Document:

exv4w4

 

Exhibit 4.4

	 	 	 	 	 
	 

	 	LABOPHARM
	 	25
	 

	 	2005 ANNUAL REPORT	 	 

MANAGEMENT’S DISCUSSION AND ANALYSIS

FOR THE YEAR ENDED DECEMBER 31, 2005

The following information should be read in conjunction with our
audited consolidated financial statements as at December 31, 2005, and
related notes thereto. Our audited consolidated financial statements have
been prepared in accordance with Canadian generally accepted accounting
principles (“GAAP”). The Management’s Discussion and Analysis provides a
review of the performance of the Company for the year ended December 31,
2005, as compared to the year ended December 31, 2004. This review was
performed by management with information available as at February 13, 2006.
Additional information relating to the Company, including its Annual
Information Form, can be found on SEDAR on www.sedar.com.

To the extent any statements made in this document contain information that
is not historical, these statements are essentially forward-looking and are
subject to risks and uncertainties. Actual results, levels of activity,
performance, or achievements could differ materially from those projected
herein and depend on a number of factors, including the successful and
timely completion of clinical studies, the uncertainties related to the
regulatory approval process, and the commercialization of products
thereafter.

Where we say “we”, “us”, “our”, or the “Company” we mean Labopharm Inc.
and its subsidiaries unless otherwise indicated. All amounts are
presented in Canadian dollars unless otherwise indicated.

OVERVIEW

We are an international specialty pharmaceutical company developing
novel drug products using our proprietary drug delivery technologies. By
applying our reformulation expertise and delivery technologies to existing
drug compounds with proven efficacy and safety, we believe that we can
accelerate drug development and lower development risk compared to
traditional pharmaceutical and biotechnology companies. Our lead product
is a once-daily formulation of the analgesic tramadol for which we have
secured nine licensing and distribution agreements for 42 countries
globally, including the United States. In November 2005, our product was
launched in Germany by our partner, HEXAL AG. Also in November, we filed a
New Drug Application (NDA) with the Food and Drug Administration (FDA) and
on January 27, 2006 our application was accepted for review and filed by
the FDA. We also have three other products that are in early clinical
development: a once-daily formulation of betahistine, a once-daily
formulation of trazodone, and DDS-2001 under a research and development
agreement with MedPointe.

Our existing products are based on our proprietary technology,
Contramid®, which we use to develop new branded products that
improve on existing drugs by providing the benefits of controlled-release
drug delivery. We believe Contramid® can be applied to a wide
variety of drugs in solid oral dosage form to improve their
administration and performance. We are also developing novel polymeric
nano-delivery systems for delivery of water-insoluble and poorly
bio-available drugs.

Our primary focus is on the global commercialization of our once-daily
tramadol product. Our global commercialization program recognizes three
markets: Europe, the United States, and the rest of the world. The European tramadol
market represents a significant opportunity with annual sales of more
than US$630 million (€500 million) and a compound annual growth rate over
the

 

 

	 	 	 	 	 
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	 	LABOPHARM
	 	 
	 

	 	2005 ANNUAL REPORT	 	 

MD&A

past five years in excess of 15%. We obtained regulatory approval for our once-daily tramadol
product in France in January 2005, and in September 2005, we received regulatory approval for an
additional 21 European countries under the Mutual Recognition Procedure (MRP). The countries
covered by the MRP approval are Germany, the United Kingdom, Italy, Spain, Portugal, Austria,
Belgium, Cyprus, the Czech Republic, Denmark, Estonia, Iceland, Latvia, Lithuania, Luxembourg,
Malta, the Netherlands, Poland, Slovakia, Slovenia and Sweden. The launch of our product in Germany
by HEXAL AG in November 2005 was the first in what will be a series of launches in key markets
throughout Europe. As the leading marketer of tramadol products in Germany, the second largest
market for tramadol products in Europe, our partner is well positioned to maximize this
opportunity. During the upcoming year, we will continue to obtain marketing authorizations from
individual countries and expect to continue to launch our once-daily tramadol product throughout
Europe.

Late in 2005, we finalized our licensing and distribution agreement for our once-daily tramadol for
France with Sanofi-aventis, and in January 2006, we entered into a second licensing and
distribution agreement for France, the latter being with Grünenthal GmbH. Both have the
semi-exclusive right to market and sell our tramadol product. France is the largest market for
tramadol products in Europe with sales for the 12-month period ended September 2005 of US$175
million, representing a compound annual growth rate of 23% over the last five years. Sanofi-aventis
and Grünenthal are the two largest marketers of tramadol products in France with approximately 88%
of the market. In November 2005, we also signed a licensing and distribution agreement for
once-daily tramadol with Recordati for United Kingdom. With this agreement, we have access to the
third largest European market for tramadol products, and have established marketing partnerships
covering the majority of the existing European tramadol market, including the top five countries.

In August 2005, we secured a licensing and distribution agreement under which we granted to Purdue
Pharma Products L.P. the exclusive right to market, sell and distribute our once-daily formulation
of the analgesic tramadol in the United States, its territories and possessions. In October 2005 we
finalized the agreement and received an up-front US$20 million licensing payment from Purdue. In
November 2005 we announced an agreement which secured the right to a waiver, allowing the FDA to
grant approval of Labopharm’s once-daily tramadol based on its merits, notwithstanding the
three-year Hatch-Waxman exclusivity period granted to Ortho-McNeil, Inc.’s extended-release
formulation of tramadol, recently licensed from Biovail Corporation. This allowed us to reduce risk
while at the same time removing uncertainty with respect to the commercialization of our once-daily
tramadol product in the U.S. In January 2006 we announced that our NDA for once-daily tramadol had
been accepted for review and filed by the FDA. The action date under the Prescription Drug User Fee
Act (PDUFA) is September 28, 2006. We are working actively with Purdue to prepare for the U.S.
launch of our product as rapidly as possible should our product receive regulatory approval.
Following launch, Purdue will assist us in achieving one of our key strategic goals by building and
training our own sales force to allow us to pursue certain specialty markets in the U.S.

Under our commercialization program for the rest of the world, in October 2005, we completed a
licensing and distribution agreement with GlaxoSmithKline for our once-daily tramadol product for
20 Latin American and Caribbean countries. Also during the fourth quarter, our once-daily tramadol
product received regulatory approval from the national regulatory authority in Mexico. We plan to
submit additional marketing applications in other jurisdictions around the world in the coming
year.

Our Goal

Our goal is to become a fully integrated, international specialty pharmaceutical company
developing and commercializing our own pharmaceutical products, with our own sales force in the
U.S. Full integration should maximize the value inherent in our technology and product candidates
by allowing greater control over the development and commercialization process and generating
higher returns on investment.

 

 

	 	 	 	 	 
	 

	 	LABOPHARM
	 	27
	 

	 	2005 ANNUAL REPORT	 	 

MD&A

Liquidity

We have incurred substantial operating losses since our inception due in large part to
expenditures for our research and development activities. As at December 31, 2005, we had an
accumulated deficit of $145 million. We expect our operating losses to decrease going forward as we
generate revenue through sales of our once-daily tramadol product while continuing to advance our
other product candidates towards commercialization and expand our development pipeline. However, as
of February 13, 2006, our committed cash obligations and expected level of expenses for the
upcoming twelve months exceed the committed sources of funds and our cash and cash equivalents on
hand. Our ability to continue as a going concern is dependent upon receiving funds through product
licensing agreements or collaborative research contracts, raising additional financing through
borrowings or equity financing, or achieving future profitable operations.

Revenue

During the fourth quarter of 2005, we achieved a significant milestone with the commercial
launch of our first product, once-daily tramadol, which precipitated our first ever product sale
(to our licensing and distribution partner for Germany, HEXAL AG). Revenue from product sales
should in the future be a key driver in evaluating our performance towards achieving profitability,
as we continue to launch our once-daily tramadol product during 2006 and thereafter, in various
markets. The selling price of our once-daily tramadol product will vary for each licensee depending
on specific market conditions in the prevailing jurisdictions including competing products and
regulatory pricing policies.

Revenue to date has been generated primarily by our licensing and distribution agreements, and in
prior periods by our research collaboration agreements. Since 2002, we have secured nine licensing
and distribution agreements for once-daily tramadol, that cover 42 countries. To date we have
received approximately $32 million of licensing payments from our once-daily tramadol licensees,
including US$20 million from Purdue Pharma Products L.P. We will also receive additional licensing
payments from Purdue upon achieving various milestones, including up to US$40 million upon the
regulatory approval of once-daily tramadol in the U.S., and up to US$110 million upon meeting
specified sales targets. In addition, we will receive from Purdue royalty rates ranging from 20% to
25% of net product sales.

Research and Development Expenses

Our research and development expenses consist primarily of fees paid to outside parties that
we use to conduct clinical studies and manufacturing process validation, salaries and related
personnel expenses, laboratory supplies and costs for facilities and equipment. In 2005, research
and development expenses increased in comparison to the year ended December 31, 2004, primarily due
to the timing and progress of expenditures related to our clinical trial program for our once-daily
tramadol product, the MRP submission costs and the validation of the commercial manufacturing
process of tramadol at a second manufacturer.

Selected Annual Information

The following selected annual information is derived from our audited consolidated financial
statements for each of the three most recently completed financial periods:

	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	Year ended	 	 	Year ended	 	 	Year ended	 
	 	 	December 31,	 	 	December 31,	 	 	December 31,	 
	$000s except per share data	 	2005	 	 	2004	 	 	2003	 
	 
	Revenue1
	 	 	3,238	 	 	 	1,394	 	 	 	622	 
	Net loss
	 	 	(33,334	)	 	 	(27,179	) 	 	 	(33,921	)
	Basic and diluted net loss per share
	 	 	(0.78	)	 	 	(0.68	)	 	 	(1.02	)
	Total assets
	 	 	54,512	 	 	 	39,916	 	 	 	36,719	 
	Long-term liabilities
	 	 	 	 	 	 	 	 	 	 	 	 
	Total deferred revenues
	 	 	29,901	 	 	 	1,776	 	 	 	477	 
	Total obligations under capital lease
	 	 	5,923	 	 	 	6,057	 	 	 	6,215	 
	Total long-term debt
	 	 	11,201	 	 	 	—	 	 	 	—	 
	 

			
	1	 	The comparative figures for revenue were reclassified to conform with the presentation in the current period.

 

 

	 	 	 	 	 
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	 	LABOPHARM
	 	 
	 

	 	2005 ANNUAL REPORT	 	 

MD&A

CHANGE IN ACCOUNTING POLICY

Consolidation of Variable Interest Entities

In June 2003, the Canadian Institute of Chartered Accountants (“CICA”) issued Accounting
Guideline AcG-15, Consolidation of Variable Interest Entities which requires consolidation of
variable interest entities (“VIE”) for fiscal years beginning on or after November 1, 2004. A VIE
is any legal structure used to conduct activities or hold assets which are not controlled by voting
interests but rather by contractual or other interests that change with that entity’s underlying
net asset value. AcG-15 requires the consolidation of a VIE by its primary beneficiary, i.e., the
party that receives the majority of the expected residual returns and/or absorbs the majority of
the entity’s expected losses. The adoption of AcG-15 did not result in any change to the
consolidated financial statements.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

In preparing our consolidated financial statements, we are required to make estimates and
assumptions that affect the reported amounts of assets and liabilities, the disclosure of
contingent assets and liabilities at the date of the consolidated financial statements and the
reported amounts of revenue and expenses during the reporting periods. We have identified the
following accounting policies that we believe require application of management’s most subjective
judgments, often requiring the need to make estimates about the effect of matters that are
inherently uncertain and may change in subsequent periods. Our actual results could differ from
these estimates and such differences could be material.

Revenue Recognition

We recognize revenue from various supply and license agreements and research agreements as
the contracted services are performed or when milestones are achieved, in accordance with the terms
of the specific agreements. Up-front payments for the use of technology where further services are
to be provided or fees received on the signing of research agreements are recognized over the
period of performance of the related activities, and as such require estimates of the applicable
period of performance. Licensing revenue, if the underlying deliverable has no stand-alone value to
the customer, is deferred and recognized over the term for which we maintain substantive
contractual obligations. This may also involve estimates from management to determine the term of
such obligations. Amounts received in advance of recognition of revenue are included in deferred
revenue.

Impairment of Long-lived Assets

Property, plant and equipment and other long-lived assets including intellectual property are
regularly reviewed for impairment whenever events or changes in circumstances indicate that the
carrying value of an asset may not be recoverable. Impairment is assessed by comparing the carrying
amount of an asset to be held and used with the sum of the undiscounted cash flows expected from
its use and disposal, and as such requires us to make significant estimates on expected revenues
from the commercialization of our products and services and the related expenses. If such assets
are considered impaired, the impairment loss to be recognized is measured by the amount by which
the carrying amount of the assets exceeds its fair value generally determined on a discounted cash
flow basis. Any impairment results in a write-down of the asset and a charge to income during the
year. Despite our going concern uncertainty, we did not deem necessary to write-down any of our
property, plant and equipment and other long-lived assets. We believe we should be able to obtain
additional financing to allow us to pursue our activities until profitability is achieved and
positive cash flow is generated. However, there can be no assurance that we will be able to raise
such capital on favorable terms or that commercial agreements will be concluded or that we will
receive payments under existing agreements.

Refundable Investment Tax Credits

We incur research and development expenditures which are eligible for refundable investment
tax credits from the Province of Québec. The investment tax credits recorded are based on our
estimates of amounts expected to be recovered and are subject to audit by the taxation authorities
and, accordingly, these amounts may vary. The amount of research and development tax credit
receivable recorded as at December 31, 2005 is $875,000, and we believe that this amount has been
conservatively estimated.

 

 

	 	 	 	 	 
	 

	 	LABOPHARM
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MD&A

Valuation Allowance on Future Tax Assets

We recorded a valuation allowance on future tax assets primarily related to operating losses
and research and development expenses carryforwards. We have assumed that the related tax benefits
are more likely than not to be not realized based on our historical results and estimated future
taxable income and tax planning strategies in the related jurisdictions. The implementation of tax
planning strategies or the generation of future taxable income in these jurisdictions could result
in the recognition of some portion or all of these carryforwards, which could result in a material
increase in our results of operations through the recovery of future income taxes.

Stock-Based Compensation

The Company accounts for its stock option plan for directors, executives and employees, for
stock option awards granted after March 1, 2002, using the fair value method. The fair value of
stock options at the grant date is determined using the Black-Scholes option pricing model and
expensed over the vesting period of the options. Assumptions that affect our application of the
fair value method include the determination of volatility factors and the expected life of the
options issued.

RESULTS OF OPERATIONS

Fluctuations in Operating Results

Our results of operations have fluctuated significantly from period to period in the past and
are likely to do so in the future. We anticipate that our quarterly and annual results of
operations will be impacted for the foreseeable future by several factors, including the timing and
amount of payments received pursuant to our current and future collaborations, and the progress and
timing of expenditures related to our research, development and commercialization efforts. Due to
these fluctuations, we believe that the period-to-period comparisons of our operating results are
not a good indication of our future performance.

Revenue

For the year ended December 31, 2005, total revenue amounted to $3,238,000 compared to
$1,394,000 for the year ended December 31, 2004.

During fiscal 2005, we recognized licensing revenue of $1,908,000, representing a portion of the
licensing payments received from Purdue Pharma Products L.P., HEXAL AG, Gruppo Angelini and Esteve
S.A, under our licensing and distribution agreements for once-daily tramadol. Licensing revenue for
the year ended December 31, 2004 was $106,000 and represented a portion of the up-front payments
received from the above mentioned partners excluding Purdue Pharma Products L.P. Over the next
several quarters, we anticipate receiving additional milestone payments as provided for in the
current licensing and distribution agreements for once-daily tramadol as we receive market and/or
price approval or launch the product in the various countries. These licensing payments, for which
the deliverable has no stand-alone value to our customers, should be recognized rateably over the
term which we maintain substantive contractual obligations, as provided for in our revenue
recognition policy.

For the year ended December 31, 2005, product sales were $1,269,000 and were attributable to the
first sales of our once-daily tramadol to HEXAL AG in Germany, and included the sale of samples for
the initial promotion of the product. The launch in Germany was the first of what will be a series
of launches in key markets in Europe and globally.

Revenue generated from research and development contracts for the year ended December 31, 2005 was
$61,000 and was derived from our co-development agreement with Gruppo Angelini under which we are
formulating a once-daily version of the anti-depressant trazodone. For the previous year, revenue
generated from research and development contracts was $1,288,000 and was derived from the
aforementioned agreement with Gruppo Angelini, as well as from our agreement with Debiopharm, under
which we were conducting research on the potential oral delivery of a current intravenous cancer
drug using our proprietary polymeric nano-delivery systems technology (previously referred as
micelles technology).

 

 

	 	 	 	 	 
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	 	LABOPHARM
	 	 
	 

	 	2005 ANNUAL REPORT	 	 

MD&A

Cost of Goods Sold

For the year ended December 31, 2005, cost of goods sold was $758,000 and consisted primarily
of raw materials, third-party bulk tablet manufacturing and third-party packaging costs for our
once-daily tramadol product. Our cost of goods sold is subject to variability due primarily to
currency fluctuation and size of packaging runs. Gross margin as a percentage of product sales
revenue for the period was 40% and will be subject in the future to variability due to our cost of
goods sold structure and to our respective selling prices in the various territories.

Research and Development Expenses

Research and development expenses (before tax credits) for the year ended December 31, 2005
were $22,451,000 compared with $16,037,000 for the year ended December 31, 2004. The increase was
primarily the result of the following factors: i) the timing and progress of our clinical trial
program for once-daily tramadol; ii) costs related to our NDA filing to the FDA; iii) costs related
to optimizing the commercial manufacturing process at our first third-party manufacturer for launch
in Europe; iv) the validation of the commercial manufacturing process for tramadol at a second
third-party manufacturer; and v) a general increase in our research and development capacities. In
addition, during the year ended December 31, 2005, we incurred costs for pharmacokinetic studies
related to our once-daily formulation of betahistine and our once-daily formulation of trazodone
while in the previous year, we incurred costs for pharmacokinetic studies related to our
controlled-release formulation of gabapentin and a once-daily formulation of oxybutynin. We have
since de-emphasized development efforts for the two latter programs.

Research and development tax credits for the year ended December 31, 2005 were $2,713,000 compared
to $823,000 in the previous year. The significant increase is primarily due to the recognition of
previously unrecorded federal research and development tax credits, which will be used to offset
federal income tax payable generated as a result of certain tax planning strategies, and due to a
favourable ruling received in 2005 for previous taxation years.

For the year ended December 31, 2005, research and development costs, net of tax credits, allocated
to our once-daily tramadol program amounted to approximately $16.3 million compared to $10.5
million for the year ended December 31, 2004.

Selling, General and Administrative Expenses

Selling, general and administrative expenses for the year ended December 31, 2005 were
$12,188,000 compared to $9,878,000 for the year ended December 31, 2004, an increase of $2,310,000
or 23%. The increase is primarily due to additional headcount required for the successful launch
and commercialization of our once-daily tramadol globally, increased executive variable
compensation expense as a result of a year of significant achievements, and increased professional
and consulting fees as we review our long-term strategy and set the stage for driving shareholder
value.

Financial Expenses

Financial expenses for the year ended December 31, 2005 were $1,937,000 compared with
$864,000 for year ended December 31, 2004. The increase is primarily due to the financial expenses
related to the term loan agreement that we entered into in June 2005.

Foreign Exchange Gain

Net loss for the year ended December 31, 2005 included a foreign exchange gain of $355,000,
primarily corresponding to the favourable effect of the currency fluctuation on the term loan
denominated in U.S. currency, partially offset by the loss incurred on the cash held in the same
currency.

Income Taxes

For the year ended December 31, 2005, the income tax expense amounted to $1,199,000 compared
to $41,000 for the preceding fiscal year. For the current year, we are generating taxable income at
the Canadian federal level and since we have utilized all our accumulated tax losses, we have
chosen to utilize our non refundable federal research and development tax credits which have a
limited carryforward period to offset these taxes instead of using the research and development
expenditure pool, which has an unlimited carryforward period.

 

 

	 	 	 	 	 
	 

	 	LABOPHARM
	 	31
	 

	 	2005 ANNUAL REPORT	 	 

MD&A

Net Loss

Net loss for the year ended December 31, 2005 was $33,334,000, or $0.78 per share, compared
with $27,179,000, or $0.68 per share, for the year ended December 31, 2004. The increase in net
loss is the result of higher expenses related to the development and preparation for commercial
launch of our once-daily tramadol, as well as higher financial expenses partially offset by an
increase in revenue in 2005.

QUARTERLY INFORMATION

The following selected financial information is derived from our unaudited quarterly
financial statements for each of the last eight quarters, all of which cover periods of three
months.

	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Three months ended	 
	 	 	 	Dec. 31,	 	 	Sept. 30,	 	 	June 30,	 	 	March 31,	 	 	 	Dec. 31,	 	 	Sept. 30,	 	 	June 30,	 	 	March 31,	 
	$000s except per share data	 	 	2005	 	 	2005	 	 	2005	 	 	2005	 	 	 	2004	 	 	2004	 	 	2004	 	 	2004	 
	 	 	 	 	 	 	 
	Revenue1
	 	 	 	2,415	 	 	 	72	 	 	 	11	 	 	 	740	 	 	 	 	970	 	 	 	238	 	 	 	93	 	 	 	93	 
	Net loss
	 	 	 	(11,067	)	 	 	(7,549	)	 	 	(8,789	)	 	 	(5,929	)	 	 	 	(6,631	)	 	 	(5,895	)	 	 	(7,084	)	 	 	(7,569	)
	Basic and diluted
net loss per share
	 	 	 	(0.26	)	 	 	(0.18	)	 	 	(0.21	)	 	 	(0.14	)	 	 	 	(0.16	)	 	 	(0.14	)	 	 	(0.18	)	 	 	(0.21	)
	 	 	 	 	 	 	 

			
	1	 	The comparative figures for revenue were reclassified to conform with the presentation in the current period.

LIQUIDITY AND CAPITAL RESOURCES

Cash and cash equivalents, investments and accrued interest on investments as at December 31,
2005 were $36,248,000. On June 28, 2005 we entered into a term loan agreement which generated gross
proceeds of $12,317,000. As part of the transaction we issued 543,104 warrants to purchase common
shares. In addition, throughout 2005 we received a US$20 million up-front licensing fee from Purdue
Pharma Products L.P. and other licensing payments from HEXAL AG, Sanofi-aventis and Recordati
totalling $6,902,000. Despite the abovementioned proceeds, our committed cash obligations and
expected level of expenses for the upcoming twelve months exceed the committed sources of funds and
our cash and cash equivalents on hand. Our ability to continue as a going concern is dependent upon
receiving additional funds through product licensing agreements or collaborative research
contracts, raising additional financing through borrowings or equity financing, or generating
significant revenue from product sales and ultimately achieving
future profitable operations. The outcome of these matters is dependent on a number of items outside of our control. As a result,
there is significant uncertainty as to whether we will have the ability to continue as a going
concern. However, we expect to raise additional funds using one or a combination of alternatives
including the receipt of licensing payments in relation to existing and additional product
distribution and licensing agreements, the obtaining of credit facilities or through equity
financing. As well, we expect to generate increased revenue from product sales as we progress with
the launch of our once-daily tramadol product. However, there can be no assurance that we will be
able to raise such capital on favourable terms, or that further commercial agreements will be
concluded or that we will receive payments under existing agreements.

Funds used in operating activities amounted to $1,040,000 for the year ended December 31, 2005 as
compared to $23,082,000 for the corresponding period last year. The decrease in funds used in the
operating activities is a direct result of licensing payments of $30,033,000 received during the
year for once-daily tramadol, of which $1,908,000 was recognized as revenue and the remaining
recorded as deferred revenue. The funds used in our operating activities were used primarily to
develop our in-house product portfolio, principally our once-daily tramadol product, and for
general operating purposes.

Funds provided from investing activities for the year ended December 31, 2005 amounted to
$5,187,000 compared to funds used in investing activities of $3,275,000 for the previous fiscal
year. Capital expenditures for the current year were $1,016,000 compared to $1,187,000 for the year
ended December 31, 2004. Capital expenditures for the year were principally related to acquisition
of laboratory and plant equipment and information technology infrastructure. Investment activities
also include the purchase and disposal of marketable securities, as we invest our excess funds
generated from previous financings or cash received from our partners according to our investment
policy.

 

 

	 	 	 	 	 
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	 	LABOPHARM
	 	 
	 

	 	2005 ANNUAL REPORT	 	 

MD&A

For the year ended December 31, 2005, funds provided by financing activities amounted to
$13,802,000 as compared to $28,446,000 for the preceding fiscal year. On June 28, 2005, we entered
into a term loan agreement which generated gross proceeds of $12,317,000, of which $11,586,000 was
attributed to the term loan and $731,000 to the 543,104 warrants issued as part of the agreement.
Related financing costs paid during the period totaled $474,000. In the year ending December 31,
2004, net proceeds of $27,804,000 were generated from the equity financing completed in May 2004.
Proceeds of $2,093,000 were obtained from the exercise of stock options during the current year,
compared to $813,000 for the exercise of stock options and warrants for the previous year.

As at December 31, 2005, working capital was $16,743,000. Accounts receivable totalled $532,000 as
at December 31, 2005 and included primarily amounts receivable for sales tax, trade receivables, as
well as accrued interest on investments. Research and development tax credits receivable totalled
$875,000 and included the estimated tax credits for the year ended December 31, 2005. In
preparation for commercial launch of our product in other European countries, we have accumulated
$2,188,000 of inventories consisting of raw materials and intermediate finished product (bulk
tablets). Inventory levels are likely to increase over the next several quarters. Accounts payable
and accrued liabilities increased from $5,930,000 at December 31, 2004 to $10,090,000 at December
31, 2005, due to the timing of the payments of expenses related to the U.S. Phase III study
associated with our once-daily tramadol product and to the amendment to the supply agreement with
Cargill, Inc. (formerly Cerestar) for the purchase of Contramid® patent rights and
Contramid® inventory. Deferred revenue totalled $29,901,000 as at December 31, 2005 and
included the unrecognized portion of the licensing payments received from the various licensees of
once-daily tramadol. These licensing fees will be recognized as revenue generally over the term
which we maintain substantive contractual obligations. Approximately $4,501,000 of the licensing
fees included in deferred revenue are subject to payback provisions if certain future conditions
are not met. Obligations under capital leases decreased in 2005 by $134,000 to $5,923,000 as at
December 31, 2005, as a result of payments made since December 31, 2004.

Cash and cash equivalents, short-term and restricted long-term investments and accrued interest on
investments (included in accounts receivable) totalled $36,248,000 as at December 31, 2005 compared
to $25,101,000 as at December 31, 2004, an increase of $11,147,000, primarily as a result of the
milestone payments received during the year and the proceeds from the financing completed in June
2005, net of the loss incurred during the year. Our investment policy regulates our investment
activities relating to cash resources. We invest in liquid, high-grade investment securities with
varying terms to maturity, selected with regard to the expected timing of expenditures
for continuing operations. As at December 31, 2005, our short-term investments included commercial
paper from major Canadian corporations and bonds issued by governments in amounts ranging from
$993,000 to $2,405,000.

Contractual Obligations

In the normal course of our operations, we have entered into several contracts providing for
the following payments:

	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Payments due by year	 
	 	 	 	 	 	 	 	Less than	 	 	 	 	 	 	 	 	 	 	After	 
	$000s	 	Total	 	 	 	1 year	 	 	2 – 3 years	 	 	4 – 5 years	 	 	5 years	 
	 	 	 	 
	Capital Lease Obligations
	 	 	12,875	 	 	 	 	889	 	 	 	1,864	 	 	 	2,002	 	 	 	8,120	 
	Long-term Debt Obligation
	 	 	14,098	 	 	 	 	5,097	 	 	 	9,001	 	 	 	—	 	 	 	—	 
	Operating Leases
	 	 	452	 	 	 	 	82	 	 	 	124	 	 	 	116	 	 	 	130	 
	Purchase Obligations
	 	 	28,155	 	 	 	 	4,630	 	 	 	23,525	 	 	 	—	 	 	 	—	 
	 	 	 	 
	Total Contractual Obligations
	 	 	55,580	 	 	 	 	10,698	 	 	 	34,514	 	 	 	2,118	 	 	 	8,250	 
	 	 	 	 

Capital and operating lease obligations pertain primarily to our facilities in Canada and Europe
and the related amounts shown in the above table are the payments due by us in connection with such
agreements. The purchase obligations in the table above include the minimum amounts we believe we
would be required to pay with regards to certain long-term supply agreements with third-party
manufacturers for bulk tablets of once-daily tramadol. These agreements provide for the purchase of
minimum quantities over the term of the agreements.

 

 

	 	 	 	 	 
	 

	 	LABOPHARM
	 	33
	 

	 	2005 ANNUAL REPORT	 	 

MD&A

Off-Balance Sheet Arrangements

To date, we have not had any relationships with unconsolidated entities or financial
partnerships, such as entities referred to as structured finance or special purpose entities, which
are established for the purpose of facilitating off-balance sheet arrangements or other
contractually narrow or limited purposes.

OUTSTANDING SHARE DATA

The number of common shares outstanding as of February 13, 2006 is 43,710,313 and has
increased by 36,450 since December 31, 2005 due to the exercise of stock options. The number of
options outstanding as of February 13, 2006 is 3,521,425 and has decreased by 39,450 since December
31, 2005 due to 36,450 options exercised since the beginning of 2006 and 3,000 options forfeited.

QUANTITATIVE AND QUALITATIVE DISCLOSURES OF MARKET RISK

Foreign Currency Risk

We operate internationally, and a substantial portion of our expense activities and capital
expenditures are in Canadian dollars, whereas our revenue (current and potential) from research
contracts and licensing and distribution agreements is, and will be, primarily in U.S. dollars or
Euros. In addition, in June 2005 we contracted a $10 million term loan denominated in U.S.
currency. A significant adverse change in foreign currency exchange rates between the Canadian
dollar relative to the U.S. dollar and Euro, could have a material effect on our consolidated
results of operations, financial position or cash flows. We have not hedged exposures denominated
in foreign currencies.

Interest Rate Risk

We invest our excess cash in investment-grade, interest-bearing securities. The primary
objective of our
investment activities is to preserve principal while at the same time maximizing yields without
significantly increasing risk. To achieve this objective, we invest in highly liquid and high
quality debt instruments or commercial paper of major corporations, government agencies and
financial institutions with maturities generally of less than two years. A significant change in
interest rates could have a material effect on the fair value of our investments if these
investments were not held to maturity.

RECENT ACCOUNTING PRONOUNCEMENTS

Comprehensive Income and Equity

In January 2005, the CICA released new Handbook Section 1530, Comprehensive Income, and
Section 3251, Equity, effective for annual and interim periods beginning on or after October 1,
2006. Section 1530 establishes standards for reporting comprehensive income. The section does not
address issues of recognition or measurement for comprehensive income and its components. Section
3251 establishes standards for the presentation of equity and changes in equity during the
reporting period. The requirements in this section are in addition to Section 1530. We have not yet
determined the impact of the adoption of this standard on the presentation of the consolidated
results of operations or financial position.

Financial Instruments — Recognition and Measurement

In January 2005, the CICA released new Handbook Section 3855, Financial Instruments —
Recognition and Measurement, effective for annual and interim periods beginning on or after October
1, 2006. This new section prescribes when a financial instrument is to be recognized on the balance
sheet and at what amount, sometimes using fair value and other times using cost-based measures. It
also specifies how financial instrument gains and losses are to be presented and defines financial
instruments to include accounts receivable and payable, loans, investments in debt and equity
securities, and derivative contracts. We have not yet determined the impact of the adoption of this
standard on the consolidated results of operations or financial position.

 

 

	 	 	 	 	 
	34

	 	LABOPHARM
	 	 
	 

	 	2005 ANNUAL REPORT	 	 

MD&A

Non-Monetary Transactions

In June 2005, the CICA released new Handbook Section 3831, Non-monetary Transactions,
effective for fiscal periods beginning on or after January 1, 2006. This standard requires all
non-monetary transactions to be measured at fair value unless they meet one of four very specific
criteria. Commercial substance replaces culmination of the earnings process as the test for fair
value measurement. A transaction has commercial substance if it causes an identifiable and
measurable change in the economic circumstances of the entity. Commercial substance is a function
of the cash flows expected by the reporting entity. We have not yet determined the impact of the
adoption of this standard on the consolidated results of operations or financial position.

Hedges

In April 2005, the CICA issued Section 3865 of the CICA Handbook entitled “Hedges”, effective
for years beginning on or after October 1, 2006. This Section establishes standards for when and
how hedge accounting may be applied. Hedging is an activity designed to modify an entity’s exposure
to one or more risks. Hedge accounting modifies the normal basis for recognizing the gains, losses,
revenues and expenses associated with a hedged item or a hedging item in an entity’s income
statement. It ensures that counterbalancing gains, losses, revenues and expenses are recognized in
the same period. We have not yet determined the impact of the adoption of this standard on the
consolidated results of operations or financial position.

EFFECTIVENESS OF INTERNAL DISCLOSURE CONTROLS

The President and Chief Executive Officer and the Chief Financial Officer have evaluated the
effectiveness of the Company’s disclosure controls and procedures as of December 31, 2005 and have
concluded that the Company’s
disclosure controls and procedures provide reasonable assurance that material information relating
to the Company, including its consolidated subsidiaries, would be made known to them by others
within those entities, particularly during the period in which this report was being prepared.

OTHER RISKS AND UNCERTAINTIES

If any of the following risks occur, our business, results of operations or financial
condition could be materially adversely affected.

	•	 	We have not generated significant revenue to date, and we expect to continue to
experience losses. It is also difficult to estimate timing and future costs of our
research and development programs.
	 
	•	 	If we fail to obtain additional regulatory approvals for our product candidates under
development, and in particular our lead product candidate once-daily tramadol, we may not
be able to generate sufficient revenues from the commercialization of our product
candidates.
	 
	•	 	We are indirectly subject to price regulation in certain countries and this could affect our gross margin.
	 
	•	 	We may not achieve our projected development goals in the time frames we announce and expect.
	 
	•	 	Rapid technological change could make our products obsolete.
	 
	•	 	We face uncertainties related to regulatory approval which could result in delays in
product commercialization in certain territories.
	 
	•	 	Even if we obtain marketing approval, our products will be subject to ongoing regulatory review.
	 
	•	 	Our products, if approved, may fail to achieve market acceptance.
	 
	•	 	Development of drugs can be costly and require years of research and development activities.
	 
	•	 	If we cannot raise additional capital on acceptable terms, we may be unable to pursue
further development of our product portfolio, obtain regulatory approvals or commercialize
our product candidates.
	 
	•	 	If we are unable to protect our intellectual property rights, our competitors may
develop and market products with similar features that may reduce demand for our products
and the effective commercialization of our products may be inhibited.
	 
	•	 	We are aware of U.S. and foreign patents owned by third parties including potential
competitors that arguably cover aspects of our once-daily tramadol product. Claims by
these and other companies that we infringe their proprietary technology may result in
liability for damages or stop our development and commercialization efforts.
	 
	•	 	We may become involved in lawsuits to protect or enforce our patents that would be
expensive and time consuming.
	 
	•	 	If third-party manufacturers of our products fail to devote sufficient time and
resources to our concerns, or if their performance is substandard, our clinical trials and
product introductions may be delayed and our costs may rise.

 

 

	 	 	 	 	 
	 

	 	LABOPHARM
	 	35
	 

	 	2005 ANNUAL REPORT	 	 

MD&A

	•	 	We currently have a single source of supply for Contramid® .
	 
	•	 	We may not be able to manufacture our products in commercial quantities, which would
prevent us from marketing our products.
	 
	•	 	We have no experience in selling, marketing or distributing our products and no
internal capability to do so yet.
	 
	•	 	We have and will continue to establish collaborative relationships, and those
relationships may expose us to a number of risks.
	 
	•	 	If we are unable to retain key personnel and hire additional qualified scientific,
sales and marketing, and other personnel, we may not be able to successfully achieve our
goals.
	 
	•	 	We have international operations that expose us to additional business risks.
	 
	•	 	We may not be able to successfully acquire and integrate complementary technologies
or businesses needed for the development of our business and any acquisitions we make
could disrupt our business and harm our financial condition.
	 
	•	 	We may incur losses associated with foreign currency fluctuations.
	 
	•	 	Competition in the pharmaceutical industry is intense, and if we fail to compete
effectively our financial results will suffer.
	 
	•	 	Generic pharmaceutical manufacturers will increase competition for certain products.
	 
	•	 	Market acceptance of our products will be limited if users of our products are unable
to obtain adequate reimbursement from third-party payors.
	 
	•	 	We are subject to the risk of product liability claims, for which we may not have, or
be able to obtain, adequate insurance coverage.
	 
	•	 	Our products involve the use of hazardous materials, and as a result we are exposed
to potential liability claims and to costs associated with complying with laws regulating
hazardous waste.
	 
	•	 	Our share price is volatile, and an investment in our common shares could suffer a decline in value.
	 
	•	 	Future sales of common shares by us or our existing shareholders may cause our stock price to fall.
	 
	•	 	We have never paid dividends on our common shares, and we do not anticipate paying
any cash dividends in the foreseeable future.Exhibit 10.1

                                REVOLVING CREDIT
                           LOAN AND SECURITY AGREEMENT

     THIS REVOLVING CREDIT LOAN AND SECURITY AGREEMENT (the "Loan Agreement") is
made  as  of  this       day  of April, 2006, among FIFTH THIRD BANK, a Michigan
                  -------
banking  corporation,  having a mailing address of 201 East Kennedy Blvd., Suite
1800,  Tampa,  Florida  33602  (the  "Bank"), DEER VALLEY HOMEBUILDERS, INC., an
Alabama  corporation  authorized  to  do  business  in the State of Florida (the
"Borrower"),  having  its  principal  place  of business at 205 Carriage Street,
Guin,  Alabama  35563,  CYTATION CORP., a Delaware corporation, having a mailing
address  of  4902  Eisenhower  Boulevard,  Suite  185,  Tampa, Florida 33634 and
DEERVALLEY  ACQUISITIONS  CORP., a Florida corporation, having a mailing address
of 4902 Eisenhower Boulevard, Suite 185, Tampa, Florida 33634 (collectively, the
"Guarantor").

                                    RECITALS:

     WHEREAS, Borrower has applied to Bank for a revolving line of credit not to
exceed TWO MILLION FIVE HUNDRED THOUSAND AND NO/100 DOLLARS ($2,500,000.00) (the
"Loan")  to  be evidenced by a revolving credit note (the "Note") and secured by
accounts  receivable, inventory, equipment and all other tangible and intangible
personal  property of Borrower.  Guarantor has guaranteed Borrower's payment and
performance  of  the  Loan  and  the  Bank has agreed to make the Loan providing
certain  conditions  herein  outlined  are  fully  complied  with.

     NOW,  THEREFORE, in consideration of the premises and covenants hereinafter
contained,  the  parties  hereto  agree  as  follows:

                      SECTION I.     RECITALS; DEFINITIONS

     1.1     RECITALS.  The  foregoing  recitals  are  true  and  correct  and
             --------
incorporated  herein  by  reference.

     1.2     DEFINED TERMS.  As used in this Loan Agreement, the following terms
             -------------
shall  have  the  following  meanings:

          "Accounts  Receivable" shall mean all accounts receivable, book debts,
notes,  drafts,  acceptances  and  other  forms of obligations, now or hereafter
owing  to  the  Borrower, whether arising from the sale of goods or rendition of
services  (including,  without  limitation,  any  such  obligation that might be
characterized  as  an  account,  contract right, or general intangible under the
Uniform Commercial Code as, from time to time, in effect in the State of Florida
or  Alabama),  all of the Borrower' rights in, to and under all purchase orders,
now  or hereafter received by the Borrower for goods or services, and all monies
due  or  to become due to the Borrower under all contracts for the sale of goods
or  the performance of services (whether or not yet earned by performance) or in

<PAGE>

connection  with any other transaction (including, without limitation, the right
to  receive  the  proceeds  of  said  purchase  orders  and  contracts), and all
collateral security and guarantees of any kind given by any obligor with respect
to  any  of  the  foregoing.

          "Advance" shall mean the amount advanced by the Bank to Borrower under
the  terms  of  this  Loan  Agreement  and  the  Note.

          "Affiliate"  shall  mean any person, corporation, association or other
business  entity  which directly or indirectly controls, or is controlled by, or
is  under  common  control  with  the  Borrower.

          "Borrowing  Base"  shall  mean,  at  any date of determination thereof
(which  date and determination shall be in the Bank's sole discretion) an amount
equal  to  the  sum of (i) 80% of Eligible Accounts Receivable, plus (ii) 50% of
Eligible  Inventory  (based upon the lower of actual cost or market value with a
maximum  Inventory Borrowing Base of $1,250,000.00).  The Bank has bargained for
and  Borrower  agrees  and  acknowledges that the Collateral not included in the
Borrowing  Base  is  a  cushion  of  collateral  value  in excess of the secured
advances  under  the  Loan.

          "Borrowing  Base  Certificate"  shall  mean  a certificate prepared by
Borrower  in  substantially  the  form  attached  hereto  as  EXHIBIT  "A".

          "Collateral"  shall have the meaning provided for such term in Section
2.1(h)  hereof.

          "Default  Rate"  shall  mean  five  percent  (5%)  per annum above the
contract  rate  as  set  forth  in  the  Note,  but not exceeding 18% per annum.

          "Eligible  Accounts  Receivable"  shall  mean,  at  any  date  of
determination  thereof,  all Accounts Receivable of Borrower: (a) which are bona
fide,  valid  and  legally  enforceable  obligations  of  the account debtors in
respect  thereof,  which  are unconditionally owing by such account debtors, and
which  do  not  represent sales on consignment, sales on return or other similar
understandings;  (b)  which,  except  for  the security interest in the Accounts
Receivable granted to the Bank, are solely owned by the Borrower, free and clear
of  any  and  all  mortgages, liens, security interests, encumbrances, claims or
rights of others, except sellers' rights (if any) to reclaim goods under Uniform
Commercial  Code  Section  2-702;  (c) which are not the subject of any defense,
offset,  counterclaim  or claim; (d) as to which no more than 60 days (or are 30
days  past  due)  shall  have  elapsed  from  the  original date of the relevant
invoice;  (e)  those  account  debtors  that  do not have more than 25% of their
respective  Accounts  Receivable aged more than 60 days; (f) Accounts Receivable
with  respect  to a single account debtor whose total obligations owing does not
exceed  25%  of  all  Eligible  Accounts Receivable; (g) as to which the account
debtors  are  (i)  solvent, going concerns unaffiliated with the Borrower or any
Guarantor, and (ii) reasonably satisfactory to the Bank from a credit standpoint
(the Bank's satisfaction may be assumed unless the Bank shall at any time advise
the  Borrower  to  the  contrary).

<PAGE>

          "Eligible  Inventory" shall mean, at any date of determination thereof
(which  date shall be in the Bank's sole discretion), all Inventory and proceeds
therefrom,  owned  by Borrower, excluding all work-in-process, but including (a)
goods-in-transit,  (b)  Inventory used for display or demonstration purposes and
obsolete  Inventory  and  (c)  Inventory in the possession of service persons or
technicians  performing  service  for  customers of the Borrower, whether or not
such  service  technicians  are  employees  or  independent  contractors  of the
Borrower.  The  eligibility  of Inventory shall be determined by the Bank in its
reasonable  commercial  discretion.

          "Equipment"  shall  mean  all of the equipment of Borrower (within the
meaning  of  the  Uniform Commercial Code, as from time to time in effect in the
State  of  Florida  or  Alabama),  now  or  hereafter  owned  or  acquired,  and
wheresoever  located,  as  well as all parts, accessions, and additions thereto,
proceeds  therefrom,  and  substitutions  and  replacements  therefor.

          "Events  of  Default"  shall have the meaning ascribed to such term in
Section  8  hereof.

          "Generally  Accepted  Accounting  Principles"  shall  mean  generally
accepted  accounting  principles,  in  effect  from  time  to time, applied on a
consistent  basis.

          "General  Intangibles"  shall  mean all of Borrower's right, title and
interest  with  respect  to  general intangibles (including payment intangibles,
contract rights, rights to payment, rights arising under common law, statutes or
regulations,  choses  or  things  in  action,  goodwill,  patents,  trade names,
trademarks,  service  marks,  copyrights, blueprints, drawings, purchase orders,
customer  lists,  monies  due  or  recoverable  from pension funds, route lists,
rights  to  payment  and other rights under any royalty or licensing agreements,
infringement  claims, computer programs, information contained on computer disks
or  tapes,  software,  literature,  reports,  catalogs, money, deposit accounts,
insurance  premium  rebates, tax refunds and tax refund claims), and any and all
supporting obligations in respect thereof, and any other personal property other
than  goods, Accounts Receivable, investment property, negotiable collateral and
chattel  paper  (within the meaning of the Uniform Commercial Code, as from time
to  time  in  effect  in  the  State  of  Florida  or  Alabama).

          "Guarantee"  shall  mean  a  guarantee issued by each Guarantor of the
loan  obligations  hereunder.

          "Inventory"  shall  mean  all of the inventory of Borrower (within the
meaning  of  the  Uniform Commercial Code, as from time to time in effect in the
State  of  Florida  or  Alabama),  now  or  hereafter  owned  or  acquired,  and
wheresoever  located, including, without limitation, all finished goods held for
sale  or  lease  or  to be furnished under a contract of service, goods that are
leased  by  Borrower  as  lessor,  goods  that are furnished by Borrower under a
contract  of  service,  and raw materials, work-in-process, or materials used or

<PAGE>

consumed  in  Borrower's  business  including  all  accessions,  additions,
attachments, improvements, substitutions and replacements thereto and therefore.

          "Investment  Property"  shall  mean  all of the investment property of
Borrower  (within  the  meaning  of the Uniform Commercial Code, as from time to
time  in  effect  in  the  State  of  Florida  or  Alabama).

          "Letter of Credit" shall mean any standby, documentary or trade Letter
of  Credit  issued by Bank hereunder as requested by Borrower for the account or
to  secure  obligations  of  Borrower  in  accordance  with the terms of Section
2.2(a).

          "Letter  of  Credit Fees" has the meaning set forth in Section 2.2(h).

          "Letter  of  Credit  Commitment"  shall mean the commitment of Bank to
issue,  in  accordance  with  the terms hereof, and to honor payment obligations
under  any  Letters  of  Credit.

          "Letter of Credit Documents" shall mean, with respect to any Letter of
Credit,  such  Letter of Credit, any amendments thereto, any documents delivered
in  connection  therewith,  any  application  therefor,  and  any  agreements,
instruments,  guarantees  or  other documents (whether general in application or
applicable  only  to  such  Letter of Credit) governing or providing for (a) the
rights and obligations of the parties concerned or at risk or (b) any collateral
security  for  such  obligations.

          "Letter of Credit Obligations" shall mean, at any time, the sum of (a)
the maximum amount that is, or at any time thereafter may become, issued by Bank
and  available  to  be  drawn under Letters of Credit then outstanding, assuming
compliance  with  all  requirements  for drawings referred to in such Letters of
Credit  plus  (b)  the  aggregate amount of all drawings under Letters of Credit
honored  by  Bank  but  not  theretofore  reimbursed.

          "Maturity  Date"  shall mean, unless sooner demanded by Bank after the
occurrence  of  an  Event  of Default hereunder, 12 months from the date hereof.

          "Permitted  Liens" means:  (a) Liens consisting of deposits or pledges
made in the ordinary course of business in connection with, or to secure payment
of  utility payments, bids, tenders, contracts (other than contracts for payment
of  money),  obligations  under workers' compensation, unemployment insurance or
similar  legislation  or under surety or performance bonds, in each case arising
in  the  ordinary course of business; (b) Liens arising out of or resulting from
any  judgment  or  awarded, the time for the appeal or petition for rehearing of
which  shall  not  have  expired,  or  in respect of which the Borrower is fully
protected by insurance or in respect of which Borrower shall at any time in good
faith  be  prosecuting  an  appeal  or proceeding for a review and in respect of
which  a  stay  of  execution pending such appeal or proceeding for review shall
have been secured, and as to which appropriate reserves have been established on
the  books  of  Borrower.

<PAGE>

          "Notice  of  Request  for  Letter  of  Credit"  shall mean a notice of
request for issuance of a Letter of Credit in form and substance satisfactory to
Bank.

                  SECTION 2.     THE LOAN AND LETTERS OF CREDIT

     2.1     REVOLVING  LOAN.
             ---------------

          (a)     ADVANCES.  Subject  to  the  Borrowing  Base  limitations  and
                  --------
subject  to  Bank's receipt of a completed Borrowing Base Certificate, Bank may,
in  its  discretion,  make Advances to Borrower in accordance with the terms and
conditions  of  this  Loan  Agreement,  at any time and from time to time, on or
after  the  date  hereof  until the Maturity Date, or until the occurrence of an
event  which  with  the  giving of notice or the passage of time, or both, shall
constitute  an  Event  of  Default.  Such  Advances may be borrowed, re-paid and
re-borrowed,  provided,  however,  the aggregate outstanding principal amount of
all  Advances,  together  with  the  aggregate  face  value  of  all  issued and
outstanding  Letters  of Credit as of such date, shall not exceed $2,500,000.00.

          (b)     INTEREST.  The  Bank shall make appropriate debits and credits
                  --------
to  the  loan  account  of Borrower corresponding to each Advance to reflect the
Advances to, prepayments, payments by and other disbursements for the account of
Borrower.  Each such entry shall be prima facie evidence of the principal amount
of Advances hereunder at any time outstanding.  Each Advance shall bear interest
from  the  date  such  Advance  is made on the aggregate unpaid principal amount
thereof  until  such  principal  amount  is paid or shall become due and payable
(whether at the stated maturity or by acceleration) pursuant to the terms of and
at  a  rate  per  annum  as  set  in  the  Note.

          (c)     CALCULATION.  Interest  on  principal outstanding from time to
                  -----------
time  shall  be  paid monthly, and shall be calculated on the basis of a 360-day
year  for  the  actual  days  elapsed.

          (d)     REQUESTS  FOR ADVANCES.  Borrower shall request Advances under
                  ----------------------
the  Loan  by  (i)  giving oral notice thereof to the Bank at above address, and
(ii)  confirming such oral notice in writing, in form and substance satisfactory
to  the  Bank,  within  two business days thereafter and delivering such written
confirmation  to  the  Bank,  together  with  any  supporting information it may
reasonably  request,  at  the  above  address.

          (e)     COMMITMENT.  The  giving  of  oral  notice  as aforesaid shall
                  ----------
irrevocably commit Borrower to accept the requested Advances under the Loan.  In
the  event  of any discrepancy between any oral notice and written confirmation,
the oral notice shall govern as to any action taken by the Bank prior to receipt
of  written  confirmation.

          (f)     UNUSED  LINE  FEE.  On  the 15th day following the end of each
                  -----------------
calendar  quarter  during  the  term  of the Loan, Borrower shall pay to Bank an

<PAGE>

unused  line fee equal to 25 basis points (0.25%) per annum times the result of:
(1)  the  amount  of  the  Loan,  less (2) the average daily balance of the Loan
outstanding  during  the  immediately  preceding  calendar  quarter.

          (g)     LIMITATION.  In  no event shall any interest charge, collected
                  ----------
or  reserved hereunder exceed the maximum rate then permitted by applicable law.

          (h)     COLLATERAL.  From  the date hereof as security for the payment
                  ----------
and  the performance of the Loan, (1) Borrower extends, sells, assigns, conveys,
mortgages,  pledges,  transfers, grants, and re-grants to the Bank a continuing,
first  priority  security interest in and to all of its respective rights, title
and  interest  in,  to and under all (A) Accounts Receivable; (B) Equipment; (C)
Inventory; (E) General Intangibles; (F) books and records; (G) deposit accounts;
(H)  cash and cash equivalents; (I) to the extent not included in the foregoing,
all  other  tangible  and  intangible  personal property of Borrower (within the
meaning  of  the  Uniform Commercial Code, as from time to time in effect in the
State  of  Florida  or  Alabama);  (J)  Investment  Property;  and (K) all other
property  and  money of the Borrower now or hereafter in the possession, custody
or  control  of  the  Bank;  and  as  to each of the foregoing, the products and
proceeds  thereof, replacements and accessions thereto; (2) each Guarantor shall
contemporaneously herewith execute and deliver to the Bank its Guarantee; all of
which  shall  constitute  the  "Collateral".

     2.2     LETTERS  OF  CREDIT.
             -------------------

     (a)     ISSUANCE.  From the date hereof until the Maturity Date, subject to
             --------
the  terms and conditions hereof and of the Letter of Credit Documents, and upon
such  other  terms  and  conditions  which Bank may reasonably require, Bank may
issue  Letters  of  Credit  as  Borrower  may  from time to time request for the
benefit  of  Borrower.  No  Letter of Credit shall have an expiration date later
than  the  earlier  of: (1) the Maturity Date, or (2) one year after the date of
issuance  thereof;  provided,  however,  that  Borrower  may request issuance or
renewal  of  a  Letter of Credit with a later expiration if, at the time of such
issuance  or  renewal,  Borrower  deposits an amount equal to the face amount of
such  Letter  of  Credit with Bank as cash collateral for such Letter of Credit.
Each  Letter of Credit shall require that all draws thereon must be presented to
Bank  by  the expiration date therefor, regardless of whether presented prior to
such date to any other institution.  Each Letter of Credit shall comply with the
related  Letter of Credit Documents.  The issuance date of each Letter of Credit
shall  be  a  business  day.

     (b)     NOTICE  AND  REPORTS.  The  request for the issuance of a Letter of
             --------------------
Credit  shall  be  submitted by Borrower to Bank at least ten (10) business days
prior to the requested date of issuance (or such shorter period as may be agreed
by  Bank)  pursuant  to a Notice of Request for Letter of Credit, accompanied by
such  applications  and  other related documents as may be required by Bank.  If
the  Notice  of  Request  for  Letter  of  Credit,  related applications and the
requested  form  of such Letter of Credit is acceptable to Bank, Bank will, upon
fulfillment  of  the applicable conditions set forth herein, make such Letter of
Credit  available  to  Borrower.

<PAGE>

     (c)     REIMBURSEMENT.  In  the  event  of  any drawing under any Letter of
             -------------
Credit,  Bank  will  promptly notify Borrower, and Borrower shall request, or be
deemed to have requested, an Advance in the amount of such drawing, the proceeds
of  which  will  be used to satisfy the related reimbursement obligations.  Upon
the  making  of  any  such  Advance,  Borrower  shall be required to immediately
reimburse  Bank  for application to the respective Letter of Credit Obligations.
Borrower's  reimbursement  obligations  hereunder  shall  be  absolute  and
unconditional  under  all  circumstances  irrespective  of any rights of setoff,
counterclaim  or  defense  to payment Borrower may claim or have against Bank or
the  beneficiary  of  the  Letter  of  Credit  drawn  upon  or any other person,
including  without  limitation  any  defense based on any failure of Borrower to
receive  consideration or the legality, validity, regularity or unenforceability
of  the  Letter  of  Credit.

     (d)     BORROWER  AS  ACCOUNT  PARTY.  Notwithstanding  anything  to  the
             ----------------------------
contrary  set  forth  in  this  Loan Agreement, in the event that Bank permits a
Letter of Credit issued hereunder to statement to the effect that such Letter of
Credit  is  issued for the account, or to secure obligations, of an Affiliate or
subsidiary  of  Borrower,  notwithstanding such statement, Borrower shall be the
actual  account party for all purposes of this Loan Agreement for such Letter of
Credit.  Such  statement  shall  not affect Borrower's reimbursement obligations
hereunder  with  respect  to  such  Letter  of  Credit.

     (e)     INTERNATIONAL  STANDBY  PRACTICES.  The  Bank  may issue Letters of
             ---------------------------------
Credit  subject  to Rules on International Standby Practices (ISP98), as adopted
as of the date of issue by the International Chamber of Commerce (the "ISP"), in
which  case the ISP may be incorporated therein and deemed in all respects to be
a  part  thereof.

     (f)     LETTER  OF CREDIT OBLIGATIONS ABSOLUTE.  With regard to each Letter
             --------------------------------------
of  Credit,  the  obligations of Borrower to the Bank under this Loan Agreement,
any  Letter of Credit Document and any other agreement or instrument relating to
any  Letter  of Credit shall be unconditional and irrevocable, and shall be paid
strictly  in  accordance  with  the terms of this Loan Agreement, such Letter of
Credit  Document and such other agreement or instrument under all circumstances,
including  without  limitation  the  following  circumstances:

          (1)     any lack of validity or enforceability of this Loan Agreement,
any  Letter  of  Credit Document, any Letter of Credit or any other agreement or
instrument  relating thereto (this Loan Agreement and all of the other foregoing
being,  collectively,  the  "L/C  Related  Documents");

          (2)     any  change  in the time, manner or place of payment of, or in
any  other  term of, all or any of the obligations of Borrower in respect of any
L/C  Related  Document  or  any  other  amendment or waiver of or any consent to
departure  from  all  or  any  of  the  L/C  Related  Documents;

          (3)     the  existence  of  any claim, set-off, defense or other right
that  Borrower may have at any time against any beneficiary or any transferee of
a  Letter  of  Credit  (or any Persons for whom any such beneficiary or any such
transferee  may be acting), Bank or any other person, whether in connection with
the  transactions  contemplated  thereby  or  any  other  unrelated transaction;

<PAGE>

          (4)     any  statement  or any other document presented under a Letter
of  Credit  proving  to  be  forged,  fraudulent, invalid or insufficient in any
respect  or  any  statement  therein  being untrue or inaccurate in any respect;

          (5)     payment  by Bank under a Letter of Credit against presentation
of  a  draft or certificate that does not strictly comply with the terms of such
Letter  of  Credit;

          (6)     any  exchange, release or non-perfection of any Collateral, or
any  release  or  amendment  or  waiver of or consent to departure from any loan
document;  or

          (7)     any other circumstance or happening whatsoever, whether or not
similar  to  any  of  the  foregoing,  including  without  limitation  any other
circumstance  that  might  otherwise  constitute  a  defense  available to, or a
discharge  of,  Borrower  or  any  Guarantor.

     (g)     CONFLICT  WITH  LETTER  OF  CREDIT  DOCUMENTS.  In the event of any
             ---------------------------------------------
conflict  between  this  Loan  Agreement  and  any  Letter  of  Credit  Document
(including  any  letter  of  credit application), the Letter of Credit Documents
shall  control.

     (h)     LETTER  OF  CREDIT  FEES.  For each Letter of Credit issued by Bank
             ------------------------
hereunder,  Borrower  shall pay to Bank, upon issuance, a fee equal to 100 basis
points  (1.00%) multiplied by the face amount of such Letter of Credit, together
with  Bank's  standard fees in effect during the issuance term of such Letter of
Credit  (including,  without  limitation,  any  renewal  or  drawing  fees).

                 SECTION 3.     REPRESENTATIONS AND WARRANTIES.

     From  the date hereof, each of the Borrower and the Guarantor represent and
warrant  to  the  Bank  as  follows:

     3.1     ORGANIZATION,  STANDING,  CORPORATE  POWERS.
             -------------------------------------------

          (a)     DULY  ORGANIZED.  In  respect  of  the  Borrower,  it (1) is a
                  ---------------
corporation  duly  incorporated, validly existing and in good standing under the
laws  of  the  State  of  Alabama;  (2)  has  all requisite power and authority,
corporate  or  otherwise,  to conduct its business as now being conducted and to
own its properties and assets; and (3) is duly qualified to do business in every
jurisdiction  wherein  the  failure  to so qualify would have a material adverse
effect.

          (b)     POWERS.  It  has  all requisite power and authority, corporate
                  ------
or  otherwise,  to execute, deliver, and to perform all of its obligations under
this  Loan  Agreement  and  under  other documents or agreements relating to the
transactions  contemplated  herein  to  which  it  is  a  party.

<PAGE>

          (c)     BINDING  OBLIGATION.  This  Loan  Agreement  and all corporate
                  -------------------
notes,  guarantees,  assignments,  security  agreements  and  all other loan and
security  agreements  executed  in  connection  therewith  are  legal, valid and
binding  obligations  of  the  Borrower and enforceable in accordance with their
respective  terms,  subject  to  the  enforcement  of  remedies  to  bankruptcy,
insolvency  and  other  laws  affecting  creditors'  rights  generally  and  to
moratorium  laws,  from  time  to  time  in  effect,  and  to  general equitable
principles  which  may  limit  the  right  to  obtain  the  remedy  of  specific
performance.

     3.2     AUTHORIZATION  OF  BORROWING.  The  execution,  delivery  and
             ----------------------------
performance  of  this Loan Agreement and the borrowings hereunder: (a) have been
duly  authorized  by  all  requisite  corporate action; (b) will not violate any
provision  of applicable law, any govern-mental rule or regulation, any order of
any  court  or  other  agency  of  government to which either of such parties is
subject  or  the articles of incorporation or by-laws of the Borrower; or (c) do
not  violate  any  provision  of any indenture, agreement or other instrument to
which  Borrower  is a party or by which Borrower or its properties or assets are
bound  and  which is material to the conduct or operation of Borrower's business
and  financial  affairs,  or  conflict with, result in a breach of or constitute
(with due notice or lapse of time or both) a default under any provision of such
indenture,  agreement  or  other  instruments,  or  result  in  the  creation or
imposition  of any lien, charge or encumbrance of any nature whatsoever upon the
property  or  assets  of  the  Borrower or the Guarantor, other than as provided
herein.

     3.3     FINANCIAL  STATEMENTS.  Borrower and each Guarantor have heretofore
             ---------------------
furnished  to  the  Bank  the  financial  statements  which  fairly  present the
financial  condition  and  the  results  of  operations  of the Borrower and the
Guarantor  as  of the date and for the period indicated, show all known material
liabilities,  direct or contingent, as of the respective dates thereof, and were
prepared  in accordance with Generally Accepted Accounting Principles applied on
a  consistent  basis.

     3.4     ADVERSE  CHANGE, ETC.  There has been no material adverse change in
             --------------------
the  business,  properties  or condition (financial or otherwise) of Borrower or
any  Guarantor  since  the  date  of the most recent of the financial statements
delivered  to  the  Bank.

     3.5     LITIGATION.  There are no actions, suits or proceedings pending or,
             ----------
to  the  knowledge  of  Borrower or any Guarantor, overtly threatened against or
affecting  any of them, at law or in equity, or before or by any Federal, state,
municipal  or other governmental court, tribunal, department, commission, board,
bureau, agency or instrumentality, domestic or foreign, which involve any of the
transactions herein contemplated or the possibility of any judgment or liability
which  would  result in any material adverse change in the business, operations,
properties or assets or in the financial condition of any of them, or materially
and  adversely  affect the ability of any of them to perform hereunder.  Neither
Borrower  nor  any  Guarantor  is  in  default with respect to (a) any judgment,
order, writ, injunction or decree; or (b) any rule or regulation of any court or

<PAGE>

Federal,  state,  municipal  or  other governmental court, tribunal, department,
commission,  board, bureau, agency or instrumentality, domestic or foreign which
would  have  a  material adverse effect on its business, properties or condition
(financial  or  otherwise).

     3.6     PAYMENTS  OF  TAXES.  Borrower  and  each  Guarantor  have filed or
             -------------------
caused to be filed all Federal, state and local tax returns that are required to
be filed and has paid or caused to be paid all taxes as shown on such returns or
on any assessment received by it, to the extent that such taxes have become due,
except  taxes  the  validity  of  which  is  being  contested  in  good faith by
appropriate  proceedings  and  for which, in the exercise of reasonable business
judgment,  there  have been set aside adequate reserves with respect to any such
tax  or  assessment  so  contested  the tax or assessment so contested shall not
materially  affect  its  ability  to  perform  hereunder.

     3.7     PRIORITY  OF  SECURITY  INTEREST.  Subject  (a)  to  filing  and
             --------------------------------
recordation  of  the  appropriate  instruments in the appropriate offices of the
proper  jurisdiction  or possession by the Bank or its agent where perfection is
based  upon  possession;  (b)  to  the  enforcement  of  remedies to bankruptcy,
insolvency,  and  other  laws  affecting  creditors'  rights  generally  and  to
moratorium  laws,  from  time  to  time  in effect; and (c) to general equitable
principles  which  may  limit  the  right  to  obtain  the  remedy  of  specific
performance,  each  of  the security interests granted to the Bank as identified
under  Section  2  of  this  Loan  Agreement  constitutes a valid first priority
security  interest  or lien in and to the property covered thereby, granting all
rights  and remedies to a secured party under the Uniform Commercial Code, as in
effect  in  the  State  of  Florida  and Alabama, as the same may be modified or
amended  from  time  to  time,  except  as  otherwise  permitted  hereunder.

     3.8     ELIGIBLE  ACCOUNTS RECEIVABLE AND ELIGIBLE INVENTORY.  All Eligible
             ----------------------------------------------------
Inventory  included  in  the  Borrowing  Base  meet  the  criteria  for Eligible
Inventory  and  all  Eligible Accounts Receivable included in the Borrowing Base
meet  the  criteria  for  Eligible  Accounts  Receivable.

     3.9     LOCATION  OF COLLATERAL.  All of the Collateral is used or held for
             -----------------------
use  by Borrower at the following locations:  205 Carriage Street, Guin, Alabama
35563,  and  7668  Highway  278,  Sulligent,  Alabama  35586.

                    SECTION 4. CONDITIONS OF LENDING AND
                         ISSUANCE OF LETTERS OF CREDIT.

     The  obligation  of  the  Bank to extend credit and issue Letters of Credit
hereunder  is  subject  to  the  following  conditions:

     4.1     REPRESENTATIONS  AND  WARRANTIES.  At  the  date of each Advance or
             --------------------------------
issuance  of  any Letter of Credit, the representations and warranties set forth
in  Section  3 hereof shall be true and correct on and as of such date, with the
same  effect  as though such representations and warranties had been made on and
as  of  such date, except to the extent that such representations and warranties
relate  solely  to  an  earlier  date.

<PAGE>

     4.2     CERTIFICATES.  On  or  before  the date hereof, the Bank shall have
             ------------
received:  (a)  from  the  Borrower:  (1) a copy of its certificate of corporate
status  and  Articles  of  Incorporation  with  all amendments, certified by the
Secretary of State of Florida, dated as of a recent date; (2) the certificate of
its  secretary or assistant secretary, dated the date hereof and certifying that
attached thereto is a true and complete copy of its Bylaws prior to the adoption
of the resolutions by its Board of Directors authorizing the execution, delivery
and  performance  of this Loan Agreement; and certification that its articles of
incorporation  have  not  been  amended  since  the  date  of the last amendment
thereof, if any, indicated on the certificate of the Secretary of State; and (b)
such  other  documents  as  the  Bank  may  reasonably  request.

     4.3     NO  DEFAULT.  At the date of each Advance or issuance of any Letter
             -----------
of  Credit,  no Event of Default, or event which with the giving of notice or of
the  passage  of time, or both, would constitute an Event of Default, shall have
occurred  and  be  continuing,  and  the  representations  and warranties of the
Borrower and each Guarantor contained herein shall remain true and correct as of
such  date, except to the extent that such representations and warranties relate
to  an  earlier  date.  Each  request  for  an  Advance  shall  constitute  the
confirmation  by  Borrower  and  each  Guarantor  that  at  the date thereof the
condi-tions  contained  in  this  Section  4.3  shall  have  been  satisfied.

     4.4     OTHER  CONDITIONS  PRECEDENT.  On  or before the date hereof, there
             ----------------------------
shall  have  been delivered to the Bank all of the financial statements, reports
and  other  documents  required  by  the  Loan  Commitment dated March 31, 2006.

            SECTION 5. CROSS-DEFAULT AND CROSS-COLLATERALIZATION.

     Any  Event  of  Default  under  the  terms of the Loan shall constitute and
hereby  is  declared  to be an immediate and absolute default under the terms of
all loans between Bank and Borrower.  Should an event of default occur under the
terms  of  any of said loans, which event is subject to notice and cure periods,
if  any, failure to cure such event of default within such curative period shall
constitute an immediate default under this Loan and all such other loans owed by
Borrower  to  Bank.  Each of the foregoing loans between Bank and Borrower shall
also  be  cross-collateralized, whether such loans are now existing or hereafter
entered  into  between  Bank  and  Borrower  at  any  time.

                      SECTION 6. AFFIRMATIVE COVENANTS

     From  the  date  hereof  and  so  long  as  the  Loan  shall  be  unpaid or
unperformed,  the  Borrower and, as specified hereinbelow, the Guarantor, as the
case  may  be,  will:

     6.1     EXISTENCE  AND  PROPERTIES.  To  the  extent  that  the  same  are
             --------------------------
necessary  for  the proper and advantageous conduct of its business, do or cause
to  be  done  all things necessary to preserve, renew and keep in full force and

<PAGE>

effect its corporate existence, rights, licenses and permits and comply with all
laws  and  regulations  applicable to it and conduct and operate its business in
substantially  the  manner  in  which  it  is  presently conducted and operated.

     6.2     INSURANCE.
             ----------

          (a)     Cause  to  be  maintained  at all times during the term of the
Loan,  general  liability insurance with limits reasonably satisfactory to or as
reasonably  required  by,  Bank.

          (b)     Cause the Collateral to be adequately insured at all times, by
financially  sound  and reputable insurers, in an amount not less than the value
thereof.

          (c)     Cause  the  Bank  to  be  a named insured to the extent of its
interest in respect the policies of insurance required by Section 6.2(a) and (b)
hereinabove.

     6.3     OBLIGATIONS,  TAXES  AND  LAWS.  Pay  or  cause  to  be  paid  all
             ------------------------------
indebtedness  and  obligations  promptly and in accordance with their respective
terms,  including, without limitation, sales, use and personal property taxes as
the  same  may  be  imposed  upon  the  Borrower  from time to time, and pay and
discharge  or  cause  to be paid and discharged promptly all taxes, assessments,
and governmental charges or levies imposed upon it or in respect of its property
before the same shall become in default, as well as all lawful claims for labor,
materials,  and  supplies  or otherwise which, if unpaid, might become a lien or
charge  upon  such  property  or  any  part  thereof, and timely comply with all
applicable  laws and governmental rules and regulations; provided, however, that
the  Borrower  shall  not be required to pay or discharge or cause to be paid or
discharged  any  such  tax,  assessment, charge, lien or claim, or timely comply
with  the  laws  and governmental rules so long as the validity thereof shall be
contested  by  appropriate  legal  proceedings timely initiated and conducted in
good  faith,  and  (a)  in  the  case of an unpaid tax, assessment, governmental
charge  or  levy,  lien, encumbrance, charge or claim, such proceedings shall be
effective  to suspend the collection thereof from the Borrower and its property;
(b)  neither  such property nor any part thereof, nor any interest therein would
be  in any danger of being sold, forfeited or lost; (c) in the case of a law and
governmental  rule  or regulation, neither the Borrower nor the Bank would be in
any  danger  of  criminal  liability  for failure to comply therewith; (d) there
shall have been established such reserve or other appropriate provision, if any,
with  respect  thereto on the books of the entity involved, as shall be required
by  Generally  Accepted  Accounting  Principles  with  respect  to any such tax,
assessment,  charge,  lien,  claim,  encumbrance,  law,  rule  or regulation, so
contested.

     6.4     FINANCIAL  STATEMENTS  AND  REPORTS.  Borrower  and  each Guarantor
             -----------------------------------
shall  maintain systems of accounting established and administered in accordance
with  Generally Accepted Accounting Principles.  The Borrower and the Guarantor,
as  appropriate,  will  furnish  to  the  Bank:

<PAGE>

          (a)     Within  120  days  after  the  end  of  each  fiscal year, the
Borrower  shall  deliver  to  the Bank, audited balance sheets and statements of
income,  retained  earnings  and changes in financial position for such year, an
audited  inventory  of Borrower, all of which shall be accompanied by supporting
schedules  and  the  unqualified  opinion  of  independent  certified  public
accountants  of  recognized standing reasonably acceptable to the Bank, together
with  copies  of  federal  corporate  tax returns within thirty (30) days of the
filing  thereof  and  upon  filing,  all filings required in accordance with SEC
regulations,  if  any.

          (b)     Within  30  days  after  the end of each month, deliver to the
Bank  the  following  financial  statements  certified  by  the  President  or
Vice-President of the Borrower as accurate to the best of his knowledge upon due
inquiry  and  investigation: (1) the Borrowing Base Certificate; (2) an accounts
receivable  aging  report  by  customer  reflecting  the past due status of each
invoice;  (3)  an inventory certification reflecting current value of Inventory;
and  (4)  consolidated,  interim  financial statements for the Borrower; in such
form  and  context  as  Bank  may  require.

          (c)     Concurrently  with  the  statements  furnished  pursuant  to
paragraphs  (a)  and  (b)  of  this  Section 6.4, a certificate of an authorized
officer  of  the Borrower certifying that to the best of his knowledge, no Event
of Default hereunder, nor any event which with notice or lapse of time, or both,
would  constitute  such  an  Event of Default, has occurred or, if such Event of
Default  or  event  has  occurred,  specifying  the  nature  and extent thereof.

          (d)     Quarterly  covenant  compliance  certificates  signed  by  an
authorized  officer  of  Borrower  within 30 days after the end of each quarter.

          (e)     Within  120  days  after  the  end  of  each  fiscal year, the
Guarantor  shall  deliver  to the Bank consolidated audited financial statements
and,  upon  filing,  all filings required in accordance with SEC regulations, if
any.

          (f)     Within  30  days  of  filing, the Guarantors shall provide the
Bank  with  consolidated  annual  corporate  tax  returns.

          (g)     Promptly,  from time to time, such other information regarding
the operation, business, affairs and financial condition of the Borrower and the
Guarantor  as  the  Bank  may  reasonably  request.

     6.5     LITIGATION  NOTICE.  Give  the  Bank  prompt  written notice of any
             ------------------
action,  suit or proceeding at law or in equity or by or before any governmental
instrumentality or other agency, the outcome of which might materially adversely
affect  the  operations or financial condition of the Borrower or the Guarantor.
The  Bank  has been given notice by Borrower of the currently pending litigation
described  in  EXHIBIT  "B"  attached  hereto.

     6.6     NOTICE  OF  DEFAULT.  Borrower  and each Guarantor, as the case may
             -------------------
be, shall give the Bank prompt written notice of any Event of Default hereunder,

<PAGE>

or  any  event  which, with the passage of time or the giving of notice or both,
would  become  such  an  Event  of  Default  hereunder.

     6.7     ACCESS TO PREMISES AND INSPECTIONS.  At all reasonable times and as
             ----------------------------------
often  as  the Bank may reasonably request, permit or arrange for any authorized
representative  designed  by  the Bank to visit and inspect the principal office
and  operations  of  the Borrower, any of the other offices or properties of the
Borrower,  including,  without limitation, the Collateral, and its books, and to
make  extracts from such books and to discuss the affairs, finances and accounts
of  the Borrower with its chief financial officer or such other person as may be
designated  by  the  chief executive or chief operating officer of the Borrower.

     6.8     CONTINUED  ASSISTANCE.  Promptly, from time to time as the Bank may
             ---------------------
reasonably  request,  Borrower  and  each  Guarantor shall perform such acts and
execute,  acknowledge,  deliver,  file,  register, deposit or record any and all
further  instruments,  agreements  and  documents whether to continue, preserve,
renew,  record or perfect the Bank's interests in the Collateral, as well as the
priority  thereof.

     6.9     TITLE  TO  COLLATERAL.  The  Borrower shall own all of the property
             ---------------------
constituting  the  security for the Loan.  All such property shall be and remain
free  and clear of all mortgages, pledges, liens, charges and other encumbrances
of  any  nature  whatsoever,  except  as granted to the Bank hereby or otherwise
permitted  herein.

     6.10     FINANCIAL  COVENANTS.  Until the Loan has been fully repaid to the
              --------------------
Bank,  Borrower  shall:

          (a)     DEBT SERVICE COVERAGE RATIO.  Maintain a Debt Service Coverage
Ratio  of not less than 1.25 to 1.00, measured on a rolling 4-quarter basis.  As
used herein "Debt Service Coverage Ratio" shall be defined as (1) (A) Net Income
of  Borrower,  plus  (B) Interest Expense, plus (C) Depreciation & Amortization,
minus  (D)  Distributions,  minus (E) Extraordinary Income/Non-Recurring Income,
divided by (2) (A) Current Portion of Long Term Debt Payments, plus (2) Interest
Expense.

          (b)     DEBT TO TANGIBLE NET WORTH RATIO.  Maintain a Debt to Tangible
Net Worth Ratio of not more than 2.00 to 1.00.  As used herein "Debt to Tangible
Net  Worth  Ratio"  shall  be  defined as (1) (A) Total Liabilities of Borrower,
minus (B) Subordinated Debt, divided by (2) (A) Net Worth, plus (B) Subordinated
Debt,  minus  (C)  Intangibles,  minus  (D)  Related  Party  Receivables.

     6.11     DEPOSIT  ACCOUNTS.  Borrower  shall place on deposit with Bank all
              -----------------
of  its corporate deposit accounts (except for payroll accounts) making the Bank
its  primary  depository  relationship.

<PAGE>

                        SECTION 7. NEGATIVE COVENANTS

     From the date hereof and so long as any of the Obligations shall be unpaid,
the  Borrower  and  each  Guarantor,  as  the  case  may  be,  will  not:

     7.1     NEGATIVE  PLEDGE.  Either  directly  or  indirectly, incur, create,
             ----------------
assume  or  permit  to exist any Liens with respect to any property securing the
Loan or be bound by or subject to any assessments and other similar governmental
charges  or  claims  except as provided in Section 6.3 of this Loan Agreement or
Permitted  Liens.

     7.2     SALE  OR  DISPOSITION  OF  COLLATERAL.  Sell, discount or otherwise
             -------------------------------------
dispose  of  any of the property securing the Loan or any part thereof except in
the  ordinary  course  of  business,  or incur additional material borrowings or
enter  into  material  leases without the prior written consent of the Bank upon
terms  and  conditions  satisfactory  to  the  Bank.

     7.3     ORGANIC  CHANGES.  Either  directly  or  indirectly,  (a)  merge or
             ----------------
consolidate  the  Borrower,  with  or  into  any other corporation; (b) sell (in
bulk), lease or otherwise dispose of all or substantially all of the property of
the  Borrower,  unless  the  transferee or the lessee shall be acceptable to the
Bank,  which acceptance must in writing and issued by the Bank prior to any such
sale,  lease  or  other  disposition, and such transferee shall have assumed the
Loan;  or (c) without prior written consent of the Bank, sell, transfer, assign,
or otherwise dispose, or permit the sale, transfer, assignment or disposition of
the  shares  of  the  Borrower,  directly  or  indirectly,  or  take  any action
whatsoever,  the  result  of  which is that the interest of the Guarantor in the
Borrower,  is  changed to the extent that such shareholders fail to retain their
current  ownership  interest  as existing as of the date of this Loan Agreement.

     7.4     DISTRIBUTIONS.  Make  any  distributions  to  shareholders, whether
             -------------
dividends,  debt  repayment,  stock  re-purchase, advances or otherwise, whether
directly or indirectly, without the prior written consent of the Bank other than
stock  dividends  and distributions made pursuant to the Earnout Agreement dated
January  18,  2006, pursuant to which, payments may be paid to the former owners
of  the  Borrower,  as an earnout, based upon the net income before taxes of the
Borrower.

     7.5     CHANGES  IN  MANAGEMENT.  Suffer  or  permit  any  change  in  the
             -----------------------
management  of  Borrower  as  in  effect  on  the date hereof, without the prior
written  consent  of the Bank, which consent shall not be unreasonably withheld.

     7.6     ADDITIONAL  INDEBTEDNESS.  Incur, create, assume or permit to exist
             ------------------------
any  additional  indebtedness  in  excess  of  $100,000.00  in the aggregate, or
indebtedness  secured  by  the Collateral pledged to secure the Loan, other than
the  indebtedness  to  the  Bank  and  other indebtedness incurred in the normal
course  of business, without the prior written consent of Bank, except as may be
permitted  hereunder.

<PAGE>

     7.7     SETTLEMENTS.  Enter  into  any  transaction  that  materially  and
             -----------
adversely  affects the collateral referenced herein or the Borrower's ability to
repay  the  Loan  other  than  in  the  normal  course  of  business.

                        SECTION 8. EVENTS OF DEFAULT

     8.1     EVENTS  OF  DEFAULT.  The occurrence of any of the following events
             -------------------
shall  constitute  an  event  of  default  (an  "Event  of  Default") hereunder:

          (a)     Any  representation or warranty made in this Loan Agreement or
in any report, certificate, financial statement or other instrument furnished in
connection  herewith  at  any  time shall prove to be false or misleading in any
material  respect  as  of  the  time  when  made;

          (b)     In  the  event  any  payment  of  principal, interest or other
monetary  obligation  is  not  made within ten (10) days after the date when due
under  the  Loan;

          (c)     Default  with  respect to any material obligation for borrowed
money  or  otherwise  of  the  Borrower  if  the  effect  of  such default is to
accelerate  the maturity of such indebtedness or to permit the holder or obligee
thereof  (or  a  trustee  on  behalf  of  such  holder or obligee) to cause such
indebtedness  to  become  due  prior  to  its  stated maturity, or such material
indebtedness shall not be paid as and when due and payable (in each case, giving
effect  to  any  applicable  grace  periods);

          (d)     Default  in the due observance or performance of any covenant,
condition or agreement contained in Sections 6 and 7 of this Loan Agreement; and
such  default  shall  not be cured within 15 days after the earlier of knowledge
thereof by an officer of the Borrower, or after written notice of the default is
delivered  by  the  Bank,  but if the default is subject to cure and the cure is
being  diligently  pursued by appropriate means at the end of such 15 days, then
Borrower  shall  have  an  additional  15  days thereafter to complete the cure;

          (e)     Default  in the due observance or performance of any covenant,
condition or agreement to be observed or performed pursuant to the terms of this
Loan  Agreement,  and  such  default shall not be cured within 15 days after the
earlier  of  knowledge  there of by an officer of the Borrower, or after written
notice of the default is delivered by the Bank, but if the default is subject to
cure and the cure is being diligently pursued by appropriate means at the end of
such  15  days,  then  Borrower  shall  have an additional 15 days thereafter to
complete  the  cure;

          (f)     The termination of its guarantee by the Guarantor or any other
guarantor  of Loan; provided, however, any such termination shall not affect the
rights  of the Bank and obligations of the Guarantor existing at the time of the
Bank's  receipt  of  written  notice  of  the  termination  of  guaranty;

<PAGE>

          (g)     The Borrower or Guarantor shall (1) make an assignment for the
benefit  of  creditors,  file a petition in bankruptcy, petition or apply to any
tribunal  for  the  appointment of a custodian, receiver or any trustee or shall
commence  any  proceeding  under  any  bankruptcy,  reorganization, arrangement,
readjustment  of  debt,  dissolution  or  liquidation  law  or  statute  of  any
jurisdiction,  whether  now  or hereafter in effect; or if there shall have been
filed  any  such petition or application, or any such proceeding shall have been
commenced  against  any of them in which an order for relief is entered or which
remains  undismissed  for  a  period  thirty  (30) days or more; the Borrower or
Guarantor,  by  any  act  or omission, shall indicate consent to, approval of or
fail  to timely object to, any such petition, application or proceeding or order
for  relief  or  for  the appointment of a custodian, receiver or any trustee or
shall  suffer  any  such  custodianship, receivership or trusteeship to continue
undischarged for a period of thirty (30) days or more; (2) generally not pay its
debts  as  such  debts  become  due or admit in writing its inability to pay its
debts  as  they  mature;  or  (3)  have  concealed,  removed, or permitted to be
concealed  or  removed,  any  part  of  its properties or assets, with intent to
hinder,  delay  or  defraud  its creditors or any of them, or made or suffered a
transfer  of  any  of its property which may be fraudulent under any bankruptcy,
fraudulent  conveyance  or  similar  law, or shall have made any transfer of its
property  to  or  for  the  benefit of a creditor at a time when other creditors
similarly  situated  have  not  been  paid; or shall have suffered or permitted,
while  solvent, any creditor to obtain a lien upon any Collateral, through legal
proceedings  or  distraint, which is not vacated or "bonded off" within ten (10)
days from the date thereof; or (4) be "insolvent" as such term is defined in the
Bankruptcy  Code,  11  U.S.C.  Sec.101(31).

     8.2     DEFAULT  RATE.  From  and  after  the  occurrence  of  an  Event of
             -------------
Default,  the  Loan  shall  accrue  interest  at  the  Default  Rate.

                             SECTION 9. REMEDIES

     From  and  after  the  occurrence  of  an  Event  of  Default:

     9.1     TERMINATION  OF  ADVANCES  AND ACCELERATION.  Bank may, at its sole
             -------------------------------------------
option  cease  making  Advances  under  this  Loan  Agreement and/or declare the
principal  of and interest on the Loan and all other obligations due by Borrower
hereunder to be immediately due and payable without presentment, demand, protest
or  notice  of  any  kind, all of which are hereby expressly waived, anything in
this  Loan  Agreement to the contrary notwithstanding, and all amounts hereunder
shall  then  be  immediately  due  and  payable.

     9.2     COLLATERAL.  With  respect  to  the  Collateral,  Bank  may:
             ----------

          (a)     Sell  the  Collateral  at  either a public or private sale, or
both,  by way of one or more contracts or transactions, for cash or on terms, in
such  manner  and  at  such  places  (including  Borrower's  premises)  as  Bank
determines  is commercially reasonable.  It is not necessary that the Collateral
be  present  at any such sale.  Bank shall give notice of the disposition of the
Collateral  as  follows:

<PAGE>

               (1)     Bank  shall  give  Borrower notice in writing of the time
and  place  of  public  sale,  or,  if  the sale is a private sale or some other
disposition  other  than a public sale is to be made of the Collateral, the time
on  or  after  which  the  private  sale or other disposition is to be made; and

               (2)     The  notice  shall  be  personally  delivered  or mailed,
postage  prepaid, to Borrower as provided in Section 10 below, at least ten (10)
days  before the earliest time of disposition set forth in the notice; no notice
needs to be given prior to the disposition of any portion of the Collateral that
is  perishable  or  threatens  to decline speedily in value or that is of a type
customarily sold on a recognized market; provided, however, that Bank may credit
                                         --------  -------
bid  and  purchase  the  Collateral  at  any  public  sale.

          (b)     Bank  may seek the appointment of a receiver or keeper to take
possession  and operate, as applicable all or any portion of the Collateral, and
to  the  maximum  extent  permitted  by  law, may seek the appointment of such a
receiver  without  the  requirement  of  prior  notice  or  a  hearing;

          (c)     Bank  shall have all other rights and remedies available to it
at law or in equity pursuant to any other loan documents execution in connection
herewith.  The  rights  and  remedies of Bank hereunder shall be cumulative, and
not  exclusive.  The exercise of one or more such remedies shall not preclude or
prevent  Bank  from,  at  the  same  time, or at any other time, resorting to or
exercising  the  same  or  other  rights,  powers, privileges or remedies herein
granted  to  it  or  to  which  it  might  otherwise  legally  resort.

     9.3     APPLICATION  OF PROCEEDS UPON DISPOSITION OF COLLATERAL.  Apply, at
             -------------------------------------------------------
Bank's  option,  the  proceeds of any sale of the Collateral as well as all sums
received  or  collected  by  Bank  from  or on account of such Collateral and/or
additional  or  substitute  collateral to (a) the payment of reasonable expenses
incurred  or  paid  by Bank in connection with any sale, transfer or delivery of
the  Collateral  and/or  such  additional  or substitute collateral, and (b) the
payment  of  the obligations or any part thereof, all in such order or manner as
Bank in its sole discretion may determine, irrespective of the date of maturity.
All acts done or to be done by Bank in conformity with the powers herein granted
are  hereby  ratified and confirmed by Borrower.  Borrower agrees to pay to Bank
any  deficiency  in  the  event  the  proceeds  of  any  foreclosure sale of the
Collateral  are  insufficient  to  satisfy the Loan obligations in full and Bank
shall  have  the  right  to  sue  Borrower  for  such  deficiency.

     9.4     RIGHT TO INCOME.  Unless such Event of Default is waived in writing
             ---------------
by  Bank, Bank may, at its sole discretion, collect, receive and receipt for all
income, interest, earnings or profits (including any dividends) now or hereafter
payable  upon or on account of the Collateral without any responsibility however
for its failure to do so.  The sums or property so collected or received by Bank

<PAGE>

on  account  of  the Collateral, and pursuant to this Section 9.4, shall be held
and retained by Bank as further security for the Obligations and shall be deemed
automatically  to  be  Collateral  under  this  Loan  Agreement.

     9.5     CASH  COLLATERALIZATION  OF  LETTERS  OF  CREDIT.  Bank  may,
             ------------------------------------------------
irrespective  of  whether  it  is  taking  any  of the actions described in this
Section  or  otherwise,  make  demand  upon Borrower to, and forthwith upon such
demand Borrower will, pay to Bank in same-day funds, for deposit in such account
as  Bank  shall  specify (the "L/C Cash Collateral Account"), an amount equal to
105%  of  the  Letter  of  Credit  Obligations  then  outstanding.  The L/C Cash
Collateral  Account shall be in the name and under the sole dominion and control
of  Bank.  Bank shall have no obligation to invest any amounts on deposit in the
L/C  Cash  Collateral  Account.  Borrower grants to Bank, a lien on and security
interest  in  the L/C Cash Collateral Account and all amounts on deposit therein
as  collateral  security  for the performance of its obligations under this Loan
Agreement  and the other loan documents. Bank shall have all rights and remedies
available  to  it  under  applicable law with respect to the L/C Cash Collateral
Account  and  all  amounts  on  deposit  therein.

     9.6     RIGHT TO SETOFF. In addition to any rights now or hereafter granted
             ---------------
under  applicable  law  and not by way of limitation of any such rights, Bank is
hereby  authorized  by  Borrower  at  any  time  or from time to time, after the
occurrence  of  an Event of Default, without notice to Borrower, or to any other
person,  any  such  notice  being  hereby  expressly  waived,  to set off and to
appropriate  and  to  apply  any  and  all deposits (general or special, time or
demand, including, but not limited to, indebtedness evidenced by certificates of
deposit,  in  each case whether matured or unmatured) and any other Indebtedness
at any time held or owing by Bank, its branches, subsidiaries or affiliates, for
the  credit or the account of Borrower against and on account of the obligations
and liabilities of Borrower to Bank under this Loan Agreement and any other loan
document, including, but not limited to, all claims of any nature or description
arising out of or connected with this Loan Agreement or any other loan document,
irrespective  of  whether or not: (a) Bank shall have made any demand hereunder;
or  (b)  Bank  shall have declared the principal of and interest on the Loan and
the  Loan  Agreement  and  other  amounts  due  hereunder to be due and payable.

     9.7     BANK'S  LIABILITY  FOR  COLLATERAL.  Borrower hereby agrees that so
             ----------------------------------
long as Bank complies with its obligations, if any, under the Uniform Commercial
Code  as  in effect from time to time in the State of Florida, Bank shall not in
any  way  or  manner  be  liable  or responsible for: (a) the safekeeping of the
Collateral, (b) any loss or damage thereto occurring or arising in any manner or
fashion  from any cause, (c) any diminution in the value thereof, (d) any act or
default  of  any  carrier,  warehouseman,  bailee,  forwarding  agency, or other
persons, and all risk of loss, damage, or destruction of the Collateral shall be
borne  by  Borrower.

                              SECTION 10.  NOTICES

     All  notices,  requests,  demands  or  other  communications to or from the
parties hereto shall be deemed to have been duly given and made: (a) in the case
of  a  letter sent other than by mail, when the letter is delivered to the party

<PAGE>

to  whom  it  is addressed; (b) in the case of a telegram or facsimile document,
when  the  telegram  or  facsimile  is sent; (c) in the case of a letter sent by
mail,  three  (3) days from the day on which the letter is deposited in a United
States  post  office, certified mail, return receipt requested, and addressed as
follows:

     If  to  the  Borrower
      or  Guarantor:          DEER  VALLEY  HOMEBUILDERS,  INC.
                              Attention:  Joel  Logan,  President
                              205  Carriage  Street
                              Guin,  Alabama  35563

     with  a  copy  to:       BUSH  ROSS,  P.A.
                              Attention:  Brent  A.  Jones
                              220  S.  Franklin  Street
                              Tampa,  Florida  33602

     If  to  the  Bank:       FIFTH  THIRD  BANK
                              Attention:  Chad  Loar,  Vice  President
                              201  East  Kennedy  Blvd.,  Suite  1800
                              Tampa,  Florida  33602

     with  a  copy  to:       FISHER  &  SAULS,  P.A.
                              Attention:  Kenneth  E.  Thornton
                              100  Second  Avenue  South,  Suite  701
                              St.  Petersburg,  Florida  33701

                           SECTION 11.  MISCELLANEOUS

     11.1     COSTS.  The  Borrower  hereby  agrees to pay to the Bank all costs
              -----
and  expenses  of  every kind and description incurred by the Bank in connection
with  the enforcement and protection in any legal or equitable proceeding of the
rights  of  the  Bank  in connection with this Loan Agreement, and in connection
with  any  action  or  claim  under  this Loan Agreement, or in any wise related
thereto, including, without limitation, the reasonable fees and disbursements of
counsel  to  the  Bank.  In the event of litigation arising out of or related to
this  agreement,  the  prevailing party shall be entitled to reasonable fees and
costs  of  its  counsel.

     11.2     SEVERABILITY.  The  provisions  of  this  Loan  Agreement  are
              ------------
severable,  and  if any provision hereof shall be held by any court of competent
jurisdiction  to  be  unenforceable, such holding shall not affect or impair any
other  provision  hereof.

     11.1     GOVERNING  LAW.  THIS  LOAN  AGREEMENT  SHALL  BE  CONSTRUED  IN
              --------------
ACCORDANCE  WITH  AND  GOVERNED  BY  THE  INTERNAL  LAWS OF THE STATE OF FLORIDA
WITHOUT  GIVING  EFFECT  TO  PRINCIPLES  OF  CONFLICT  OF  LAWS.

<PAGE>

     11.2     INDEMNITY.  Borrower  agrees  to  indemnify and hold harmless Bank
              ---------
and  each  of  its  affiliates, employees, representatives, officers, directors,
agents  and  attorneys  (any of the foregoing shall be an "Indemnitee") from and
                                                           -----------
against  any  and  all  claims,  liabilities,  losses,  damages,  actions,
investigations,  proceedings,  attorneys'  fees  and  expenses (as such fees and
expenses  are  incurred and irrespective of whether suit is brought) and demands
by  any  party,  including the costs of investigating and defending such claims,
actions, investigations or proceedings, and the costs of answering any discovery
served  in  connection  therewith, whether or not Borrower or the person seeking
indemnification  is  the  prevailing party and whether or not the person seeking
indemnification  is  a party to any such action or proceeding (a) resulting from
any  breach  or  alleged breach by Borrower of any representations or warranties
made  hereunder, or (b) arising out of (1) the Loan or otherwise under this Loan
Agreement,  including  the  use  of  the  proceeds  of the Loan hereunder in any
fashion  by  Borrower  or  the  performance  of  its  obligations under the loan
documents  by  Borrower,  (2)  allegations  of  any participation by Bank in the
affairs  of  Borrower,  or  allegations  that  Bank has any joint liability with
Borrower  for  any  reason, or (3) any claims against Bank by any shareholder or
other investor in or lender to Borrower, by any brokers or finders or investment
advisers or investment bankers retained by Borrower or by any other third party,
for  any  reason  whatsoever,  or (c) in connection with taxes (other than taxes
imposed  on the overall net income of the Bank), fees, and other charges payable
in connection with the Loan, or the execution, delivery, and enforcement of this
Loan  Agreement, the other loan documents, and any subsequent amendments thereto
or  waivers  of  any  of  the  provisions  thereof,  unless  the  person seeking
indemnification under clause (a), (b) or (c) of this Section 11.2, is determined
in  such  case  to  have acted or failed to act with gross negligence or willful
misconduct  by  a  non-appealable  judicial  order.

     11.5     INTERPRETATION.  To  the extent not otherwise provided for hereby,
              --------------
the  course of dealing by and between the Bank and the Borrower shall control in
the  determination  and  interpretation  of  the  rights  of the parties hereto.
Further,  to the extent not otherwise provided for hereby nor by or inconsistent
with the course of dealing by and between the parties hereto, the usage of trade
in  transactions  substantially  similar to the transactions contemplated herein
shall  control  in  the  determination  and  interpretation of the rights of the
parties  hereto.

     11.6     REVIVAL  AND  REINSTATEMENT  OF OBLIGATIONS.  If the incurrence or
              -------------------------------------------
payment  of  the obligations by Borrower or the transfer to Bank of any property
should  for any reason subsequently be declared to be void or voidable under any
state  or federal law relating to creditors' rights, including provisions of the
bankruptcy  code  relating  to  fraudulent  conveyances,  preferences,  or other
voidable  or  recoverable  payments  of  money  or  transfers  of  property
(collectively,  a  "Voidable  Transfer"),  and  if  Bank is required to repay or
                    -------------------
restore,  in  whole  or  in part, any such Voidable Transfer, or elects to do so
upon  the  reasonable  advice  of  its  counsel,  then,  as to any such Voidable
Transfer,  or  the  amount  thereof  that Bank is required or elects to repay or
restore,  and  as  to all costs, expenses, and reasonable attorneys fees of Bank

<PAGE>

related  thereto,  the  liability  of  Borrower  automatically shall be revived,
reinstated,  and  restored  and shall exist as though such Voidable Transfer had
never  been  made.

     11.7     ATTORNEY-IN-FACT.  The  Borrower  hereby constitute any officer of
              ----------------
the  Bank as attorney-in-fact, with power to receive and open all mail addressed
to  them; to endorse their name on any notes, acceptances, checks, drafts, money
orders or other evidences of payment or collateral that may come into the Bank's
possession;  to sign their name on any invoice or bill of lading relating to any
Account  Receivable,  or  on  drafts  against  customers,  to  send requests for
verification  of  Accounts Receivable to any account debtor and, to do all other
acts  and  things necessary to carry out this Loan Agreement; provided, however,
the  Bank  agrees  that  it shall not exercise the powers conferred upon in this
Section  11.7  until  the  occurrence of an Event of Default, or an event which,
with  the  giving of notice or the passage of time, or both, would constitute an
Event of Default.  All acts of said attorney or designee are hereby ratified and
approved  by the Borrower and the Guarantor, and said attorney or designee shall
not  be  liable  for  any  acts  of  commission or omission nor for any error of
judgment  or  mistake  of  fact  or  law,  unless  said  attorney or designee is
determined  in such case to have acted or failed to act with gross negligence or
willful  misconduct  by  an  non-appealable  judicial order..  This power, being
coupled with an interest, is irrevocable so long as any obligations, monetary or
otherwise,  remain,  due  to  the  Bank  from  the  Borrower  or  the Guarantor.

     11.8    HEADINGS.  The  name  of  this  Loan Agreement, as well as Section
             --------
headings  used  herein,  are  for  conveniences of reference only and are not to
affect  the construction of, or be taken into consideration in interpreting this
Loan  Agreement.

     11.9    TERMS.  Any  term  used herein shall be equally applicable to both
             -----
the  singular  and  plural  forms.

     11.10   JURY  TRIAL.  BORROWER,  GUARANTOR AND THE BANK HEREBY KNOWINGLY,
             -----------
VOLUNTARILY, INTENTIONALLY, AND IRREVOCABLY WAIVE THE RIGHT ANY OF THEM MAY HAVE
TO A TRIAL BY JURY IN RESPECT TO ANY LITIGATION, WHETHER IN CONTRACT OR TORT, AT
LAW  OR  IN EQUITY, BASED HEREON, OR ARISING OUT OF, UNDER OR IN CONNECTION WITH
THIS  LOAN  AGREEMENT  AND  ANY  OTHER DOCUMENT OR INSTRUMENT CONTEMPLATED TO BE
EXECUTED  IN  CONJUNCTION HEREWITH, OR ANY COURSE OF CONDUCT, COURSE OF DEALING,
STATEMENTS  (WHETHER  VERBAL  OR  WRITTEN) OR ACTIONS OF ANY PARTY HERETO.  THIS
PROVISION  IS  A  MATERIAL  INDUCEMENT  FOR  THE  BANK  ENTERING  INTO THIS LOAN
AGREEMENT.  FURTHER,  BORROWER HEREBY CERTIFIES THAT NO REPRE-SENTATIVE OR AGENT
OF  THE  BANK,  NOR THE BANK'S COUNSEL, HAS REPRESENTED, EXPRESSLY OR OTHERWISE,
THAT  THE  BANK WOULD NOT, IN THE EVENT OF SUCH LITIGATION, SEEK TO ENFORCE THIS
WAIVER  OF  RIGHT  TO  JURY  TRIAL PROVISION.  NO REPRESENTATIVE OR AGENT OF THE
BANK,  NOR  BANK'S COUNSEL HAS THE AUTHORITY TO WAIVE, CONDITION, OR MODIFY THIS
PROVISION.

<PAGE>

     IN WITNESS WHEREOF, the parties hereto have caused this Loan Agreement to
be executed and delivered as of the day and year first above written.

WITNESSES:                    "BORROWER"

                              DEER  VALLEY  HOMEBUILDERS,  INC.,
                              an  Alabama  corporation

-----------------------------     By:-------------------------------------
Signature  of  Witness               Joel  Logan,  as  its  President

----------------------------------
Print  or  type  Name  of  Witness

----------------------------------          (CORPORATE  SEAL)
Signature  of  Witness

----------------------------------
Print  or  type  Name  of  Witness

                              "GUARANTOR"

                               CYTATION  CORP.,  a  Delaware  corporation

------------------------------    By:--------------------------------------
Signature  of  Witness               Charles  G.  Masters, as its President

----------------------------------
Print  or  type  Name  of  Witness

----------------------------------               (CORPORATE  SEAL)
Signature  of  Witness

----------------------------------
Print  or  type  Name  of  Witness

                              DEERVALLEY  ACQUISITIONS  CORP.,
                              a  Florida  corporation

-----------------------------     By:--------------------------------------
Signature  of  Witness               Charles  G.  Masters, as its President

----------------------------------
Print  or  type  Name  of  Witness

-----------------------------------          (CORPORATE  SEAL)
Signature  of  Witness

----------------------------------
Print  or  type  Name  of  Witness

<PAGE>

                              "BANK"

                              FIFTH  THIRD  BANK,
                              a  Michigan  banking  corporation

--------------------------------     By:-------------------------------------
Signature  of  Witness               Chad  Loar,  as  its  Vice  President

----------------------------------
Print  or  type  Name  of  Witness

----------------------------------          (CORPORATE  SEAL)
Signature  of  Witness

----------------------------------
Print  or  type  Name  of  Witness

STATE  OF  ALABAMA
COUNTY  OF
            ----------------

     The foregoing instrument was acknowledged before me this      day of April,
                                                             ------
2006,  by Joel Logan, as President of DEER VALLEY HOMEBUILDERS, INC., an Alabama
corporation,  on  behalf  of  the  corporation.

----- Personally known                  ----------------------------------
----- Florida Driver's License          Notary Public
----- Other Identification Produced

      -----------------          -------------------------------------
      -----------------          Print or type name of Notary

                                        (SEAL)

STATE  OF  ALABAMA
COUNTY  OF
           ----------------

     The foregoing instrument was acknowledged before me this      day of April,
                                                             ------
2006,  by  Charles  G.  Masters,  as  President  of  CYTATION  CORP., a Delaware
corporation,  on  behalf  of  the  corporation.

---- Personally known               ----------------------------------
---- Florida Driver's License          Notary Public
---- Other Identification Produced
     -----------------          --------------------------------------
     ----------------           Print or type name of Notary

                                        (SEAL)

STATE  OF  ALABAMA
COUNTY  OF
          ----------------

     The foregoing instrument was acknowledged before me this ____ day of April,
2006,  by  Charles  G. Masters, as President of DEERVALLEY ACQUISITIONS CORP., a
Florida  corporation,  on  behalf  of  the  corporation.

---- Personally known                --------------------------------
---- Florida Driver's License          Notary Public
---- Other Identification Produced

     -----------------          -------------------------------------
     -----------------          Print or type name of Notary

                                        (SEAL)

<PAGE>

STATE  OF  ALABAMA
COUNTY  OF
          --------------------

     The  foregoing instrument was acknowledged before me this ___ day of April,
2006,  by  Chad  Loar, as Vice President of FIFTH THIRD BANK, a Michigan banking
corporation,  on  behalf  of  the  Bank.

---- Personally known               ---------------------------------
---- Florida Driver's License          Notary Public
---- Other Identification Produced
     -----------------          -------------------------------------
     -----------------          Print or type name of Notary

                                        (SEAL)
ATTACHMENTS:
-----------
     Exhibit  "A"  -  Borrowing  Base  Certificate
     Exhibit  "B"  -  Litigation  Notice

<PAGE>

                                   EXHIBIT "A"
                           BORROWING BASE CERTIFICATE
                           --------------------------

FIFTH  THIRD  BANK
201  East  Kennedy  Blvd.,  Suite  1800
Tampa,  Florida  33602

Pursuant  to  the  Loan and Security Agreement, Borrower hereby certifies, as of
the  above  date,  the  following:

(A)  Current  Value  of  Inventory                              $
                                                                 --------------
(B)  Less:  Ineligibles                                         $
                                                                 --------------
(C)  Net  Amount  of  Inventory  (A)  Less  (B)                 $
                                                                 --------------
(D)  50%  of  (C)  Not  To  Exceed  $1,250,000.00               $
                                                                 --------------
(E)  Aggregate  Amount  of  Accounts  Receivable                $
                                                                 --------------
(F)  Less:  Ineligibles

     Accounts  over  90  days                         $
                                                       ------------
     Accounts  with  Account  Debtors  having
     in  excess  of  25%  of  total  Eligible  A/R    $
                                                       ------------
     Other  (if  applicable)                          $
                                                       ------------
     Total  Ineligible                                $
                                                       ------------

(G)  Net Amount of Eligible Accounts Receivable (E) Less (F)    $
                                                                 --------------
(H)  80%  of  (G)                                               $
                                                                 --------------
(I)  CURRENT  BORROWING  BASE:                                  $
     (D)  Plus  (H)                                              --------------

(J)  The  aggregate  unpaid  principal                          $
     Owed  to  Bank  is  (will  not  exceed  maximum             --------------
     loan  limit  or  (I)  above)

(K)  Availability  (I)  Less  (J),  Less  all  issued and       $
     Outstanding  Letters  of  Credit,                           --------------
     Not  to  exceed  the  maximum  loan  limit  of  $  2,500,000.00

<PAGE>

The  undersigned  hereby certifies, represents, and warrants to FIFTH THIRD BANK
(the  "Bank")  as  follows:

1.     All the representations and warranties contained in the Loan and Security
Agreement or in any other related loan document are true and correct on the date
hereof.

2.     No  event  of default has occurred, or would result from the advance made
in  connection herewith, that constitutes an Event of Default under the Loan and
Security  Agreement  or  any  other  related  document.

3.     The  description  of  Eligible  Inventory  and  Eligible Accounts and the
values  assigned  thereto  are  true  and  correct in all material respects (see
attached  inventory  declaration  and  accounts receivable aging).  We are legal
owners  of  the  inventory  and the accounts receivable as identified above.  We
further  certify  that  the  inventory  is  in  good  condition and that storage
conditions  are  safe  and  satisfactory  for  this  type  of  inventory.

4.     The  aggregate  unpaid  principal balance of the Loan does not exceed the
lesser  of  the  $2,500,000.00 (after taking into account issued and outstanding
Letters  of  Credit)  Commitment  or  Borrowing  Base.

This  shall  also  certify  that,  for  the  month  ending,  200___, DEER VALLEY
HOMEBUILDERS, INC., an Alabama corporation (the "Borrower" or "Corporation") was
in  compliance  with  the following covenants contained in the Loan and Security
Agreement  between  Bank  and  Borrower  dated  April  ___,  2006.

     COVENANT                                         ACTUAL         COMPLIANCE
     --------                                         ------------------------

1.   Maintain  a  Debt  Service  Coverage             -----------  -----------
     Ratio  of  not  less  than  1.25  to  1.00
     "Debt  Service  Coverage  Ratio"  is
     (1)  (A)  Net  Income  of  Borrower,
     plus  (B)  Interest  Expense,
     plus  (C)  Depreciation  &  Amortization,
     minus  (D)  Distributions,
     minus  (E)  Extraordinary  Income  /
     Non-Recurring  Income,
     divided  by  (2)  (A)  Current  Portion  of
     Long  Term  Debt  Payments,
     plus  (2)  Interest  Expense

<PAGE>

2.   Maintain  a  Debt  to  Tangible  Net             -----------  -----------
     Worth  Ratio  of  Not  More  than
     2.00  to  1.00
     "Debt  to  Tangible  Net  Worth  Ratio"  is:
     (1)  (A)  Total  Liabilities  of  Borrower,
     minus  (B)  Subordinated  Debt,
     divided  by  (2)  (A)  Net  Worth,
     plus  (B)  Subordinated  Debt,
     minus  (C)  Intangibles,
     minus  (D)  Related  Party  Receivables

By:                                           By:
   -------------------------------               ----------------------------

Its:                                          Its:
    ------------------------------                ---------------------------

Date:              ,  200                     Date:               ,  200
     -------------       ---                       --------------       ----

<PAGE>

                                   EXHIBIT "B"
                                LITIGATION NOTICE

     Jason  Don  Gann  v.  Deer  Valley  Homebuilders,  Inc.,  is  a  worker's
compensation  and  retaliatory  discharge  claim  filed  by an ex-employee.  The
Company's worker's compensation insurance is defending the worker's compensation
portion of this lawsuit and the retaliatory discharge claim is being defended by
the  Company.  That issue should be resolved without any material adverse affect
on  the  Company

<PAGE>

Source: [{"source": "alea-institute/alea-institute/kl3m-data-edgar-agreements/train-00102-of-00352.parquet"}, [{"source": "alea-institute/alea-institute/kl3m-data-edgar-agreements/train-00102-of-00352.parquet"}]]