DELTA HOLDING, INC.
AND SUBSIDIARIES
--------------------------------------------------------------------
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1995
AND DECEMBER 31, 1994
TABLE OF CONTENTS
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION PP. 1-3
INDEPENDENT AUDITOR'S REPORT P. 4
CONSOLIDATED FINANCIAL STATEMENTS PP. 5-8
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS PP. 9-22
DELTA HOLDING, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
RESULTS OF OPERATIONS
- ---------------------
BACKGROUND
Continuing operations consist of the property-owning activities of the
Company. Included are the Leopold Retirement Inn, an independent living
facility for the elderly in Bellingham, Washington; the Best Western Lakeway
Inn, a full-service hotel also located in Bellingham; and several apartment
buildings located in Colorado Springs, Colorado.
Discontinued operations consist of the activities carried out under the trade
name of Delta Warranty, and includes the marketing and distribution of
extended service contracts and surge suppression equipment coupled with
extended service contracts. This business segment is treated as discontinued
operations as this business was sold August 1, 1995. The results of its
operations are reported separately.
FOR THE YEAR ENDED DECEMBER 31, 1995 vs. THE YEAR ENDED DECEMBER 31, 1994
Revenues from property operations increased 4%, from $6,200,000 in 1994 to
$6,418,000 in 1995, an increase of $218,000. $52,000 of this increase was
due to increased occupancy at the Best Western Lakeway Inn, reversing a five
year decline in occupancy caused by overbuilding of the hotel industry in
Bellingham. The remaining $166,000 of the overall increase was due to a
combination of improved occupancy and rent increases in the Colorado
apartments, reflecting the strong local economy in Colorado Springs.
Operating expenses for the property operations decreased 6% from $5,294,000
in 1994 to $4,977,000 in 1995, a decrease of $317,000. $265,000 of this
decrease was caused by lower depreciation expense, reflecting the lower value
of properties after the recording of a $3,700,000 property valuations loss in
1994. The balance of the decrease reflects lower property taxes and reduced
personnel costs at the Best Western Lakeway Inn.
Selling and administrative expenses declined 24% from $1,481,000 in 1994 to
$1,125,000 in 1995, a decrease of $356,000. Virtually all of this decrease
was due to reduced corporate expenses. These declined in relation to 1994
due to one-time legal and professional fees incurred in 1994 for the
Company's original stock issuance and registration. Also contributing to the
decline were the reductions in corporate staff after the sale of the warranty
operations on August 1, 1995.
1
This combination of increased revenue and reduced expenses resulted in an
increase in operating profit of $891,000, from a loss of $575,000 in 1994 to
a profit of $316,000 in 1995. Interest income declined in 1995 from $225,000
in 1994 to $112,000 in 1995. This reduction was due to smaller amounts of
interest-bearing restricted investments held in the warranty business during
1995 and then, with the sale of the warranty operations in mid-1995, the loss
of all such interest bearing funds. Interest expense increased slightly from
$976,000 in 1994 to $1,036,000 reflecting increased deeds of trust balances
on several properties as the deferred interest from the prior year
accumulated within the principal balance and started to earn interest.
The 1994 income statement contains a $3,700,000 valuation loss on property.
This amount was recorded in 1994 based on the market value of the Best
Western Lakeway Inn and the Leopold Retirement Inn determined by professional
real estate agents, engaged in December 1994, to sell the properties. The
agents engaged were specialists in the areas of hotel properties and senior
living facilities, respectively. The valuation loss of $2,800,000 on the
Lakeway and $900,000 on the Leopold reflected the amounts necessary to reduce
the carrying value to the anticipated selling price. The carrying value of
the two properties had previously been based on professional appraisals that
utilized a variety of methods, including physical replacement cost, to
determine their value.
DISCONTINUED OPERATIONS
The warranty operations recorded operating losses in all the reporting
periods. The warranty business had an operating loss of $2,958,000 in 1994;
this decreased to a loss of $375,000 in the seven months ended July 31, 1995.
The large swing in the reported losses was due primarily to the required
accounting procedures for unearned revenue. The loss in 1994 was increased
by the deferral of $1,879,000 in revenue relating to uninsured future
exposure on contracts sold during the year. The loss in 1995 was reduced by
the net amortization of prior unearned revenue in the amount of $1,135,000,
reflecting the fact that the majority of contracts sold in 1995 were insured.
The cash flow during both periods was negative at a relatively consistent
rate, averaging between $90,000 and $115,000 per month. Overall, the
warranty business had negative cash flow of $1,317,000 in 1994 and $629,000
in the sevens months of 1995.
Because of these losses and negative cash flows, the Board of Directors
decided to sell the warranty business, resulting in the transaction completed
on August 1, 1995. In that transaction, the Company transferred all warranty
business assets and liabilities to the buyer, DelCor Holdings, Inc. Former
officers of Delta Holding, Inc. own a majority interest in DelCor Holdings,
Inc. The Company received no compensation, other than the relief from the
warranty-related liabilities, in the transaction. Because the liabilities
transferred substantially exceeded the assets transferred, the Company
recorded a gain of $2,263,000 on the sale. (Notes 11 and 12 provide details
of the warranty operations and the sale transaction.)
2
FINANCIAL CONDITION, LIQUIDITY AND FUTURE PLANS
At December 31, 1995, the Company had total assets of $10,105,000, total
liabilities of $12,256,000, and stockholders' deficit of $2,151,000. The
major asset of the Company is property, which comprises $9,229,000 of the
total assets. All of the property is categorized as property held for sale
and therefore carried at the lower of cost or net realizable value. It is
the intention of the Board to sell all the property, retire the related
secured debt and other liabilities, and return any remaining funds to the
shareholders. The Directors have initiated this process and intend to
complete it as soon as possible. To facilitate this process and to reduce
expenses until such time as the residual funds can be returned to
shareholders, the Directors are submitting a plan to the shareholders to
convert the Company to a liquidating trust. To be approved, shareholders
representing 66.67% of the total outstanding shares must approve the plan.
The major liability of the Company is debt secured by the properties,
totaling $11,319,000. Of this amount, $652,000 is in the form of first
mortgages to banks, with the remaining $10,667,000 in the form of deeds of
trust. The deeds of trust mature on September 1, 1996 or when the property
securing the obligations is sold, if earlier.
As disclosed in Note 14, subsequent to December 31, 1995, the Company sold
the Leopold Retirement Inn, the Best Western Lakeway Inn, the Rockledge
Apartments in Colorado Springs and the Carmel Apartments in Colorado Springs,
retiring the related deeds of trust and mortgages.
With the completion of these transactions, all deeds of trust maturing on
September 1, 1996 have been paid off with the exception of $1,960,000 secured
by the Kit Carson Apartments in Colorado Springs. These deeds of trust are in
default as of September 1, 1996; however, no immediate action is anticipated
by the holders of these deeds. The Kit Carson is currently under a contract
of sale. Many of the conditions necessary to complete the sale have been
fulfilled. However, several conditions remain to be satisfied before
closing, which is now anticipated to be in mid October, 1996. At closing,
all principal and accrued interest to the day of closing will be paid from
the proceeds.
At December 31, 1995, the Company had $656,000 cash on hand and $116,000 in
accounts receivable. Accounts payable and accrued expenses totaled $937,000.
The property operations are currently generating sufficient cash to pay
expenses as incorred and the Company anticipates meeting its current
obligations as they come due.
Gordon Cheadle Terry L. Switzer
President and Vice Chairman of the Board Vice President, Finance
3
DELOITTE &
TOUCHE LLP 700 FIFTH AVENUE, SUITE 4500
SEATTLE WA 98104-5044
TELEPHONE: (206) 292-1800
FACSIMILE: (206) 343-7809
INDEPENDENT AUDITORS' REPORT
Board of Directors
Delta Holding, Inc.
Renton Washington
We have audited the accompanying consolidated balance sheet of Delta Holding,
Inc. and subsidiaries (the Company) as of December 31, 1995. This financial
statement is the responsibility of the Company's management. Our
responsibility is to express an opinion on this financial statement based on
our audit.
We conducted our audit on accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the balance sheet is free of
material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the balance sheet. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall balance sheet
presentation. We believe that our audit of the balance sheet provides a
reasonable basis for our opinion.
In our opinion, such consolidated balance sheet presents fairly, in all
material respects, the financial position of the Company as of December 31,
1995, in conformity with generally accepted accounting principles.
As discussed in Note 1 to the consolidated financial statements, the Company
has prepared a proposed plan of dissolution and the Company's shareholders
will vote on whether to approve this plan of dissolution and transfer the
Company's remaining assets and liabilities to a newly formed liquidating
trust.
DELOITTE & TOUCHE LLP
MARCH 1, 1996
(SEPTEMBER 30, 1996, AS TO NOTE 14)
4
DELTA HOLDING, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
December 31, December 31,
1995 1994
------------ ------------
(audited) (unaudited)
ASSETS
- ------
Property, equipment, and fixtures:
Equipment and vehicles $8 $153
Furniture 2 135
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10 288
Less: accumulated depreciation (2) (162)
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8 126
Restricted investments 3,302
Property held for sale 9,229 10,175
Cash and cash equivalents 656 632
Accounts receivable (less allowance for doubtful accounts
of $37,000 in 1995 and $212,000 in 1994) 116 1,061
Deferred acquisition costs 1,361
Inventory, prepaid expenses, and other assets 96 621
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TOTAL ASSETS $10,105 $17,278
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LIABILITIES
- -----------
Accounts payable $454 $1,793
Accrued expenses 483 720
Unearned revenue 7,089
Secured debt 11,319 11,086
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TOTAL LIABILITIES 12,256 20,688
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STOCKHOLDERS' DEFICIT
- ----------------------
Common stock ($1 par, 1,500,000 shares authorized,
484,128 shares issued and outstanding) 484 484
Paid-in capital 6,074 6,074
Accumulated deficit (8,709) (9,968)
------------ ------------
TOTAL STOCKHOLDERS' DEFICIT (2,151) (3,410)
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $10,105 $17,278
------------ ------------
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See notes to consolidated financial statements.
5
DELTA HOLDING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(in thousands, except per share data)
For The For The
Year Ended Year Ended
December 31, December 31,
1995 1994
------------ ------------
Revenue $6,418 $6,200
Operating expenses 4,977 5,294
------------ ------------
Gross margin from operations 1,441 906
Selling and administrative expenses 1,125 1,481
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Income (loss) before other income (expense) 316 (575)
Other income (expense):
Interest income 112 225
Interest expense (1,036) (976)
Loss on sale of assets (21) (31)
Valuation losses on property (3,700)
------------ ------------
Total (945) (4,482)
------------ ------------
Loss from continuing operations (629) (5,057)
Discontinued operations (Note 12):
Loss from operations (375) (2,958)
Gain on disposal 2,263
------------ ------------
Gain (loss) from discontinued operations 1,888 (2,958)
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Net income (loss) $1,259 $ (8,015)
------------ ------------
------------ ------------
Net income (loss) per share
Loss from continuing operations $ (1.30) $ (10.45)
Gain (loss) from discontinued operations 3.90 (6.11)
------------ ------------
------------ ------------
Net income (loss) $ 2.60 $ (16.56)
------------ ------------
------------ ------------
Weighted average number of shares outstanding 484,128 484,128
------------ ------------
------------ ------------
See notes to consolidated financial statements.
6
DELTA HOLDING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)
For The For The
Year Ended Year Ended
December 31, December 31,
1995 1994
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
- ------------------------------------
Net loss from continuing operations $ (629) $ (5,057)
Adjustments to reconcile net loss to net cash provided
by operating activities:
Depreciation 431 696
Loss on sale of assets 21 31
Increase in secured debt due to addition of accrued interest 959 883
Valuation losses on property 3,700
Changes in assets and liabilities, net of effects from
dispositions:
Accounts receivable (23) 895
Inventory, prepaid expenses, and other assets 64 (10)
Accounts payable (135) 183
Accrued expenses 172 83
Discontinued operations, net (629) (1,317)
------------ ------------
Net cash provided by operating activities 231 87
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CASH FLOWS FROM INVESTING ACTIVITIES
- ----------------------------------------
Proceeds from sales of property 567 145
Additions to property, equipment, and fixtures (48) (92)
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Net cash provided by investing activities 519 53
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CASH FLOWS FROM FINANCING ACTIVITIES
- ------------------------------------
Payments on long term debt (726) (169)
------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 24 (29)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 632 661
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $656 $632
------------ ------------
------------ ------------
See notes to consolidated financial statements.
7
DELTA HOLDING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
(unaudited)
(in thousands)
Total
Common Stock Paid-In Accumulated Stockholders'
Shares Amount Capital Deficit Equity (Deficit)
------- ------ ------- ----------- ----------------
Balance, January 1, 1994 484,128 $484 $6,074 $(1,953) $4,605
Net Loss, Year Ended
December 31, 1994 (8,015) (8,015)
------- ------ ------- ----------- ----------------
Balance, December 31, 1994 484,128 484 6,074 (9,968) (3,410)
Net Income, Year Ended
December 31, 1995 1,259 1,259
------- ------ ------- ----------- ----------------
Balance, December 31, 1995 484,128 $484 $6,074 $(8,709) $ (2,151)
------- ------ ------- ----------- ----------------
------- ------ ------- ----------- ----------------
See notes to consolidated financial statements.
8
DELTA HOLDING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31,
1995 AND DECEMBER 31, 1994
1. SIGNIFICANT ACCOUNTING POLICIES (UNAUDITED)
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements include
the accounts of Delta Holding, Inc. and its subsidiaries (collectively the
"Company"). All significant intercompany balances and transactions have
been eliminated.
NATURE OF OPERATIONS - During the year ended December 31, 1994 and for the
first seven months of the year ended December 31, 1995, the Company
operated two lines of business: warranty operations and property
management. The warranty operations consisted of the sale and service of
extended warranties on consumer electronic products, computer products and
appliances. The warranties were sold through a dealer network consisting
of retail department and electronic stores throughout the entire United
States. The warranty operations comprised about 40% of the Company's
revenues in the reporting periods. As discussed in Note 13, the Company
sold its warranty operations on August 1, 1995.
The property management operations consist of the ownership, operation and
sale of income producing properties. Properties include a hotel and a
retirement apartment complex in Washington and apartment complexes in
Colorado. The property management operations comprised about 60% of the
Company's revenues in the reporting periods.
USE OF ESTIMATES - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates.
BASIS OF ACCOUNTING - As of November 1, 1988 (as discussed in Note 2), all
assets and liabilities of the Company were restated to reflect their
estimated fair value. These fair values became the Company's historical
cost from that date forward. It is the intention of the Company's
directors to sell all of the Company's properties in the near future.
However, the properties are not recorded to liquidation value and the
actual values realized in a sale may differ from their carrying value. It
is also the intention of the directors to submit a plan to the shareholders
to convert the Company to a liquidating trust. Under the proposed plan,
which would require approval of 66.67% of the number of outstanding shares,
each shareholder would receive an interest in the liquidating trust
equivalent to the shareholder's ownership interest in the Company.
9
PROPERTY, EQUIPMENT AND FIXTURES - Property is stated at cost. The Company
depreciates assets on a straight-line basis over the following lives:
Equipment and vehicles 5 years
Furniture and fixtures 5 years
RESTRICTED INVESTMENTS - Certain financial instruments included in
restricted investments (Note 3) are carried at cost which approximates
market.
PROPERTY HELD FOR SALE - Property held for sale is recorded at the lower of
cost or net realizable value based on recent purchase offers or estimates
of value using direct capitalization or discounted cash flow methods (see
Note 4).
CASH AND CASH EQUIVALENTS - Cash and cash equivalents include short-term
investments with an original maturity of three months or less.
ACCOUNTS RECEIVABLE - Accounts receivable balances at December 31, 1994
primarily include amounts due from dealers for extended warranty contracts
sold. At December 31, 1995, accounts receivable balances consist primarily
of amounts due from property operations. An allowance is recorded to
reduce the balance when management has identified potentially uncollectible
amounts.
REVENUE FROM OPERATIONS, UNEARNED INCOME AND DEFERRED ACQUISITION COSTS -
Revenue from operations consists of property management revenue and is
recognized in the month earned. Unearned revenue related to warranty
contracts expiring in future periods is recognized as a liability at the
balance sheet date. Costs directly related to acquiring new and renewal
warranty contracts are deferred and amortized in proportion to the related
revenue and are recorded in operating expenses.
INCOME TAXES - The Company follows FASB Statement No. 109 "Accounting for
Income Taxes" which requires an asset and liability approach for financial
accounting and reporting of income taxes. Deferred income tax assets and
liabilities are computed annually for differences between the basis used
for financial reporting and reporting for income taxes. A valuation
allowance is established when necessary to reduce deferred income tax
assets to the amount expected to be realized (see Note 8).
NET INCOME (LOSS) PER SHARE - Net income (loss) per share computations are
based on the weighted average number of shares outstanding. Potentially
dilutive securities for certain deeds of trust payable which exceed the
amount of net realizable value of related properties, as described in Note
7, are excluded as no additional shares were issued as part of the sale of
properties as described in Note 14.
RECLASSIFICATIONS - Certain reclassifications have been made to the prior
year's financial statements to be consistent with the current presentation.
10
2. REORGANIZATION PROCEEDINGS
On September 11, 1987, the Company filed a petition for protection under
Chapter 11 of the U.S. Bankruptcy Code. After acceptance by a majority of
the creditors, the Company's First Amended Plan of Reorganization was
confirmed by the U.S. Bankruptcy Court on October 17, 1988, and became
effective on November 1, 1988. The First Amended Plan was based upon
projections of cash flows to repay the creditors by September 1, 1993. The
Company accounted for the reorganization as a quasi-reorganization.
Accordingly, all assets and liabilities were restated to reflect their
estimated fair value as of November 1, 1988. Such amounts are referred to
as cost in these financial statements.
The Company was unable to meet the terms set forth by the First Amended
Plan and on August 23, 1993, the U.S. Bankruptcy Court approved the Second
Amended Plan of Reorganization (the Plan) which became effective on
September 7, 1993 following approval by a majority of the creditors. Under
the Plan, existing unsecured creditors, with claims against the Company
totaling approximately $73,159,000, were given the following options to
exchange their allowed claims:
a) For a pro rata share of the beneficial interests in a liquidating
trust (the Trust).
b) For shares of common stock at the rate of one share per $100 of
allowed claims.
c) For the lesser of $500 or 25% of the allowed claims.
After the creditors voted for the above options, the results were as
follows:
a) Under the Plan, a Trustee for the Trust, appointed by the
Bankruptcy Court, chose certain investment properties based upon
stipulated values in the Plan. The net book value of assets
transferred was $1,795,000 including property with a net book value of
$3,922,000 offset by mortgages payable assumed of $2,127,000. A
resulting receivable of $889,000 (which was received in March 1994)
was recorded by the Company for the related income tax liability of
the Company on the gain from the assets transferred.
b) There are 484,128 shares of common stock (unaudited) which were
issued to stockholders in April 1994.
c) Creditors with debt totaling approximately $2,150,000 elected the
option to receive cash, resulting in approximately $193,000 being paid
by the Company prior to December 31, 1993.
11
There were other less significant classes of creditors which were either
paid in full in the normal course of business or whose payment terms did
not change (mortgages payable). See Note 7 regarding the revised payment
terms of deed of trust creditors under the Plan.
In conjunction with the terms of the Plan authorizing issuance of common
stock, the Articles of Incorporation were amended effective February 18,
1994 to increase the authorized shares to 1,500,000 shares (unaudited),
which is reflected on the Consolidated Balance Sheet.
The Company provided property management services for the properties
transferred to the Trust through their sale date. The properties were sold
by the Trustee in January and February 1994.
3. RESTRICTED INVESTMENTS (UNAUDITED)
Restricted investments at December 31, 1994 consist of the following (in
thousands):
Assets held in trust $2,230
Other restricted investments 1,072
-----
$3,302
------
------
Assets held in trust is primarily comprised of U.S. Treasury Bills
maintained in a trust account established under a warranty services
agreement with a major retailer as security for the Company's obligations
under the extended service contracts sold. The agreement provides for a
maximum amount of $3,000,000 in the trust balance funded by interest earned
on the investments held in the trust. Interest earned after the account
reaches the maximum balance will be remitted to the Company on a quarterly
basis. Amounts in the trust account will be remitted to the Company at the
earlier of the retailer's discretion or five years from the termination of
the warranty services agreement.
Other restricted investments consist primarily of short term certificates
of deposit. These amounts are restricted in accordance with various
bonding, insurance and state regulatory requirements. In addition, at
December 31, 1994, the Company had a letter of credit issued for $450,000
to an insurance carrier to cover warranty claims costs that exceed amounts
deposited. The letter of credit is secured by a certificate of deposit and
will be used by the carrier only if valid insured warranty claims are not
paid by the Company directly.
Restricted investments relate entirely to the operations of the warranty
business, which was sold August 1, 1995 (See Note 13 - Discontinued
Operations).
12
4. PROPERTY HELD FOR SALE
Property held for sale is recorded at the lower of cost or net realizable
value based on recent purchase offers or estimates of value using direct
capitalization or discounted cash flow methods and consists of the
following (in thousands):
December 31, December 31,
1995 1994
-------------- --------------
(unaudited)
Land $1,851 $1,851
Building & improvements 7,147 8,011
Equipment and vehicles 71 102
Furniture & fixtures 160 211
----- ----
$9,229 $10,175
------ -------
------ -------
5. UNEARNED REVENUE AND DEFERRED ACQUISITION COSTS
(UNAUDITED)
Activity in the unearned revenue and deferred acquisition costs balances
related to the warranty business during the periods ended December 31, 1994
and December 31, 1995 was as follows (in thousands):
Unearned revenue:
Balance, January 1, 1994 $5,211
Warranty contracts sold 5,804
Warranty revenue recognized (3,926)
Balance, December 31, 1994 7,089
Warranty contracts sold 3,077
Warranty revenue recognized (4,212)
-------
Balance, July 31, 1995 5,954
Transfer to buyer of warranty business on Aug. 1, 1995 (5,954)
-------
Balance, December 31, 1995 $ --
-------
-------
Deferred acquisition costs:
Balance, January 1, 1994 $1,105
Acquisition costs incurred 1,205
Amount expensed (949)
-------
Balance, December 31, 1994 1,361
Acquisition costs incurred 605
Amount expensed (891)
-------
Balance, July 31, 1995 1,075
Transfer to buyer of warranty business on Aug. 1, 1995 (1,075)
-------
Balance, December 31, 1995 $ --
-------
-------
13
6. SUPPLEMENTAL CASH FLOW INFORMATION (UNAUDITED)
Cash payments for interest on indebtedness were $77,000 for the year ended
December 31, 1995 and $92,000 for the year ended December 31, 1994. There
were no amounts paid for income taxes.
Disclosure of noncash investing and financing activities:
On August 1, 1995 the Company transferred all the assets and liabilities of
the warranty operations to DelCor Holding, Inc. The Company received no
compensation, other than the relief from the warranty-related liabilities,
in the transaction. The book value of assets transferred was $5,453,000.
The book value of liabilities transferred was $7,716,000, giving rise to a
non-cash gain of $2,263,000 on the transaction (see Note 12).
7. SECURED DEBT
Secured debt consists of the following (in thousands):
At December At December
31, 1995 31, 1994
------------ -----------
(Unaudited)
Six mortgages payable to financial institutions
maturing through 2005, payable monthly in-
cluding interest at rates ranging from 6.75% to
9.5%, collateralized by certain receivables
and buildings. $652 $904
Deeds of trust bearing interest at 9.5% per
annum, secured by buildings. The obligations
mature on the earlier of September 1, 1996 or
the date upon which the property securing the
obligation is sold. Payment terms under the
Plan (See Note 2) require interest payments on
September 1 of each year of a minimum of 4%
on the outstanding principal balance. Any
accrued interest not paid will be added to the out-
standing principal balance. If the proceeds from
the sale of the underlying property are not
sufficient to retire the obligation in full, or if
the creditor chooses to receive stock at the
maturity date, the Company is required to issue
shares of common stock having a fair value equal
to the unpaid portion. (See Note 14.) 10,667 10,182
------ ------
$11,319 $11,086
------- -------
------- -------
14
As of December 31, 1995, estimated remaining
principal payments required on long term debt
for years ending December 31 are as follows
(in thousands):
1996 $10,870
1997 95
1998 95
1999 44
2000 49
Thereafter 166
-------
$11,319
-------
-------
The fair value of the mortgages payable is estimated to be equal to the
book value of the mortgages payable based on current rates available to the
Company for debt of the same remaining maturities. The fair value of the
deeds of trust is estimated as the amount that will be paid to the
creditors from sales of the underlying properties, or $10,056,000 and
$9,787,000 as of December 31, 1995 and 1994, respectively.
8. INCOME TAXES
The tax effect of temporary differences and net operating loss
carryforwards that gave rise to the Company's deferred tax assets and
liabilities at December 31, 1994 and December 31, 1995, are as follows (in
thousands):
December 31, December 31,
1995 1994
------------ ------------
(Unaudited)
Deferred tax assets:
Tax basis net operating losses $2,131 $770
Accrued but unpaid interest 1,328 1,078
Unearned revenue 2,410
Property basis and depreciation 1,232 1,211
Other 31 178
---------- ----------
4,722 5,647
---------- ----------
Deferred tax liabilities:
Deferred acquisition costs 462
----------
462
----------
Net deferred tax asset 4,722 5,185
Valuation allowance (4,722) (5,185)
---------- ----------
$ -- $ --
---------- ----------
---------- ----------
15
At December 31, 1995, the Company has tax basis net operating loss
carryforwards which expire as follows (in thousands):
2008 $2,265
2009 4,003
------
$6,268
------
------
The following schedule accounts for the difference between the actual tax
provisions and the amounts obtained by applying the statutory U.S. federal
income tax rate to the income (loss) before taxes (in thousands):
Year Ended Year Ended
December 31, December 31,
1995 1994
------------ ------------
(unaudited)
Federal income tax benefit on
losses from continuing operations
at statutory rate (34%) $(213) $(1,719)
Addition to valuation allowance
due to uncertainty of realization
of net operating loss carryforwards 213 1,719
------ ------
Income taxes from continuing operations -- --
------ ------
Federal income tax expense (benefit)
on income (losses) of discontinued
operations at statutory rate (34%) 641 (1,005)
Addition to valuation allowances due
to uncertainty of realization net
operating loss carryforwards 1,005
Offset to income tax expense recorded
in current year due to utilization of
net operating loss carryforwards (641)
------ ------
Income taxes from discontinued
operations -- --
------ ------
Income taxes, net $ -- $ --
------ ------
------ ------
16
9. BUSINESS SEGMENT REPORTING (UNAUDITED)
Through August 1, 1995 (see Note 13), the Company reported its operations
in two business segments: warranty operations and property management.
The warranty operations segment sold and serviced extended warranties on
consumer electronic products, computer products and appliances. The
property management segment owns, operates and sells income producing
properties. Intersegment sales are not material. The property management
segment represents the entire business operations beginning August 1, 1995.
Amounts by business segment are as follows for the years ended December 31,
1994 and December 31, 1995 (in thousands):
Warranty Property Corporate
Operations Management and Other Total
--------------------------------------------------------------------------
Revenues 1995 $4,212 $6,418 $10,630
1994 3,926 6,200 10,126
Operating profit 1995 (375) 528 (212) (59)
(loss) 1994 (2,958) (27) (548) (3,533)
Capital expenditures 1995 7 41 48
1994 12 80 92
Depreciation expense 1995 34 397 431
1994 75 621 696
Identifiable assets at 1995 0 9,449 656 10,105
end of period 1994 6,217 10,879 632 17,728
The operating loss of the Corporate and Other includes general corporate
administrative expenses. Identifiable assets related to Corporate and
Other include cash and cash equivalents and other items not identifiable to
a particular segment. In 1994 the Company had a non-operating loss of
$3,700,000 from valuation losses on properties that is excluded from the
operating loss reported above.
17
10. PROPERTY UNDER MANAGEMENT
The Company is a lessor under various lease agreements for apartment
complexes and office buildings. The leases are substantially all
month-to-month leases. The net book value of leased investment properties,
included in property held for sale, consists of the following amounts (in
thousands):
December 31, December 31,
1995 1994
------------ ------------
(Unaudited)
Cost $5,488 $6,226
Accumulated depreciation (1,085) (1,092)
------ ------
Net book value $4,403 $5,134
------ ------
------ ------
During 1994, management recorded a valuation loss of $3,700,000 (unaudited)
on certain properties for which the decline in value was considered to be
other than temporary. All property is categorized as property held for
resale due to the decision of the directors to proceed with the disposing
of the property.
11. COMMITMENTS AND CONTINGENCIES
The Company leases office space under an agreement that extends to
September 1996. Commitments under this lease at December 31, 1995 are
$12,000. Rental expense for the years ended December 31, 1995 and December
31, 1994, totaled $144,000 and $257,000 (unaudited), respectively.
As described in Note 13, the Company remains contingently liable for
certain liabilities assumed by DelCor Holdings, Inc., the buyer of the
warranty operations. Should DelCor default on its obligation to pay these
liabilities, the creditors in question may turn to the Company to satisfy
their claims. To protect itself should this occur, the Company has
retained a security interest in accounts receivable, fixtures and
equipment, and certain cash reserve accounts for future warranty claims.
In addition, the Company is liable for non-claim future liabilities that
arise from operations of the warranty business prior to the date of sale,
to the extent that such liabilities were not disclosed at the time of the
sale.
Quantifying the contingent liabilities that may revert to the Company
should DelCor default on its obligations to pay the assumed warranty
liabilities is not possible. However, to give some scope to the exposure,
the liabilities assumed by DelCor exceeded the value of assets transferred
to DelCor by $2,263,000 (see Note 12). This amount of net liabilities
transferred represents the Company's maximum exposure to this contingency.
18
12. DISCONTINUED OPERATIONS (UNAUDITED)
On August 1, 1995, the Company sold its warranty operations in a
transaction in which it transferred all the assets and liabilities of the
warranty operation to the buyer. The Company received no compensation,
other than the relief from warranty-related liabilities, in the
transaction. The book value of the assets trans-ferred was $5,453,000.
The book value of liabilities transferred was $7,716,000, giving rise to a
gain of $2,263,000 on the transaction.
For income tax purposes, the transaction resulted in a loss, due to the
substantial difference between the book and the tax basis of certain assets
and liabilities involved in the transaction. Therefore, no income tax
benefit is recorded for the transaction as this loss adds to the previously
existing net operating losses, whose realizability is uncertain.
Revenue and operating results from the warranty operations were as follows
(in thousands):
Operating
Revenue Loss
------- -------
For the seven months included
in the year ended
December 31, 1995: $4,212 $ (375)
For the year ended
December 31, 1994: 3,926 (2,958)
19
Included in the consolidated balance sheet at December 31, 1994, are the
following assets and liabilities relating to discontinued operations (in
thousands):
Property and equipment (net of
accumulated depreciation): $ 125
Restricted investments 3,302
Cash 1
Accounts receivable (net of allowance
for doubtful accounts) 967
Deferred acquisition costs 1,361
Inventory, prepaid expenses, and
other assets 461
-----
Total assets 6,217
-----
Accounts payable 1,203
Accrued expenses 409
Unearned revenue 7,089
-----
Total liabilities 8,701
-----
Net Liabilities $2,484
-----
-----
13. RELATED PARTY TRANSACTION (UNAUDITED)
On August 1, 1995, the Company sold its warranty operations to DelCor
Holdings, Inc. (DelCor). DelCor is a newly-formed Washington corporation
which was organized for the purpose of acquiring these assets and related
liabilities. David L. Larson, formerly President of Delta Holding, Inc.
owns a 42.5% interest in DelCor's common stock. Eric C. Kord, Jr.,
formerly Vice-President of Delta Holding, Inc., owns a 15% interest in
DelCor's common stock. The remaining 42.5% of DelCor's common stock is
beneficially owned by an individual with no previous affiliation to Delta
Holding, Inc. Messrs. Larson and Kord resigned as Company officers
immediately prior to the sale.
The assets sold to DelCor included furniture, fixtures and equipment,
inventory, accounts receivable, rights under business agreements,
intangible property rights, licenses and authorizations (to the extent
assignable), contract rights under existing warranty agreements, and the
rights to certain balances held in escrow and bank accounts previously
established to secure the Company's obligations under the issued warranty
contracts.
20
The Company did not receive any cash from DelCor in exchange for these
assets, but DelCor assumed specified liabilities of the Company. The
assumed liabilities included, among others, obligations under the licensed
business agreements; equipment, office and automobile leases; all claims
and liabilities under the warranty contracts, in effect as of the closing
or that might arise on or after the closing; ordinary trade payables and
accrued expenses; and accrued but unpaid liabilities under claim insurance
policies.
Under the agreement, DelCor is obligated to indemnify and hold harmless the
Company from all claims, liabilities, costs and expenses, including
reasonable attorney's fees, incurred as a result of DelCor's failure or
refusal to pay the Scheduled Liabilities. DelCor's indemnification
obligation is secured by an interest, in favor of the Company, in past,
present and future accounts receivable, and the future fixtures and
equipment of DelCor, and DelCor's rights to distributions that may
subsequently be made with respect to a cash reserve accounts held by a
major customer to secure obligations on warranty contracts. Such security
interest is subordinate to claims that the customer may have against the
amount in such cash reserve account and to liens that may subsequently be
granted by DelCor in favor of unaffiliated third party lenders who provide
financing to DelCor to conduct its warranty business. In any event, the
Company is obligated to release its security interest in this cash reserve
no later than 30 months after the closing.
14. SUBSEQUENT EVENTS (UNAUDITED)
On February 12, 1996, the Company sold the Leopold Retirement Inn, one of
the properties held for sale. The sale price was $1,654,000 and the gain
on the transaction was $96,000. On May 16, 1996, the Company sold the Best
Western Lakeway Inn, another of its properties held for sale. The sale
price was $3,300,000 and the gain on the transaction was $351,000.
On August 30, 1996, the Company sold two of its properties in Colorado
Springs held for sale - the Rockledge Apartments and the Carmel Apartments.
The Rockledge was sold for $4,800,000 and the gain on the transaction was
$2,192,000. The Carmel was sold for $1,450,000 and the gain on the
transaction was $569,000.
With the completion of these transactions, all deeds of trust maturing on
September 1, 1996 have been paid off with the exception of $1,960,000
secured by the Kit Carson Apartments in Colorado Springs. These deeds of
trust are in default as of September 1, 1996; however, no immediate action
is anticipated by the holders of these deeds. The Kit Carson is currently
under a contract of sale. Many of the conditions necessary to complete the
sale have been fulfilled. However, several conditions remain to be
satisfied before closing, which is now anticipated to occur by early
October, 1996. At closing, all principal and accrued interest to the day
of closing will be paid from the proceeds.
21
DELTA HOLDING, INC.
DIRECTORS AND EXECUTIVE OFFICERS CORPORATE HEADQUARTERS
The directors and executive officers
of the Company as of July 24, 1996
are as follows: 258 SW 43rd St., Suite A
Renton WA 98055
NAME AGE POSITION (206) 251-9192
-----------------------------------
Thomas G. Pagano 44 Chairman of LEGAL COUNSEL
the Board
Perkins Coie
Gordon Cheadle 64 President Seattle, Washington
Vice Chairman
of the Board AUDITORS
Carl R. Wiley 66 Director Deloitte & Touche LLP
Seattle, Washington
Maynard G. Norman 71 Director
James F. Johannes 57 Director
Terry L. Switzer 46 Vice President
Finance and
Operations
TRANSFER AGENT AND REGISTRAR
First Interstate Bank of Washington, N.A. is the Transfer Agent and
Registrar for the Company's Common Stock and maintains shareholder records.
The Transfer Agent should be contacted on questions of changes in address,
name or ownership, lost certificates and consolidation of accounts. When
corresponding with the Transfer Agent, shareholders should state the exact
name(s) in which the stock is registered, certificate number, as well as
old and new information about the account.
First Interstate Bank of Washington, N.A.
c/o Chase Mellon Shareholder Services
85 Challenger Road
Overpeck Center
Ridgefield Park NJ 07660
1-800-522-6645
22
DELTA HOLDING, INC.
FORM 10-QSB
For the Quarter Ended October 1, 1996
INDEX
PART 1 - FINANCIAL INFORMATION
Item 1 - Financial Statements
Consolidated Balance Sheet at October 1, 1996. . . 2
Consolidated Statements of Operations for the
Nine Months Ended October 1, 1996 and
September 30, 1995 . . . . . . . . . . . . . . . . 3
Consolidated Statements of Cash Flows for the
Nine Months Ended October 1, 1996 and
September 30, 1995 . . . . . . . . . . . . . . . . 4
Notes to Consolidated Financial Statements . . . . 5 - 6
Item 2 - Management's Discussion and Analysis
of Financial Condition and Results of Operations . 7 - 10
1 of 10
DELTA HOLDING, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
October 1, December 31,
1996 1995
---------- -----------
(unaudited) (audited)
ASSETS
Equipment and furniture:
Equipment 8 8
Furniture 2 2
------- -------
10 10
Less: accumulated depreciation (4) (2)
------- -------
6 8
Property held for sale 1,926 9,229
Cash and cash equivalents 621 656
Accounts receivable (less allowance for doubtful
accounts of $37,000 at October 1, 1996 and
December 31, 1995) 50 116
Inventory, prepaid expenses, and other assets 33 96
------- -------
TOTAL ASSETS 2,636 10,105
------- -------
------- -------
LIABILITIES
Accounts payable 21 454
Accrued expenses 46 483
Long term debt 2,167 11,319
------- -------
TOTAL LIABILITIES 2,234 12,256
------- -------
STOCKHOLDERS' EQUITY
Common stock ($1 par, 1,500,000 shares authorized,
484,128 shares issued and outstanding) 484 484
Paid-in capital 6,074 6,074
Accumulated deficit (6,156) (8,709)
------- -------
TOTAL STOCKHOLDERS' EQUITY 402 (2,151)
------- -------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY 2,636 10,105
------- -------
------- -------
See notes to consolidated financial statements.
2 of 10
DELTA HOLDING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(in thousands, except per share data)
For The For The
Three Months Ended Nine Months Ended
------------------------- ---------------------------
October 1, September 30, October 1, September 30,
1996 1995 1996 1995
---------- ------------- ---------- -------------
Revenue $381 $1,710 $2,506 $4,790
Operating expenses 229 1,225 1,954 3,815
-------- -------- -------- --------
Gross margin from operations 152 485 552 975
Selling and administrative expenses 146 260 707 875
-------- -------- -------- --------
Income (loss) before other income (expense) 6 225 (155) 100
Other income (expense):
Interest income 13 17 38 108
Interest expense (88) (251) (553) (760)
Gain (loss) on disposal of assets 2,762 (17) 3,223 (17)
-------- -------- -------- --------
Total 2,687 (251) 2,708 (669)
-------- -------- -------- --------
Income (loss) from continuing operations 2,693 (26) 2,553 (569)
Discontinued operations:
Operating income (loss) 9 (409)
Gain on disposal 2,263 2,263
-------- -------- -------- --------
Gain from discontinued operations 2,272 1,854
-------- -------- -------- --------
Net income (loss) $2,693 $2,246 $2,553 $1,285
-------- -------- -------- --------
-------- -------- -------- --------
Net income (loss) per share:
Income (loss) from continuing operations $5.56 ($0.05) $5.27 ($1.18)
Income from discontinued operations 4.69 3.83
-------- -------- -------- --------
Net income $5.56 $4.64 $5.27 $2.65
-------- -------- -------- --------
-------- -------- -------- --------
Weighted average number of shares outstanding 484,128 484,128 484,128 484,128
-------- -------- -------- --------
-------- -------- -------- --------
See notes to consolidated financial statements.
3 of 10
DELTA HOLDING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)
For The
Nine Months Ended
-------------------------
October 1, September 30,
1996 1995
---------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) from continuing operations $2,553 ($569)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation 225 459
Loss (gain) on sale of assets (3,223) 17
Increase in long term debt due to addition
of accrued interest 553 760
Changes in assets and liabilities:
Accounts receivable 66 (5)
Inventory, prepaid expenses, and other assets 63 (6)
Accounts payable (433) (132)
Accrued expenses (437) 160
Discontinued operations, net (629)
------- ------
Net cash provided (used) by operating activities (633) 55
------- ------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sales of property (net of
transaction costs) 10,428 567
Additions to property, equipment, and fixtures (125) (69)
------- ------
Net cash provided by investing activities 10,303 498
------- ------
CASH FLOWS FROM FINANCING ACTIVITIES
Payments on long term debt (9,705) (602)
------- ------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (35) (49)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 656 632
------- ------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $621 $583
------- ------
------- ------
See notes to consolidated financial statements.
4 of 10
DELTA HOLDING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
________________________________________________________________________
1. BASIS OF PRESENTATION
The accompanying financial statements reflect all adjustments which
are, in the opinion of management, necessary for a fair statement of
the results for the interim periods presented. All such adjustments
are of a normal recurring nature.
2. NET INCOME (LOSS) PER SHARE
Net income (loss) per share computations are based on the net income
(loss) and the weighted average number of shares outstanding. The
computation is presented for both continuing and discontinued
operations.
3. COMMON STOCK ISSUANCE CONTINGENCY
Under the terms of the Company's Second Amended Plan of
Reorganization (the Plan) which became effective on September 7,
1993 following the approval by a majority of the creditors, certain
obligations secured by deeds of trust matured on September 1, 1996
or the date upon which the property securing the obligation was
sold. If the proceeds from the sale of the underlying property were
not sufficient to retire the obligation in full, or if the creditors
chose to receive stock at the maturity date, the Company was
required to issue shares of common stock having a fair value equal
to the unpaid portion. As of November 14, 1996, the date of this
report, all such properties have been sold and all obligations
secured by deeds of trust have been paid in full. Therefore, no
effect is given to this contingency in the accompanying financial
statements.
4. DISCONTINUED OPERATIONS
On August 1, 1995, the Company sold its warranty operations in a
transaction in which it transferred all the assets and liabilities
of the warranty operations to the buyer. The Company received no
compensation, other than the relief from warranty-related
liabilities, in the transaction. The book value of the assets
transferred was $5,453,000. The book value of liabilities
transferred was $7,716,000, giving rise to a gain of $2,263,000 on
the transaction.
5 of 10
For income tax purposes, the transaction resulted in a loss, due to
the substantial difference between the book and the tax basis of
certain assets and liabilities involved in the transaction.
Therefore, no income tax benefit was recorded for the transaction as
this loss adds to the previously existing net operating losses,
whose realizability is uncertain.
The warranty operations are classified as discontinued and treated
as a separate item in the statement of operations and the cash flow
statement. For the three month period ended September 30, 1995, the
revenue for the warranty operations was $523,000; during the same
period the operating income was $9,000. For the nine month period
ended September 30, 1995, the revenue was $4,211,000 and the
operating loss was $409,000.
5. SALE OF PROPERTY
On February 12, 1996, the Company sold the Leopold Retirement Inn,
one of the properties held for sale. The sale price was $1,654,000
and the gain on the transaction was $96,000. On May 16, 1996, the
Company sold the Best Western Lakeway Inn, another of its properties
held for sale. The sale price was $3,300,000 and the gain on the
transaction was $365,000.
On August 30, 1996, the Company sold two of its properties in
Colorado Springs held for sale - the Rockledge Apartments and the
Carmel Apartments. The Rockledge was sold for $4,800,000 and the
gain on the transaction was $2,193,000. The Carmel was sold for
$1,450,000 and the gain on the transaction was $569,000.
6. SUBSEQUENT EVENTS
On October 28, 1996, the Company sold a property in Security,
Colorado - the Kit Carson Apartments. The sale price was $2,750,000
and the gain on the transaction was approximately $1,185,000. As
part of the sale, all obligations secured by deeds of trust on the
property were paid in full. These obligations had matured on their
due date of September 1, 1996. Interest was paid to the closing date.
6 of 10
DELTA HOLDING, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
RESULTS OF OPERATIONS
BACKGROUND
Continuing operations consist of the property-owning activities of the
Company. Included are the Leopold Retirement Inn, an independent living
facility for the elderly in Bellingham, Washington; the Best Western
Lakeway Inn, a full-service hotel also located in Bellingham; and several
apartment buildings located in or near Colorado Springs, Colorado.
Discontinued operations consist of the activities carried out under the
trade name of Delta Warranty, and includes the marketing and distribution
of extended service contracts and surge suppression equipment coupled with
extended service contracts. This business segment is treated as
discontinued operations as this business was sold August 1, 1995. The
results of its operations are reported separately.
FOR THE THREE MONTHS ENDED OCTOBER 1, 1996 vs. THE THREE MONTHS ENDED
SEPTEMBER 30, 1995
Revenues from property operations decreased 78%, from $1,710,000 in 1995 to
$381,000 in 1996, a decrease of $1,329,000. All of the decrease was caused
by the loss of revenue from the disposal of the following properties: the
Delta Financial Center office building sold in August 1995, the Leopold
Retirement Inn sold in February 1996, the Best Western Lakeway Inn sold in
May 1996, and the Rockledge and Carmel Apartments in August 1996.
Operating expenses for the property operations decreased 81% from
$1,225,000 in 1995 to $229,000 in 1996, a decrease of $996,000. The
reduction in operating expenses was proportional to the reduction in
revenue.
7 of 10
Selling and administrative expenses decreased 43% from $260,000 in 1995 to
$146,000 in 1996, a decrease of $114,000. This decrease was due to lower
payroll expenses which were partially offset by higher professional fees
resulting from legal work relating to the sale of various properties.
Combining the reduced revenues, the proportionately reduced operating
expenses, and decreased selling and administrative expenses, the operating
results before interest and other income/expenses decreased from a profit
of $225,000 in 1995 to $6,000 in 1996. Interest income decreased slightly
from $17,000 in 1995 to $13,000 in 1996. Interest expense decreased from
$251,000 in 1995 to $88,000 in 1996, reflecting decreased mortgages and
deeds of trust balances resulting from the sale of the various properties.
The 1996 statement of operations contains a gain of $2,762,000 from the
disposal of assets resulting primarily from the sale of the Rockledge
Apartments and the Carmel Apartments.
FOR THE NINE MONTHS ENDED OCTOBER 1, 1996 vs. THE NINE MONTHS ENDED
SEPTEMBER 30, 1995
Revenues from the property operations decreased 48%, from $4,790,000 in
1995 to $2,506,000 in 1996, a decrease of $2,284,000. All of the decrease
was caused by the loss of revenue from the disposal of the following
properties: the Delta Financial Center office building sold in August
1995, the Leopold Retirement Inn sold in February 1996, the Best Western
Lakeway Inn sold in May 1996, and the Rockledge Apartments and Carmel
Apartments in August 1996.
Operating expenses for the property operations decreased 48% from
$3,815,000 in 1995 to $1,954,000 in 1996, a decrease of $1,861,000. The
reduction in operating expenses was proportional to the reduction in
revenue.
Selling and administrative expenses decreased 19% from $875,000 in 1995 to
$707,000 in 1996, a decrease of $168,000. This decrease was due to lower
payroll expenses and reduced advertising expenses, partially offset by
higher professional fees resulting from legal work relating to the sale of
various properties.
Page 8 of 10
Combining the reduced revenues, the proportionately reduced operating
expenses, and decreased selling and administrative expenses, the operating
results before interest and other income/expenses decreased from a profit
of $100,000 in 1995 to a loss of $155,000 in 1996. Interest income
decreased from $108,000 in 1995 to $38,000 in 1996, due to the loss of
interest-bearing restricted investments held in the warranty business
during 1995. Interest expense decreased from $760,000 in 1995 to $553,000
in 1996, reflecting decreased mortgages and deeds of trust balances
resulting from the sale of the Leopold Inn, Lakeway Inn and Rockledge and
Carmel Apartments..
The 1996 statement of operations contains a gain of $3,223,000 from the
disposal of assets. $365,000 of this amount is from the sale of the Best
Western Lakeway Inn in May 1996. Another $96,000 is from the sale of the
Leopold Inn in February 1996. The gain on the sale of the Rockledge
Apartments was $2,193,000 while the Carmel Apartments had a gain of
$569,000.
DISCONTINUED OPERATIONS
The warranty operations recorded an operating profit of $9,000 in the three
months ended September 30, 1995 and a loss of $409,000 for the nine months
ended the same date. The warranty operations also incurred negative cash
flow of $629,000 during the nine month period. Because of these losses and
negative cash flows, the Board of Directors decided to sell the warranty
business, resulting in the transaction completed on August 1, 1995. In
that transaction, the Company transferred all warranty business assets and
liabilities to the buyer. The Company received no compensation, other than
the relief from the warranty-related liabilities, in the transaction.
Because the liabilities transferred substantially exceeded the assets
transferred, the Company recorded a gain of $2,263,000 on the sale. (Note
4 provides more details on the warranty operations.)
FINANCIAL CONDITION, LIQUIDITY AND FUTURE PLANS
At October 1, 1996, the Company had total assets of $2,636,000, total
liabilities of $2,234,000 and stockholders' equity of $402,000. The major
asset of the Company is property, which comprises $1,926,000 of the total
assets. All of the property is categorized as property held for sale and
therefore carried at the lower of cost or net realizable value. It is the
intention of the Board to sell all property, retire the related secured
debt and other liabilities, and return any remaining funds to the
shareholders.
9 of 10
The Directors have initiated this process and intend to complete it as soon
as possible. To facilitate this process and to reduce expenses until such
time as the residual funds can be returned to shareholders, the Directors
intend to submit a plan to the shareholders to convert the Company to a
liquidating trust. To be approved, shareholders representing 66.67% of the
total outstanding shares must approve the plan.
The major liability of the Company at October 1, 1996 was debt secured by
the properties, totaling $2,167,000. Of this amount, $137,000 is in the
form of first mortgages to banks, with the remaining $2,030,000 in the form
of deeds of trust. The deeds of trust matured on September 1, 1996.
As disclosed in Note 6, these deeds of trust were paid in full on October
28, 1996 when the Company sold the Kit Carson Apartments in Security,
Colorado. The sale price of the Kit Carson Apartments was $2,750,000 and
the gain on the transaction was approximately $1,185,000.
At October 1, 1996, the Company had $621,000 cash on hand and $50,000 in
accounts receivable. Accounts payable and accrued expenses totaled
$107,000. Given this positive working capital, the Company is able to meet
its obligations as they come due.
Gordon Cheadle Terry L. Switzer
President and Vice Chairman of the Board Vice President, Finance
10 of 10
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
The following Pro Forma Consolidated Balance Sheet as of October 1, 1996 is
unaudited. The Pro Forma Consolidated Balance Sheet was prepared as if the plan
of liquidation described in the Proxy Statement had been adopted and the Company
had transferred its assets to the Liquidating Trust as of October 1, 1996, and
as of such date had paid or provided for all of the expenses associated with
administering the Liquidating Trust through the final liquidation of the
Company's assets and payment of its liabilities. The Pro Forma Consolidated
Balance Sheet does not purport to represent what the Company's financial
position would actually have been if the liquidation had in fact occurred as of
such date. The Pro Forma Consolidated Balance Sheet is based on historical
financial statements and should be read in conjunction with the Company's other
financial statements and notes thereto included in Exhibit B to the Proxy
Statement.
DELTA HOLDING, INC.
PRO FORMA CONSOLIDATED BALANCE SHEET
OCTOBER 1, 1996
(unaudited; in thousands, except per share data)
Adjustments for
Adjustments for Administration
Property Sales of Liquidating
and Liquidating Trust Until
Trust Final
Historical Formation Distribution Pro Forma
---------- --------- ------------ ---------
ASSETS
Equipment & furniture (net) 6 (6)(d)
Property held for sale 1,926 (1,843)(a) (83)(d)
Cash 621 919 (a) (310)(d) 1,230
Accounts receivable 50 (50)(d)
Inventory, prepaid expenses, &
other assets 33 (10)(a) (23)(d)
------- ------------- ----------- --------
TOTAL ASSETS 2,636 (934) (472) 1,230
------- ------------- ----------- --------
------- ------------- ----------- --------
LIABILITIES
Accounts payable 21 (21)(d)
Accrued expenses 46 100(b) (96)(d) 50
Long term debt 2,167 (21,159)(a) (8)(d)
------- ------------- ----------- --------
TOTAL LIABILITIES 2,234 (2,059) (125) 50
STOCKHOLDERS' EQUITY 402 1,125(c) (347)(d) 1,180
------- ------------- ----------- --------
TOTAL LIABILITIES & STOCKHOLDERS'
EQUITY 2,636 (934) (472) 1,230
------- ------------- ----------- --------
------- ------------- ----------- --------
Net equity per share $2.44
--------
Number of shares outstanding 484,128
--------
--------
Notes:
(a) Reflects the sale of Kit Carson Apartments (completed in October 1996)
and Lost Creek property (scheduled to be completed in February 1997).
Both sales were for an all-cash purchase price. Debt secured by the
properties was retired as part of the sales transactions.
(b) Reflects the accrual of estimated costs associated with the Special
Meeting and formation of the Liquidating Trust. Special Meeting
expenses are estimated as follows: $40,000 for professional fees,
$25,000 for all aspects of the meeting itself including preparation
and mailing of the proxy materials, and $10,000 for proxy
solicitation. Estimated costs for formation of the Liquidating Trust
(primarily professional fees) are $25,000.
(c) Net effect to stockholders equity from the gain on the sale of the
properties in (a) above and the accrual of the estimated costs of the
annual meeting and liquidating trust in (b) above.
(d) The following key assumptions underlie the estimates for
administration of the Liquidating Trust until final distribution:
1. All the non-cash assets of the Liquidating Trust are assumed to
be converted to cash and all liabilities paid off except for a
$50,000 accrual. This amount represents funds retained to pay
costs for record storage, correspondence, and other miscellaneous
items for several years after final distribution to
beneficiaries.
2. Final distribution is assumed to occur August 31, 1999. Expenses
assumed to be incurred to that date include employee severances
and administrative costs at a level substantially reduced from
present Company operations. It is assumed that the cash balances
do not earn interest income.
3. The estimated amount for final distribution is computed based on
the assumptions that there are no major costs for litigation and
that no contingent liabilities become payable. It is also
assumed that the Company's net operating losses result in no
taxes becoming payable.
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