DELTA MUTUAL, INC.
111 North Branch Street
Sellersville, PA 18960
September 16, 2005
Securities and Exchange Commission
Washington, D.C. 20549
Dear Sir/Madam:
We have received your comment letter dated September 9, 2005. The response
letter of Delta Mutual, Inc. (the "Company") to these comments is attached
hereto.
As President of the Company, this is to confirm that the Company is
responsible for the accuracy and adequacy of the disclosure in the filings. I
personally review all filings before they are submitted and work closely with
the Company's legal counsel and auditor.
I acknowledge that staff comments or changes to disclosure in response to
staff comments do not foreclose the Securities and Exchange Commission from
taking any action with respect to the filings and that the Company may not
assert staff comments as a defense in any proceeding initiated by the Commission
or any person under the federal securities laws of the United States.
I am also aware that the Division of Enforcement has access to all
information we provide to the staff of the Division of Corporation Finance in
your review of our filings or in response to your comments on our filings.
Sincerely,
/s/ Peter F. Russo
Peter F. Russo
President
Delta Mutual, Inc.
DELTA MUTUAL, INC.
111 North Branch Street
Sellersville, PA 18960
September 16, 2005
Mr. Jorge Bonilla
United States Securities and Exchange Commission
450 Fifth Street N.W.
Washington, D.C. 20549
RE: Delta Mutual, Inc. Form 10-KSB for the year ended December 31, 2004
Forms 10-QSB for the quarters ended March 31, 2005 and June 30, 2005
File No. 000-30563
Dear Mr. Bonilla:
Delta Mutual, Inc. (the "Company") has received a comment letter from the SEC
under date of September 9, 2005. As requested in such letter, the Company
herewith provides responses to the questions raised by staff. For convenience,
the matters are listed below, followed by the Company's responses.
Form 10-KSB for the year ended December 31, 2004
Balance Sheet, page F-2
SEC COMMENT 1: We note that the Company has capitalized $170,000 in
construction costs. Explain to us the nature of these costs and refer us
to the GAAP literature that supports the capitalization of these costs.
COMPANY RESPONSE: In accordance with Financial Accounting Standards Board
Statement No. 67 ("Accounting for Costs and Initial Rented Operations of
Real Estate Property"), certain costs are referred to as pre-acquisition
costs. These are costs that are incurred before the actual date on which a
parcel of real property is acquired. The $170,000 of capitalized
construction costs on the Company's balance sheet at December 31, 2004
represents design fees and other costs related in connection with
acquisition and proposed development of approximately 270 low income homes
that are designated Section 124 eligible in the city of Aguadilla, Puerto
Rico. The Company has accounted for these costs as pre-acquisition costs
that would be capitalized if the property were acquired or the acquisition
of the property is probable.
In future filings, the Company will include in significant accounting
policies the following disclosure on the accounting policy for
pre-acquisition costs:
Preacquisition Costs
The Company accounts for costs incurred prior to the date of acquisition
of a parcel of real property as preacquisition costs. Preacquisition costs
are capitalized if the property was acquired or the acquisition of the
property is probable. Capitalized preacquisition costs in excess of
recoverable amounts are charged to expense.
Note 1 Description of Business and Summary of Significant Accounting Policies
Evaluation of Long-Lived Assets, page F-11
SEC COMMENT 2: Tell us how you considered paragraph 7 of SFAS 144 in assessing
long-lived assets for impairment based on the "present value" of the
related estimated future cash flows. Separately, explain to us your
impairment policy for properties to be held and used and for properties
held for sale.
COMPANY RESPONSE: Impairment is defined in Financial Accounting Standards Board
Statement No. 144 ("Accounting for Impairment or Disposal of Long-Lived
Assets") as the condition that exists when the carrying amount of a
long-lived asset exceeds it fair value. An impairment is recognized only
if the carrying amount of a long-lived asset is not recoverable and
exceeds its fair value. This circumstance exists if the carrying amount of
the asset in questions exceeds the sum of the undiscounted cash flows
expected to result from the use and eventual disposition of the asset. The
impairment loss is measured as the amount by which the carrying amount
exceeds it fair value.
The Company tested for impairment of its long-lived assets
("pre-acquisition costs or capitalized construction costs") to its
estimated undiscounted cash flows expected to result from its construction
and development project in Puerto Rico. Management determined, based on
the future expected results and cash flow to be generated, no impairment
existed as of the balance sheet date.
The Company tests for impairment of its long-lived assets as of each
balance sheet date for which it reports. If the carrying amount of the
long-lived assets in question exceeds the sum of the undiscounted cash
flow expected to result from the use and expected disposition of the
asset, an impairment is recognized. The impairment loss is measured as the
amount by which the carrying amount exceeds it fair value.
Note 5 Investment in Joint Ventures, pages F-18 - F-19
SEC COMMENT 3: Please tell us you interest ownership in Delta-Envirotech, Inc.
and explain what effective control means as disclosed in note 5b. Refer us
to the accounting literature that you relied on for, and explain how it
supports, your consolidation of this entity.
COMPANY RESPONSE: Delta Mutual, Inc. owns 45% of the outstanding common stock of
Delta-Envirotech, Inc. The Board of Directors consists of three members of
which, Mr. Peter F. Russo, representing Delta Mutual, Inc., has veto power
over all substantial operational decisions. Delta Envirotech, Inc. relies
on the operational and financial support provided by Delta Mutual, Inc. to
conduct its business activities. The Company is the only source of funds
to Delta-Envirotech, Inc. in the form of capital contributions or loans.
Further, all significant agreements are reviewed and approved by Delta
Mutual, Inc. prior to their execution by Delta-Envirotech Inc. Delta
Mutual, Inc. absorbs the majority of the entities losses. Delta Mutual,
Inc. is deemed the primary beneficiary, regardless of its ownership
percentages.
Financial Accounting Standards Board Interpretation No. 46 ("FIN 46"),
"Consolidation of Variable Interest Entities," requires the primary
beneficiary of a variable interest entity to consolidate that entity. The
primary beneficiary of a variable interest entity is the party that
absorbs a majority of the variable interest entity's expected losses,
receives a majority of the entity's expected residual returns or both, as
a result of ownership, contractual or other financial interest in the
entity.
In future filings, the Company will include in significant accounting
policies the following disclosure:
Principles of Consolidation
The Company's consolidated financial statements include the accounts of
all majority-owned subsidiaries where its ownership is more than 50
percent of common stock. Our consolidated financial statements also
include the accounts of any Variable Interest Entities ("VIE's") where we
are deemed the primary beneficiary, regardless of our ownership
percentage. All significant intercompany balances and transactions with
consolidated subsidiaries are eliminated in our consolidated financial
statements. Where our ownership interest is less than 100 percent, the
minority ownership interests are reported in our Consolidated Statement of
Financial Position as a liability. The minority ownership interest of our
earnings or loss, net of tax, is classified as "Minority interest in
earnings of consolidated subsidiaries" in the Consolidated Statement of
Operations.
Note 6 - Convertible Debt, pages F-19 - F20
SEC COMMENT 4: Please provide us with your calculation of the intrinsic value
of the embedded beneficial conversion option within the convertible debt.
Also, explain to us your basis for the amortization period of the
intrinsic value of the beneficial conversion feature. Refer to APB 14,
EITF 98-5 and EITF 00-27.
COMPANY RESPONSE: Using the guidance in EITF 00-27, we performed the
calculations of allocating the proceeds from the issuance of convertible
debt with detachable warrants to each respective security based upon their
relative fair values (see computation attached). We used the conversion
value of the convertible debt and the calculated fair value of the
warrants using the Black-Scholes valuation model as our estimate of fair
values. We then compared the allocated proceeds of the convertible debt to
the difference between its conversion value and face amount. The
calculated fair value of the convertible debt of $725,855 should have been
recorded as the value of the Beneficial Conversion Feature and accordingly
credited to Additional Paid In Capital. The value of the warrants of
$235,545 should have been recorded as a reduction of the convertible debt.
The debt is recorded at zero (all remaining value being allocated to the
Beneficial Conversion Feature). The debt would be accreted under the
interest method until it is either converted or matures.
Should there be any other questions or comments, please contact me at (215)
258-2800.
Sincerely,
/s/ Peter F. Russo
Peter F. Russo
President
Excess
Quoted Stk Conversion Allocation Allocation
Issuance Face/ Conversion Price or BS Convertible Conversion Issuance Vs Alloc Proceeds Proceeds
date Proceeds Price Calculation Into shares Value date Proceeds Bene Conv Warrants
-------- -------- ---------- ----------- ----------- ---------- -------- ---------- ---------- ----------
Convertible
Debt 05/12/04 $129,160 $ 0.12 $0.52 1,033,280 $ 537,306 05/12/04 $ 408,146 $129,160
05/12/04 $193,740 $ 0.12 $0.52 1,546,920 $ 605,956 05/12/04 $ 612,216 $193,740
07/01/04 $157,000 $ 0.05 $0.40 3,140,000 $1,256,000 07/01/04 $1,099,000 $157,000
07/16/04 $ 37,500 $ 0.05 $0.16 750,000 $ 135,000 07/16/04 $ 97,500 $ 37,503
09/20/04 $331,500 $ 0.05 $0.19 6,630,000 $1,235,400 09/20/04 $1,063,247 $152,153 $179,347
10/19/04 $ 25,000 $ 0.05 $0.26 500,000 $ 130,000 10/19/04 $ 116,724 $ 13,276 $ 11,724
11/02/04 $ 12,500 $ 0.05 $0.25 250,000 $ 62,500 11/02/04 $ 56,245 $ 6.255 $ 6,245
11/05/04 $ 25,000 $ 0.05 $0.23 500,000 $ 115,000 11/05/04 $ 103,251 $ 11,749 $ 13,251
11/26/04 $350,000 $ 0.05 $0.35 1,000,000 $ 350,000 11/26/04 $ 324,979 $ 25.021 $ 24,979
-------- ---------- ---------- ----------
Total $961,400 $3,901,509 $725,855 $235,545
Quoted Stk
Issuance Price or BS Convertible Conversion
date Calculation Into shares Value Allocation Proceeds Warrants
-------- ----------- ----------- ---------- ------------------------------------------
Warrants 09/20/04 $0.25 6,630,000 $1,456,200 =$331500*1456200/(1456200+1235400=2691600)
10/19/04 $0.26 500,000 $ 114,600 =25000*114800/(114800+130000=244800)
11/02/04 $0.25 250,000 $ 62,400 =12500*62400/(62400+62500)
11/05/04 $0.23 500,000 $ 129,700 =25000*129700/(129700+115000=244700)
11/26/04 $0.35 1,000,000 $ 349,400 =50000*349400/(349400+350000=699400)
12-May-04 12-May-04 01-Jul-04 16-Jul-04 20-Sep-04 19-Oct-04 05-Nov-04 26-Nov-04
$129,160.00 $193,740.00 $157,000.00 $ 37,500.00 $331,500.00 $ 25,000.00 $ 12,500.00 $ 50,000.00
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Jun-04 $ 3,784.68 $ 5,677.02 $ 9,461.70
Jun-04 $ 3,895.58 $ 5,843.36 $ 9,738.94
Aug-04 $ 4,009.73 $ 6,014.59 $ 6,163.70 $ 876.52 $ 17,064.54
Sep-04 $ 4,127.22 $ 6,190.83 $ 6,405.68 $ 897.01 $ 17,620.74
Oct-04 $ 4,248.16 $ 6,372.23 $ 6,657.16 $ 917.98 $ 9,713.69 $ 27,909.22
Nov-04 $ 4,372.64 $ 6,558.95 $ 6,918.52 $ 939.43 $ 9,998.32 $ 732.56 $ 29,520.42
Dec-04 $ 4,500.77 $ 6,751.15 $ 7,190.13 $ 961.39 $ 9,670.40 $ 373.71 $ 1,465.11 $30, 912.66
- ------------------------------------------------------------------------------------------------------------------------------------
28,938.78 $ 43,408.13 $ 33,335.19 $ 4,592.33 $ 29,382.41 $ 732.56 $ 373.71 $ 1,465.11 $142,228.22
- ------------------------------------------------------------------------------------------------------------------------------------
Jan-05 $ 4,632.65 $ 6,948.97 $ 7,472.41 $ 983.66 $ 9,953.77 $ 384.88 $ 1,508.04 $ 31,884.38
Feb-05 $ 4,768.39 $ 7,152.59 $ 7,765.77 $ 1,006.86 $ 10,245.44 $ 396.39 $ 1,552.23 $ 32,887.67
Mar-05 $ 4,908.12 $ 7,362.18 $ 8,070.65 $ 1,030.39 $ 10,545.65 $ 408.24 $ 1,597.72 $ 33,922.95
Apr-05 $ 5,051.94 $ 7,577.91 $ 8,387.50 $ 1,054.48 $ 10,854.66 $ 420.44 $ 1,644.53 $ 34,991.46
May-05 $ 5,199.97 $ 7,799.96 $ 8,716.79 $ 1,079.12 $ 11,172.73 $ 433.01 $ 1,692.72 $ 36,094.30
Jun-05 $ 5,352.34 $ 8,026.51 $ 9,059.00 $ 1,104.35 $ 11,500.11
Jul-05 $ 5,509.18 $ 8,263.77 $ 9,414.65 $ 1,130.16 $ 11,837.09 $ 459.29 $ 1,793.38 $ 38,407.52
Aug-05 $ 5,670.61 $ 8,505.91 $ 9,784.26 $ 1,156.68 $ 12,163.95 $ 473.02 $ 1,845.93 $ 39,620.26
Sep-05 $ 5,836.77 $ 8,755.15 $ 10,168.38 $ 1,183.61 $ 12,540.96 $ 487.16 $ 1,900.01 $ 40,872.04
Oct-05 $ 6,007.80 $ 9,011.70 $ 10,567.59 $ 1,211.28 $ 12,908.44 $ 501.73 $ 1,955.69 $ 42,164.23
Nov-05 $ 6,183.84 $ 9,275.76 $ 10,982.46 $ 1,239.59 $ 13,286.69 $ 516.73 $ 2,013.00 $ 43,498.07
Dec-05 $ 6,365.04 $ 9,547.56 $ 11,413.62 $ 1,268.56 $ 13,676.02 $ 532.18 $ 2,071.98 $ 44,874.96
- ------------------------------------------------------------------------------------------------------------------------------------
$ 65,486.65 $ 98,229.97 $111,803.08 $ 13,448.64 $140,705.51 $ -- $ 5,459.03 $ 21,317.55 $456,450.43
- ------------------------------------------------------------------------------------------------------------------------------------
Jan-06 $ 6,551.55 $ 9,827.33 $ 11,861.73 $ 1,298.21 $ 14,076.76 $ 548.09 $ 2,132.69 $ 46,296.36
Feb-06 $ 6,743.53 $ 10,115.29 $ 1,328.56 $ 14,489.24 $ 564.47 $ 2,195.19 $ 35,436.28
Mar-06 $ 6,941.13 $ 10,411.69 $ 1,359.61 $ 14,913.80 $ 581.35 $ 2,259.51 $ 36,467.09
Apr-06 $ 7,144.52 $ 10,716.78 $ 1,391.39 $ 15,350.81 $ 598.73 $ 2,325.72 $ 37,527.95
May-06 $ 7,353.84 $ 11,030.81 $ 1,423.91 $ 15,800.62 $ 616.63 $ 2,393.87 $ 38,619.68
Jun-06 $ 1,457.20 $ 16,263.62 $ 635.06 $ 2,464.01 $ 20,819.89
Jul-06 $ 1,491.26 $ 16,740.18 $ 654.05 $ 2,536.22 $ 21,421.71
Aug-06 $ 1,526.11 $ 17,230.70 $ 673.60 $ 2,610.53 $ 22,040.94
Sep-06 $ 1,561.78 $ 17,735.61 $ 693.74 $ 2,687.03 $ 22,678.16
Oct-06 $ 1,598.29 $ 714.48 $ 2,765.76 $ 5,078.53
Nov-06 $ 1,635.65 $ 387.06 $ 2,846.81 $ 4,869.52
Dec-06 $ 1,673.88 $ 1,673.88
- ------------------------------------------------------------------------------------------------------------------------------------
34,734.57 $ 52,101.90 $ 11,861.73 $ 17,745.85 $142,601.34 $ -- $ 6,667.26 $ 27,217.34 $292,929.99
- ------------------------------------------------------------------------------------------------------------------------------------
Jan-07 $ 1,713.18
Total $129,160.00 $193,740.00 $157,000.00 $ 37,500.00 $312,689.26 $ 732.56 $ 12,500.00 $ 50,000.00 $893,321.82
AMORTIZATION SCHEDULE - Normal Amortization
Date Payment Interest Principal Balance
- --------------------------------------------------------------------------------------
Loan 11/22/2004 12,500.00
1 12/2/2004 0.00 373.71 373.71- 12,873.71
2004 Totals 0.00 373.71 373.71-
2 1/2/2005 0.00 384.88 384.88- 13,258.59
3 2/2/2005 0.00 396.39 396.39- 13,654.98
4 3/2/2005 0.00 408.24 408.24- 14,063.22
5 4/2/2005 0.00 420.44 420.44- 14,483.66
6 5/2/2005 0.00 433.01 433.01- 14,916.67
7 6/2/2005 0.00 445.96 455.96- 15,362.63
8 7/2/2005 0.00 459.29 459.29- 15,821.92
9 8/2/2005 0.00 473.02 473.02- 16,294.94
10 9/2/2005 0.00 487.16 487.16- 16,782.10
11 10/2/2005 0.00 501.73 501.73- 17,283.83
12 11/2/2005 0.00 516.73 516.73- 17,800.56
13 12/2/2005 0.00 532.18 532.18- 18,332.74
2005 Totals 0.00 5,459.03 5,459.03-
14 1/2/2006 0.00 548.09 549.09- 18,880.83
15 2/2/2006 0.00 564.47 564.47- 19,445.30
16 3/2/2006 0.00 581.35 581.35- 20,026.65
17 4/2/2006 0.00 598.73 598.73- 20,625.38
18 5/2/2006 0.00 616.63 616.63- 21,242.01
19 6/2/2006 0.00 635.06 635.06- 21,877.07
20 7/2/2006 0.00 654.0 654.05- 22,531.12
21 8/2/2006 0.00 673.60 673.60- 23,204.72
22 9/2/2006 0.00 693.74 693.74- 23,898.46
23 10/2/2006 0.00 714.48 714.48- 24,612.94
24 10/18/2006 25,000.00 387.06 24,612.94 0.00
2006 Totals 25,000.00 6,667.26 18,332.74
Grand Totals 25,000.00 12,500.00 12,500.00
Date Payment Interest Principal Balance
- --------------------------------------------------------------------------------------
Loan 9/20/2004 331,500.00
1 10/20/2004 0.00 9,713.69 9,713.69- 341,213.69
2 11/20/2004 21,189.26 9,998.32 11,190.94 330,022 75
3 12/20/2004 0.00 9,670.40 9,670.40- 339,693.15
2004 Totals 21,189.26 29,382.41 8,193.15
4 1/20/2005 0.00 9,953.77 9,953.77- 349,346.92
5 2/20/2005 0.00 10,245.44 10,245.44- 359,892.36
6 3120/2005 0.00 10,545.65 10,545.65- 370,438.01
7 4/20/2005 0.00 10,854.66 10,854.66- 381,292.67
8 5/20/2005 0.00 11,172.73 11,172.73- 392,165.40
9 6/20/2005 0.00 11,500.11 11,500.11- 403,965.51
10 7/20/2005 0.00 11,837.09 11,837.09- 415,802.60
11 8/20/2005 0.00 12,183.95 12,183.95- 427,986.55
12 9/20/2005 0.00 12,540.96 12,540.96- 440,527.51
13 10/20/2005 0.00 12,908.44 12,908.44- 453,435.95
14 11/20/2005 0.00 13,286.69 13,286.69- 466,722.64
15 12/20/2005 0.00 13,676.02 113.676.02- 480,398.66
2005 Totals 0.00 140.705.51 140,705.51
16 1/20/2006 0.00 14,076.76 14,076.76- 494,475.42
17 2/20/2006 0.00 14,489.24 14,489.24- 508,954.66
18 3/20/2006 0.00 14,913.80 14,913.80- 523,878.46
19 4/20/2006 0.00 15,350.81 15,350.81- 539,229.27
20 5/2012006 0.00 15,800.62 15,800.62- 555,029.89
21 6/20/2006 0.00 16,263.62 16,263.62- 571,293.51
22 7/20/2006 0.00 16,740.18 16,740.18- 588,033.69
23 8/20/2006 0.00 17,230.70 17,230.70- 605,264.39
24 9/20/2006 623,000.00 17,735.61 605,264.39 0.00
2006 Totals 623,000.00 142,601.34 480,398.66
Grand Totals 644,189.26 312,689.26 331,500.00