATED PARTY
On
January 18, 2006, the Company entered into an Earnout Agreement with the
former
owners of Deer Valley Homebuilders, Inc. See Note
9-Long Term Debt-Loans and Earnout for
further details. The former owners of Deer Valley Homebuilders, Inc. are
members
of Company’s board of directors and shareholders of the Company.
On
January 18, 2006, Deer Valley Homebuilders, Inc. entered into three seven
year
employment agreements with members of the company. See Note
12 - Commitments and Contingencies- Employment
Agreements for
further details. The three employees are members of the Company’s board of
directors and shareholders of the Company.
In
January 2006, the Company issued 17,338 common shares to Sequence Advisors
Corporation, an affiliate of two former directors. In addition, the Company
issued 37,500 shares as part of an agreement entered into in January 2006.
See
Note
10-Equity Transactions -Miscellaneous
Equity Transactions
for
further details
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 and shareholders. 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. The service provider
and
its employees are also holders of the Company’s Series B Convertible Preferred
Stock, Series C Convertible Preferred Stock, and an affiliate of Midtown
Partners, LLC. See Note
10-Equity Transactions
for
further details on Midtown Partners, Series B Convertible Preferred stock,
and
the Series C Convertible Preferred stock.
On
April
18, 2006, pursuant to the Sales Contract, Deer Valley Homebuilders, Inc.
("DVH"), an indirectly wholly-owned subsidiary of Deer Valley Corporation,
purchased real property located at 7668 Highway 278 in Sulligent, Alabama
(the
"Sulligent Property") from Steve J. Logan. The Sulligent Property consists
of a
65,992 square foot manufacturing plant located on approximately 13 acres
of
land. The purchase price for the Sulligent Property was $725,000, subdivided
as
follows. Deer Valley assumed Mr. Logan's mortgage of approximately $610,000
and
will pay the remaining $115,000 to Mr. Logan in equal monthly payments of
$5,000
for twenty-three months. Deer Valley obtained the funds for the purchase
price
of the Sulligent Property from its revolving line of credit described in
Note
8-Long Term Debt-Loans and Letter of Credit.
Mr.
Logan is a member of the Company’s board directors and shareholder of the
Company.
On
June
29, 2006 the Company elected Charles G. Masters to serve as President, Chief
Executive Officer, and Chief Financial Officer. See
Note
12 - Commitments and Contingencies- Employment
Agreements for
further details. Mr. Masters is a member of the Company’s board directors and
shareholder of the Company.
In
early
November of 2006, a shareholder approached the Company about exchanging
registered shares of the Company’s common stock for shares of the Company’s
preferred stock and “out of the money” warrants. See Note
10-Equity Transactions-Series E Convertible Preferred Stock for
further details.
NOTE
14- FLUCTUATIONS IN FIRST QUARTER RESULTS OF OPERATIONS
(UNAUDITED)
In
the
first quarter of 2006 the Company inadvertently excluded a $93,000 agreement
entered into with Sequence Advisors (See Note
10-Equity Transactions -Miscellaneous
Equity Transactions)
as well
as the additional depreciation expense incurred as a result of the step up
in
basis of certain assets as acquisition. The Company has voluntarily chosen
to
correct the error in the current financial statements. The following is a
summary of the adjustment to the Statement of Operations for the first quarter.
|
|
|
|
|
|
|
|
1st
Quarter
|
|
|
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
Operating
expenses, as originally reported
|
|
$
|
1,285,392
|
|
|
Immaterial
error correction
|
|
|
18,357
|
|
1
|
Immaterial
error correction
|
|
|
93,000
|
|
2
|
Operating
expenses, as adjusted
|
|
$
|
1,396,749
|
|
|
|
|
|
|
|
|
Operating
income, as originally reported
|
|
$
|
732,298
|
|
|
Immaterial
error correction
|
|
|
(18,357
|
)
|
1
|
Immaterial
error correction
|
|
|
(93,000
|
)
|
2
|
Operating
income, as adjusted
|
|
$
|
620,941
|
|
|
|
|
|
|
|
|
Net
income/(loss), as originally reported
|
|
$
|
463,501
|
|
|
Immaterial
error correction, net of income tax effect
|
|
|
(11,741
|
)
|
1
|
Immaterial
error correction, net of income tax effect
|
|
|
(59,483
|
)
|
2
|
Net
income/(loss), as adjusted
|
|
$
|
392,277
|
|
|
|
|
|
|
|
|
Net
income/(loss) available to common shareholders, as originally
reported
|
|
$
|
(1,140,828
|
)
|
|
Immaterial
error correction, net of income tax effect
|
|
|
(11,741
|
)
|
1
|
Immaterial
error correction, net of income tax effect
|
|
|
(59,483
|
)
|
2
|
Net
income/(loss) available to common shareholders, as
adjusted
|
|
$
|
(1,212,052
|
)
|
|
|
|
|
|
|
|
Net
income/(loss) per share (basic), as reported
|
|
$
|
(1.14
|
)
|
|
Immaterial
error correction
|
|
|
(0.01
|
)
|
1
|
Immaterial
error correction
|
|
|
(0.03
|
)
|
2
|
Net
income/(loss) per share (basic), as adjusted
|
|
$
|
(1.18
|
)
|
|
|
|
|
|
|
|
Net
income/(loss) per share (fully diluted), as reported
|
|
$
|
(1.14
|
)
|
|
Immaterial
error correction
|
|
|
(0.01
|
)
|
1
|
Immaterial
error correction
|
|
|
(0.03
|
)
|
2
|
Net
income/(loss) per share (fully diluted), as adjusted
|
|
$
|
(1.18
|
)
|
|
|
|
|
|
|
|
Weighted
average common shares outstanding, as reported
|
|
|
1,000,000
|
|
|
Immaterial
error correction
|
|
|
30,082
|
|
2
|
Weighted
average common shares outstanding, as adjusted
|
|
|
1,030,082
|
|
|
|
|
|
|
|
|
Weighted
average common and common stock equivalents outstanding, as
reported
|
|
|
1,000,000
|
|
|
Immaterial
error correction
|
|
|
30,082
|
|
2
|
Weighted
average common and common stock equivalents outstanding, as
adjusted
|
|
|
1,030,082
|
|
|
(1)
Additional depreciation expense as a result of the step up in
basis of
assets at acquisition.
|
(2)
$93,000 Sequence Advisor agreement inadvertently excluded from
income.
|
ITEM
8.
|
CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND
FINANCIAL DISCLOSURE
|
None.
Evaluation
of Disclosure Controls and Procedures
The
Company’s Chief Executive Officer and acting 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 December 30, 2006 covered by this Annual Report on
Form 10-KSB. Based upon such evaluation, the Chief Executive Officer
and acting 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 acting Chief Financial Officer does not relate to reporting
periods after December 30, 2006.
The
Company’s Chief Executive Officer is actively researching candidates for
membership on the Board of Directors who would be “independent” and who,
accordingly, could serve on an audit committee. In addition, the Company's
Chief Executive and acting 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.
Changes
in Internal Controls over Financial Reporting
Beginning
with the Company’s first fiscal year ending after December 15, 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. At this
time,
management is assessing the proper parameters of a Section 404 compliance
project in light of emerging guidance from the SEC on such
parameters.
Except
as
described above, during the fourth 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, if any, within a company have been
detected.
None.
PART
III
|
DIRECTORS
AND EXECUTIVE OFFICERS OF THE
REGISTRANT
|
Officers
and
Directors
As
of
March 23, 2007, the directors and executive officers of Deer Valley Corporation,
their ages, positions, the dates of initial election or appointment as directors
or executive officers, and the expiration of their terms are as set forth
in the
following table.
Name
of Director/Executive Officer
|
Age
|
Position
|
Period
Served
|
Charles
G. Masters
|
67
|
President,
Chief Executive Officer,
and
Class II Director
|
January
18, 2006 to Present; term
as
Class II Director expires in
2007
|
|
|
|
|
Joel
Stephen Logan, II
|
38
|
Class
II Director, Member of the Board of Directors of Deer Valley
Homebuilders,
Inc., President and General Manager of Deer Valley Homebuilders,
Inc.
|
September
22, 2006 to Present; term expires at next meeting of
shareholders
|
|
|
|
|
Charles
L. Murphree, Jr.
|
45
|
Class
I Director, Member of the Board of Directors of Deer Valley Homebuilders,
Inc., Vice President and Regional Sales Director of Deer Valley
Homebuilders, Inc.
|
September
22, 2006 to Present; term expires at next meeting of
shareholders
|
|
|
|
|
John
Steven Lawler
|
38
|
Class
III Director, Member of the Board of Directors of Deer Valley
Homebuilders, Inc., Director of Finance, Deer Valley Homebuilders,
Inc.
|
September
22, 2006 to Present; term expires at next meeting of
shareholders
|
|
|
|
|
Hans
Beyer
|
41
|
Class
II Director
|
July
27, 2006 to Present; term
as
Class II Director expires in
2007
|
|
|
|
|
John
Giordano
|
49
|
Class
III Director
|
July
27, 2006 to Present; term
as
Class III Director expires in
2008
|
|
|
|
|
Dale
Phillips
|
59
|
Class
I Director
|
July
27, 2006 to Present; term
as
Class I Director expires in
2009
|
Duties,
Responsibilities And Experience
Charles
G. Masters,
Chief
Executive Officer, President and Director of Cytation Corporation. Mr. Masters
was the founder of DeerValley Acquisitions Corporation. In March 1998, Mr.
Masters founded and has since served as CEO and CFO of Bumgarner Enterprises,
Inc., an oil and gas development and a business consulting firm. Since 2001,
Mr.
Masters has also served as Director, CEO and CFO of Ranger Industries, Inc.,
a
public company, which is the sole shareholder of Bumgarner Enterprises. Mr.
Masters has founded and served as the CEO and CFO of several private companies
involved in the development of military electronic communications and test
equipment, pioneering the introduction of microprocessors into point of sale
equipment, medical equipment, artificial intelligence devices, and the
development of laser scanners. Mr. Masters received a B.S.E.E. (1961) from
Duke
University, a M.S.E.E. (1964) from the University of Pittsburgh and a M.S.M.S.
(1966) from Johns Hopkins University.
Joel
Stephen Logan, II,
Member
of the Board of Directors of the Company and of Deer Valley Homebuilders,
Inc.,
President, and General Manager of Deer Valley Homebuilders, Inc. Mr. Logan
is
well-known throughout the factory-built home industry, having founded and
operated two successful companies in the industry. Since leading the group
which
founded DVH in 2004, Mr. Logan has served as Chairman of the Board, General
Manager, and President of that company. In 1996, Mr. Logan led the group
which
founded a HUD Code housing company, Pinnacle Homes of Alabama. Mr. Logan
served
as served as President and General Manager of Pinnacle until the company
was
purchased in 1998. Following the buy-out, Pinnacle became a division of Patriot
Homes of Indiana, and Mr. Logan continued as General Manager of the Pinnacle
Division until 2003. Mr. Logan also serves as a member of the Board of Directors
of two charities, Quinn's Ranch Children's Home and GMM Children Feeding
Center.
Mr. Logan holds a degree in Business Administration from Mississippi State
University.
Charles
L. Murphree, Jr.,
Member
of the Board of Directors of the Company and of Deer Valley Homebuilders,
Inc.,
Vice President and Regional Sales Director of Deer Valley Homebuilders, Inc.
As
one of the founders of DVH, since April of 2004 Mr. Murphree has served as
a
Corporate Director, Sales Manager and Vice President of DVH. From 2003 until
2004, Mr. Murphree served as Plant Manager for Clayton Homes, Inc. From 2000
through 2003, Mr. Murphree worked as General Manager of the Energy and LifeStyle
Divisions of Southern Energy Homes, Inc. Mr. Murphree graduated from the
University of Alabama Huntsville with a Bachelor of Science in Business
Administration.
John
Steven Lawler,
Member
of the Board of Directors of the Company and of Deer Valley Homebuilders,
Inc.,
Secretary-Treasurer
and Director
of Finance of Deer Valley Homebuilders, Inc. As part of the DVH's founding
group, since April 2004 Mr. Lawler, a certified public accountant, has served
as
Director of Finance for DVH. From 2001 until 2004, he served as ERP and IT
Project Manager for Cavalier Homes, Inc. From 1999 until 2001, Mr. Lawler
worked
as the ERP Team Leader for Financial Accounting for Cavalier Homes, Inc.
Mr.
Lawler holds a Bachelor of Science in Business Administration from the
University of Alabama.
Hans
Beyer,
Director.
Since
February of 2005, Mr. Beyer has served as a partner for Saxon Gilmore Carraway
Gibbons Lash & Wilcox, P.A. At Saxon Gilmore Carraway Gibbons Lash &
Wilcox, P.A., he oversees and manages complex legal matters. From September
2005
until December 31, 2006, Mr. Beyer served as the Senior Vice President of
Mirabilis Ventures, Inc. At Mirabilis Ventures, Inc., he oversaw private
equity
investments. In addition, Mr. Beyer is President and Founder for Daedalus
Consulting, Inc. In connection with his position at Daedalus Consulting,
Inc.,
Mr. Beyer provides consulting advice on business matters. From 2003 to February
2005, Mr. Beyer was a partner at Buchanan Ingersoll, P.C. Prior to 2002,
Mr.
Beyer was the founder and President of the Law Firm of Hans Christian Beyer,
P.A. Mr. Beyer holds a B.A. from the University of Michigan and a J.D. from
the
University of Michigan Law School.
John
Giordano,
Director.
For the past five years Mr. Giordano has served as Chair of the Business,
Tax
and Corporate Finance Practice Group at Bush Ross, P.A., a Tampa, Florida
law
firm. He is regularly involved in complex business-related transactions,
has
extensive experience in a broad range of areas, including federal and
state
securities
law, corporate finance, mergers, acquisitions, and tax law, and has acted
as
general corporate counsel for numerous Florida-based public and private
corporations. Mr. Giordano attended the University of Florida, where he received
a B.S., a J.D., and an L.L.M. in taxation.
Dale
Phillips,
Director.
For the
past five years, Mr. Phillips has served as a director and Vice President
of
Finance for RE Purcell Construction Co., Inc., a paving and utility contractor.
He is also a director and Vice President for Dalmari, Inc. Mr. Phillips holds
an
A.S. (1968) in Business Management from Champlain College and a B.A. (1971)
in
Accounting from Castleton State College.
Significant
Employees
Other
than the executive officers of Deer Valley named above, no other employees
are
required to be disclosed under this item. Because of their importance to
the
success of Deer Valley and the Company, Deer Valley maintains “key man” life
insurance policies, with Deer Valley as beneficiary, on the former owners
of
Deer Valley, including Joel Stephen Logan II, John Steven Lawler, and Charles
Murphree.
Family
Relationships
There
are
no family relationships among any of our directors and executive
officers.
Involvement
In Legal Proceedings
To
the
best of our knowledge, there is no material proceeding to which any director,
officer or affiliate of the Company, any owner of record or beneficially
of more
than 5% of any class of voting securities of the Company, or security holder
is
a party adverse to the Company or has a material interest adverse to the
Company
or any of its subsidiaries.
To
the
best of our knowledge, during the past five years, none of our directors
or
executive officers were involved in any of the following: (1) any bankruptcy
petition filed by or against any property or business of which such person
was a
general partner or executive officer either at the time of the bankruptcy
or
within two years prior to that time; (2) any conviction in a criminal proceeding
or being subject to a pending criminal proceeding (excluding traffic violations
and other minor offenses); (3) being subject to any order, judgment, or decree,
not subsequently reversed, suspended or vacated, of any court of competent
jurisdiction, permanently or temporarily enjoining, barring, suspending,
or
otherwise limiting his involvement in any type of business, securities or
banking activities; or (4) being found by a court of competent jurisdiction
(in
a civil action), the SEC, or the Commodities Futures Trading Commission to
have
violated a federal or state securities or commodities law, and the judgment
has
not been reversed, suspended, or vacated.
Audit
Committee
We
do not
currently have a standing audit committee. The Company’s Chief Executive Officer
is actively researching candidates for membership on the Board of Directors
who
would be “independent” and who, accordingly, could serve on an audit committee.
The board member who is currently performing the equivalent functions of
an
audit committee is Charles G. Masters, who has not been determined to be
an
“audit committee financial expert.”
Audit
Committee Financial Expert
We
do not
currently have an “audit committee financial expert" as defined under Item
401(e) of Regulation S-B. As discussed above, our Board of Directors plans
to
form an Audit Committee. In addition, the Board is actively seeking to appoint
an individual to the Board of Directors and the Audit Committee who would
be
deemed an audit committee financial expert.
Section
16(a) Beneficial Ownership Reporting Compliance
Section
16(a) of the Securities Exchange Act of 1934, as amended, requires the Company’s
directors, officers and holders of more than 10% of the Company’s equity
securities to file with the Securities and Exchange Commission initial reports
of ownership and reports of changes in ownership. Based solely on a review
of
the forms, reports, and certificates filed with the Company by such persons,
all
Section 16(a) filing requirements were complied with by such persons during
the
last fiscal year except that Charles Masters failed to timely report a
conversion of Series B Preferred Stock to common stock, which conversion
occurred automatically, without any action by or notice to Mr.
Masters.
Code
of Ethics
The
Company has not adopted a code of ethics which applies to its principal
executive officer, principal financial officer, principal accounting officer
or
controller, or persons performing similar functions. The Company desires
to
appoint independent members to the Board of Directors before adopting such
a
code. The Company is actively searching for individuals who would be considered
independent, as well as qualified to serve as directors.
Material
Changes to Nominations by Security Holders of Director
Candidates
In
the
past fiscal year, there has been no material change to the procedures by
which
security holders may recommend nominees to the small business issuer’s board of
directors.
Executive
Compensation
The
following table sets forth information regarding the compensation earned
by our
Chief Executive Officer and each of our most highly compensated executive
officers whose aggregate annual salary and bonus exceeded $100,000 for each
of
the years indicated with respect to services rendered by such
persons.
SUMMARY
COMPENSATION TABLE
Name
and Principal Position
|
Year
|
Salary
|
Bonus
($)
|
Option
Awards
(#)
|
Non-Equity
Incentive Plan Compensation
($)
|
All
Other Compensation
($)
|
Total
($)
|
Charles
G. Masters (1)
|
2006
2005
|
$60,000
-
|
-
-
|
-
-
|
-
-
|
$60,000
-
|
$120,000
-
|
|
|
|
|
|
|
|
|
Joel
Stephen Logan, II(2)
|
2006
2005
|
$52,000
$52,000
|
$450
|
-
-
|
$406,045(7)
$245,161(8)
|
$43,838(13)
$143,617(14)
|
$502,333
$440,778
|
|
|
|
|
|
|
|
|
Charles
L. Murphree, Jr.(3)
|
2006
2005
|
$52,000
$52,000
|
$450
-
|
-
-
|
$206,466(9)
$124,353(10)
|
$30,144(13)
$86,710(14)
|
$289,060
$263,063
|
|
|
|
|
|
|
|
|
John
Steven Lawler (4)
|
2006
2005
|
$52,000
$52,000
|
$450-
|
-
-
|
$198,039(11)
$118,291(12)
|
$21,975(15)
$67,021(14)
|
$272,464
$237,312
|
|
|
|
|
|
|
|
|
Richard
A. Fisher(5)
|
2006
2005
|
$0
$0
|
-
-
|
-
-
|
$0
$0
|
-
-
|
$0
$0
|
|
|
|
|
|
|
|
|
Kevin
J. High (6)
|
2006
2005
|
$0
$0
|
-
-
|
-
-
|
$0
$0
|
-
-
|
$0
$0
|
1) |
On
January 18, 2006, Mr. Masters was elected to serve as a Director,
Chief
Executive Officer, and President of the Company. Mr. Masters’ salary is
$120,000 per year and began accruing on July 1, 2006. Prior to
July 1, Mr.
Masters was compensated as a consultant, and such compensation
is listed
under “All Other Compensation” here. In addition to the compensation
described above, in 2006 the Company paid $100,000 to Ranger Industries,
Inc., an entity controlled by Charles Masters, in return for services
rendered in 2005. Please see Item 12 below for a fuller description
of the
Company’s contract with Ranger Industries,
Inc.
|
|
2)
|
Mr.
Logan is a Director of the Company and President and General Manager
of
Deer Valley Homebuilders, Inc., a material operating subsidiary
of the
Company acquired on January 18, 2006. Mr. Logan’s executive compensation
above includes historical compensation paid by Deer Valley Homebuilders,
Inc. prior to its acquisition by the Company. Mr. Logan also earned
payments under the Earnout Agreement described in Item 12 of this
filing
and $31,914 in additional proceeds from the sale of Deer Valley
Homebuilders, Inc. as consideration for an untimely release by
the Company
of Mr. Logan’s personal guarantee. Such payments have not been included
above, as they are treated as additional, contingent purchase price
paid
for the acquisition of Deer Valley Homebuilders, Inc. Mr. Logan’s bonus of
$450 is an anniversary bonus paid to each employee of Deer Valley
Homebuilders, Inc. upon the anniversary of his or her
employment.
|
|
3)
|
Mr.
Murphree is Director of the Company and Vice President and Regional
Sales
Director of Deer Valley Homebuilders, Inc, a material operating
subsidiary
of the Company acquired on January 18, 2006. Mr. Murphree’s executive
compensation above includes historical compensation paid by Deer
Valley
Homebuilders, Inc. prior to its acquisition by the Company. Mr.
Murphree
also earned payments under the Earnout Agreement described in Item
12 of
this filing and $19,149 in additional proceeds from the sale of
Deer
Valley Homebuilders, Inc. as consideration for an untimely release
by the
Company of Mr. Murphree’s personal guarantee. Such payments have not been
included above, as they are treated as additional, contingent purchase
price paid for the acquisition of Deer Valley Homebuilders, Inc.
Mr.
Murphree’s bonus of $450 is an anniversary bonus paid to each employee of
Deer Valley Homebuilders, Inc. upon the anniversary of his or her
employment.
|
|
4)
|
Mr.
Lawler is Director of the Company and Director of Finance of Deer
Valley
Homebuilders, Inc, a material operating subsidiary of the Company
acquired
on January 18, 2006. Mr. Lawler’s executive compensation above includes
historical compensation paid by Deer Valley Homebuilders, Inc.
prior to
its acquisition by the Company. Mr. Lawler also earned payments
under the
Earnout Agreement described in Item 12 of this filing and $14,894
in
additional proceeds from the sale of Deer Valley Homebuilders,
Inc. as
consideration for an untimely release by the Company of Mr. Lawler’s
personal guarantee. Such payments have not been included above,
as they
are treated as additional, contingent purchase price paid for the
acquisition of Deer Valley Homebuilders, Inc. Mr. Lawler’s bonus of $450
is an anniversary bonus paid to each employee of Deer Valley Homebuilders,
Inc. upon the anniversary of his or her
employment.
|
|
5)
|
Mr.
Fisher resigned as Chairman and General Counsel, effective as of
January
18, 2006.
|
|
6)
|
Mr.
High resigned as President, effective as of January 18,
2006.
|
|
7)
|
Non-equity
incentive plan compensation consisted of “hitch” bonuses and
profit-sharing arrangements described in “Employment Agreements with Named
Executive Officers” below. Amount reflects accruals in fiscal year 2006,
including a “hitch” bonus of $7,740 and profit-sharing of $91,378 accrued
but unpaid in 2006. In 2006 Mr. Logan was paid $139,080 as a “hitch
bonus,” which includes $6,600 accrued but unpaid in 2005, and $253,127
in
profit-sharing, which includes $78,680 accrued but unpaid in
2005.
|
|
8)
|
Non-equity
incentive plan compensation consisted of “hitch” bonuses and
profit-sharing arrangements described in “Employment Agreements with Named
Executive Officers” below. Amount reflects accruals in fiscal year 2005,
including a “hitch” bonus of $6,600 and profit-sharing of $78,680 accrued
but unpaid in 2005. In 2005 Mr. Logan was paid $76,260 as a “hitch bonus,”
which includes $4,980 accrued but unpaid in 2004, and $103,350
in
profit-sharing, which includes $14,749 accrued but unpaid in
2004.
|
9) |
Non-equity
incentive plan compensation consisted of “hitch” bonuses and
profit-sharing arrangements described in “Employment Agreements with Named
Executive Officers” below. Amount reflects
accruals in fiscal year 2006, including a “hitch” bonus of $5,556 and
profit-sharing of $43,892 accrued but unpaid in 2006. In
2006 Mr. Murphree
was paid $76,732 as a “hitch bonus,” which includes $4,466 accrued but
unpaid in 2005, and $122,545 in profit-sharing, which includes
$37,793
accrued but unpaid in
2005.
|
|
10)
|
Non-equity
incentive plan compensation consisted of “hitch” bonuses and
profit-sharing arrangements described in “Employment Agreements with Named
Executive Officers” below. Amount reflects accruals in fiscal year 2005,
including a “hitch” bonus of $4,466 and profit-sharing of $37,793 accrued
but unpaid in 2005. In 2005 Mr. Murphree was paid $41,697 as a
“hitch
bonus,” which includes $3,100 accrued but unpaid in 2004, and $49,642 in
profit-sharing, which includes $6,145 accrued but unpaid in
2004.
|
|
11)
|
Non-equity
incentive plan compensation consisted of “hitch” bonuses and
profit-sharing arrangements described in “Employment Agreements with Named
Executive Officers” below. Amount reflects accruals in fiscal year 2006,
including a “hitch” bonus of $4,515 and profit-sharing of $39,661 accrued
but unpaid in 2006. In 2006 Mr. Lawler was paid $81,130 as a “hitch
bonus,” which includes $3,850 accrued but unpaid in 2005, and $110,733
in
profit-sharing, which includes $34,150 accrued but unpaid in
2005.
|
|
12)
|
Non-equity
incentive plan compensation consisted of “hitch” bonuses and
profit-sharing arrangements described in “Employment Agreements with Named
Executive Officers” below. Amount reflects accruals in fiscal year 2005,
including a “hitch” bonus of $3,850 and profit-sharing of $34,150 accrued
but unpaid in 2005. In 2005 Mr. Lawler was paid $44,485 as a “hitch
bonus,” which includes $2,905 accrued but unpaid in 2004, and $44,856 in
profit-sharing, which includes $6,145 accrued but unpaid in
2004.
|
|
13)
|
Amount
relates to health insurance premiums, director fees, and partial
reimbursement for payment of taxes accrued in 2006 and payable
by
shareholder due to status as a Subchapter S
corporation.
|
|
14)
|
Amount
relates to partial reimbursement for payment of taxes accrued in
2005 and
payable by shareholder due to status as a Subchapter S
corporation.
|
|
15)
|
Amount
relates to director fees, and partial reimbursement for payment
of taxes
accrued in 2006 and payable by shareholder due to status as a Subchapter
S
corporation.
|
Stock
Options and Stock Appreciation Rights Grant Table
Neither
the Company, DVA, nor Deer Valley Homebuilders, Inc. issued any common share
purchase options or stock appreciation rights during the 2006 fiscal year
to its named executive officers.
Stock
Options and Stock Appreciation Rights Exercise And Valuation
Table
With
respect to each of our named executive officers, there have not been any
common
share purchase options or stock appreciation rights exercised in fiscal
year 2006, and there are not any unexercised common share purchase options
or stock appreciation rights as of December 30, 2006.
Employment
Agreements with Named Executive Officers
On
January 18, 2006, Deer Valley Homebuilders, Inc. (“DVH”) entered into the
following employment agreements with the following executive
officers.
On
January 18, 2006, Deer Valley Homebuilders, Inc. entered into a seven year
employment agreement with Joel Stephen Logan, II. Under the terms of Mr.
Logan’s
Employment Agreement, Mr. Logan is (a) entitled to receive a fixed annual
salary
of $52,000, (b) entitled to receive a monthly “hitch bonus” of $60 per “floor”
produced by DVH, (c) is eligible to participate and receive 4.6% of the net
income before taxes of DVH, and (d) entitled to receive health benefits and
coverage, as provided by DVH.
On
January 18, 2006, Deer Valley Homebuilders, Inc. entered into a seven year
employment agreement with Charles L. Murphree, Jr. Under the terms of Mr.
Murphree’s Employment Agreement, Mr. Murphree is (a) entitled to receive a fixed
annual salary of $52,000, (b) entitled to receive a monthly “hitch bonus” of
$33.33 per “floor” produced by DVH, (c) is eligible to participate and receive
2.2% of the net income before taxes of DVH, and (d) entitled to receive health
benefits and coverage, as provided by DVH.
On
January 18, 2006, Deer Valley Homebuilders, Inc. entered into a seven year
employment agreement with John Steven Lawler. Under the terms of Mr. Lawler’s
Employment Agreement, Mr. Lawler is (a) entitled to receive a fixed annual
salary of $52,000, (b) entitled to receive a monthly “hitch bonus” of $35 per
“floor” produced by DVH, (c) is eligible to participate and receive 2% of the
net income before taxes of DVH, and (d) entitled to receive health benefits
and
coverage, as provided by DVH.
Each
of
the employment agreements described above provides for severance payments,
in
the amount of the unpaid fixed annual salary due under such
agreements.
Stock
Option Plans
During
2006, the Company did not maintain any stock option plans.
Compensation
of Directors
The
Company pays directors deemed independent under the rules of the American
Stock
Exchange $2,500 per meeting physically attended and $300 per telephonic meeting.
In addition, the Company reimburses directors for their reasonable expenses
for
attending Board and Board Committee meetings.
ITEM
11. SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND
RELATED STOCKHOLDER MATTERS
The
table
below sets forth information with respect to the beneficial ownership of
our
capital stock as of March 23, 2007 for (i) any person whom we know to be
the
beneficial owner of more than 5% of our outstanding common stock (ii) each
of
our directors or those nominated to be directors, and executive officers
and
(iii) all of our directors and executive officers as a group.
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT(1)
|
Title
of Class
|
Name
and Address
of
Beneficial Owner
|
Amount
and Nature of
Beneficial
Ownership
|
Percentage
of Class(2)
|
Common
Stock; Common Stock issuable upon conversion of Series A Preferred
Stock,
Series A Common Stock Purchase Warrants, and Series B Common
Stock
Purchase Warrants.
|
Charles
G. Masters, Director, Chief Executive Officer & President of Deer
Valley Corporation.(3)
|
1,815,713(5)
|
8.90%
|
|
|
|
|
Common
Stock; Common Stock issuable upon conversion of Series A Preferred
Stock;
Common Stock issuable upon exercise of Series A and Series B
Warrants
|
Joel
Stephen Logan, II, Member of the Board of Directors of Deer Valley
Corporation and of Deer Valley Homebuilders, Inc., President
and General
Manager of Deer Valley Homebuilders, Inc.(4)
|
514,263
Direct
Ownership(6)
|
2.52%
|
|
|
|
|
Common
Stock; Common Stock issuable upon conversion of Series A Preferred
Stock;
Common Stock issuable upon exercise of Series A and Series B
Warrants
|
Charles
L. Murphree, Jr., Member of the Board of Directors of Deer Valley
Corporation and of Deer Valley Homebuilders, Inc., Vice President
and
Regional Sales Director of Deer Valley Homebuilders, Inc.(4)
|
342,844
Direct
Ownership(7)
|
1.68%
|
|
|
|
|
Common
Stock; Common Stock issuable upon conversion of Series A Preferred
Stock;
Common Stock issuable upon exercise of Series A and Series B
Warrants
|
John
Steven Lawler, Member of the Board of Directors of Deer Valley
Corporation
and of Deer Valley Homebuilders, Inc., Director of Finance, Deer
Valley
Homebuilders, Inc.(4)
|
171,423
Direct
Ownership(8)
|
*
|
|
|
|
|
Common
Stock; Common Stock issuable upon conversion of Series C Preferred
Stock;
Common Stock issuable upon exercise of Series C Warrants
|
Christopher
Phillips(3)
|
5,357,700(9)
|
26.26%
|
|
|
|
|
Common
Stock; Common Stock issuable upon conversion of Series A Preferred
Stock;
Common Stock issuable upon exercise of Series A and Series B
Warrants
|
Hans
Beyer,
Member
of the Board of Directors of Deer Valley Corporation(3)
|
566,885(10)
|
2.78%
|
|
|
|
|
Common
Stock and Securities convertible into Common Stock
|
All
Officers and Directors as a group (7 persons)
|
3,411,128
|
16.72%
|
*Less
than 1%.
(1) Directors
Dale Phillips and John Giordano own no securities of Deer Valley Corporation.
All of the Company’s Series B and D Convertible Preferred Stock automatically
converted to common stock on July 24, 2006 and so does not appear here.
Holders
of more than 5% of our outstanding Series A Convertible Preferred Stock,
Series
C Convertible Preferred Stock, and Series E Convertible Preferred Stock
are not
included above because (1) such holders vote on an as-converted basis
with
common shareholders on all matters save those involving a material alteration
to
the rights of holders of Series A, C, or E Convertible Preferred Stock
and (2)
holders of Series A, C, and E Convertible Preferred Stock are contractually
restricted from converting such stock or exercising warrants such that
they
would own or vote more than 4.99% of the Company’s common stock. Therefore, it
is the
Company’s
view that ownership of more than 5% of such preferred stock is immaterial
for
purposes of determining voting control of the Company.
(2) Applicable
percentage of ownership is based on (i) 8,461,854 shares of common stock
being
issued and outstanding as of March 23, 2007, (ii) an aggregate of 8,517,000
shares of common stock which are issuable upon the conversion of 638,775
shares
of the Company’s Series A Convertible Preferred Stock issued and outstanding as
of March 23, 2007, (iii) an aggregate of 2,675,000 shares of common stock
which
are issuable upon the conversion of 26,750 shares of the Company’s Series C
Convertible Preferred Stock currently issued and outstanding, and (iv)
750,000
shares of common stock issuable upon conversion of the Company’s Series E
Preferred Stock. Calculations do not include outstanding warrants, options,
or
other rights issued by the Company, unless the reporting person is the
beneficial owner of the warrant, option, or other right. Beneficial ownership
is
determined in accordance with the rules of the Commission and generally
includes
voting of investment power with respect to securities. Shares of common
stock
subject to securities exercisable or convertible into shares of common
stock
that are currently exercisable or exercisable within 60 days of January
20, 2006
are deemed to be beneficially owned by the person holding such options
for the
purpose of computing the percentage of ownership of such persons, but
are not
treated as outstanding for the purpose of computing the percentage ownership
of
any other person. Unless otherwise noted, we believe that all shares
are
beneficially owned and that all persons named in the table have sole
voting and
investment power with respect to all shares of common stock owned by
them.
(3) Unless
otherwise indicated, the mailing address of the shareholder is 4902 Eisenhower
Blvd., Suite 185, Tampa, FL 33634.
(4) Unless
otherwise indicated, the mailing address of the shareholder is 205 Carriage
St.,
Guin, Alabama 35563.
(5) Includes
(a) 1,730,000 common shares directly owned by Charles G. Masters, (b)
354 common
shares owned by Charles Masters’ spouse, (c) 33,334 common shares issuable upon
conversion of 2,500 shares of the Company’s Series A Preferred Stock owned by
Charles Masters’ spouse, (d) 33,334 common shares issuable upon exercise of the
Company’s Series A Common Stock Purchase Warrant owned by Charles Masters’
spouse, (e) 2,024 common shares issuable upon exercise of another of
the
Company’s Series A Common Stock Purchase Warrants owned by Charles Masters’
spouse, and (f) 16,667 common shares issuable upon exercise of the Company’s
Series B Common Stock Purchase Warrant owned by Charles Masters’ spouse. Charles
G. Masters disclaims beneficial ownership of securities owned by his
spouse,
except to the extent of his pecuniary interest therein, and the inclusion
of
these shares in this filing shall not be deemed an admission of beneficial
ownership of all of the reported shares for purposes of Section 16 or
for any
other purpose.
(6) Includes
(a) 2,122 common shares, (b) 200,000 common shares issuable upon exercise
of the
Company’s Series A Preferred Stock; (c) 200,000 common shares issuable upon
exercise of the Company’s Series A Common Stock Purchase Warrant, (d) 12,141
common shares issuable upon exercise of another of the Company’s Series A Common
Stock Purchase Warrants, and (e) 100,000 common shares issuable upon
exercise of
the Company’s Series B Common Stock Purchase Warrant.
(7) Includes
(a) 1,415 common shares, (b) 133,334 common shares issuable upon exercise
of the
Company’s Series A Preferred Stock, (c) 133,334 common shares issuable upon
exercise of the Company’s Series A Common Stock Purchase Warrant, (d) 8,094
common shares issuable upon exercise of another of the Company’s Series A Common
Stock Purchase Warrants, and (e) 66,667 common shares issuable upon exercise
of
the Company’s Series B Common Stock Purchase Warrant.
(8) Includes
(a) 708 common shares, (b) 66,667 common shares issuable upon exercise
of the
Company’s Series A Preferred Stock, (c) 66,667 common shares issuable upon
exercise of the Company’s Series A Common Stock Purchase Warrant, (d) 4,047
common shares issuable upon exercise of another of the Company’s Series A Common
Stock Purchase Warrants, and (e) 33,334 common shares issuable upon exercise
of
the Company’s Series B Common Stock Purchase Warrant.
(9) Includes
(a) 302,500 common shares owned by Famalom, LLC, an entity for which
Christopher
Phillips serves as the managing member (b) 2,675,000 common shares issuable
upon
conversion of 2,675 shares of the Company’s Series C Preferred Stock owned by
Total CFO, LLC, an entity for which Mr. Phillips serves as the managing
member,
(c) 2,000,000 shares of common stock which are issuable upon exercise
of a
warrant held by Total CFO, LLC, an entity for which Mr. Phillips serves
as the
managing member, and (d) 190,100 common shares indirectly owned by nature
of Mr.
Phillip’s ownership of Apogee Financial Investments, Inc. The conversion rights
of each holder of outstanding shares of Series C Preferred Stock is limited
in
the certificate of designations, preferences and rights of such stock,
and the
exercise rights in the warrants issued to Total CFO, LLC are limited,
so, in
each instance, the holder is not entitled to convert any Series C Preferred
Stock, or exercise any warrants, to the extent that, after such conversion,
the
sum of the number of shares of common stock beneficially owned by such
holder
and its affiliates, will result in beneficial ownership of more than
4.99% of
the outstanding shares of common stock. As a result, the inclusion of
Series C
Preferred Stock in this Filing shall not be deemed an admission of beneficial
ownership of all of registered securities under Section 16 or for any
other
purpose. In addition, Christopher Phillips disclaims beneficial ownership
of
securities owned by Famalom, LLC, Total CFO, LLC, and Apogee Financial
Investments, Inc., except to the extent of his pecuniary interest therein,
and
the inclusion of these shares in this Filing shall not be deemed an admission
of
beneficial ownership of all of the reported shares or for any other
purpose.
(10) Includes
(a) 142 common shares, (b) 13,333 common shares issuable upon exercise
of the
Company’s Series A Preferred stock, (c) 13,333 common shares issuable upon
exercise of the Company’s Series A Common Stock Purchase Warrant, (d) 810 common
shares issuable upon exercise of another of the Company’s Series A Common Stock
Purchase Warrants, (e) 6,667 common shares issuable upon exercise of
the
Company’s Series B Common Stock Purchase Warrant, (f) 342,500 shares of common
stock owned indirectly through Daedalus Consulting, Inc., and (g) 190,100
common
shares indirectly owned by nature of Mr. Beyer’s indirect ownership of Apogee
Financial Investments, Inc. Mr. Beyer disclaims beneficial ownership
of
securities owned by Daedalus Consulting, Inc. and Apogee Financial Investments,
Inc., except to the extent of his pecuniary interest therein, and the
inclusion
of these shares in this Filing shall not be deemed an admission of beneficial
ownership of all of the reported shares or for any other purpose.
Securities
Authorized for Issuance Under Equity Compensation Plans
As
of
December 30, 2006, the Company had not authorized the issuance of securities
of
the Company under any equity compensation plan.
Change
in Control and Acquisition
There
are
no existing agreements which may provide for a change in control of the
Company.
ITEM
12. CERTAIN
RELATIONSHIPS
AND RELATED
TRANSACTIONS
Transactions
with Related Persons, Promoters and Certain Control
Persons
Except
as
set forth below, there were no transactions during the last two fiscal
years,
and there are no proposed transactions to which the Company or its subsidiary
was or is to become a party, in which any director, executive officer,
director
nominee, beneficial owner of more than five percent (5%) of any class
of our
stock, or members of their immediate families had, or is to have, a direct
or
indirect material interest.
In
connection with the Securities Purchase and Share Exchange Agreement,
on January
18, 2006, the Company issued to a lender (the “Lender”) an Interest Bearing
Non-Convertible Installment Promissory Note, in the original principal
amount of
One Million Five Hundred Thousand and No/100 Dollars ($1,500,000), together
with
interest accruing thereon at an annual rate of twelve percent (12%) per
annum
(the “Promissory Note”). The Lender also owns Series A Preferred Stock, Series A
Common Stock Purchase Warrants, Series B Common Stock Purchase Warrants,
and
Series D Common Stock Purchase Warrants. In March 2006, the Lender agreed
to
convert the Promissory Note into 150,000 shares of Series A Preferred
Stock,
Series
A
Common Stock Purchase Warrants entitling the holder to purchase 2,000,000
shares
of Common Stock at an exercise price of one dollar and fifty cents ($1.50)
per share, and Series
B
Common Stock Purchase Warrants entitling the holder to purchase 1,000,000
shares
of Common Stock at an exercise price of two dollars and twenty five cents
($2.25).
In
connection with the Capital Stock Purchase Agreement, DVA entered into
the
Earnout Agreement, pursuant to which, additional payments may be paid
to the
former owners of Deer Valley Homebuilders, Inc., as an earnout, based
upon the
net income before taxes of Deer Valley Homebuilders, Inc. during the
five (5)
years following January 18, 2006, up to a maximum of $6,000,000. 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. Joel Stephen Logan, II, the President and General
Manager of Deer Valley Homebuilders, Inc., Charles L. Murphree, Jr.,
the Vice
President and Regional Sales Director of Deer Valley Homebuilders, Inc.,
and
John Steven Lawler, Director of Finance of Deer Valley Homebuilders,
Inc., are
each a party to the Earnout Agreement. Messrs. Logan, Murphree, and Lawler
are
all directors of Deer Valley Corporation and of Deer Valley Homebuilders,
Inc.
The business purpose of executing the Earnout Agreement was to set the
purchase
price of Deer Valley Homebuilders, Inc. by an objective standard, given
that the
owners of DVH, DVA, and the Company could not agree on an outright purchase
price. The Company’s obligations under the Earnout Agreement could negatively
affect earnings per share, liquidity, capital resources, market risk,
and credit
risk.
Pursuant
an oral consulting agreement with Ranger Industries, Inc., the Company
paid, in
two installments on January 30, 2006 and February 8, 2006, a $100,000
consulting
fee to Ranger Industries, Inc., as payment in full for services rendered.
Ranger
Industries, Inc. is controlled by Charles G. Masters, the Chief Executive
Officer & President of the Company.
On
January 25 2006, the Company approved Deer Valley Homebuilders, Inc.
(“DVH”)
entering into a Sales Contract with Steven J. Logan to purchase a 65,992
square
foot manufacturing plant located on approximately 13 acres of land located
at
7668 Highway 278 in Sulligent, Alabama (the “Sulligent Property”). In addition,
Steve J. Logan and DVH agreed to enter into a short term lease of the
Sulligent
Property for nominal consideration to allow early occupancy and commencement
of
operations pending the expected purchase. Steven J. Logan is the father
of DVH’s
President and General Manager, Joel Logan. The Sales Contract was approved
by
the disinterested members of DVH’s Board of Directors and the Chief Executive
Officer of the Company.
On
April
18, 2006, pursuant to the Sales Contract, the form of which is attached
hereto
as Exhibit 10.23, DVH purchased the Sulligent Property from Steven J.
Logan. The
purchase price for the Sulligent Property was $725,000, subdivided as
follows.
DVH assumed Mr. Logan's mortgage of approximately $610,000 and agreed
to pay the
remaining $115,000 to Mr. Logan in equal monthly payments of $5,000 for
twenty-three months. DVH obtained the funds for the purchase price of
the
Sulligent Property from a revolving line of credit, which has since been
replaced by a traditional mortgage.
Midtown
Partners & Co., LLC (“Midtown Partners”), an SEC and NASD registered broker
dealer, acted as the placement agent for the Company in connection with
the
Series A Preferred Stock Offering and the Series D Preferred Stock Offering
and
was paid commissions as previously disclosed in the Company’s filings.
Christopher
Phillips and other stockholders have an ownership interest in Midtown
Partners.
In
early
November 2006, a shareholder approached the Company about exchanging
registered
shares of the Company’s common stock for shares of the Company’s preferred stock
and “out of the money” warrants. On November 16, 2006, the Company entered into
a Share Exchange Agreement with that holder of the Company’s common stock, par
value $0.001 (the “Common Stock”) whereby the shareholder agreed to exchange
750,000 shares of Common Stock for 750,000 shares of the Company’s Series E
Convertible Preferred Stock (the “Series E Preferred Stock”) and Series F
Warrants (the “Series F Warrants”). The Series E Preferred Stock is convertible
into the Company’s Common Stock at the option of the holder any time after the
date of issuance on a one-for-one basis. The conversion rights of the
holder of
Series E Preferred Stock are limited so that the holder cannot convert
any
Series E Preferred Stock if, after such conversion, the number of shares
of
Common Stock beneficially owned by the holder and its affiliates, will
exceed
4.99% of the outstanding shares of Common Stock. Pursuant to the Share
Exchange
Agreement, the Company also issued the Series F Warrants. The Series
F Warrants
entitle the holder to
purchase
750,000 shares of the Company’s Common Stock at an exercise price of two dollars
and twenty five cents ($2.25) per share. The Series F Warrants are exercisable,
in whole or in part, at any time from the date of grant, November 16,
2006, and
expire on the fifth anniversary of the grant date. Similar to the Series
E
Preferred Stock, the exercise rights of the Series F Warrants are limited
so
that the holder is not entitled to exercise the warrants if, after such
exercise, the number of shares of common stock beneficially owned by
the holder
and its affiliates, will exceed 4.99% of the outstanding shares of common
stock.
The Series E Preferred Stock and the Series F Warrants were issued pursuant
to
the exemption from registration found in Section 3(a)(9) of the Securities
Act
of 1933. As a result of the Share Exchange Agreement, the 750,000 shares
of
registered Common Stock tendered by the shareholder to the Company were
returned
to the pool of authorized but unissued shares of the Company’s Common
Stock.
Corporate
Governance - Director Independence
The
Company’s stock is quoted on the Over The Counter Bulletin Board, which does
not
have director independence requirements. Under Item 407(a) of Regulation
S-B,
the Company has chosen to measure the independence of its directors under
the
definition of independence used by the American Stock Exchange, which
can be
found in the AMEX Company Guide, §121(A)(2) (2007). Under such definition, none
of the directors of the Company is independent, because the Company’s board of
directors cannot affirmatively determine that any of its directors does
not have
a relationship that would interfere with the exercise of independent
judgment in
carrying out the responsibilities of a director.
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)
|
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)
|
4.05
|
Certificate
of Designation, Rights, and Preferences of Series E Convertible
Preferred
Stock. (2)
|
10.01
|
Securities
Purchase and Share Exchange Agreement dated January 18, 2006,
by and among
the Company, Richard A. Fisher, Kevin J. High, certain purchasers
of the
Company's Series A Convertible Preferred Stock, DeerValley
Acquisitions
Corp., and certain other persons a party thereto. (3)
|
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. (3)
|
10.03
|
Earnout
Agreement. (3)
|
10.04
|
Form
of Series A Common Stock Purchase Warrant. (3)
|
10.05
|
Form
of Series B Common Stock Purchase Warrant. (3)
|
10.06
|
Form
of Series C Common Stock Purchase Warrant. (4)
|
10.07
|
Form
of Series D Common Stock Purchase Warrant. (4)
|
10.08
|
Form
of Series E Common Stock Purchase Warrant. (4)
|
10.09
|
Form
of Series F Common Stock Purchase Warrant. (2)
|
10.10
|
Form
of Series BD-1 Common Stock Purchase Warrant. (4)
|
10.11
|
Form
of Series BD-2 Common Stock Purchase Warrant. (4)
|
10.12
|
Form
of Series BD-3 Common Stock Purchase Warrant. (4)
|
10.13
|
Form
of Series BD-4 Common Stock Purchase Warrant. (4)
|
10.14
|
Form
of Series BD-5 Common Stock Purchase Warrant. (4)
|
10.15
|
Interest
Bearing Non-Convertible Installment Promissory Note.
(3)
|
10.16
|
Placement
Agent Agreement between Cytation Corporation and Midtown
Partners, LLC.
(3)
|
10.17
|
Debt
Exchange Agreement between Vicis Capital Master Fund and
Cytation
Corporation. (4)
|
10.18
|
Revolving
Credit and Security Agreement. (5)
|
10.19
|
Revolving
Credit Note. (5)
|
10.20
|
Continuing
Guaranty of Cytation Corporation. (5)
|
10.21
|
Continuing
Guaranty of Deer Valley Acquisitions Corp. (5)
|
10.22
|
Agreement
and Plan of Merger between Cytation Corp., a Delaware corporation,
and
Deer Valley Corporation, a Florida corporation. (1)
|
10.23
|
Sales
Contract for Sulligent Property. (6)
|
10.24
|
Form
of Loan Agreement (7)
|
10.25
|
Form
of Commercial Promissory Note (7)
|
10.26
|
Form
of Mortgage, Assignment of Leases and Rents, Security Agreement
and
Fixture Filing (7)
|
10.27
|
Form
of Guaranty of Loan, Cytation Corp. (7)
|
10.28
|
Form
of Guaranty of Loan, DeerValley Acquisitions Corp. (7)
|
10.29
|
Form
of Share Exchange Agreement. (2)
|
|
|
|
|
21.01
|
List
of Subsidiaries of the Company. (2)
|
|
|
|
|
|
|
|
|
(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 10-QSB, filed with the SEC on November
20, 2006
and incorporated herein by reference.
(3) Previously
filed as an exhibit to the Form 8-K filed with the SEC on January
25, 2006 and
incorporated herein by reference.
(4) 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.
(5) Previously
filed as an exhibit to the Form 8-K filed with the SEC on April 18,
2006 and
incorporated herein by reference.
(6) Previously
filed as an exhibit to the Form 8-K filed with the SEC on April 24,
2006 and
incorporated herein by reference.
(7) Previously
filed as an exhibit to the Form 8-K filed with the SEC on June 1,
2006 and
incorporated herein by reference.
(8) Filed
herewith.
Pre-Approval
Policies and Procedures
Prior
to
engaging our accountants to perform a particular service, our board
of directors
obtains an estimate for the service to be performed. All of the services
described above were approved by the board of directors in accordance
with its
procedures.
Audit
Fees
The
aggregate fees billed by Herman, Lagor, Hopkins & Meeks, P.A. for
professional services rendered for the audit of the Company’s financial
statements for the fiscal year ended December 30, 2006 and for the
review of the
financial statements included in the Company’s Form 10-QSB for the periods ended
April 1, July 1, and September 30, 2006, were approximately $20,000.
The fees
for the same services rendered for comparable audits and reviews
of Deer Valley
Homebuilders, Inc. and Deer Valley Acquisitions Corp. amounted to
approximately
$60,000.
The
aggregate fees billed by Herman, Lagor, Hopkins & Meeks, P.A. for
professional services rendered for the audit of Deer Valley Homebuilders,
Inc.’s
financial statements for the fiscal year ended December 31, 2005
and for the
review of its financial statements included in the Company’s Form 10-QSB for the
period ended September 30, 2005, were approximately $60,000. The
fees for the
same services rendered for comparable audits of the Company and Deer
Valley
Acquisitions Corp. amounted to approximately $16,000.
The
aggregate fees billed by Radin, Glass & Co., LLP for professional services
rendered for the review of the Company’s financial statements included in the
Company’s Form 10-QSB for the periods ended March 31, 2005 and June 30, 2005
were $6,500.
Audit-Related
Fees
In
the
last two fiscal years, there were no fees billed for services reasonably
related
to the performance of the audit or review of our financial statements
outside of
those fees disclosed above under "Audit Fees."
Maintaining
Principal Accountant’s Independence
The
board
of directors has considered whether the provision of the services
described
below are compatible with maintaining the principal accountant’s independence
and believes that such services do not compromise that
independence.
Tax
Fees
During
the last two fiscal years, Radin, Glass & Co., LLP did not render any
services for tax compliance, tax advice, and tax planning work. During
the last
fiscal year, the aggregate fees billed by Herman, Lagor, Hopkins
& Meeks for
tax compliance and tax advice were approximately $45,000.
All
Other Fees
There
were no other fees billed by our principal accountants other than
those
disclosed above for the last two fiscal years.
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of
1934, the Company has duly caused this Report to be signed on its
behalf by the
undersigned, thereunto duly authorized.
DEER
VALLEY
CORPORATION
By:
/s/
Charles G. Masters
Charles
G.
Masters
President
and Chief
Executive Officer
Date:
April 9,
2007
Pursuant
to the requirements of the Securities Exchange Act of 1934, this
Report has been
signed by the following persons on behalf of the Company and in the
capacities
indicated on April 9, 2007.
/s/
Charles G.
Masters
|
|
President,
Chief Executive Officer
|
Charles
G. Masters
|
|
(Principal
Executive Officer) and Director
|
|
|
|
|
|
|
/s/
Joel S. Logan,
II
|
|
|
Joel
S. Logan, II
|
|
Director
|
|
|
|
|
|
|
/s/
Charles
Murphree
|
|
|
Charles
Murphree
|
|
Director
|
|
|
|
|
|
|
/s/
John S.
Lawler
|
|
|
John
S. Lawler
|
|
Director
|
|
|
|
|
|
|
/s/
Dale
Phillips
|
|
|
Dale
Phillips
|
|
Director
|
|
|
|
|
|
|
|
|
|
Hans
Beyer
|
|
Director
|
|
|
|
|
|
|
|
|
|
John
N. Giordano
|
|
Director
|
|
|
|
|
|
|
|
|
|