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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
______________________
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE SECURITIES EXCHANGE
ACT OF 1934
Filed by the Registrant /X/
Filed by a Party other than the Registrant / /
Check the appropriate box:
/X/ Preliminary Proxy Statement
/ / Confidential, for Use of
the Commission Only (as
permitted by Rule 14a-6(e)(2))
/ / Definitive Proxy Statement
/ / Definitive Additional Materials
/ / Soliciting Material Pursuant to Seciton 240.14a-11(c) or
Section 240.14a-12
DELTA HOLDING, INC.
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(Name of Registrant as Specified in Its Charter)
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(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
/ / $125 per Exchange Act Rules 0-11(c)(1)(ii), 14a-6(i)(1), or 14a-6(i)
(2) or Item 22(a)(2) of Schedule 14A
/ / $500 per each party to the controversy pursuant to Exchange Act Rule
14a-6(i)(3)
/ / Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11
CALCULATION OF FILING FEE
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Per unit price or other
underlying value of Proposed
Title of each class of Aggregate number of transaction computed maximum
securities to which securities to which pursuant to Exchange aggregate value of
transaction applies transaction applies Act Rule 0-11 transaction Total
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/X/ Fee paid previously with preliminary materials.
/ / Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
Amount Previously Paid: $125 Filing Party: DELTA HOLDING, INC.
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Form, Schedule or
Registration Statement No.: FILE NO. 0-24010 Date Filed:JANUARY 16, 1996
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PRELIMINARY COPIES
DELTA HOLDING, INC.
258 S.W. 43rd Street, Suite A
Renton, Washington 98055
November X, 1996
Dear Shareholder:
The Annual Meeting of Shareholders of Delta Holding, Inc. (the
"Company") will be held on Monday, December 16, 1996, at 10 a.m. Pacific
Standard Time at the Best Western Executive Inn, 5700 Pacific Highway East,
Fife, Washington 98424.
You are being asked to consider a proposal of great importance--the
adoption of a Plan of Complete Liquidation and Dissolution (the "Plan"). In
addition, you will have the opportunity to vote for an individual to serve as
the Class A director and two individuals to serve as the Class B directors on
the Company's staggered Board of Directors.
The Board of Directors has approved the Plan and, as required by
applicable Washington law, is submitting the Plan to the shareholders for
approval. The Plan will be adopted if approved by shareholders who hold
two-thirds or more of the Company's outstanding shares. If the Plan is
adopted, the Company's assets, subject to existing liabilities, will be
transferred to a liquidating trust, established for the sole purpose of
collecting and disposing of the Company's assets, paying off and discharging
liabilities, and distributing the net proceeds to the shareholders.
Each of the members of the Board of Directors recommends approval
of these proposals. The formal Notice of Meeting and Proxy Statement appear
on the following pages and contain detailed discussions of these proposals.
We urge you to read carefully the description of these proposals in the Proxy
Statement.
We hope you can attend the meeting. However, whether or not you
plan to attend, please complete, sign, date and return the accompanying proxy
card as soon as possible in the enclosed envelope. If you attend the
meeting, you may revoke your proxy if you wish and vote personally. It is
important that your shares be represented.
SINCERELY,
GORDON H. CHEADLE
PRESIDENT AND
VICE CHAIRMAN OF THE BOARD
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PRELIMINARY COPIES
DELTA HOLDING, INC.
258 S.W. 43RD STREET, SUITE A
RENTON, WA 98055
TELEPHONE: (206) 251-9192
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD DECEMBER 16, 1996
Notice is hereby given that the Annual Meeting of the Shareholders
of Delta Holding, Inc., a Washington corporation (the "Company"), will be
held at the Best Western Executive Inn, 5700 Pacific Highway East, Fife,
Washington 98424, on Monday, December 16, 1996, at 10 a.m. Pacific Standard
Time for the following purposes:
(1) to consider and act upon a resolution to consent to, approve
and adopt the Plan of Complete Liquidation and Dissolution which is described
in and attached as Exhibit A to the accompanying Proxy Statement;
(2) to elect an individual to serve as the Class A director and two
individuals to serve as the Class B directors on the staggered Board of
Directors; and
(3) to transact such other business as may properly come before such
Annual Meeting or any adjournments thereof.
The Board of Directors has set the close of business on November
X-1, 1996 as the date for the determination of the shareholders entitled to
notice of and to vote at such Annual Meeting and, accordingly, only such
persons as are holders of record of Common Stock of the Company at the close
of business on that date will be entitled to vote at such Annual Meeting or
any adjournments thereof.
Your attention is directed to the Proxy Statement which follows.
BY ORDER OF THE BOARD OF DIRECTORS
GORDON H. CHEADLE
PRESIDENT AND VICE CHAIRMAN OF THE BOARD
November X, 1996
Renton, Washington
<PAGE>
WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING, PLEASE COMPLETE,
SIGN, DATE AND RETURN THE ACCOMPANYING PROXY CARD AS SOON AS POSSIBLE IN THE
ENCLOSED ENVELOPE. IF YOU ATTEND THE MEETING, YOU MAY REVOKE YOUR PROXY IF
YOU WISH AND VOTE PERSONALLY. IT IS IMPORTANT THAT YOUR SHARES BE
REPRESENTED.
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PRELIMINARY COPIES
DELTA HOLDING, INC.
258 S.W. 43RD STREET, SUITE A
RENTON, WA 98055
TELEPHONE: (206) 251-9192
PROXY STATEMENT FOR ANNUAL MEETING OF
SHAREHOLDERS TO BE HELD ON DECEMBER 16, 1996
INTRODUCTION
This Proxy Statement is furnished in connection with the
solicitation of proxies by the Board of Directors of Delta Holding, Inc., a
Washington corporation (the "Company"), for the Annual Meeting of
Shareholders (the "Annual Meeting") to be held at 10 a.m., Pacific Standard
Time on Monday, December 16, 1996, at the Best Western Executive Inn, 5700
Pacific Highway East, Fife, Washington 98424, or at any adjournments thereof.
This Proxy Statement, the accompanying Proxy and other information are being
mailed to shareholders on or about November X, 1996. This Proxy Statement
should be read both carefully and in its entirety before a shareholder votes
upon the proposals presented at the Annual Meeting.
A shareholder giving a proxy on the enclosed form has the power to
revoke it by written communication delivered to the Secretary of the Company
at any time before the proxy is exercised or by a duly executed proxy bearing
a later date. If a shareholder attends the Annual Meeting and wishes to vote
his or her shares in person, his or her proxy will not be used. All proxies
not so revoked will be voted as instructed therein. In the absence of any
instruction, such proxies will be voted "FOR" the proposals set forth in the
foregoing Notice of Annual Meeting of Shareholders.
In addition to the solicitations by mail, the officers and
regularly engaged employees of the Company may solicit proxies by telephone,
telegraph or personal calls, at no additional compensation. The Company has
also engaged Hebert Research, Inc. to assist in soliciting proxies for the
Annual Meeting. Banks, brokerage firms, custodians, nominees and fiduciaries
may be reimbursed by the Company for their reasonable out-of-pocket expenses
in sending proxy material to their principals.
Only holders of record of the Company's common stock, $1.00 par
value ("Common Stock"), at the close of business on November X-1, 1996, are
entitled to
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receive notice of and to vote at the Annual Meeting or any adjournments
thereof. The total number of outstanding shares of Common Stock as of that
date was 484,128. As of the date of this Statement, the Company knows of no
other business which will be presented for consideration at the Annual
Meeting. However, the proxies solicited hereby will be exercised on any other
matters and proposals that may properly come before the Annual Meeting or any
adjournments thereof in accordance with the discretion of the persons named
therein. The presence at the Annual Meeting, in person or by proxy, of a
majority of the shares outstanding and entitled to vote will constitute a
quorum for the transaction of business.
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CONTENTS
Summary Of The Proxy Statement . . . . . . . . . . . . . . . . . . . . . . 1
Proposal No. 1--Adoption of the Plan. . . . . . . . . . . . . . . . . 1
Principal Provisions of the Plan . . . . . . . . . . . . . . . . 1
Reasons for Adopting the Plan . . . . . . . . . . . . . . . . . 3
Disadvantages in Adopting the Plan . . . . . . . . . . . . . . . 3
Accounting Treatment of Transaction . . . . . . . . . . . . . . 4
Federal Income Tax Consequences . . . . . . . . . . . . . . . . 4
Absence of Appraisal Rights . . . . . . . . . . . . . . . . . . 5
Recommendation of the Board . . . . . . . . . . . . . . . . . . 5
Consequences of Failure to Approve Proposal No. 1 . . . . . . . 5
Proposal No. 2--Election of Class A Director and Class B Directors . 5
Payment of Class 5 Claims . . . . . . . . . . . . . . . . . . . . . . 6
Proposal No. 1--Adoption of the Plan . . . . . . . . . . . . . . . . . . . 8
Background Information . . . . . . . . . . . . . . . . . . . . . . . 8
Warranty Business . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Reasons for Adopting the Plan . . . . . . . . . . . . . . . . . . . . 10
Disadvantages in Adopting the Plan . . . . . . . . . . . . . . . . . 13
Factors Relating to Liquidation Value of the Company's Assets . . . . 14
Principal Provisions of the Plan . . . . . . . . . . . . . . . . . . 15
Dissolution Proceedings . . . . . . . . . . . . . . . . . . . . . . . 16
Liquidating Trust . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Close of Transfer Books . . . . . . . . . . . . . . . . . . . . . . . 19
Absence of Appraisal Rights . . . . . . . . . . . . . . . . . . . . . 19
Recommendation of the Board; Required Shareholder Approval . . . . . 19
Consequences of Failure to Approve Proposal No. 1 . . . . . . . . . . 19
Federal Income Tax Consequences of the Plan . . . . . . . . . . . . . . . 20
Consequences to the Company . . . . . . . . . . . . . . . . . . . . . 20
Distribution of Property . . . . . . . . . . . . . . . . . . . . 20
Income Prior to Dissolution . . . . . . . . . . . . . . . . . . 20
Consequences to Shareholders . . . . . . . . . . . . . . . . . . . . 21
Gain and Loss on Transfer of Assets . . . . . . . . . . . . . . 21
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Gain and Loss From Ongoing Operations of the
Liquidating Trust . . . . . . . . . . . . . . . . . . . . . 22
Liquidating Trust . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Backup Withholding . . . . . . . . . . . . . . . . . . . . . . . . . 22
Proposal No. 2--Election of Directors . . . . . . . . . . . . . . . . . . 23
The Company's Business . . . . . . . . . . . . . . . . . . . . . . . . . . 25
The Company's Properties . . . . . . . . . . . . . . . . . . . . . . . . . 26
Leased Properties . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Owned Properties . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Recent Property Sales . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Plans Regarding Sale of the Company's Remaining Real Estate Assets . . . . 28
Payment of Class 5 Claims . . . . . . . . . . . . . . . . . . . . . . . . 30
Management's Discussion and Analysis of Results of Operations and
Financial Condition . . . . . . . . . . . . . . . . . . . . . . . . . 31
Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . 32
Background . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
For the Six Months Ended June 30, 1996 vs. The Six Months Ended June
30, 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
For the Year Ended December 31, 1995 vs. The Year Ended December 31,
1994 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
Discontinued Operations . . . . . . . . . . . . . . . . . . . . . . . 34
Financial Condition, Liquidity and Future Plans . . . . . . . . . . . 35
Executive Officers . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
Security Ownership of Management . . . . . . . . . . . . . . . . . . . . . 36
Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . 37
Board Report on Executive Compensation . . . . . . . . . . . . . . . 37
Executive Compensation Table . . . . . . . . . . . . . . . . . . . . 38
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Transactions Involving Directors . . . . . . . . . . . . . . . . . . . . . 38
Independent Auditors . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
Market Price of and Dividends on Common Equity and Other
Shareholder Matters . . . . . . . . . . . . . . . . . . . . . . . . . 41
Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
Proposals of Shareholders . . . . . . . . . . . . . . . . . . . . . . . . 42
Delay in Holding Annual Meeting . . . . . . . . . . . . . . . . . . . . . 42
Delinquent SEC Filings . . . . . . . . . . . . . . . . . . . . . . . . . . 44
Other Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
Solicitation of Proxies . . . . . . . . . . . . . . . . . . . . . . . . . 45
EXHIBITS
Plan of Complete Liquidation and Dissolution. . . . . . . . . . . . . . . A
Form of Liquidating Trust Agreement. . . . . . . . .Appendix I to Exhibit A
Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . B
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SUMMARY OF THE PROXY STATEMENT
The following is a summary of material information concerning the
proposals to be voted upon by the shareholders and of certain other
information contained in this Proxy Statement. This summary is included for
convenience only and is not to be considered complete. It is qualified in
its entirety by the more detailed information and financial statements
contained elsewhere in this Proxy Statement.
At the Annual Meeting of Delta Holding, Inc., a Washington corporation
(the "Company"), shareholders will be asked (i) to consent to, approve and
adopt the Plan of Complete Liquidation and Dissolution (the "Plan") attached
to this Proxy Statement as Exhibit A and (ii) to elect Gordon H. Cheadle as
the Class A director to serve until the Company's 1998 Annual Meeting and
Maynard G. Norman and Terry L. Switzer as the Class B directors to serve
until the Company's 1999 Annual Meeting.
PROPOSAL NO. 1--ADOPTION OF THE PLAN
PRINCIPAL PROVISIONS OF THE PLAN
The Board of Directors (the "Board") has approved the Plan and, as
required by applicable Washington law, is submitting the Plan to shareholders
for approval. The Plan will be adopted if approved by shareholders who hold
two-thirds or more of the Company's outstanding shares. The following is a
brief summary of the principal features of the Plan:
(i) If the Plan is adopted, all of the Company's assets, subject to
existing liabilities, will be transferred to a liquidating trust
(the "Liquidating Trust") established for the sole purpose of
collecting and disposing of the Company's assets, paying off and
discharging liabilities, and distributing the net proceeds to the
shareholders.
(ii) The Company will file articles of dissolution with the Washington
Secretary of State to dissolve the corporation under applicable
state law. Following dissolution, the Company will remain in
existence for the sole purpose of taking steps necessary to transfer
to the Liquidating Trust assets subject to liabilities, and to
facilitate the discharge of liabilities, including determining
whether and to what extent to notify its known claimants of the
dissolution in order to take advantage of the statutory prohibition
blocking claims against the Company if not asserted within 120 days
from the date of written notice to known creditors.
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(iii) Shareholders as of November X-1, 1996 will automatically
receive their pro rata share of the beneficial interests in
the Liquidating Trust if the Plan is approved and the
Liquidating Trust is established. Shareholders will not be
required to surrender their stock certificates in order to
acquire their beneficial interests in the Liquidating Trust.
After issuance of the beneficial interests, such interests
are not transferable except for transfers by will, intestate
succession or operation of law and except for transfers from
the record holder of shares to the beneficial owner of such
shares.
(iv) The Liquidating Trust, which will be organized pursuant to the
Liquidating Trust Agreement, will be administered by three
trustees (the "Trustees") who will have broad authority to
administer the Liquidating Trust and to dispose of its assets,
subject to certain limitations set forth in the Liquidating
Trust Agreement. Gordon H. Cheadle, James F. Johannes and
Maynard G. Norman, who have served as three of the Company's
five directors, will serve as the initial Trustees.
(v) The Trustees are charged with the responsibility of disposing
of the assets transferred to the Liquidating Trust and held on
behalf of the Liquidating Trust's beneficiaries. It is
anticipated that the Trustees will attempt to sell assets for
cash, but are authorized to sell assets on terms, if the
Trustees believe in their discretion that such sales maximize
the prices at which the assets can be sold. In no event will,
however, the Trustees accept a deferred payment arrangement
providing for a final payment on the assets sold that is more
than three years after the establishment of the Liquidating
Trust.
(vi) Each of the beneficiaries in the Liquidating Trust will be
entitled to its pro rata share of distributions, if any, made
by the Liquidating Trust. It will be left to the discretion
of the Trustees to determine when such distributions should be
made. The Trustees may make one or more distributions as
assets are sold and the assumed liabilities discharged or
postpone distributions until all liabilities have been
discharged or the discharge thereof provided for and the final
amounts available for distribution have been determined.
(vii) After establishing the Liquidating Trust and transferring to it
the Company's assets, subject to existing liabilities, the
Company will deregister as a public company under the
Securities Exchange Act of 1934, as amended (the "1934 Act")
and will no longer be subject to the periodic reporting
obligations imposed upon public companies.
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(viii) The Liquidating Trust Agreement imposes certain reporting
obligations upon the Trustees for the benefit of the
beneficiaries. As soon as possible after the close of each
calendar year, the Trustees will mail to beneficiaries a
statement reflecting information which may be helpful in
determining the amount of taxable income from the Liquidating
Trust that they should include in their federal income tax
returns. In addition, after the termination of the Liquidating
Trust, the Trustees will be required to submit a written report
and accounting to the beneficiaries that will include financial
statements of the Liquidating Trust. There is no requirement
that such financial statements be audited or certified by an
independent certified public accounting firm. The Trustees may
submit special reports for interim periods if they deem it
advisable.
REASONS FOR ADOPTING THE PLAN
The Board is recommending the adoption of the Plan for the following
reasons:
(i) With the Company's sale of its warranty business, the Company
has no operating business and owns only real estate assets,
each of which is on the market, making this an opportune time
to proceed with the dissolution of the Company and the final
liquidation of its assets;
(ii) Adoption of the Plan is appropriate, in the Board's view, to
realize one of the primary objectives of the Second Amended
Plan of Reorganization (the "Second Amended Plan"), the
liquidation of assets and distribution to shareholders of
their pro rata share of the Company's net value;
(iii) The Company's dissolution, and the establishment of the
Liquidating Trust, will eliminate certain administrative costs
that otherwise would have been incurred by the Company during
liquidation if the Company were not to be dissolved; and
(iv) The Plan represents, in the Board's opinion, the most prudent
way for the Company to discharge its known liabilities and to
provide for contingent and unknown liabilities.
DISADVANTAGES IN ADOPTING THE PLAN
If the Plan is approved by shareholders, the Company will cease to be a
public company and the Company's assets and liabilities will be assigned and
transferred to the Liquidating Trust. This change in status might arguably
disadvantage shareholders in several ways. Since the Liquidating Trust, as the
Company's
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successor, would not be subject to the periodic reporting requirements of the
1934 Act, shareholders will not have public access to the same type of
information regarding the Company that would have been available had the
Company remained a public company. The Trustees are not required to furnish
the beneficiaries quarterly or annual reports, although it is anticipated
that the Trustees will provide interim reports of the Liquidating Trust's
affairs. The Trustees must submit to the beneficiaries a final accounting of
the Liquidating Trust. There is no requirement that financial statements of
the Trust be audited. In contrast, the Company is now required to file with
the SEC quarterly and annual reports, and special interim reports when
material events affecting the Company occur, and the financial statements in
the Company's annual reports must be audited by independent public
accountants. The Trustees of the Liquidating Trust are appointed, and
continue to serve as trustees, pursuant to the terms of the Liquidating Trust
Agreement. Beneficiaries do not elect each year persons to serve as Trustees
and do not have the democracy rights available to shareholders in a public
company. The interests of the beneficiaries are not transferable, except in
limited instances. See "Proposal No. 1--Adoption of the Plan--Liquidating
Trust" as to the beneficiaries' right to transfer interests in the
Liquidating Trust.
ACCOUNTING TREATMENT OF TRANSACTION
The Company currently uses historical based cost accounting for
preparation of its financial statements. If approved, the liquidation and
dissolution proposal will be reflected in the Company's financial statements
using the liquidation basis of accounting, which values assets at their
estimated net realizable value and liabilities at their estimated settlement
amount.
FEDERAL INCOME TAX CONSEQUENCES
The liquidation of the Company will constitute a taxable event for the
shareholders and the Company. Each shareholder's taxable gain or loss, for
federal income tax purposes, will be measured, on a "per share" basis, by the
difference between (i) the shareholder's pro rata share of the fair market
value, net of liabilities, of the assets transferred to the Liquidating Trust
and (ii) the shareholder's basis in his or her Company Common Stock. Loss
will be recognized only when the final distribution from the Company has been
received or is determinable with reasonable certainty and only if the
aggregate value of the distributions with respect to a share is less than the
shareholder's adjusted basis therein. The Company will recognize gain or
loss on the transfer of its assets to the Liquidating Trust equal to the
difference between the fair market value of the assets and the Company's
adjusted basis therein. See "Federal Income Tax Consequences of the Plan."
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ABSENCE OF APPRAISAL RIGHTS
Under Washington law, shareholders of the Company will not be entitled to
appraisal rights or similar rights of dissenters with respect to the Plan.
RECOMMENDATION OF THE BOARD
Each of the five members of the Board voted to recommend a vote for
adoption of the Plan. The affirmative vote of two-thirds or more of the
Company's shares outstanding and entitled to vote is required for adoption of
the Plan. As a result, any shares not voted (whether by abstention, broker
nonvote or otherwise) will have the same effect as a vote against the proposal.
CONSEQUENCES OF FAILURE TO APPROVE PROPOSAL NO. 1
If the shareholders fail to adopt the Plan, the Board will not be
authorized to proceed with the dissolution of the Company. This will deprive
the Company of the opportunity to take advantage of the statutory provisions for
managing known and unknown claims against the Company. In addition, the Company
will remain a public company, subject to the 1934 Act, obligating it to make
periodic and special reports to the Securities and Exchange Commission, to have
the Company's annual financial statement audited and to take certain other
actions to comply with applicable federal rules and regulations. Such actions
will, in the Board's opinion, increase the cost of disposing of the Company's
assets, reducing the amount potentially available for distribution to
shareholders.
Whether or not the Plan is approved, the Company does not intend to
pursue any new business activities, and the Board intends to continue the
Company's efforts to sell all remaining assets as soon as acceptable offers
can be secured. The sale of such assets, which are owned by the Company
through wholly owned subsidiaries, does not, in the Board's opinion, require
the approval of the shareholders. At such time as the Company has disposed
of all real estate and other assets, it will cease active operations and
again solicit the approval of the shareholders to file for dissolution.
PROPOSAL NO. 2--ELECTION OF CLASS A DIRECTOR AND CLASS B DIRECTORS
It is proposed that Gordon H. Cheadle, one of the Company's directors, be
elected to serve as the Class A director until the sooner of (i) the expiration
of his term, which is a three-year term expiring with the 1998 Annual Meeting,
or (ii) his successor is duly elected and qualified. It is also proposed that
Maynard G. Norman, one of the Company's current directors, and Terry L. Switzer,
the Company's Vice President and Secretary, be elected to serve as the Class B
directors until the sooner of
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(i) the expiration of their term, which is a three-year term expiring with the
1999 Annual Meeting, or (ii) their successors are duly elected and qualified.
Under the Company's Articles of Incorporation, the Board has three classes of
directors, with members of each class serving for three-year terms. At this
meeting, one Class A director and two Class B directors are to be elected. The
Class A director would have been elected at the 1995 Annual Meeting but for the
delay in holding of such meeting. See "Delay in Holding Annual Meeting" below.
Holders of shares of Common Stock are entitled to one vote per share with
respect to the election of each director proposed for election at the Annual
Meeting. Shareholders will have a quorum for conducting business at the Annual
Meeting if a majority of the outstanding shares entitled to vote are represented
in person or by proxy. The affirmative vote of a majority of the shares
represented at the meeting is required to elect the Class A director and each
of the Class B directors. Any shares not voted (whether by abstention,
broker nonvote or otherwise) will have no impact on the vote, as long as a
quorum for conducting business is represented at the Annual Meeting.
PAYMENT OF CLASS 5 CLAIMS
Prior to 1988, Delta Financial Services, Inc. ("DFS"), a predecessor
to the Company, which is now a wholly owned subsidiary, offered a note and
deed of trust program. Participants in this program loaned funds to DFS in
exchange for promissory notes secured by liens against property owned by DFS.
The priority of these liens was established by the order in which the loans
were made to DFS and the related deeds of trust recorded against the DFS
properties given as collateral. Under the Second Amended Plan, which was
adopted by the Company in 1993, the outstanding notes issued under this
program were characterized as Class 5 Claims against the Company, retaining
their liens against the collateral and recognized as having a value equal to
100% of the claims, together with accrued interest, as of the effective date
of the Second Amended Plan. The Company obligated itself to pay accrued
interest on the outstanding balance of such Class 5 Claims at 4% per annum on
September 1 of each year, commencing on September 1, 1994, and continuing
until September 1, 1996 or the earlier maturity date of the obligation. The
Second Amended Plan provided for the Company to add any unpaid interest on
the interest payment date to the outstanding balance of the Class 5 Claims.
Each of the Class 5 Claims was to mature upon the earlier of September 1,
1996 or the date the collateral securing such Class 5 Claim is sold.
Due to the Company's disappointing financial performance, it did not
make any interest payments on the Class 5 Claims on either September 1, 1994
or September 1, 1995. As provided in the Second Amended Plan, the interest
that had accrued on the
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Class 5 Claims as of such dates was added to the outstanding principal
balance of the Class 5 Claims and the new principal balance continued to
accrue interest at 9.5% per annum. Upon the sale of the Delta Financial
Center, the Leopold Retirement Center, the Best Western Lakeway Inn, the
Carmel Apartments and the Rockledge Apartments, which transactions were
closed in 1995 and 1996, the Company retired all Class 5 Claims with liens
against these properties and paid in the aggregate approximately $9,936,000.
As of September 1, 1996, the maturity date for the Class 5 Claims, the
outstanding principal plus accrued interest of the Class 5 Claims was
approximately $2,050,000, all of which was secured by liens against the Kit
Carson Apartments. The Kit Carson Apartments was sold in October 1996 and the
Company used a portion of the net sale proceeds from the sale of this project
to retire the outstanding Class 5 Claims. The balance of net sale proceeds,
approximately $544,000, was set aside as Company reserves.
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PROPOSAL NO. 1--ADOPTION OF THE PLAN
BACKGROUND INFORMATION
In September 1987, Delta Financial Services, Inc. ("DFS") filed a
bankruptcy petition for protection under Chapter 11 of the U.S. Bankruptcy
Code. DFS proposed a plan of reorganization which was declared effective by
the U.S. Bankruptcy Court in November 1988 (the "First Amended Plan"). The
Company was formed at that time to facilitate DFS's plan of reorganization
and in connection therewith acquired all of the outstanding shares of the
Common Stock of DFS and certain related companies (the "Delta Companies"),
and assumed certain secured and unsecured obligations of DFS. DFS's First
Amended Plan covered all the assets and liabilities of DFS and the Delta
Companies, even though DFS itself was the only party that filed for relief
under federal bankruptcy laws.
Given the Company's consolidated financial performance following
consummation of the First Amended Plan, the Company was aware that it would
be unable to satisfy certain financial obligations to its creditors which
matured in September, 1993 and, correspondingly, petitioned the U.S.
Bankruptcy Court to approve a Second Amended Plan of Reorganization (the
"Second Amended Plan"). Under the Second Amended Plan, which was approved in
August 1993, the Company satisfied the financial obligations of certain of
its creditors by offering them the option of exchanging their claims for
either shares of the Company's Common Stock or beneficial interests in a
newly established liquidating trust, to which the Company contributed certain
assets and liabilities. Over 3,500 creditors exercised the option of
exchanging their claims for shares of the Company's Common Stock and this
exchange brought the Company within the definition of a public company under
Section 12(g) of the Securities Exchange Act of 1934, as amended (the "1934
Act"), and, as a result, the Company registered with the Securities and
Exchange Commission (the "Commission") as a public company in 1994.
The Company succeeded to the businesses originally conducted by DFS
and its related companies which historically consisted of two segments:
(i) the ownership and operation of a number of real estate assets
in Washington and Colorado and
(ii) the business of selling extended service contracts under the
trade name "Delta Warranty" with respect to various consumer
products, including consumer electronics, appliances,
computers, office equipment and lawn and garden equipment.
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Under the Second Amended Plan, the Company was not under an obligation
to dispose of its real estate assets. However, the Company's management
indicated at the time of the Second Amended Plan that it did not intend for
the Company to remain indefinitely in the real property business but expected
to dispose of the real estate assets when market conditions were deemed
favorable. Since 1993, the Company has sold or otherwise disposed of nine
properties, including the recent sales of the Leopold Retirement Center in
February 1996, the Lakeway Inn in May 1996, the Carmel Apartments and the
Rockledge Apartments in August 1996 and the Kit Carson Apartments in October
1996 as part of an overall plan for the orderly disposition of real estate
assets.
WARRANTY BUSINESS
Through the Second Amended Plan, the Company secured the opportunity
to continue its warranty business, with the hope of generating significant
future profits to increase the value of the Company and possibly to permit
subsequent distributions to shareholders. The disclosure statement
accompanying the Second Amended Plan noted that while the net receipts
generated by the warranty business had fallen substantially below original
expectations, the Company's management believed the warranty business had
overcome the adverse impact resulting from the bankruptcy proceeding of DFS
and was hopeful that revenues could be substantially increased. The Company
generated sales from its warranty business of $4,980,000 and $5,804,000 in
1993 and 1994, respectively. However, after deferring sales to future
periods representing future exposure for warranty claims, the reported
revenues from the warranty business declined from $4,449,000 in 1993 to
$3,926,000 in 1994, representing an approximate 12% decrease in annual
revenues. The Company's expenses increased from $6,076,000 in 1993 to
$6,884,000 in 1994, representing an approximate 13% increase in operating
expenses. Accordingly, the Company recorded a net operating loss of
$1,627,000 and $2,958,000 in 1993 and 1994, respectively. The Company
attributes its increases in sales from 1993 to 1994 to an expansion of its
business to include power conditioning and surge suppression equipment and to
an expansion of the Company's dealer base for marketing extended warranties
to consumers. The Company experienced higher operating expenses in 1994
compared to 1993 due to higher selling expenses and the cost of introducing
in 1994 new programs to one of the Company's major retailers for the sale of
extended warranties.
The warranty business had negative cash flow of $1,317,000 in 1994 and
$629,000 in the first seven months of 1995. This substantially depleted the
Company's cash and created severe cash flow problems. The Company used cash
from real estate operations, deferred the payment of accounts payable and
utilized funds from the sale of assets to cover the cash shortfalls due to the
warranty business. The Company did not have any available bank lines to cover
these cash shortfalls.
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These cash flow problems were responsible for the Board's decision to postpone
the holding of the Annual Meeting. See "Delay in Holding Annual Meeting."
Recognizing the financial drain of the warranty business, the Board,
beginning in the spring of 1994, explored the possibility of securing equity or
debt to fund the warranty business. The Board thought that such a capital
infusion would permit an expansion of the warranty business, improving its
profitability by taking advantage of the Company's existing management,
database on warranty claim experience, dealer network and marketing
expertise. The Board directed management to pursue opportunities for
obtaining new capital, and this led to discussions with a number of potential
capital sources, but management concluded, toward the end of 1994, that it
was unlikely new capital could be arranged for the warranty business.
During this time period, the Board also considered the feasibility of
selling the warranty business and contacted a number of potential purchasers,
including several of the Company's competitors. These inquiries led to a
number of preliminary discussions about the terms of a prospective sale and
generated several offers for the warranty business. In August 1995, the
Company consummated the sale of the warranty business to DelCor Holdings,
Inc., a newly formed corporation, partially owned by former key officers and
employees of the Company. See "Transactions Involving Directors" for a
discussion of the terms of this transaction.
REASONS FOR ADOPTING THE PLAN
The Board is recommending the adoption of the Plan for the following
reasons:
(i) With the Company's sale of its warranty business, the Company
has no operating business and owns only real estate assets,
each of which is on the market, making this an opportune time
to proceed with the dissolution of the Company and the final
liquidation of its assets;
(ii) Adoption of the Plan is appropriate, in the Board's view, to
realize one of the primary objectives of the Second Amended
Plan, the liquidation of assets and distribution to
shareholders of their pro rata share of the Company's net
value;
(iii) The Company's dissolution, and the establishment of a
liquidating trust ("Liquidating Trust"), will eliminate
certain administrative costs that otherwise would have been
incurred by the Company during liquidation if the Company
were not to be dissolved; and
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(iv) The Plan represents, in the Board's opinion, the most prudent
way for the Company to discharge its known liabilities and to
provide for contingent and unknown liabilities.
The following material provides additional explanation of the Board's
reasons for adopting the Plan.
With the Company's sale of its warranty business, the Company has no
operating business and owns only real estate assets, each of which is on the
market, making this an opportune time to proceed with the dissolution of the
Company and the final liquidation of its assets. The Company did not receive
any cash upon the sale of the warranty business that could be redeployed by
management to increase the value of the shareholders' equity in the Company.
Moreover, the Board does not believe it appropriate for the Company, at this
stage in its history, to acquire a new business or to use the proceeds from the
sale of the real estate assets for any purpose other than to discharge
liabilities and to distribute the net proceeds, if any, among the shareholders.
Neither the Company's prior performance nor the opportunities presented by the
remaining real estate assets seem to warrant, in the Board's judgment, a
continuation of the Company. In addition, the Board and management have
decided that the liquidation of the remaining corporate assets and the
cessation of the Company's business activities are most consistent with the
intent of the Second Amended Plan and represent the likely desires of a
majority of the shareholders who became shareholders of the Company only
because their prior debt claims against DFS could not be paid.
The Board expects the Company's dissolution and the establishment of
the Liquidating Trust to eliminate certain operating and administrative costs
that would otherwise be incurred by the Company if it were not to be
dissolved. If the Plan is approved, the Company will immediately transfer
its remaining assets to the Liquidating Trust, subject to then-existing
liabilities, whose payment will be specifically assumed by the Liquidating
Trust. The Company will then deregister as a public company under the 1934
Act. This action will allow the Company to avoid the incurrence of the
legal, accounting and administrative expenses that are otherwise inherent in
operating as a public company under the federal securities laws. Following
dissolution and the establishment of the Liquidating Trust, the Company will
no longer be obligated to comply with the various regulations applicable to
public companies operating subject to the 1934 Act and corporations existing
under Washington law. There will no longer be a need to hold an annual
shareholders' meeting, to prepare proxy materials to solicit shareholder
approval for the election of directors and approval for other corporate
action, to prepare and file quarterly and special reports with the
Commission, and to have the Company's financial statements audited by an
independent certified public accountant. The cost of administering the
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liquidation of the Company's assets will be limited to the specific costs
incurred by the Liquidating Trust (see "--Liquidating Trust" below), which
expenses are expected to be substantially less than the costs the Company would
incur if it sought to liquidate its assets while remaining a public company
subject to the extensive reporting requirements of the 1934 Act.
The Plan represents, in the Board's opinion, the most prudent way for
the Company to discharge its known liabilities, to provide for the payment of
contingent and unforeseen liabilities and to limit its exposure as a result
of future business activities. Following dissolution, the Company will
continue its corporate existence under Washington law solely for the purpose
of engaging in activities appropriate to the winding up and liquidation of
its business and affairs. This will permit the Company to take the steps
necessary to transfer its assets to the Liquidating Trust, to discharge its
liabilities and to provide for the distribution of its remaining assets,
after the payment of liabilities to shareholders, through the Liquidating
Trust. Following dissolution, the Company will not be authorized to engage
in any additional business activities, thus limiting the Company's exposure
for business activities unrelated to the liquidation of the Company's assets.
The Washington Business Corporation Act ("WBCA") sets forth specific
procedures that may be used by a dissolved corporation to dispose of known
claims. A dissolved corporation may notify in writing its known creditors of
the dissolution at any time after its effective date. Such notice must state a
deadline, which may not be fewer than 120 days from the effective date of the
notice, by which the dissolved corporation must receive the claim. Any claim
against the dissolved corporation that is not tendered by the specified date is
time barred and, following such date, may not be asserted against the dissolved
corporation. This procedure applies only to known claims and specifically
excludes a contingent liability or a claim based upon an event occurring after
the dissolution's effective date. The WBCA also provides that a corporate
dissolution extinguishes claims against the corporation, its directors, officers
and shareholders for any right or claim existing, or liability incurred, prior
to such dissolution if action or other proceeding related thereto is not
commenced within two years after the date of dissolution. The Board expects the
Company to take advantage of these statutory provisions in such a way as to
minimize the Company's potential exposure for known and contingent claims
against the Company, thereby increasing the amount that may be available for
distribution to shareholders following the discharge of, or provision for, the
Company's liabilities.
The Liquidating Trust will assume the Company's liabilities, existing
as of its dissolution, except to the extent that such liabilities may be
subsequently discharged or relieved because the claim is not brought in a
timely fashion. Accordingly, the Liquidating Trust is not expected to have
any greater exposure for the Company's
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<PAGE>
liabilities than the Company itself would have following dissolution. Since
the Liquidating Trust's business activities will be limited to the
liquidation of the Company's remaining assets, the discharge of liabilities
and the distribution of remaining assets to its beneficial owners, it is not
expected that the Liquidating Trust will incur the liabilities, or have the
potential exposure, of an active operating business.
DISADVANTAGES IN ADOPTING THE PLAN
If the Plan is approved by shareholders, the Company will cease to be
public company and the Company's assets and liabilities will be assigned and
transferred to the Liquidating Trust. Shareholders will cease to be
shareholders and become instead beneficiaries of the Liquidating Trust. This
change in status might arguably disadvantage shareholders in several ways,
including the following:
(a) Since the Liquidating Trust, as the Company's successor, would
not be subject to the periodic reporting requirements of the 1934 Act,
shareholders will not have public access to the same type of information
regarding the Company that would have been available had the Company remained a
public company. The Trustees are not required to furnish the beneficiaries
quarterly or annual reports, although it is anticipated that the Trustees will
provide interim reports of the Liquidating Trust's affairs. The Trustees must
submit to the beneficiaries a final accounting of the Liquidating Trust. There
is no requirement that financial statements of the Trust be audited. In
contrast, the Company is now required to file with the SEC quarterly and annual
reports, and special interim reports when material events affecting the Company
occur, and the financial statements in the Company's annual reports must be
audited by independent public accountants.
(b) The Trustees of the Liquidating Trust are appointed, and
continue to serve as trustees, pursuant to the terms of the Liquidating Trust
Agreement. Beneficiaries do not elect each year persons to serve as Trustees
and do not have the democracy rights available to shareholders in a public
company.
(c) The interests of the beneficiaries are not transferable, except
in limited instances. Interests may be transferred only by will, intestate
succession or operation of law. Accordingly, while no market has existed for
the shares of the Company's common stock, contractual restrictions upon
transfer, similar to those applicable to the Liquidating Trust, do not exist.
(d) Following the Plan's adoption, the Company may not, as a matter
of law, conduct any business except that appropriate to wind up and liquidate
its business and affairs. If shareholders thought it prudent for the Company to
continue
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<PAGE>
holding its investments in real estate, to pursue new business opportunities, or
to expand the Company's current business, dissolution of the Company would be
ill-advised.
Since it is the present intent of the Board to continue liquidating the
real estate assets, and to limit the Company to winding up type activities,
whether or not the Plan is approved, shareholders who disapprove of this
strategy should make their views known to the Board and may attempt to redirect
the Company's focus by prevailing upon the Board to change its current plans or
exercising their franchise rights to elect Board members sharing a common view
for promoting the interests of shareholders.
FACTORS RELATING TO LIQUIDATION VALUE OF THE COMPANY'S ASSETS
It is impossible to determine what amount, if any, will be available for
distribution to the shareholders if the Plan is adopted and the Company's assets
are promptly liquidated through the Liquidating Trust. The amount and timing of
distributions to the shareholders will depend upon a number of factors, which
are not within the control of the Company and which are subject to varying
market and other conditions. Principal factors affecting the amount and timing
of the distributions include, among others:
(i) The net sale price at which each of the Company's real estate
assets is sold;
(ii) The timing of the sales of the Company's real estate assets,
and whether and to what extent such asset generates a positive
or negative cash flow prior to its sale;
(iii) Whether and to what extent the Company sells a real estate
asset on terms, some of which provide for a portion of the
gross sale price for the asset to be paid over time;
(iv) The cost of administering the Liquidating Trust which will
reduce the amount distributable to beneficiaries;
(v) The extent to which the Company has unknown, but contingent,
liabilities that are assumed, and must be discharged, by the
Liquidating Trust; and
(vi) Whether the Company must discharge any of the liabilities
specifically assumed by DelCor Holdings, Inc. at the time it
acquired the warranty business from the Company.
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PRINCIPAL PROVISIONS OF THE PLAN
The Plan provides for the liquidation and dissolution of the Company
immediately after its adoption. Pursuant to the Plan, the Company will:
(i) File articles of dissolution, and such other documents as may
be necessary, with the Washington Secretary of State in order
to dissolve the corporation under the WBCA;
(ii) As soon as possible, distribute the Company's assets, subject
to all existing liabilities, to the Liquidating Trust that is
being established on behalf and for the benefit of the
shareholders. See "--Liquidating Trust" below for a discussion
of the terms of the Liquidating Trust;
(iii) Following the Company's dissolution, it will remain in
existence for the sole purpose of taking steps necessary to
transfer assets to the Liquidating Trust and to facilitate the
discharge of its liabilities, including determining whether and
to what extent to notify known claimants of the dissolution in
order to take advantage of certain statutory provisions
blocking claims against the Company if not asserted within 120
days from the date written notice of the claim is given to the
creditors;
(iv) Deregister the Company's Common Stock under the 1934 Act and
take any and all other actions as may be necessary to cause
the Company to cease to be a public company under federal
securities laws;
(v) Modify or amend the Plan at any time without shareholder
approval if the Board determines such action to be in the best
interest of the Company or its shareholders; provided,
however, that if the amendment or modification will materially
or adversely affect the interest of shareholders or requires
approval under applicable law, such amendment or modification
will be submitted to shareholders for approval; and
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(vi) Appoint Gordon H. Cheadle, James F. Johannes and Maynard G.
Norman as the initial Trustees under the Liquidating Trust
Agreement (both terms as hereinafter defined).
Shareholders as of the Record Date (as hereinafter defined) will
automatically receive their pro rata share of the beneficial interests in the
Liquidating Trust if the Plan is approved and the Liquidating Trust
established. After the issuance of the beneficial interests, such interests
in the Liquidating Trust are not transferable except for transfer by will,
intestate succession or operation of law. In addition, if shares are
beneficially owned by the record owner for the benefit of another, the
beneficial interest may be transferred to such beneficial owner without
restriction. No transfer permitted under the Liquidating Trust will be
deemed made until written notice thereof has been given to the Trustees.
DISSOLUTION PROCEEDINGS
Upon approval of the Plan by the holders of two-thirds or more of the
Company's outstanding shares, the Company will have elected to wind up and
dissolve in accordance with the provisions of Chapter 23B.14 of the WBCA.
Immediately following approval of the Plan, the Board will cause to be filed
with the Washington Secretary of State articles of dissolution, and such
other documents as may be necessary to formally dissolve the corporation
under applicable state law. The articles of dissolution will provide that
the dissolution is effective upon the date of their filing with the
Washington Secretary of State. Immediately following the dissolution, the
Board will cause all of the Company's assets, subject to existing
liabilities, to be transferred to the Liquidating Trust, to be held and
discharged in accordance with the provisions of the Liquidating Trust
Agreement. In accordance with the Plan, the Board will continue to act as a
board of directors, and will have full power to oversee and to wind up and
settle the affairs of the Company.
LIQUIDATING TRUST
If the Plan is approved, the Company will cause the Liquidating Trust
to be established to succeed to the then-existing assets and liabilities of
the Company. The Liquidating Trust will be organized under, and its
operations governed by, a Liquidating Trust Agreement substantially in the
form attached to this Proxy Statement as Appendix I to Exhibit A (the
"Liquidating Trust Agreement"). Because the Company owns most of its assets
indirectly through its subsidiaries, the Company may, in the Board's
discretion, transfer to the Liquidating Trust shares of the subsidiaries as
opposed to the assets. In this way, the Liquidating Trust will succeed to
all the assets owned by the Company, directly or indirectly, and will be able
to cause the orderly dissolution of the subsidiaries.
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<PAGE>
The Liquidating Trust will be administered by three trustees (the
"Trustees") who will have broad authority to administer the Liquidating Trust
and dispose of its assets, subject to certain limitations set forth in the
Liquidating Trust Agreement. Gordon Cheadle, James F. Johannes and Maynard G.
Norman, who have served as three of the Company's five directors, will serve as
the initial Trustees, and each has agreed to serve in such capacity. Should a
Trustee resign, be removed, die or become incompetent or bankrupt, a vacancy
will be deemed to exist and a successor will be appointed by the remaining
Trustees. If the vacancy is not filled within 30 days, a majority of the
beneficiaries of the Liquidating Trust may call a meeting to appoint a
successor Trustee. Shareholder approval of the Plan will be deemed to
include shareholder approval of the Trustees and any successor Trustee
selected pursuant to the Liquidating Trust Agreement.
The Trustees will attempt to sell or otherwise dispose of all the assets
transferred to the Liquidating Trust and held on behalf of the Liquidating
Trust's beneficiaries. It is expected that the Trustees will attempt to sell
assets for cash, but they are authorized to sell assets on terms, with a portion
of the purchase price to be deferred, if the Trustees believe, in their
judgment, that such sales maximize the price at which the assets are sold. In
deciding whether to sell assets on terms, the Trustees will take into account
the difficulty in marketing the asset, the attractiveness of the terms, the
interest rate on the deferred portion of the purchase price and the adequacy of
the collateral, if any, given to secure payment of the deferred portion of the
obligation. In no event will, however, the Trustees accept a deferred payment
arrangement providing for a final payment on the asset to be made more than
three years after the establishment of the Liquidating Trust. The Liquidating
Trust will be obligated to pay all obligations and liabilities of the Company,
including contingent liabilities, which are not paid or otherwise provided for
by the Company. The Liquidating Trust will have no obligation to pay any
liabilities of the Company which may, subsequent to dissolution, be barred
because such claim was not brought against the Company in a timely fashion.
See "--Principal Provisions of the Plan" above.
The Trustees will each receive for their services the sum of $2,400 per
year, plus $500 per meeting, and will be reimbursed for expenses reasonably
incurred in the performance of their duties. Each Trustee, employee and agent
of the Liquidating Trust will be indemnified out of the assets of the
Liquidating Trust against all liabilities and expenses incurred by him in the
performance of his duties unless he is adjudicated to have acted in bad faith
or with willful misfeasance, gross negligence or in reckless disregard of his
duties.
Limitations on the right of the Trustees to invest the Trust Estate (as
defined in the Liquidating Trust Agreement) as well as additional powers and
duties of the Trustees are set forth in the Liquidating Trust Agreement.
Unless earlier terminated
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by the beneficiaries, the Liquidating Trust will continue until the earlier of
the date on which all liabilities have been discharged and the remaining assets
of the Liquidating Trust have been distributed to beneficiaries or three years
after the Liquidating Trust's formation. At the end of such period, any
remaining assets will be distributed to the beneficiaries after providing for
any outstanding claims, liabilities, debts and obligations. If any portion of
the Liquidating Trust's net assets is not duly claimed by a beneficiary, such
assets will be disposed of in accordance with applicable law.
All shareholders of the Company will automatically become
beneficiaries of the Liquidating Trust. Their interests in the Liquidating
Trust will not be transferable except by will, intestate succession or
operation of law, and except that a record holder of the Company's Common
Stock may assign his or her interest to the beneficial owner of such Common
Stock, so that the beneficial owner of the shares becomes the beneficiary
under the Liquidating Trust. Each of the beneficiaries will be entitled to
its pro rata share of distributions, if any, made by the Liquidating Trust,
based upon the beneficiary's former pro rata share of the Company's Common
Stock. It will be left to the discretion of the Trustees to determine when
such distributions may be made. The Trustees may make one or more
distributions as the assets are sold and the assumed liabilities are
discharged or provided for. Following the sale of all remaining assets, the
Trustees will pay or provide for all obligations and liabilities of the
Liquidating Trust and any remaining obligations and liabilities of the
Company, and they will then distribute the net proceeds of sales and
dispositions of assets pro rata to shareholders of record as of the final
record date.
The Liquidating Trust Agreement imposes certain reporting obligations
upon the Trustees for the benefit of the beneficiaries. As soon as possible
after the close of each calendar year, the Trustees will mail to
beneficiaries a statement reflecting information which may be helpful in
determining the amount of taxable income from the Liquidating Trust that they
should include in their federal income tax returns (see "Federal Income Tax
Consequences of the Plan"). In addition, after the termination of the
Liquidating Trust, the Trustees will be required to submit a written report
and accounting to beneficiaries that will include financial statements of the
Liquidating Trust. There is no requirement that such financial statements be
audited or certified by an independent certified public accountant. In
addition, the Trustees may submit similar reports for interim periods if they
deem it advisable.
The foregoing summary is qualified in its entirety by reference to
Appendix I to Exhibit A attached to this Proxy Statement.
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CLOSE OF TRANSFER BOOKS
At the close of business on November X-1, 1996 (the "Record Date"), the
stock transfer books of the Company were closed, and no further transfers will
be recorded. Shareholders as of the Record Date will automatically receive
their pro rata share of the beneficial interests in the Liquidating Trust if
the Plan is approved and the Liquidating Trust organized. Shareholders will
not be required to surrender their stock certificates in order to acquire
such beneficial interests.
ABSENCE OF APPRAISAL RIGHTS
Under Washington law, shareholders of the Company will not be entitled
to appraisal rights or similar rights of dissenters with respect to the Plan.
RECOMMENDATION OF THE BOARD; REQUIRED SHAREHOLDER APPROVAL
Each of the five members of the Board has voted to recommend a vote for
adoption of the Plan. The affirmative vote of two-thirds or more of the
Company's shares outstanding and entitled to vote is required for adoption of
the Plan. As a result, any shares not voted (whether by abstention, broker
nonvote or otherwise) will have the same effect as a vote against the proposal.
CONSEQUENCES OF FAILURE TO APPROVE PROPOSAL NO. 1
If the shareholders fail to adopt the Plan, the Board will not be
authorized to proceed with the dissolution of the Company. This will deprive
the Company of the opportunity to take advantage of the statutory provisions
for managing known and unknown claims against the Company. In addition, the
Company will remain a public company, subject to the 1934 Act, obligating it
to make periodic and special reports to the Commission, to have the Company's
annual financial statements audited and to take certain other actions to
comply with applicable federal rules and regulations.
Whether or not the Plan is approved, the Company does not intend to
pursue any new business activities. The Board intends to limit the Company's
activities to the ownership of its existing real estate activities and to
continue the Company's efforts to sell these assets as soon as acceptable
offers can be secured. Since each of the real estate assets is owned by a
wholly owned subsidiary of the Company, the sale of such assets may be
approved by the Board, representing the Company as the subsidiaries' sole
shareholder. It is not expected that the Board will seek the approval of the
shareholders to authorize the sale of any of the real estate assets.
Moreover, if and when the real estate assets are sold, the Company will
discharge or provide for its existing liabilities and, if the Board deems it
appropriate, distribute any excess funds to the shareholders as special
dividends. At such time as the Company has disposed
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of all real estate assets, it will cease active operations and again solicit
the approval of the shareholders to file for dissolution.
FEDERAL INCOME TAX CONSEQUENCES OF THE PLAN
The following discussion summarizes those federal income tax
considerations that will result from the liquidation and materially affect a
shareholder. The discussion is general in nature and may not be applicable
to all shareholders because of their particular circumstances. Furthermore,
it does not consider state, local or foreign tax laws, nor does it address
the U.S. income tax consequences to persons who are subject to taxation under
the laws of any foreign jurisdiction. The Company has not requested a ruling
from the Internal Revenue Service (the "IRS") as to any aspect of the Plan.
Accordingly, there can be no assurance that the IRS will not challenge the
conclusions set forth in this discussion or that such a challenge will not be
successful.
CONSEQUENCES TO THE COMPANY
DISTRIBUTION OF PROPERTY
As discussed below under "--Consequences to Shareholders--Gain and
Loss," the transfer of the assets to the Liquidating Trust will be treated
for tax purposes as if the Company has distributed its net assets to the
shareholders in exchange for their shares in a plan of liquidation. Upon
making a liquidating distribution, a corporation recognizes gain or loss as
if it sold the distributed property to the distributee at its fair market
value. Accordingly, the Company will recognize gain or loss on the transfer
of its assets to the Liquidating Trust equal to the difference between the
fair market value of the assets and the Company's adjusted basis therein.
However, any loss recognized by the Company on the transfer of a subsidiary
corporation to the Liquidating Trust may be denied under consolidated return
tax rules limiting the recognition of losses on the distribution or sale of
certain subsidiary corporations. To the extent the Company recognizes gain
upon the distribution of the assets, the Company's share, as determined under
the consolidated return tax rules, of the tax net operating losses of the
Company's consolidated tax return group should generally be available to
offset the taxable income, if any, recognized by the Company upon the
distribution of the assets. Accordingly, the Company believes that the
taxable consequences to it of the distribution will be negligible.
INCOME PRIOR TO COMPLETE LIQUIDATION DISSOLUTION
After adoption of the Plan and until the winding up of its affairs is
complete, the Company will continue to be subject to tax on its taxable
income or loss, which will be derived from, among other items, investment
income earned on amounts
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retained to meet claims, expenses of liquidation and amounts paid in
satisfaction of certain claims. The Company's share of the remaining tax net
operating losses of the Company's consolidated tax return group should be
available to offset any taxable income recognized by the Company during this
period.
CONSEQUENCES TO SHAREHOLDERS
GAIN AND LOSS ON TRANSFER OF ASSETS
The Liquidating Trust is intended to qualify as a grantor trust that
is ignored for tax purposes. Assuming that it so qualifies, the transfer of
the assets of the Company to the Liquidating Trust will be recharacterized as
the Company's liquidating distributions of its remaining assets (net of
liabilities) to the shareholders in exchange for their shares of the
Company's Common Stock. A shareholder will recognize taxable gain or loss on
these deemed distributions equal to the difference between (i) the
shareholder's pro rata share of the fair market value, net of liabilities and
measured at the time of the transfer, of the assets transferred to the
Liquidating Trust on the shareholder's behalf and (ii) the shareholder's
adjusted basis in the Company's Common Stock. This gain or loss will be
capital gain or loss for the shareholder if the shares of Common Stock were a
capital asset in the hands of the shareholder. Any capital gain or loss will
be long-term capital gain or loss if the shareholder held the shares of the
Company's Common Stock for more than one year. Capital gain is currently
subject to favorable tax rates.
Shareholders will compute gain or loss on a "per share" basis. Each
liquidating distribution by the Company, either directly to the shareholder or
to the Liquidating Trust on behalf of the shareholder, will be allocated
proportionately to each share of stock owned by the shareholder. Gain will be
recognized by reason of a distribution only to the extent that the aggregate
value of the distributions (including the fair market value of net assets
transferred to the Trustees of the Liquidating Trust) with respect to a share
exceeds the shareholder's adjusted basis in that share. Loss will be recognized
only when the final distribution from the Company has been received or is
determinable with reasonable certainty and then only if the aggregate value of
the distributions with respect to a share is less than the shareholder's
adjusted basis in that share.
In order to assist them with their income tax reporting obligations, the
Company will provide shareholders with its best estimate of the net value of the
assets, if any, transferred to the Liquidating Trust on their behalf. However,
there is no assurance that the IRS will not successfully challenge the Company's
valuation or that the valuation will not otherwise prove to be incorrect. If
the subsequently determined value of amounts distributed by the Company, either
directly to the shareholders or to the Liquidating Trust on the shareholders'
behalf, is greater than the
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Company's prior determination of that value, the difference will be treated as
additional gain (or reduced loss). Conversely, if the subsequently determined
value of amounts distributed by the Company is less than the Company's prior
determination of that value, then the amount of gain previously recognized would
be reduced (or the prior loss increased).
GAIN AND LOSS FROM ONGOING OPERATIONS OF THE LIQUIDATING TRUST
Assuming that it qualifies as a grantor trust, the Liquidating Trust
will not be subject to tax. Instead, the beneficiaries will be deemed to
directly own a proportional interest in the assets held by the Liquidating
Trust (including a proportionate share of the stock of any former subsidiary
of the Company held by the Liquidating Trust), and any income, expenses,
gains or losses recognized by the Liquidating Trust will be includible in the
beneficiaries' income in the year incurred. Furthermore, these items will
have the same character in the hands of the beneficiaries that they would
have had if recognized by the Liquidating Trust. The basis of a beneficiary
in property held on the beneficiary's behalf by the Liquidating Trust will be
its fair market value on the date of transfer by the Company to the
Liquidating Trust, and the beneficiary's holding period (for purposes of
determining whether capital gain or loss on any sale is short-term or
long-term) will be measured from the date of transfer. Because the existence
of the Liquidating Trust is ignored for tax purposes, the beneficiaries will
not recognize gain or loss upon distributions from the Liquidating Trust.
However, some of the assets of the Liquidating Trust may consist of the stock
of former Company subsidiaries that are themselves subject to separate
taxation on their corporate income. See "Proposal No. 1--Adoption of the
Plan-Liquidating Trust." The beneficiaries will recognize gain or loss on
any distributions with respect to the shares of stock of the subsidiaries as
discussed; this gain will be ordinary income, in the case of dividend
distributions and capital gain or loss with respect to distributions in
redemptions of new stock.
LIQUIDATING TRUST
Assuming that it qualifies as a grantor trust, the Liquidating Trust
will not recognize income, gain or loss upon the receipt of property from
either the Company or ongoing operations.
QUALIFICATION AS A GRANTOR TRUST
As discussed above, the Liquidating Trust is intended to qualify as a
grantor trust for tax purposes, so that the separate existence of the
Liquidating Trust will be ignored and the shareholders will be treated as the
owners of underlying assets. See "--Consequences to Shareholders--Gain and
Loss on Transfer of Assets." Nonetheless, it is not certain that the IRS will
not successfully challenge this conclusion. First, the IRS has established
certain guidelines for issuing a ruling regarding whether a liquidating trust
qualifies as a trust and is therefore eligible for grantor trust treatment.
Rev. Proc. 82-58, 1982-2 C.B. 847, as modified by Rev. Proc. 91-15, 1991-1
C.B. 484. Among the requirements set forth in these guidelines is a
requirement that the trust not receive transfers of any unlisted stock
of a single issuer that represents 80 percent or more of the stock of such
issuer. As discussed above, it is possible that the liquidating trust will
receive the stock of one or more subsidiaries of the Company. See
"Liquidating Trust." It is not clear whether the ownership of such stock
would violate the 80 percent restriction set forth above. Arguably, it should
not because the Liquidating Trust would acquire any such subsidiary merely to
cause its orderly dissolution, which is consistent with the requirement that
a liquidating trust not be operated as an ongoing business. It is possible,
however, that the IRS might conclude that the Liquidating Trust was not a
trust for tax purposes because it was entitled to receive the stock of
Company subsidiaries.
Second, the IRS ruling guidelines for liquidating trusts discussed
above require that the trustee be required to make distributions of trust
proceeds at least annually. Rev. Proc. 82-58, supra. The Liquidating Trust
Agreement contains no such provision. Arguably, the Liquidating Trust is
still being conducted for the primary purpose of liquidating the assets of
the Company so that it will qualify as a trust despite the lack of an annual
distribution requirement. It is possible, however, that the Liquidating Trust
will not qualify as a trust for this reason.
Third, a recent Supreme Court decision, Holywell Corp. v. Smith, 121
S. Ct. 1021 (1992), has cast doubt upon the qualification of liquidating
trusts as grantor trusts. The Court in that case concluded that a liquidating
trust established pursuant to a plan of bankruptcy was not a grantor trust.
Arguably, the instant case is distinguishable from Holywell because the
Liquidating Trust's assets are, prior to the transfer, vested in the Company so
that the trust more nearly resembles a grantor trust. (In Holywell the
purported "grantor" of the trust did not have title to assets prior to the
creation of the trust.) Nonetheless, it is possible that the Holywell decision
might cause a court to conclude that the liquidating trust was not a
grantor trust.
If the Liquidating Trust does not qualify as a grantor trust, it may
be subject to separate taxation, either as a simple or complex trust or as an
association taxable as a corporation. If the Liquidating Trust is
characterized as an association, then any transfer of the assets of the
Liquidating Trust to the beneficiaries will be taxable to the beneficiaries
with no corresponding deduction for the Liquidating Trust.
BACKUP WITHHOLDING
A beneficiary may be subject to backup withholding at the rate of 31% in
connection with liquidating distributions received with respect to his or her
shares of stock, unless such beneficiary (i) is a corporation or comes within
certain other exempt categories and, when required, demonstrates this fact or
(ii) provides a correct taxpayer identification number, certifies as to no loss
of exemption for backup
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withholding and otherwise complies with applicable requirements of the backup
withholding rules. A beneficiary who does not provide the Liquidating Trust
with his or her correct taxpayer identification number may be subject to
penalties imposed by the IRS. Any amount paid as backup withholding will be
creditable against the beneficiary's income tax liability. The Liquidating
Trust will report to the beneficiaries and the IRS the amount of any
"reportable payments" distributed and the amount of tax withheld, if any, with
respect to the beneficial interests.
The foregoing discussion is based upon the Internal Revenue Code of 1986,
as amended, and the related treasury regulations, administrative rulings and
court decisions as of the date hereof. The foregoing is subject to change
either prospectively or retroactively and such change could affect the
continuing validity of the discussion. In view of the complexities of the
income tax consequences of the liquidation, shareholders are urged to consult
their own tax advisers with respect to the federal income tax consequences of
the Plan as it affects them individually, as well as the state, local and
foreign consequences to them.
PROPOSAL NO. 2--ELECTION OF DIRECTORS
In 1994, the shareholders approved amendments to the Company's
Articles of Incorporation that created three classes of directors and
staggered the years in which directors in each of the classes would be
elected. The Board has three classes of directors: Class A, Class B and
Class C. Class A consists of only one director whose term expires at the
Annual Meeting of Shareholders. It is proposed that Gordon H. Cheadle, who
is currently serving as the Class A director, be elected to serve as the
Company's sole Class A director in accordance with the Bylaws for a term
expiring with the 1998 Annual Meeting or until his successor is duly elected
and qualified. Class B consists of two directors whose terms expire at the
1996 Annual Meeting of Shareholders. It is proposed that Maynard G. Norman,
who is currently serving as one of the Class B directors, and Terry L.
Switzer, who is currently serving as Vice President and Secretary of the
Company, be elected to serve as the Company's Class B directors in accordance
with the Bylaws for a term expiring with the 1999 Annual Meeting or until
their successors are duly elected and qualified. If the shareholders approve
the Plan, the Board, including the new Class A and B directors to be elected,
will be responsible for ensuring that the Company's assets are transferred to
the Liquidating Trust and, thereafter, will not be responsible for disposing
of the remaining assets. The following table sets forth the name, class,
position with the Company and service dates of the three individuals who have
been nominated to be the Class A and B directors of the Company.
<TABLE>
<CAPTION>
NAME DIRECTOR CLASS POSITION WITH COMPANY DIRECTOR OR OFFICER SINCE
- ---- --------------- --------------------- -------------------------
<S> <C> <C> <C>
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Gordon H. Cheadle Class A Director and President February 1992
Maynard G. Norman Class B Director February 1992
Terry L. Switzer Class B Vice President and November 1993
Secretary
</TABLE>
GORDON H. CHEADLE, age 64, has been a director of the Company since
February 1992 and has been the president of the Company since May 1992. Mr.
Cheadle has served as Vice Chairman of the Board since February 1992 and served
as Chairman of the Unsecured Creditors Committee during part of the time DFS was
in Chapter 11 bankruptcy. Mr. Cheadle has been the proprietor of Cheadle
Design, a design and sales firm, since 1968. Mr. Cheadle also serves on the
boards of directors of Transcontinental Services Inc. and Grange Gold
Corporation.
MAYNARD G. NORMAN, age 71, has been a director of the Company since
February 1992 and served on the Unsecured Creditors Committee while Delta
Financial Services, Inc. was in Chapter 11 bankruptcy. Mr. Norman has been a
sales representative for Ford in automobile sales since 1951 and has been with
Scarff Ford in Auburn since January 1981.
Terry L. Switzer, age 46, has been Vice President of the Company since
November 1993 and Secretary of the Company since May 1995. From April 1989
through October 1993, Mr. Switzer acted as Controller of Mayne Nickless, Inc. a
holding company for the U.S. operation's of an Australian multinational company
involved in the security and protection service industry.
The persons named in the accompanying Proxy intend to vote for the
election of Gordon H. Cheadle as the Company's Class A director and Maynard
G. Norman and Terry L. Switzer as the Company's Class B directors unless
authority to vote for one or more of them is specifically withheld in the
Proxy.
Holders of shares of Common Stock are entitled to one vote per share
in the election of each director. Shareholders will have a quorum for
conducting business at the Annual Meeting if a majority of the outstanding
shares entitled to vote are represented in person or by proxy. The
affirmative vote of a majority of the shares represented at the meeting is
required to elect the Class A director and each Class B director. Any shares
not voted (whether by abstention, broker nonvote or otherwise) will have no
impact on the vote, as long as a quorum for conducting business is
represented at the Annual Meeting. The Board recommends a vote FOR Gordon H.
Cheadle as the Class A director and votes FOR each of Maynard G. Norman and
Terry L. Switzer as the Class B directors.
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The Board has been informed that Gordon H. Cheadle, Maynard G. Norman and
Terry L. Switzer are available to serve as a directors, but if one or more of
them should become unavailable to serve as a director or should any vacancy
occur before the election (which events are not anticipated), the proxies may be
voted for a substitute nominee selected by the Board.
The Company has no audit, compensation or nominating committee. The
Board held 11 meetings during the year ended December 31, 1994, six meetings
during the year ended December 31, 1995, and no meetings during the period
ended June 30, 1996. Since June 30, 1996, the Board has met once. During each
such period, all of the directors attended 75% or more of the total number of
meetings of the Board. Directors are to be compensated at the rate of $500
per meeting attended.
THE COMPANY'S BUSINESS
The Company was incorporated in the State of Washington in 1988. The
Company holds all of the outstanding stock in the following companies: DFS,
Delta Securities, Inc., Delta Mortgage and Escrow Company, Inc. and Delta
Management Company, Inc. The following provides a brief description of the
business activities of each of the Company's subsidiaries:
A. DFS owns a 99.5-acre parcel of undeveloped land in Graham,
Washington, an undeveloped commercial lot in Bellingham, Washington, one-half
block from the Leopold Retirement Center. DFS was the owner of the Leopold
Retirement Center, a senior citizens' apartment complex consisting of 79
apartments and 7 guest rooms, in Bellingham, Washington, prior to its sale by
DFS in February 1996. DFS also owned three other multi-family apartment
projects in Colorado (the Carmel Apartments, the Rockledge Apartments and the
Kit Carson Apartments), encompassing in the aggregate 466 apartment units.
Two of the Colorado projects were sold in August of 1996 and one was sold in
October 1996.
B. DELTA SECURITIES, INC. is a real estate company whose sole
activity is to assist the Company with the disposition and sale of the real
estate assets of the Company and its subsidiaries.
C. DELTA MORTGAGE AND ESCROW COMPANY, INC. serves as the trustee under
the deeds of trust executed to secure payment of the notes issued under DFS's
note and deed of trust program. As these deeds of trust are repaid, the
corporation executes the necessary reconveyance documents to release the
property from the satisfied deeds of trust. It is anticipated that this entity
will remain active until all such obligations have been retired, and their liens
released, and then it will proceed with its dissolution.
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D. DELTA MANAGEMENT COMPANY, INC. was the owner and operator of the
Lakeway Inn, a 130-room full-service hotel and convention center in Bellingham,
Washington. The Lakeway Inn was sold by Delta Management Company, Inc. in May
1996.
See "Proposal No. 1--Adoption of the Plan--Background Information" for a
more detailed discussion of the history of the Company and its subsidiaries. As
described in "Proposal No. 1--Adoption of the Plan--Warranty Business", with the
sale by the Company of all its interest in its warranty business (through its
subsidiaries, Delta Warranty of Florida, Inc. and Delta Service Administrators,
Inc.), the Company's sole remaining assets consist of the real estate assets,
all of which are currently on the market for sale. The Company is not otherwise
engaged in any active trade or business. The Company and its subsidiaries
currently employ approximately 3 individuals, including officers. It is
management's opinion that current employee relations are good in all areas.
THE COMPANY'S PROPERTIES
LEASED PROPERTIES
The executive offices of the Company are located at 258 S.W. 43rd Street,
Suite A, Renton, Washington 98055. This office space, comprising approximately
1,060 rentable square feet, is occupied pursuant to a six-month lease covering
the period from September 1, 1996 through February 28, 1997. The base monthly
rent is $1,100, and the Company is obligated to cover certain pass-through
expenses related to the leased space. The Company has the option to extend the
lease for an additional six-month period, with the base rent increasing to
$1,150 per month during the extension period. The Company plans to exercise its
option to lease the executive offices for the additional six-month period. This
lease will be assumed by the Liquidating Trust if the Plan is approved.
OWNED PROPERTIES
Through its subsidiaries, the Company owns and operates the following
undeveloped properties:
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LOST CREEK PROPERTY, 11117 Eustis Hunt Road East, Graham, Washington, is
99.5 acres of undeveloped land, approximately 50 miles south of Seattle,
suitable for single-family development. As of June 30, 1996, the property was
subject to a first mortgage with an outstanding principal balance of
approximately $140,000, which bears interest at 9.5% per annum and matures
December 1, 1998. The monthly payment is $5,403. The property is situated in
an expanding area and has good potential for single homesite development. It is
management's opinion that the property is adequately covered by insurance. The
property has a tax basis of approximately $1,500,000. The property tax is
assessed at the rate of 0.0150111 for an annual amount of $4,458.
CORNWALL PROPERTY, 1100 Cornwall Avenue, Bellingham, Washington, is an
undeveloped, commercial lot located near Bellingham Bay, approximately two
blocks from the downtown core and 1/2 block from the Leopold. As of June 30,
1996, the property is subject to a first mortgage of approximately $6,000.
It is presently rented on a month-to-month basis to a local recycling
business. It is suitable for commercial development and is being held for
immediate sale. The Company's management is of the opinion that the property
is adequately covered by insurance. The tax basis of the property is
$83,000. Property taxes are assessed at a rate of 0.0128111 for an annual
amount of $984.
RECENT PROPERTY SALES
As a part of its overall plan for disposing of its real estate assets,
the Company recently has sold its interest in the Leopold Retirement Center and
the Lakeway Inn, two commercial properties located in Bellingham, Washington,
and its interests in the Carmel Apartments and the Rockledge Apartments, two
apartment projects located in Colorado. The following is a brief summary of
these transactions.
BEST WESTERN LAKEWAY INN. The Lakeway Inn is Bellingham's only
full-service hotel, with 132 rooms, a coffee shop, restaurant, lounge/bar,
approximately 11,000 square feet of banquet space, an indoor, heated swimming
pool, hot tub, sauna
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and fitness center. The Company initially listed for sale the Lakeway Inn in
January 1995. It accepted an offer for the property in April 1995, but that
transaction failed to close. The property was placed back on the market in
August 1995, and in May 1996, the Company sold the Lakeway Inn to a new
purchaser for an all cash purchase price of $3,300,000. The Company
recognized a loss for tax purposes of approximately $295,000 upon the sale.
The cash sale proceeds were used to defray the Company's closing costs, to
retire $2,769,000 in Class 5 Claims, and to pay past due real estate taxes
and equipment leases. The Company retained approximately $8,000 after the
payment of such expenses. For the first four months of 1996, the Lakeway Inn
generated $69,000 in operating losses before depreciation and interest
expenses and $268,000 in taxable losses when taking into account depreciation
and interest expenses. The property was marketed through Colliers
International Hotel Realty.
CARMEL APARTMENTS. The Carmel Apartments is a two-building,
three-story, 78-unit apartment complex located in Colorado Springs, Colorado.
In August 1996, the Company sold the Carmel Apartments for an all-cash
purchase price of $1,450,000. The gain on the transaction for tax purposes
was approximately $520,000. Cash proceeds of the sale were used to pay
closing costs, to retire a first mortgage of $322,000 and to pay $809,000 in
Class 5 Claims. The balance of the proceeds, amounting to approximately
$228,000, are being held to cover the Company's future expenses and
liabilities and as a cash reserve for future distribution to the Company's
shareholders. The property was marketed through Marcus & Millichap.
KIT CARSON APARTMENTS. The Kit Carson Apartments, located in
Security, Colorado, is a two-building, three-story, 108-unit complex
constructed in 1971. In October 1996, the Company sold this project for an
all cash purchase price of $2,750,000. The Company recognized a gain for tax
purposes of approximately $1,185,000 on the transaction. A portion of the
proceeds from the sale were used to pay closing costs and retire outstanding
Class 5 Claims of approximately $2,050,000. The balance of the sale proceeds,
$544,000, were set aside to pay future expenses and liabilities and as
reserves for distributions to the Company's shareholders. The property was
marketed by Marcus & Millichap.
LEOPOLD RETIREMENT CENTER. The Leopold Retirement Center is a senior
citizen apartment complex consisting of 79 apartments and 7 guest rooms. In
February 1996, the Company sold the Leopold Retirement Center for an all cash
purchase price of $1,654,000. The Company recognized a gain for tax purposes
of approximately $305,000 upon the sale. The cash proceeds from the
transaction were used to defray the seller's closing costs, to retire a first
mortgage of $47,000 and $114,000 in Class 5 Claims, and to pay off past due
legal fees of $169,000. The balance of the proceeds, amounting to
approximately $1,215,000, were set aside by the Company to cover future
expenses and liabilities and as a reserve for distribution to the Company's
shareholders after discharging or providing for the Company's liabilities.
The property was marketed through Marcus & Millichap.
ROCKLEDGE APARTMENTS. The Rockledge Apartments is an eight-building,
three-story, 180-unit complex with a single-story office building with
basement. The Company sold this Colorado Springs, Colorado apartment complex
in August 1996 for an all-cash purchase price of $4,800,000. The Company
recognized a gain for tax purposes of approximately $205,000 upon the sale.
The Company utilized the cash proceeds of the sale to pay closing costs and
to retire Class 5 Claims with an outstanding principal balance plus accrued
interest of approximate $5,493,000. The additional $1,048,000 of
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outstanding Class 5 Claims secured by the lien against the property was paid
out of cash reserves of the Company. This property was also marketed on behalf
of the Company by Marcus & Millichap.
PLANS REGARDING SALE OF THE COMPANY'S REMAINING REAL ESTATE ASSETS
The following provides a brief summary of the steps taken by the
Company to sell, or to prepare for sale, the Company's remaining real estate
assets. Both of the real estate assets in which the Company has an interest
are owned by DFS, a wholly owned subsidiary of the Company.
LOST CREEK PROPERTY. In April 1994, the Company contracted to sell the
Lost Creek Property to a developer for $600,000. Closing was contingent upon
the developer's receiving preliminary plat approval for a residential
development from Pierce County. The plat approval has been substantially
delayed due to wetlands and environmental issues, but the developer is still
pursuing preliminary plat approval. The Company extended the period for closing
the transaction through December 1996 in exchange for an increase in the
purchase price to $620,000. If the sale closes, the Company will recognize a
loss for tax purposes of approximately $905,000. The property is not
encumbered, and the net sales proceeds, after covering closing costs, will be
added to the Company's cash reserves.
CORNWALL PROPERTY. The Company has contracted to sell its commercial lot
in Bellingham, Washington for an cash purchase price of $135,000. The purchase
price is subject to reduction, at the rate of $13.03 per square foot, if a
survey discloses the
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lot to have less than 10,363 square feet. The sale is subject to customary
contingencies, including an environmental inspection, feasibility study,
title review, and property inspection. There is no financing contingency,
but the purchaser is not obligated to close unless it receives a low income
housing tax credit reservation to construct a low income residential project
on the lot. The purchaser is in the process of conducting its due diligence.
The closing is scheduled for December 1996 if the purchaser's closing
conditions can be satisfied. If the sale closes, the Company will recognize
a taxable gain of $41,000. The property is not encumbered, and the net sale
proceeds, after covering closing costs, will be added to the Company's cash
reserves.
PAYMENT OF CLASS 5 CLAIMS
Prior to 1988, DFS offered a note and deed of trust program.
Participants in this program loaned funds to DFS in exchange for promissory
notes secured by liens against property owned by DFS. The priority of these
liens was established by the order in which the loans were made to DFS and
the related deeds of trust recorded against the DFS properties given as
collateral. Under the Second Amended Plan, which was adopted in 1993, the
outstanding notes issued under this program were characterized as Class 5
Claims against the Company. Each Class 5 Claim retained its lien, in the
order of priority originally given, against the collateral and was
recognized, at that time, as having a value equal to 100% of the amount of
the Class 5 Claim, together with accrued interest. As of September 1, 1993,
the effective date of the Second Amended Plan, the Company had outstanding
Class 5 Claims of approximately $9,022,000, secured by liens against six of
the properties owned by the Company.
After the effective date of the Second Amended Plan, each Class 5
Claim was to bear interest at 9.5% per annum. The Company was obligated to
pay accrued interest on the outstanding balance of each Class 5 Claim at 4%
per annum on September 1 of each year beginning on September 1, 1994, and
continuing until September 1, 1996 or the earlier maturity date of the
obligation. Accrued interest on each such Class 5 Claim not paid on the
interest payment date was to be added to the outstanding principal balance
and, thereafter, to bear interest at 9.5% per annum. Each Class 5 Claim was
to mature upon the earlier of September 1, 1996 or the date the collateral
securing such Class 5 Claim was sold. Upon maturity of a Class 5 Claim, the
Company was obligated to retire the Class 5 Claim by applying toward its
payment the net cash available from the sale of the collateral securing the
Class 5 Claim after payment of the cost of sale and the payment of all other
secured claims having priority over the Class 5 Claim then being retired. If
there was not sufficient cash to retire such Class 5 Claim in full, the
Company is to discharge the unpaid portion of the Class 5 Claim by issuing to
the holder of such Class 5 Claim Common Stock with a fair market value equal
to the unpaid portion of the Class 5 Claim.
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Due to the Company's disappointing financial performance, it did not
make any interest payments on either September 1, 1994 or September 1, 1995
and, accordingly, the interest accrued on each such date was added to the
outstanding principal balance of the Class 5 Claim and the new principal
balance continued to accrue interest at 9.5%. The following transactions in
1995 and 1996 repaid the outstanding principal balance and accrued interest
on the Class 5 Claims:
(a) In 1995, the Company sold Delta Financial Center and retired Class 5
Claims with an outstanding principal balance, plus accrued interest, of
approximately $451,000;
(b) In February 1996, the Company sold the Leopold Retirement Center and
retired Class 5 Claims with an outstanding principal balance, plus accrued
interest, of approximately $114,000;
(c) In May 1996, the Company sold the Lakeway Inn and retired Class 5
Claims with an outstanding principal balance, plus accrued interest, of
approximately $2,769,000;
(d) In August 1996, the Company sold the Carmel Apartments and the
Rockledge Apartments and retired Class 5 Claims with an outstanding principal
balance, plus accrued interest, of approximately $6,302,000; and
(e) In October 1996, the Company sold the Kit Carson Apartments and
retired all remaining Class 5 Claims. The outstanding principal balance, plus
accrued interest, equaled approximately $2,050,000.
As of September 1, 1996, the Company was in default under the
remaining Class 5 Claims. The default continued until the Kit Carson
Apartments were sold. As part of the closing, all remaining Class 5 Claims,
plus accrued interest through the closing date, were repaid in full.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
This Proxy Statement includes in Exhibit B the Company's financial
statements for the years ended December 31, 1995 and 1994, and for the six
months ended June 30, 1996. The financial statements for the interim period
ended June 30, 1996 and for the years ended December 31, 1995 and 1994 (except
for the Company's balance sheet as of December 31, 1995) are unaudited. SEE
"Delay in Holding Annual Meeting " below for a discussion of the reasons why the
Company's 1994 year-end financial statements are unaudited and why the Company's
1995 year end financial statements (except for its balance sheet) are unaudited.
The following constitutes management's discussion and analysis of the
results of operations and financial condition for the years ended December 31,
1995 and 1994, and for the period from January 1, 1996 through June 30, 1996.
RESULTS OF OPERATIONS
BACKGROUND
During the relevant periods, continuing operations consist of the
property-owning activities of the Company. The Company's properties 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 "Delta Warranty," and include 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
because the business was sold as of August 1, 1995. The results of its
operations are reported separately.
FOR THE SIX MONTHS ENDED JUNE 30, 1996 VS. THE SIX MONTHS ENDED
JUNE 30, 1995
Revenues from the property operations decreased 31% from $3,080,000 in
1995 to $2,125,000 in 1996, a decrease of $955,000. All of the decrease was
caused by the loss of revenue from properties disposed of. The Delta
Financial Center office building sold in August 1995, the Leopold Retirement
Inn sold in February 1996, and the Best Western Lakeway Inn sold in May 1996.
The revenues from properties owned and operated for the entire time span of
both quarters were up slightly due to a rent increase at the Colorado Springs
apartments.
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Operating expenses for the property operations decreased 33% from
$2,590,000 in 1995 to $1,725,000 in 1996, a decrease of $865,000. In addition
to proportional decreases in expenses due to the disposition of properties,
additional cost savings were obtained from lower property taxes and reduced
personnel expenses at the Best Western Lakeway Inn.
Selling and administrative expenses decreased 9% from $615,000 in 1995 to
$561,000 in 1996, a decrease of $54,000. 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.
Combining the reduced revenues, more-than-proportionately reduced
operating expenses, and decreased selling and administrative expenses, the
operating loss before interest and other income/expenses increased from
$125,000 in 1995 to $161,000 in 1996. Interest income decreased from $91,000
in 1995 to $25,000 in 1996, due to the loss of interest-bearing restricted
investments held in the warranty business during 1995. Interest expense
decreased from $509,000 in 1995 to $465,000 in 1996, reflecting decreased
mortgages and deeds of trust balances resulting from the sale of the Leopold
Retirement Inn and Best Western Lakeway Inn.
The 1996 statement of operations contains a gain of $461,000 from the
disposal of assets. $351,000 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 Retirement Inn in February 1996.
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. Of this increase,
$52,000 was due to increased occupancy of 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. Of this
decrease, $265,000 was caused by lower depreciation expense, reflecting the
lower value of properties after the recording of a $3,700,000 property
valuation loss in 1994. The balance of the decrease reflects lower property
taxes and reduced personnel costs at the Best Western Lakeway Inn.
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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 expenses 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.
The 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 in interest income 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 values 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 losses
of $2,800,000 on the Best Western Lakeway Inn and $900,000 on the Leopold
Retirement Inn reflected the amounts necessary to reduce the carrying values
to the anticipated selling prices. The carrying values of the two properties
had previously been based on professional appraisals that utilized a variety
of methods, including physical replacement cost, to determine their values.
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.
These losses continued into 1995, with the warranty business incurring operating
losses of $375,000 in the first seven months ended July 31, 1995. The warranty
business had negative cash flow of $1,317,000 in 1994 and $629,000 in the seven
months of 1995.
Because of these losses and negative cash flows, the Board 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 the Company own a majority interest in DelCor Holdings, Inc. The Company
received no compensation, other than the
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relief from the warranty-related liabilities, in the transaction. Because the
liabilities transferred substantially exceeded assets transferred, the Company
recorded a gain of $2,263,000 on the sale.
FINANCIAL CONDITION, LIQUIDITY AND FUTURE PLANS
At June 30, 1996, the Company had total assets of $6,672,000, total
liabilities of $8,963,000, and stockholders' deficit of $2,291,000. The major
asset of the Company is property, which comprises $5,107,000 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 Board is submitting the
Plan to the shareholders to transfer the remaining assets of the Company to a
liquidating trust. To be approved, shareholders representing two-thirds of the
total outstanding shares must approve the plan.
The major liability of the Company at June 30, 1996, is debt secured
by the properties, totaling $8,752,000. Of this amount, $525,000 is in the
form of first mortgages to banks, with the remaining $8,227000 in the form of
deeds of trust. The deeds of trust matured on September 1, 1996 or when the
property securing the obligation is sold, if earlier.
As disclosed in Note 6 of the financial statements for the interim period
ended June 30, 1996, in Exhibit B, subsequent to June 30, 1996, the Company sold
the Carmel Apartments and the Rockledge Apartments, retiring the related deeds
of trust and mortgages. The Company has sales contracts with buyers on the
other properties owned by it.
At June 30, 1996, the Company had $1,507,000 cash on hand and $52,000 in
accounts receivable. Accounts payable and accrued expenses totaled $211,000.
The property operations are currently generating positive cash flow, enabling
the Company to meet its current obligations as they become due.
EXECUTIVE OFFICERS
The executive officers of the Company are:
NAME AGE POSITION
---- ---- --------
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Gordon H. Cheadle 64 President and Chief Executive Officer
Terry L. Switzer 46 Vice President and Secretary
Thomas G. Pagano 45 Director and Secretary
The following information describes the executive officers of the Company.
GORDON H. CHEADLE. For a description of Mr. Cheadle, see "Proposal
No. 2--Election of Directors."
TERRY L. SWITZER. For a description of Mr. Switzer, see "Proposal
No. 2--Election of Directors."
THOMAS G. PAGANO was appointed as a director of the Company in February
1991. Mr. Pagano has served as Chairman of the Board since October 1992 and as
Secretary from February 1992 to October 1992. Mr. Pagano has been a certified
public accountant and a principal at the public accounting firm of Johnson,
Stone and Pagano, P.S. since 1982. Mr. Pagano also serves on the board of
directors of the Northwest Trek Foundation.
SECURITY OWNERSHIP OF MANAGEMENT
The only issued and outstanding class of voting securities of the Company
is its one class Common Stock. The Company is not aware of any person or group
known to be the beneficial owner of 5% or more of the outstanding shares of
Common Stock. The following table sets forth certain information regarding the
ownership of Common Stock of the Company as of November X-1, 1996 with respect
to each director and executive officer of the Company and all directors and
executive officers of the Company as a group.
NAME AND ADDRESS SHARES BENEFICIALLY PERCENTAGE OF OUTSTANDING
- ---------------- -------------------- -------------------------
OWNED SHARES(1)
------ ---------
Thomas G. Pagano 0 --
3311 N 18th St.
Tacoma, WA 98406
Gordon H. Cheadle 4,282 *
4229 -1st NW
Seattle, WA 98107
Carl R. Wiley 0 --
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3043 Powder River Dr.
Eugene, OR 97401
Maynard G. Norman 1,538 *
432 SW 143rd St.
Seattle, WA 98166
James F. Johannes 13,870(2) 2.86
201 W Main St.
Puyallup, WA 98371
Terry L. Switzer 0 0
258 S.W. 43rd Street,
Suite A
Renton, WA 98055
All directors and 19,690 4.07
executive officers
as a group (6 persons)
_______________
(1) As of November X-1, 1996, there were 484,128 shares of Common Stock
outstanding.
(2) Includes 12,332 shares held by James F. Johannes as trustee for Valley
Packers, Inc. Employees Defined Benefit Pension Plan.
* Less than 1%.
EXECUTIVE COMPENSATION
BOARD REPORT ON EXECUTIVE COMPENSATION
Compensation policies with respect to the Company's employees in general
are determined by the Board. The foundation of the Company's compensation
policies is the view that the Company's success is attributable to the efforts
of its employees, including its executive officers. Compensation of executive
officers is determined by the Board on a performance basis and in comparison to
comparable positions in comparable industries.
The compensation of David L. Larson, the Company's former President and
Chief Executive Officer, was established and approved by the U. S. Bankruptcy
Court while the Company remained subject to the court's jurisdiction as part of
DFS's reorganization under Chapter 11 and was maintained at that level after the
Company
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emerged from Chapter 11. The compensation of Gordon H. Cheadle and the other
executive officers and Terry L. Switzer was established at their employment
commencement date in conjunction with their employment contracts and is reviewed
periodically.
By Order of the Board of Directors
Gordon H. Cheadle
President and Vice Chairman of the Board
EXECUTIVE COMPENSATION TABLE
The following table provides information with respect to the annual
compensation for services to the Company in fiscal year 1995 for the Company's
Chief Executive Officer.
ANNUAL COMPENSATION
NAME AND -------------------
PRINCIPAL POSITION YEAR SALARY ($)
- ------------------ ---- ----------
Gordon H. Cheadle 1995 $7,500
President and Chief
Executive Officer(1)
David L. Larson 1995 $52,500
President and Chief
Executive Officer(2)
_______________
(1) Mr. Cheadle has served as President and Chief Executive Officer since
August 1995.
(2) Mr. Larson served as President from April 1991 through July 1995. He
resigned at the time of the Company's sale of its warranty business to
DelCor Holdings, Inc.
TRANSACTIONS INVOLVING DIRECTORS
On August 1, 1995, the Company sold, pursuant to an Asset Purchase
Agreement dated as of July 31, 1995 ("Asset Purchase Agreement"), to DelCor
Holdings, Inc. ("DelCor") its warranty business and certain other non-real
estate assets. DelCor is a newly formed Washington corporation which was
organized for the purpose of acquiring these assets by David L. Larson and Eric
Kord, two former executive officers of the Company, and Nomad, Inc., a newly
organized Washington corporation owned and controlled by Michael Heijer.
Messrs. Larson and Kord resigned as the Company's President and Vice President,
respectively, immediately
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prior to the consummation of the sale. Messrs. Larson and Kord and Nomad, Inc.
own 42.5%, 15% and 42.5% respectively, of DelCor's common stock.
The Company consummated the transaction by (i) causing Delta Management
Company, Inc. ("DMC"), a wholly owned subsidiary of the Company, to transfer to
DelCor substantially all of DMC's non-real estate assets and (ii) selling
directly to DelCor all of the issued and outstanding common stock of Delta
Warranty of Florida, Inc. ("DWF") and Delta Service Administrators, Inc.
("DSA"), two other wholly owned subsidiaries of the Company. Immediately prior
to the sale, DWF transferred to DFS, another wholly owned subsidiary of the
Company, fee simple interest in two real estate assets, the Leopold Retirement
Center, a housing project for the elderly in Bellingham, Washington, and the
Lost Creek Property, a 99.5-acre parcel of undeveloped land in Pierce County,
Washington. These assets were transferred out of DWF because the sale was not
to involve the transfer of any real estate assets from the Company or its
subsidiaries to DelCor.
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
subsidiaries' obligations under the issued warranty contracts.
The Company did not receive any cash from DelCor in exchange for these
assets, but DelCor assumed, pursuant to an Assumption of Contracts, Obligations
and Liabilities (the "Assumption Agreement") specified liabilities of the
Company, DMC, DWF and DSA (collectively, the "Delta Warranty Companies")
specifically listed in the Assumption Agreement (collectively, the "Scheduled
Liabilities"). The Scheduled Liabilities included, among others, obligations of
the Delta Warranty Companies under the licensed business agreements; the
equipment, office and automobile leases of the Delta Warranty Companies; 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 associated with the non-real estate business of the Delta Warranty
Companies, exclusive of certain accrued legal and accounting expenses in excess
of stipulated ceilings; and accrued but unpaid liabilities under claim insurance
policies previously maintained by the Delta Warranty Companies. In addition,
DelCor agreed to assume responsibility for the prosecution and defense of
pending litigation with Electronic Systems Protection, Inc., a vendor of surge
protection equipment, previously sold to DMC.
Based upon the financial statements and schedules prepared at the
closing, DelCor assumed responsibility for the payment of trade payables and
accrued
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expenses of approximately $1,790,000 and accrued legal and accounting fees of
approximately $106,000. Neither the Asset Purchase Agreement nor the Assumption
Agreement attempted to quantify the amount of other Scheduled Liabilities and
certain of those liabilities, such as amounts now payable or in the future
payable under the assumed warranty contracts, are uncertain in amount. Over the
last three years, the Company's claims under warranty contracts have been in the
range of 25% to 35% of the premiums. Should that claims experience persist as
to the warranties now outstanding, DelCor would be responsible for $1,600,000 to
$2,200,000 on the warranty contracts assumed. There is, however, no certainty
that this will be the claims experience as to the outstanding warranties.
Under the Assumption Agreement and the Asset Purchase Agreement,
DelCor is obligated to indemnify and hold harmless the Company and DMC from
all claims, liabilities, costs and expenses, including reasonable attorneys'
fees, incurred by either of them 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 and DMC, in past, present and
future accounts receivable, and the future fixtures and equipment, of DelCor,
DWF and DSA, and DelCor's rights to distributions that may subsequently be
made with respect to a cash reserve account held by K-Mart to secure Delta
Warranty Companies' obligations on warranty contracts written for K-Mart
consumers. Such security interest is subordinate to claims that K-Mart 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. If
DelCor obtains insurance to cover claims against DelCor and the Delta
Warranty Companies under the warranty contracts sold to K-Mart customers, the
Company and DMC are obligated to release their security interest in the
amounts held in the K-Mart cash reserve account; provided that, following
such release, there is, in the opinion of the Company and DMC, sufficient
remaining collateral to secure the outstanding uninsured liabilities assumed
by DelCor under the Asset Purchase Agreement. In any event, the Company and
DMC are to release their security interest in the K-Mart cash reserve account
no later than 30 months after the closing.
The Company and DMC are, in addition, obligated to indemnify and hold
harmless DelCor from all claims, liabilities, costs and expenses, including
reasonable attorneys' fees, incurred by DelCor as a result of any liabilities
other than those stipulated as Scheduled Liabilities.
Terry L. Switzer, the Company's Vice President, represented the
Company in negotiating the terms of the Asset Purchase Agreement, and it was
presented to the Board for review and approval.
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INDEPENDENT AUDITORS
Deloitte & Touche, LLP, 700 Fifth Avenue, Seattle, Washington 98104,
which has served as the Company's independent auditor since 1988, has been
selected to continue as the Company's independent auditor for the fiscal year
ended December 31, 1995. Representatives of Deloitte & Touche, LLP will be
present at the Annual Meeting and, accordingly, will be available to respond
to questions and to make a statement if they so desire. If the shareholders
do not approve the Plan, the Company intends to select Deloitte & Touche, LLP
to conduct any additional audits that may be required in order to comply with
applicable federal securities laws.
MARKET PRICE OF AND DIVIDENDS ON COMMON EQUITY AND OTHER
SHAREHOLDER MATTERS
The Company has issued a total of 484,128 shares of Common Stock and
currently has 3,501 shareholders. No shares of Common Stock are subject to
outstanding option or warrants. No persons have any right to cause the Company
to register shares of Common Stock or to list on any exchange. No dividends
have been declared or paid on any shares of Common Stock during the past two
fiscal years. The Company is not subject to any restrictions on paying
dividends in the future.
There is no established public trading market for the Company's Common
Stock. It is unlikely that a market for the Common Stock will develop in the
future. The Company does not meet the qualifications to list on the New York
Stock Exchange, Inc., the American Stock Exchange or the Nasdaq National Market.
The Common Stock is currently not listed on the National Association of
Securities Dealers OTC (over-the-counter) Electronic Bulletin Board or published
in the National Daily Quotation Service Pink Sheets. The Common Stock remains
subject to applicable state securities laws regulating resale, which could
inhibit trading in the Common Stock.
LEGAL PROCEEDINGS
On November 29, 1995, Esfeld Investment Services ("Esfeld") submitted to
the Company a demand for arbitration to resolve whether and to what extent
Esfeld was entitled to commissions as a result of the sale of the warranty
business to DelCor. Esfeld claims that such commissions are due under the terms
of a Limited Client Consultant Fee Agreement entered into in September 1994.
The Company denied that a commission is owed to Esfeld under that agreement. In
April 1996 the arbitrator ruled in favor of the Company holding that no
commissions or other payments were due to Esfeld under the Consultant Fee
Agreement.
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<PAGE>
PROPOSALS OF SHAREHOLDERS
The Company has not received any proposals from shareholders for
inclusion in the Company's proxy materials for either the 1995 or 1996 Annual
Meeting. If the proposal for liquidation of the Company set forth in this
Proxy Statement is not approved, proposals that shareholders wish to include
in the Company's proxy statement and form of proxy for presentation at the
1997 Annual Meeting, if any, must be received by the Company at 258 S.W. 43rd
Street, Suite A, Renton, Washington 98055, attention of the Corporate
Secretary, no later than January 31, 1997.
DELAY IN HOLDING ANNUAL MEETING
This Proxy Statement has been prepared in connection with the holding of
the Company's Annual Meeting. The holding of this Annual Meeting has been
substantially delayed, inasmuch as the Company was, under its Bylaws, obligated
to hold the Annual Meeting on May 19, 1995 and again on May 19, 1996. The Board
refrained from calling the Annual Meeting earlier because, through 1995 and into
the second quarter of 1996, the Company did not have available cash to pay the
accounting and legal expenses incident to holding this Annual Meeting.
Under existing federal laws and regulations, the Company must include in
the proxy solicitation materials sent to its shareholders audited financial
statements for the prior fiscal year. As of May 1995, when the Annual Meeting
should have been held, the Company owed approximately $120,000 in accounting
fees to Deloitte & Touche, LLP, the Company's independent public accountants,
which fees had been incurred for the accountants' 1993 audit and assistance to
the Company in registering its securities under the Securities Act of 1933, as
amended. In addition, the Company owed at that time approximately $150,000 in
legal fees incurred for legal counsel's assistance with federal securities law
compliance, real estate transactions and miscellaneous corporate matters. Given
the Company's financial performance through 1994 and 1995, the Company did not
have the cash to pay these accounting and legal fees, and the additional fees
that would be incurred in preparing for the Annual Meeting, without forcing the
Company to fail to pay other critical payables necessary to cover the operating
expenses on the Company's real estate investments and to pay warranty claims,
employee salaries, marketing expenses and other expenditures deemed essential to
the then ongoing operations of the warranty business. The Board decided that it
was in the best interest of the shareholders for the Company to pay the critical
business expenses necessary to protect the value of the Company's investments
and assets, while deferring the holding of the Annual Meeting until additional
capital might be raised or assets sold to generate sufficient cash to cover past
and current accounting and legal expenses. The Board wished to avoid forcing
the Company into a bankruptcy proceeding, believing bankruptcy to be extremely
unattractive due to the
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delays and complications of obtaining U.S. Bankruptcy Court approval to conduct
business, the cost of administering the bankruptcy case, and the likely impact
that bankruptcy would have upon the Company's trade creditors, customers,
shareholders and others.
Throughout 1995, the Board sought to address the Company's liquidity
problems by seeking additional capital and attempting to sell one or more of the
Company's primary assets. Management actively solicited buyers for the warranty
business, whose activity was primarily responsible for the Company's severe cash
flow problems, and such efforts ultimately led to the sale of the warranty
business, but the sale did not generate cash that could be used by the Company
to pay off the outstanding accounting and legal bills and other expenses. SEE
"Transactions Involving Directors." Furthermore, while efforts were made to
sell the real estate assets of the Company, no sales were consummated in 1995,
other than the sale of the Delta Financial Center. See "Recent Property Sales"
and "Plans Regarding Sale of the Company's Real Estate."
Recognizing that the Company's efforts to raise additional cash to cover
the expenses of the Annual Meeting might not be successful, the Board asked the
Company's counsel to prepare, without requiring immediate payment of past due
legal fees and the cost of the additional services, a no-action request to the
Commission seeking the Commission's waiver of the requirement that its 1994
proxy solicitation materials include an audit of the 1994 financial statements.
The Company's counsel consented to assist with the preparation of this letter
and it was submitted to the Commission in September 1995. The Company based its
request for a waiver of the audit requirement primarily upon the grounds that
requiring an audit of the 1994 financial statements would impose a substantial
financial burden upon the Company and its shareholders and would delay, perhaps
indefinitely, the holding of its Annual Meeting. The Commission was advised
that the proxy solicitation materials would include the proposal for the
dissolution of the Company and the transfer of its assets, subject to existing
liabilities, to a liquidating trust and that if the Plan were approved, the
Company would immediately proceed to deregister as a public company under the
1934 Act. In November 1995, the Commission advised the Company that, based upon
the information in its no-action request, the Commission would not recommend any
action against the Company based solely on the Company's failure to provide
audited 1994 financial statements in its proxy statement for the Annual Meeting.
The Commission also advised the Company that, if the Plan were not approved, the
Company would be expected to fully comply with its reporting obligations under
the 1934 Act for all periods.
Upon notice from the Commission's staff during the week of January 22,
1996 that it intended to conduct a full review of the Company's preliminary
materials with
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comments to follow within 30 days of such notice, the Company recognized that
the resulting delay would require the Company to update its financial statements
to include financial information for the year ended December 31, 1995. The
necessity of filing unaudited financial statements for two fiscal years was not
contemplated when the Company's counsel made its no action request relating to
the 1994 financial statement. Therefore, the Company's counsel submitted an
additional no-action request to the Commission dated January 25, 1996 seeking
the Commission's waiver of the requirement that its 1994 proxy solicitation
materials include an audit of the 1995 and 1994 financial statements. The
Company based its request for a waiver of the audit requirement primarily upon
the same grounds asserted in its initial waiver request. In a letter dated
February 5, 1996, the Commission advised the Company that, based upon the
information in its no-action request, the Commission would not recommend any
action against the Company based solely on the Company's failure to provide
audited 1994 financial statements and audited 1995 financial statements of
operations, cash flows and changes in stockholders' equity in the proxy
statement for the Annual Meeting, provided that an audited December 31, 1995
balance sheet and unaudited financial statements containing all of the required
information were included in the proxy materials. The Commission also advised
the Company that, if the Plan were not approved, the Company would be expected
to fully comply with its reporting obligations under the 1934 Act for all
periods and that, with respect to any future filings under the l933 Act, the
Commission would not accept unaudited statements of the Company for any periods
for which audited financial statements are required by applicable federal
securities laws.
The Company has paid out of cash from operations and from the sale of its
properties the accounting fees owed to Deloitte & Touche, LLP and the legal fees
owed by it.
DELINQUENT SEC FILINGS
The Company failed to file with the SEC Form 10-Ks for the years ended
December 31, 1995 and 1994, Form 10-Qs for the second and third quarters of
1995, and Form 8-Ks upon the sale of the Leopold Retirement Center and the
Lakeway Inn. The Company filed with the SEC a Form 10-Q for the first quarter
of 1995, Form 10-Qs for the first and second quarters of 1996 and filed these
proxy materials with the SEC prior to their distribution to the shareholders.
If the Plan is approved by the shareholders, the Company will deregister as a
public company under the 1934 Act, not make any further filings with the SEC
other than that necessary to deregister, and proceed to liquidate as outlined in
these proxy materials. On the other hand, if the Plan is not approved by the
shareholders, the Company will remain subject to the periodic reporting
obligations of the 1934 Act. The SEC staff has also confirmed that,
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if the Plan is not approved, the Company must promptly file with the SEC the
delinquent SEC filings.
OTHER MATTERS
As of the date of this Proxy Statement, the Board knows of no other
matters that are to be brought to a vote at the Annual Meeting. If any other
matter does come before the Annual Meeting, however, the persons appointed in
the enclosed form of Proxy or their substitutes will vote in accordance with
their best judgment on such matters.
SOLICITATION OF PROXIES
The cost of solicitation of proxies will be borne by the Company,
including expenses in connection with preparing, assembling and mailing this
Proxy Statement. Proxies may be solicited by the Company's officers and
regular employees. Such solicitations may be made personally or by mail,
telephone, facsimile or telegram.
In addition, the Company has entered into an agreement with Hebert
Research, Inc. under which it will use its best efforts to solicit shareholders
to grant their approval of the proposals described in these proxy materials.
The Company has agreed to indemnify Hebert Research, Inc. against certain
liabilities, including certain liabilities under the federal and state
securities laws.
TO THE EXTENT THAT SUCH INDEMNIFICATION PROVISIONS PURPORT TO INCLUDE
INDEMNIFICATION FOR LIABILITIES UNDER THE 1934 ACT, IN THE OPINION OF THE
COMMISSION, SUCH INDEMNIFICATION IS CONTRARY TO PUBLIC POLICY AND, THEREFORE,
UNENFORCEABLE.
BY ORDER OF THE BOARD OF DIRECTORS
GORDON H. CHEADLE
PRESIDENT AND VICE CHAIRMAN OF THE BOARD
November X, 1996
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DELTA HOLDING, INC.
AND SUBSIDIARIES
--------------------------------------------------------------------
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1995
AND DECEMBER 31, 1994
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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 positive cash flow, enabling
the Company to meets its current obligations as they come due.
Gordon Cheadle Terry L. Switzer
President and Vice Chairman of the Board Vice President, Finance
3
<PAGE>
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
<PAGE>
DELTA HOLDING, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
December 31, December 31,
1995 1994
------------ ------------
(audited) (unaudited)
<S> <C> <C>
ASSETS
- ------
Property, equipment, and fixtures:
Equipment and vehicles $8 $153
Furniture 2 135
------------ ------------
10 288
Less: accumulated depreciation (2) (162)
------------ ------------
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
------------ ------------
TOTAL ASSETS $10,105 $17,278
------------ ------------
------------ ------------
LIABILITIES
- -----------
Accounts payable $454 $1,793
Accrued expenses 483 720
Unearned revenue 7,089
Secured debt 11,319 11,086
------------ ------------
TOTAL LIABILITIES 12,256 20,688
------------ ------------
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
------------ ------------
------------ ------------
</TABLE>
See notes to consolidated financial statements.
5
<PAGE>
DELTA HOLDING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(in thousands, except per share data)
<TABLE>
<CAPTION>
For The For The
Year Ended Year Ended
December 31, December 31,
1995 1994
------------ ------------
<S> <C> <C>
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
------------ ------------
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)
------------ ------------
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
------------ ------------
------------ ------------
</TABLE>
See notes to consolidated financial statements.
6
<PAGE>
DELTA HOLDING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)
<TABLE>
<CAPTION>
For The For The
Year Ended Year Ended
December 31, December 31,
1995 1994
------------ ------------
<S> <C> <C>
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
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
- ----------------------------------------
Proceeds from sales of property 567 145
Additions to property, equipment, and fixtures (48) (92)
------------ ------------
Net cash provided by investing activities 519 53
------------ ------------
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
------------ ------------
------------ ------------
</TABLE>
See notes to consolidated financial statements.
7
<PAGE>
DELTA HOLDING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
(unaudited)
(in thousands)
<TABLE>
<CAPTION>
Total
Common Stock Paid-In Accumulated Stockholders'
Shares Amount Capital Deficit Equity (Deficit)
------- ------ ------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
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)
------- ------ ------- ----------- ----------------
------- ------ ------- ----------- ----------------
</TABLE>
See notes to consolidated financial statements.
8
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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.
17
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
EXHIBIT A
PLAN OF COMPLETE LIQUIDATION AND DISSOLUTION
OF
DELTA HOLDING, INC.
The Plan of Complete Liquidation and Dissolution (the "Plan") of Delta
Holding, Inc., a Washington corporation (the "Company"), has been adopted by the
Board of Directors of the Company (the "Board") as being in the best interests
of the Company and its shareholders. The Board has directed that the Plan be
submitted to the holders of the outstanding voting shares of the Company's
common stock for its adoption or rejection at a meeting of shareholders and has
authorized the distribution of a Proxy Statement in connection with the
solicitation of proxies for such meeting. Upon such adoption, the Company shall
voluntarily dissolve in accordance with Chapter 23B.14 of the Washington
Business Corporation Act and Section 336 of the Internal Revenue Code of 1986,
as amended, as follows:
1. ADOPTION OF PLAN
The effective date of the Plan (the "Effective Date") shall be the
date on which it is adopted by the shareholders of the Company. The Company
shall file as soon thereafter as practicable Articles of Dissolution under
RCW 23B.14.030 and a copy of a Revenue Clearance Certificate issued pursuant
to RCW 82.32.260. Upon the filing of such Articles of Dissolution, the
Company, its Board, officers, employees and agents shall hold the Company out
as a corporation in dissolution.
2. TRANSFER OF ASSETS TO THE LIQUIDATING ENTITY
As soon as is reasonably practicable after the Effective Date, the
Company shall distribute all its assets, subject to the then existing debts
and liabilities, to the shareholders by distributing such assets to a
liquidating trust formed solely for the purpose of succeeding to such assets
(the "Liquidating Trust").
<PAGE>
3. INTERIM PERIOD PRIOR TO DISTRIBUTION TO THE LIQUIDATING TRUST
Within the period beginning on the Effective Date and ending on the
transfer of the Company's assets to the Liquidating Trust, the Company shall
have the authority to engage in such transactions as may be necessary to
preserve the value of the Company's assets, on such terms and conditions as
the Board shall determine with no further approvals by shareholders, except
as required by law. The assets of the Company consist almost exclusively of
its interests in its subsidiaries, and all shares relating to the
subsidiaries will be transferred to the Liquidating Trust. Alternatively,
the Company may cause the subsidiary to adopt a complete plan of liquidation
and transfer its assets, subject to existing liabilities and debts, to the
Liquidating Trust. It is expected that the Board will proceed expeditiously
to transfer the Company's assets to the Liquidating Trust, but the timing of
such transactions and whether the Liquidating Trust will succeed directly to
the assets or will acquire them indirectly by acquisition of the shares of
the subsidiaries will be determined by the Board, acting in a prudent and
reasonable fashion, and with the advice of legal counsel.
4. DEREGISTRATION UNDER SECURITIES EXCHANGE ACT
As soon as is reasonably practicable after the Effective Date, the
Company shall deregister its common stock under the Securities Exchange Act
of 1934 and take any and all actions, as may be necessary or advisable, in
the Board's opinion, to cause the Company to cease to be a public company
under federal securities laws.
5. DISTRIBUTIONS TO SHAREHOLDERS FROM THE LIQUIDATING TRUST
As provided in the Liquidating Trust Agreement, which shall be in
substantially the form attached hereto as Appendix I (the "Liquidating Trust
Agreement"), the Liquidating Trust shall distribute to the beneficiaries of
the Liquidating Trust cash or other assets and all properties held by it,
after paying or adequately providing for any debts and liabilities, at such
times and under such conditions as the Trustees may direct.
6. AMENDMENT OF PLAN
The Board may modify or amend the Plan at any time without shareholder
approval if it determines that such action would be in the best interests of
the Company or its shareholders. If any amendment or modification appears
necessary and in the judgment of the Board will materially and adversely
affect the interests of the shareholders or requires approval under
applicable law, such an amendment or modification will be submitted to the
shareholders for approval.
-2-
<PAGE>
7. AUTHORIZATION TO BOARD AND OFFICERS
The Board and the officers of the Company are authorized to approve such
changes to the terms of any of the transactions referred to herein, to interpret
any of the provisions of the Plan, and to make, execute and deliver such other
agreements, conveyances, assignments, transfers, certificates and other
documents and take such other action as such Board and officers deem necessary
or desirable in order to carry out the provisions of the Plan and to effect the
complete liquidation and dissolution of the Company in accordance with
Washington law, including, but not limited to, the transfer of the Company's and
its subsidiaries' assets, subject to liabilities and debts, to the Liquidating
Trust.
8. SELECTION OF TRUSTEES
Gordon Cheadle, James F. Johannes and Maynard G. Norman are hereby
selected to act as trustees under the Liquidating Trust Agreement. Their
selection as trustees shall be deemed approval of any successor trustee
selected by the remaining trustees, pursuant to Article X of the Liquidating
Trust Agreement.
-3-
<PAGE>
APPENDIX I TO EXHIBIT A
DELTA HOLDING, INC.
LIQUIDATING TRUST AGREEMENT
AGREEMENT AND DECLARATION OF TRUST (this "Agreement") dated
____________ ________________, 1996 by and between Delta Holding, Inc., a
Washington corporation (the "Company"), and Gordon Cheadle, James F. Johannes
and Maynard G. Norman (together the "Trustees").
On November __, 1996, the Board of Directors of the Company ("the Board")
adopted and voted to submit to the shareholders of the Company a Plan of
Complete Liquidation and Dissolution of the Company in accordance with
Section 336 of the Internal Revenue Code of 1986, as amended (the "Plan"). The
Plan was adopted by the shareholders of the Company at a meeting held on
December __, 1996. Pursuant to the Plan, the Board has determined that it is
appropriate to create this liquidating trust.
In consideration of the premises, the Company hereby grants, releases,
assigns, transfers, conveys and delivers unto the Trustees for the benefit of
the shareholders of the Company as of the Record Date (as hereinafter defined)
and their permitted successors and assigns as herein provided (the
"Beneficiaries"), all of the Company's right, title and interest in and to
the assets listed on Schedule 1 hereto (the "Trust Assets"), in trust for the
uses and purposes stated herein, subject to the terms and provisions set out
below, and the Trustees hereby accept the Trust Assets and such Trust,
subject to the terms and provisions hereof.
ARTICLE I. NAME AND DEFINITIONS
1.1 NAME
The trust shall be known as the "Delta Holding Liquidating Trust."
1.2 CERTAIN TERMS DEFINED
For all purposes of this instrument, unless the context otherwise
requires:
(a) "Beneficial Interest" shall mean the proportionate share of
each Beneficiary in the Trust Estate determined by the ratio of the
number of issued and outstanding Shares held by each Beneficiary on
________________________________________________________________________________
APPENDIX I TO EXHIBIT A PAGE 1
<PAGE>
the close of business on the Record Date to the number of such issued and
outstanding Shares held on such date by all Shareholders.
(b) "Code" shall mean the Internal Revenue Code of 1986, as amended.
(c) "Effective Date" shall mean the date of this Agreement, being the
first date on which the distribution of assets from the Company to the Trustees
occurs.
(d) "Record Date" shall mean the date selected by the Board for
determination of the shareholders of the Company entitled to become
Beneficiaries.
(e) "Shares" shall mean the shares of Common Stock, $1.00 par value, of
the Company.
(f) "Shareholders" shall mean the holders of record of the outstanding
Shares at the close of business on the Record Date.
(g) "Trust" shall mean the trust created by this Agreement.
(h) "Trust Estate" shall mean all the property held from time to time by
the Trustees under this Agreement, including, without limitation, the Trust
Assets and, in addition, shall thereafter include all dividends, rents,
royalties, income, proceeds and other receipts of or from the Trust Estate.
(i) "Trustees" shall mean the original Trustees and their successors.
ARTICLE II. NATURE OF TRANSFER
2.1 PURPOSE OF TRUST
The sole purpose of the Trust is to liquidate the Trust Estate in a
manner calculated to conserve and protect the Trust Estate, and to collect
and distribute the income and proceeds therefrom to the Beneficiaries in as
prompt and orderly a fashion as possible after the payment of, or provision
for, expenses, debts and liabilities. The Trust is not organized for, and
shall have no responsibility, objective or authority to carry on, a
profit-making business that would normally be conducted by a business
organization classified as a corporation or partnership. The Trustees shall
take no action that would unduly prolong the duration of the Trust.
________________________________________________________________________________
APPENDIX I TO EXHIBIT A PAGE 2
<PAGE>
2.2 INSTRUMENTS OF FURTHER ASSURANCE
After the liquidation and dissolution of the Company, such persons as
have the rights and power to so act will, upon reasonable request of the
Trustees, execute, acknowledge and deliver such further instruments and do
such further acts as may be necessary or proper to effectively carry out the
purposes of this Agreement, to transfer to the Trustees any property intended
to be covered hereby and to vest in the Trustees, and their successors and
assigns, the estate, powers, instruments or funds in trust hereunder.
2.3 PAYMENT OF COMPANY LIABILITIES
The Trustees hereby assume all the claims, debts, liabilities and
obligations (including unascertained or contingent liabilities and expenses) of
the Company, except for those claims, debts, liabilities and obligations of the
Company that are subsequently discharged by the Company's compliance with the
procedures set forth in RCW 23B.14.060 and that expire as a result of the
application of RCW 23B.14.340. Should any liability be asserted against the
Trustees as the transferees of the Trust Estate or as a result of the assumption
made in this Section 2.3, the Trustees may use such part of the Trust Estate as
may be necessary in contesting any such liability or in payment thereof, but in
no event shall the Trustees, Beneficiaries or employees or agents of the Trust
be personally liable, nor shall resort be had to the private property of such
persons, in the event the Trust Estate is not sufficient to satisfy the
liabilities of the Trust.
2.4 INCIDENTS OF OWNERSHIP
The Shareholders shall be the Beneficiaries of the Trust created by this
Agreement, and the Trustees shall retain only such incidents of ownership as are
necessary to undertake the actions and transactions authorized herein.
ARTICLE III. BENEFICIARIES
3.1 BENEFICIAL INTERESTS
(a) The Beneficial Interest of each Shareholder as a Beneficiary
hereof shall be determined by the Trustees in accordance with a certified copy
of the Company's shareholder list as of the Record Date, which list is being
delivered by the Company to the Trustees herewith.
(b) When the Trustees have determined the Beneficial Interests
of the Shareholders, they shall notify each Shareholder of the amount of his
Beneficial
________________________________________________________________________________
APPENDIX I TO EXHIBIT A PAGE 3
<PAGE>
Interest and, in the Trustees' discretion, shall advise him to surrender his
certificate for Shares.
(c) No Shareholder is obligated to surrender his certificates
representing Shares in order to obtain his Beneficial Interest in the Trust.
3.2 RIGHTS OF BENEFICIARIES
Each Beneficiary shall be entitled to participation in the rights and
benefits due to a Beneficiary hereunder according to such Beneficiary's
Beneficial Interest. Each Beneficiary shall take and hold the same subject to
all the terms and provisions of this Agreement. The interest of the Beneficiary
hereby is declared and shall be in all respects personal property, and, upon the
death of an individual Beneficiary, such Beneficiary's interest shall pass as
personal property to the legal representative and such death shall in no way
terminate or affect the validity of this Agreement. A Beneficiary shall have no
title to, right to, possession of, management of or control of the Trust Estate,
except as herein expressly provided. No widower, widow, heir or devisee of any
person who may be a Beneficiary shall have any right of dower, homestead or
inheritance, or of partition, or of any other right, statutory or otherwise, in
any property whatever forming a part of the Trust Estate, but the whole title to
all the Trust Estate shall be vested in the Trustees, and the sole interest of
the Beneficiaries shall be the rights and benefits given to such persons under
this Agreement.
3.3 NO TRANSFER OF INTERESTS OF BENEFICIARIES
The Beneficial Interests of the Beneficiaries of the Trust shall not be
transferable; provided, however, that the Beneficial Interest of a Beneficiary
shall be assignable or transferable by will, intestate succession or operation
of law and that a record owner of Shares may assign his Beneficial Interest to
the beneficial owner thereof. No assignment hereunder shall be deemed effective
until written notice thereof has been delivered to the Trust.
The Beneficial Interests of the Beneficiaries hereunder shall not be
subject to attachment, execution, sequestration or any order of any court, nor
shall such interests be liable for the contracts, debts, obligations,
engagements or liabilities of any Beneficiary, but the interest of a Beneficiary
shall be paid by the Trustees to the Beneficiary free and clear of all
assignments, attachments, anticipations, levies, executions, decrees and
sequestrations, except as may exist pursuant to a distribution of "remaining
assets" under Section 4.1, and shall become the property of the Beneficiary only
when actually received by such Beneficiary.
________________________________________________________________________________
APPENDIX I TO EXHIBIT A PAGE 4
<PAGE>
3.4 TRUSTEES AS BENEFICIARIES
Each Trustee, either individually or in a representative or fiduciary
capacity, may be a Beneficiary to the same extent as if he were not a Trustee
hereunder and have all the rights of a Beneficiary, including, without
limitation, the right to vote and to receive distributions, to the same extent
as if he were not a Trustee hereunder.
ARTICLE IV. DURATION AND TERMINATION OF TRUST
4.1 DURATION
The existence of the Trust shall continue until the first to occur of
(a) the complete distribution of the Trust Estate and (b) the expiration of
three years from the Effective Date, unless an earlier termination is required
by the applicable laws of the State of Washington or by the action of the
Beneficiaries as provided in Section 4.2. Any remaining assets shall be
distributed to the Beneficiaries, subject to any remaining claims, debts,
liabilities and obligations. If any portion of the Trust Estate is not duly
claimed, such assets shall be disposed of in accordance with applicable law.
4.2 TERMINATION BY BENEFICIARIES
The Trust may be terminated at any time by the action of Beneficiaries
having an aggregate Beneficial Interest of at least two thirds of the total
Beneficial Interests as evidenced in the manner provided in Article XII;
provided, however, that such termination would not result in a breach of any
obligation of the Trust.
4.3 CONTINUANCE OF TRUST FOR WINDING UP
After the termination of the Trust and solely for the purpose of
liquidating and winding up the affairs of the Trust, the Trustees shall continue
to act as such until their duties have been fully performed. Upon distribution
of all the Trust Estate, the Trustees shall retain the books, records,
shareholder lists, certificates for Shares and files that shall have been
delivered to or created by the Trustees. At the Trustees' discretion, all of
such records and documents may be destroyed at any time after seven years from
the distribution of all the Trust Estate. Except as otherwise specifically
provided herein, upon the distribution of all the Trust Estate, the Trustees
shall have no further duties or obligations hereunder, except to account as
provided in Section 5.5.
________________________________________________________________________________
APPENDIX I TO EXHIBIT A PAGE 5
<PAGE>
ARTICLE V. ADMINISTRATION OF TRUST ESTATE
5.1 SALE OF TRUST ESTATE
The Trustees, at such times as they may deem appropriate, may transfer,
assign or otherwise dispose of all or any part of the Trust Estate as they deem
appropriate at public auction or at private sale for cash, securities or other
property, or upon credit (either secured or unsecured as the Trustees shall
determine).
5.2 PAYMENT OF CLAIMS, DEBTS, EXPENSES AND LIABILITIES
The Trustees shall collect the assets of and hold the Trust Estate
without provision for, or the obligation to make payment of, any interest
thereon to any Beneficiary. The Trustees shall pay from the Trust Estate all
claims, debts, expenses, liabilities, charges and obligations of the Trust
Estate and all debts, liabilities and obligations that the Trustees
specifically assume and agree to pay pursuant to this Agreement and such
transferee liabilities that the Trustees may be obligated to pay as
transferees of the Trust Estate, including, without limitation, interest,
penalties, taxes, assessments and public charges of every kind and nature and
the costs, charges and expenses connected with the execution and
administration of the Trust and such other payments and disbursements as are
provided in this Agreement or that may be determined to be a proper charge
against the Trust Estate by the Trustees. Notwithstanding a termination of
the Trust for any reason, the Trustees may, in their discretion, make
provisions by reserve or otherwise, out of the Trust Estate, for such amount
as the Trustees in good faith may determine to be necessary to meet present
or future claims, debts and liabilities of the Trust, whether fixed or
contingent.
5.3 INTERIM DISTRIBUTIONS
At such times as may be determined by them, the Trustees shall
distribute, or cause to be distributed, to the Beneficiaries, in proportion
to their respective Beneficial Interests, any proceeds from the sale of
assets or income from investments of the Trust Estate, or any other portion
of the Trust Estate, to the extent that the Trustees in their sole discretion
determine that the amount thereof is no longer necessary to meet claims and
any liabilities of the Trust Estate.
5.4 FINAL DISTRIBUTION
If the Trustees determine that all claims, debts, expenses, liabilities,
charges and obligations of the Trust have been paid or discharged or if the
existence of the Trust shall terminate pursuant to Section 4.1 or 4.2, the
Trustees shall, as expeditiously as is consistent with the conservation and
protection of the Trust Estate, distribute the Trust Estate to the
Beneficiaries, in proportion to their interests therein.
________________________________________________________________________________
APPENDIX I TO EXHIBIT A PAGE 6
<PAGE>
The Trustees shall hold in the Trust and thereafter make disposition of all
liquidating distributions and other payments due any Beneficiaries who have not
been located, subject to applicable state laws regarding escheat and abandoned
property.
5.5 REPORTS TO BENEFICIARIES
As soon as practicable after the termination of the Trust, the Trustees
shall submit a written report and account to the Beneficiaries showing (a) the
assets and liabilities of the Trust upon termination and the receipts and
disbursements of the Trustees for such period, (b) any changes in the Trust
Estate that they have not previously reported, and (c) any action taken by the
Trustees in the performance of their duties under this Agreement that they have
not previously reported and which, in their opinion, materially affects the
Trust Estate. The Trustees may submit similar reports for such interim periods
as they deem advisable. There is no requirement that the financial statements
prepared by the Trustees be audited.
5.6 FEDERAL INCOME TAX INFORMATION
As soon as possible after the close of the calendar year, the Trustees
shall mail to each Beneficiary a statement estimating on a per Share basis the
dates and amounts of all distributions made by the Trustees, depreciation
allowances, if any, and such other information as is reasonably available to the
Trustees that may be helpful in determining the amount of taxable income from
the Trust that such Beneficiary should include in his federal income tax return
for the preceding year. In addition, after receipt of a request in good faith,
or in their discretion without such a request, the Trustees may furnish to any
person who has been a Beneficiary at any time during the preceding year a
statement containing such further information as is reasonably available to the
Trustees that may be helpful in determining the amount of income and expenses of
the Trust that such person should include in his federal income tax return.
ARTICLE VI. POWERS OF AND LIMITATIONS ON TRUSTEES
6.1 LIMITATIONS ON TRUSTEES
The Trustees shall not at any time, on behalf of the Trust or
Beneficiaries, enter into or engage in any trade or business, and no part of the
Trust Estate shall be used or disposed of by the Trustees in furtherance of any
trade or business of the Trust. The Trustees shall be restricted to the holding
and collection of the assets in the Trust Estate and the payment and
distribution thereof for the purposes set forth in this Agreement and to the
conservation and protection of the Trust Estate and the administration thereof
in accordance with the provisions of this Agreement. In no event shall the
Trustees receive any property, make any distribution, satisfy or discharge any
claims, debts, expenses, charges, liabilities and obligations or otherwise
________________________________________________________________________________
APPENDIX I TO EXHIBIT A PAGE 7
<PAGE>
take any action that is inconsistent with a complete liquidation of the Company
as that term is used and interpreted by Sections 337 and 331 of the Code,
regulations promulgated thereunder, and rulings, decisions and determinations of
the Internal Revenue Service and courts of competent jurisdiction or any action
that would jeopardize the status of the Trust as a "liquidating trust" for
federal income tax purposes. This limitation shall apply irrespective of
whether the conduct of any such trade or business is deemed by the Trustees to
be necessary or proper for the conservation and protection of the Trust Estate.
To this end, the Trustees shall make continuing efforts to liquidate and dispose
of the Trust Assets, make timely distributions to the Beneficiaries of the Trust
and not unduly prolong the duration of the Trust.
6.2 SPECIFIC POWERS OF TRUSTEES
Subject to the provisions of Section 6.1, the Trustees shall have the
following specific powers in addition to any powers conferred on them by any
other Section or provision of this Agreement or any statutory laws of the State
of Washington; provided, however, that the enumeration of the following powers
shall not be considered in any way to limit or control the power of the Trustees
to act as specifically authorized by any other Section or provision of this
Agreement and to act in such manner as the Trustees may deem necessary or
appropriate to conserve and protect the Trust Estate or to confer on the
Beneficiaries the benefits intended to be conferred on them by this Agreement:
(a) To perform any and all acts necessary or desirable to carry out
the purpose of the Trust, including, but not limited to, any and all acts
necessary or desirable to conserve, maintain and manage the assets in the
Trust Estate pending their sale or liquidation, and to engage counsel and
to sue for and defend the Trust and settle or compromise claims in favor
of or against the assets of the Trust Estate.
(b) To retain sufficient cash, including if necessary a portion of
the cash proceeds realized from the sale of the assets in the Trust
Estate, in one or more demand and/or time deposits in banks or savings
institutions or temporarily to invest and reinvest such cash in temporary
investments such as short-term certificates of deposit or Treasury bills,
solely to meet the Trustees' reasonable and good-faith estimate of claims
and unascertained or contingent liabilities or contingent expenses (other
than claims of Shareholders with respect to their Shares) that would have
been payable by the Company, had it not dissolved, and have not been
adequately provided for by the Reserve Fund, and to meet any and all
expenses reasonably expected to be incurred in determining or
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APPENDIX I TO EXHIBIT A PAGE 8
<PAGE>
contesting such claims, but not to otherwise invest or reinvest any such
proceeds.
(c) To make withdrawals from such accounts or deposits to pay such
claims and expenses upon receipt of evidence reasonably satisfactory to them
as to the validity thereof.
(d) To determine which assets in the Trust should be sold and which
assets in the Trust, if any, should be distributed in kind to the
Beneficiaries.
(e) To distribute, at such times as the Trustees deem appropriate,
assets to the Beneficiaries not required to be retained to meet claims or
expenses assumed pursuant to Section 2.3.
(f) To distribute to the Beneficiaries, at such times as the Trustees
deem appropriate, the net cash proceeds from the sale of the assets in the
Trust Estate or income from investments (to the extent not required to be set
aside to meet claims and related expenses), and to make distributions to the
Beneficiaries from time to time and upon termination of the Trust of assets
not required to be retained to meet claims or expenses.
(g) To maintain adequate records with respect to Trust activities.
(h) To deposit distributed assets as provided by applicable law for any
Beneficiary who cannot be located.
(i) To sell, exchange or otherwise dispose of any property at any time
held or acquired hereunder at public or private sale, for cash or on terms,
without the necessity of court approval or advertisement.
(j) To register any stock, bond or other security in the name of a
nominee, with or without disclosure of any fiduciary relationship, and to convey
title to any real property to a nominee and to hold title to real property in
the name of a nominee, with or without disclosure of any fiduciary relationship;
but accurate records shall be maintained showing that such security or real
property is a Trust asset.
(k) To vote any securities held by the Trust.
(l) To rescind or modify any contract affecting the Trust.
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APPENDIX I TO EXHIBIT A PAGE 9
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(m) To borrow money in such amounts as the Trustees deem advisable for
Trust purposes.
(n) To employ agents, auditors, attorneys, real estate brokers and
investment counselors and to pay them reasonable compensation.
(o) To select an annual accounting period, to charge any expense, tax,
repair or replacement either to income or principal, or apportion the same
between income and principal, to apportion the sale price of any asset between
income and principal, to determine in their sole discretion whether to amortize
any premium or accumulate any discount on investments purchased or sold, and to
provide or fail to provide a reasonable reserve against depreciation or
obsolescence for any asset that at any time is a part of the Trust Estate.
(p) To serve without making and filing inventory and appraisement,
without filing any annual or other returns or reports to any court, and
without giving bond, but the Trustees shall furnish after the end of each
calendar year with reasonable promptness an annual report including a
statement of receipts and disbursements to the Beneficiaries, and to render
an account to each of the Beneficiaries at the time of the Trust termination.
ARTICLE VII. CONCERNING TRUSTEES, BENEFICIARIES, EMPLOYEES AND AGENTS
7.1 GENERALLY
The Trustees accept and undertake to discharge the trust created by this
Agreement, on the terms and conditions hereof. The Trustees shall exercise such
of the rights and powers vested in them by this Agreement, and use the same
degree of care and skill in their exercise as a prudent man would exercise or
use under the circumstances in the conduct of his own affairs. No provision of
this Agreement shall be construed to relieve the Trustees from liability for
their own grossly negligent action, their own grossly negligent failure to act
or their own willful misconduct, except that:
(a) No Trustee shall be responsible for the acts or omissions of
any other Trustee if done or omitted without his knowledge or consent
unless it shall be proved that such Trustee was grossly negligent in
ascertaining the pertinent facts, and no successor Trustee shall be in
any way responsible for the acts or omissions of any Trustees in office
prior to the date on which he becomes a Trustee.
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APPENDIX I TO EXHIBIT A PAGE 10
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(b) No Trustee shall be liable except for the performance of such duties
and obligations as are specifically set forth in this Agreement, and no implied
covenants or obligations shall be read into this Agreement against the Trustees.
(c) In the absence of bad faith on the part of the Trustees, the
Trustees may conclusively rely, as to the truth of the statements and the
correctness of the opinions expressed therein, on any certificates or
opinions furnished to the Trustees and conforming to the requirements of this
Agreement, but in the case of any such certificates or opinions that are
specifically required to be furnished to the Trustees by any provision
hereof, the Trustees shall be under a duty to examine the same to determine
whether or not they conform to the requirements of this Agreement.
(d) No Trustee shall be liable for any error of judgment made in good
faith.
(e) No Trustee shall be liable with respect to any action taken or
omitted to be taken by him in good faith in accordance with the direction of
Beneficiaries having an aggregate Beneficial Interest of more than 50%
relating to the time, method and place of conducting any proceeding for any
remedy available to the Trustees, or exercising any trust or power conferred
on the Trustees under this Agreement.
7.2 RELIANCE BY TRUSTEES
Except as otherwise provided in Section 7.1:
(a) The Trustees may rely and shall be protected in acting on any
resolution, certificate, statement, instrument, opinion, report, notice,
request, comment, order or other paper or document believed by them to be
genuine and to have been signed or presented by the proper party or parties.
(b) The Trustees may consult with legal counsel to be selected by them,
including firms of which a Trustee may be a member, and the advice or opinion of
such counsel shall be full and complete personal protection to all Trustees,
employees and agents of the Trust in respect of any action taken or suffered by
them in good faith and in reliance on, or in accordance with, such advice or
opinion.
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APPENDIX I TO EXHIBIT A PAGE 11
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(c) Persons dealing with Trustees shall look only to the Trust
Estate to satisfy any liability incurred by the Trustees to such person in
carrying out the terms of the Trust, and the Trustees shall have no personal
or individual obligation to satisfy any such liability.
(d) As far as practicable, the Trustees shall cause any written
instrument creating an obligation of the Trust to include a reference to this
Agreement to provide that neither the Beneficiaries, the Trustees nor their
agents shall be liable thereunder and that the other parties to such instrument
shall look solely to the Trust Estate for the payment of any claim thereunder or
the performance thereof; provided, however, that the omission of such provision
from any such instrument shall not render the Beneficiaries, Trustees or their
agents liable nor shall the Trustees be liable to anyone for such omission.
7.3 LIABILITY TO THIRD PERSONS
No Beneficiary shall be subject to any personal liability whatsoever, in
tort, contract or otherwise, to any person in connection with the Trust Estate
or the affairs of the Trust; and no Trustee, employee or agent of the Trust
shall be subject to any personal liability whatsoever, in tort, contract or
otherwise, to any person in connection with the Trust Estate or the affairs of
the Trust, except for his own willful misconduct, knowingly and intentionally
committed in bad faith; and all such other persons shall look solely to the
Trust Estate for satisfaction of claims of any nature arising in connection with
the affairs of the Trust. If the Trustees deem it appropriate, the Trustees may
obtain insurance for the protection of the Trust Estate, its Beneficiaries,
Trustees, employees and agents in such amount as the Trustees shall deem
adequate to cover all foreseeable liability to the extent available at
reasonable rates.
7.4 RECITALS
Any written instrument creating an obligation of the Trust shall be
conclusively taken to have been executed or done by a Trustee, employee or agent
of the Trust only in his capacity as a Trustee under this Agreement or in his
capacity as an employee or agent of the Trust. Any written instrument creating
an obligation of the Trust shall refer to this Agreement and contain a recital
to the effect that obligations thereunder are not personally binding on, nor
shall resort be had to the private property of, any of the Trustees,
Beneficiaries, employees or agents of the Trust. Only the Trust Estate or a
specific portion thereof shall be bound, but the omission of such recital shall
not operate to impose personal liability on any of the Trustees, Beneficiaries,
employees or agents of the Trust.
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APPENDIX I TO EXHIBIT A PAGE 12
<PAGE>
7.5 INDEMNIFICATION
Each Trustee, employee and agent shall be indemnified out of the Trust
Estate against all liabilities and expenses, including amounts paid in
satisfaction of judgments, in compromise or as fines and penalties, and counsel
fees, reasonably incurred by him in connection with the defense or disposition
of any action, suit or other proceeding by the Trust or any other person,
whether civil or criminal, in which he may be involved or with which he may be
threatened, while in office or thereafter by reason of his being or having been
such a Trustee, employee or agent; provided that he shall not be entitled to
have such indemnification in respect of any matter as to which he shall have
been adjudicated to have acted in bad faith or with willful misfeasance or gross
negligence or in reckless disregard of his duties; provided further that, as in
any matter disposed of by a compromise payment by such Trustee, employee or
agent, pursuant to a consent decree or otherwise, no indemnification either for
said payment or for any other expenses shall be provided unless the Trust shall
have received a written opinion from independent counsel approved by the
Trustees to the effect that, if the foregoing matters had been adjudicated, such
Trustee, employee or agent would not have been found to have acted in bad faith
or with willful misfeasance or gross negligence or in reckless disregard of his
duties. The rights accruing to any Trustee, employee or agent under these
provisions shall not exclude any other right to which he may be lawfully
entitled; provided, however, that no Trustee, employee or agent may satisfy any
right of indemnity or reimbursement granted herein or to which he may be
otherwise entitled except out of the Trust Estate, and no Beneficiary shall be
personally liable to any person with respect to any claim for indemnity or
reimbursement or otherwise, except as otherwise provided by law. The Trustees
may make advance payments in connection with indemnification under this
Section 7.5; provided that the indemnified Trustee, employee or agent shall have
given a written undertaking to repay any amount advanced to him and to reimburse
the Trust in the event it is subsequently determined that he is not entitled to
such indemnification. The Trustees may purchase such insurance as they
determine, in the exercise of their discretion, adequately insures that each of
the Trustees, employees and agents of the Trust shall be indemnified against any
such loss, liability or damage pursuant to this Section 7.5. The rights
accruing to any person by reason of the foregoing shall not be deemed to exclude
any other right to which he may legally be entitled nor shall anything else
contained herein restrict the right of the Trustees to indemnify or reimburse
such person in any proper case even though not specifically provided for herein,
nor shall anything contained herein restrict the right of any such person to
contribution under applicable law.
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APPENDIX I TO EXHIBIT A PAGE 13
<PAGE>
ARTICLE VIII. PROTECTION OF PERSONS DEALING WITH TRUSTEES
8.1 ACTION BY TRUSTEES
All action required or permitted to be taken by the Trustees shall require
the approval of at least a majority of the Trustees, except as otherwise
required by law.
8.2 RELIANCE ON STATEMENT BY TRUSTEES
Any person dealing with the Trustees shall be fully protected in relying on
the Trustees' certificate signed by any one or more of the Trustees that they
have authority to take any action under the Trust. Any person dealing with the
Trustees shall be fully protected in relying on the Trustees' certificate
setting forth the facts concerning the calling of any meeting of Beneficiaries,
the giving of notice thereof and the action taken at such meeting, including the
aggregate Beneficial Interest of the Beneficiaries taking such action.
ARTICLE IX. COMPENSATION OF TRUSTEES
9.1 AMOUNT OF COMPENSATION
In lieu of commission or other compensation fixed by law for trustees, the
Trustees shall each receive as compensation for services hereunder $2,400 per
year and $500 per meeting.
9.2 EXPENSES
Each Trustee shall be reimbursed from the Trust Estate for all expenses
reasonably incurred by him in the performance of his duties in accordance with
this Agreement.
ARTICLE X. TRUSTEES AND SUCCESSOR TRUSTEES
10.1 NUMBER OF TRUSTEES
Subject to the provision of Section 10.3 relating to the period ending the
appointment of a successor Trustee, there shall always be two Trustees of the
Trust, each of whom shall be a citizen and resident of, or a corporation that is
incorporated under the laws of, a state of the United States, and, if a
corporation, it shall be authorized to act as a corporate fiduciary under the
laws of the State of Washington.
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APPENDIX I TO EXHIBIT A PAGE 14
<PAGE>
10.2 RESIGNATION AND REMOVAL
Any Trustee may resign and be discharged from the Trust hereby created by
giving written notice thereof to the remaining Trustee. Such resignation shall
become effective on the day specified in such notice or upon the appointment of
such Trustee's successor and such successor's acceptance of such appointment,
whichever is earlier. Any Trustee may be removed at any time, with or without
cause, by Beneficiaries having an aggregate Beneficial Interest of at least
two-thirds of the total Beneficial Interests.
10.3 APPOINTMENT OF SUCCESSOR
Should at any time a Trustee resign or be removed, or die or become
mentally incompetent or bankrupt, a vacancy shall be deemed to exist and a
successor shall be appointed by the remaining Trustee. If such a vacancy is not
filled by the remaining Trustee within 30 days, the Trustee shall promptly give
notice of such vacancy to the Beneficiaries and the Beneficiaries may, pursuant
to Article XII hereof, call a meeting to appoint a successor Trustee by
Beneficiaries owning a majority of the Beneficial Interests represented at the
meeting. Pending the appointment of a successor Trustee, the remaining Trustee
then serving may take any action as required.
10.4 ACCEPTANCE OF APPOINTMENT BY A SUCCESSOR TRUSTEE
Any successor Trustee appointed hereunder shall execute an instrument
accepting such appointment and shall deliver one counterpart thereof to the
other Trustee. Thereupon such successor Trustee shall, without any further act,
become vested with all the estates, properties, rights, powers, trusts and
duties of his predecessor in the Trust hereunder with like effect as if
originally named herein, but the retiring Trustee shall nevertheless, when
requested in writing by the successor Trustee or by the remaining Trustee,
execute an instrument or instruments conveying and transferring to such
successor Trustee, upon the trust herein expressed, all the estates, properties,
rights, powers and trusts of such retiring Trustee, and shall duly assign,
transfer and deliver to such successor Trustee all property and money held by
him hereunder.
10.5 BONDS
Unless required by the Board prior to the Effective Date, or unless a bond
is required by law, no bond shall be required of any original or successor
Trustee hereunder. If a bond is required by law, no surety or security with
respect to such bond shall be required unless required by law and such
requirement cannot be waived by or with approval of the Beneficiaries or unless
required by the Board. If a bond is required by the Board or by a majority vote
of the Trustees, the Board or the Trustees,
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APPENDIX I TO EXHIBIT A PAGE 15
<PAGE>
as the case may be, shall determine whether, and to what extent, a surety or
security with respect to such bond shall be required.
ARTICLE XI. CONCERNING BENEFICIARIES
11.1 LIMITATION ON SUITS BY BENEFICIARIES
No Beneficiary shall have any right by virtue of any provisions of this
Agreement to institute any action or proceeding at law or in equity against any
party other than the Trustees upon or under or with respect to the Trust Estate
or the agreements relating to or forming part of the Trust Estate, and the
Beneficiaries do hereby waive any such right, unless Beneficiaries having an
aggregate Beneficial Interest of 33.5% shall have made written request upon the
Trustees to institute such action or proceeding in their own names as Trustees
hereunder and shall have offered to the Trustees reasonable indemnity against
the costs and expenses to be incurred therein or thereby, and the Trustees for
30 days after their receipt of such notice, request and offer of indemnity shall
have failed to institute any such action or proceeding.
11.2 REQUIREMENTS OF UNDERTAKING
The Trustees may request any court to require, and any court may in its
discretion require, in any suit for the enforcement of any right or remedy under
this Agreement, or in any suit against the Trustees, the filing by any party
litigant in such suit of any undertaking to pay the costs of such suit, and such
court may in its discretion assess reasonable costs, including reasonable
attorneys' fees, against any party litigant in such suit, having due regard to
the merits and good faith of the claims or defenses made by such party litigant,
provided that the provisions of this Section 11.2 shall not apply to any suit by
the Trustees.
ARTICLE XII. MEETING OF BENEFICIARIES
12.1 PURPOSE OF MEETINGS
A meeting of the Beneficiaries may be called at any time and from time to
time pursuant to the provisions of this Article XII for the purposes of taking
any action that the terms of this Agreement permit Beneficiaries having a
specified aggregate Beneficial Interest to take either acting alone or with the
Trustees.
12.2 MEETING CALLED BY TRUSTEES
The Trustees may at any time call a meeting of the Beneficiaries to be held
at such time and such place within or outside the State of Washington as the
Trustees
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APPENDIX I TO EXHIBIT A PAGE 16
<PAGE>
shall determine. Written notice of every meeting of the Beneficiaries shall be
given by the Trustees (except as provided in Section 12.3), which written notice
will set forth the time and place of such meeting and in general terms the
action proposed to be taken at such meeting, and shall be mailed not more than
60 days or less than 10 days before such meeting is to be held to all the
Beneficiaries of record not more than 60 days before the date of such meeting.
The notice shall be directed to the Beneficiaries at their respective addresses
as they appear in the records of the Trust.
12.3 MEETING CALLED ON REQUEST OF BENEFICIARIES
Within 30 days after written request to the Trustees by Beneficiaries having an
aggregate Beneficial Interest of 33.5% to call a meeting of all the
Beneficiaries, which written request shall specify in reasonable detail the
action proposed to be taken, the Trustees shall proceed under the provisions of
Section 12.2 to call a meeting of the Beneficiaries. If the Trustees fail to
call such a meeting within such 30-day period, then such meeting may be called
by Beneficiaries having an aggregate Beneficial Interest of 33.5% or their
designated representative.
12.4 PERSONS ENTITLED TO VOTE AT MEETING OF BENEFICIARIES
Each Beneficiary shall be entitled to vote at a meeting of the
Beneficiaries either in person or by his proxy duly authorized in writing. The
vote of each Beneficiary shall be in proportion to his proportionate Beneficial
Interest in the Trust Estate.
12.5 QUORUM
At any meeting of Beneficiaries, the presence of Beneficiaries having an
aggregate Beneficial Interest sufficient to take action on any matter for the
transaction of which such meeting was called shall be necessary to constitute a
quorum; but, if less than a quorum is present, Beneficiaries having an aggregate
Beneficial Interest of more than 50% of the aggregate Beneficial Interest of all
Beneficiaries represented at the meeting may adjourn such meeting with the same
effect and for all intents and purposes as though a quorum had been present.
Any meeting of Beneficiaries may be adjourned from time to time and a meeting
may be held at such adjourned time and place without further notice.
12.6 CONDUCT OF MEETINGS
The Trustees shall appoint the Chairman and the Secretary of the meeting.
The vote on any resolution submitted to any meeting of Beneficiaries shall be by
written ballot. Two Inspectors of Votes, appointed by the Chairman of the
meeting, shall
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APPENDIX I TO EXHIBIT A PAGE 17
<PAGE>
count all votes cast at the meeting for or against any resolution and shall
make and file with the Secretary of the meeting their verified written report.
12.7 RECORD OF MEETING
A record of the proceedings of each meeting of Beneficiaries shall be
prepared by the Secretary of the meeting. The record shall be signed and
verified by the Secretary of the meeting and shall be delivered to the Trustees
to be preserved by them. Any record so signed and verified shall be conclusive
evidence of all the matters therein stated.
ARTICLE XIII. AMENDMENTS
13.1 CONSENT OF BENEFICIARIES
In addition to any amendments otherwise authorized herein, the Trustees
may, either in their sole discretion and without the consent of any of the
Beneficiaries, or at the direction of Beneficiaries having an aggregate
Beneficial Interest of at least two-thirds of the total Beneficial Interests,
add or delete any provisions of this Agreement so that the Trust constitutes
a "liquidating trust" for federal income tax purposes, or otherwise add to,
delete or modify any provisions of this Agreement; provided, however, that no
such amendment shall cause the Trust not to constitute a "liquidating trust"
or shall affect the Beneficiaries' right to receive their pro rata shares of
the Trust Estate at the time of distribution. The Trustees shall promptly
make and execute a declaration effecting any such amendment.
13.2 NOTICE AND EFFECT TO AMENDMENT
Promptly after the execution by the Trustees of any such declaration of
amendment, the Trustees shall give notice of the substance of such amendment to
the Beneficiaries, or, in lieu thereof, the Trustees may send a copy of the
amendment to each Beneficiary. Upon the execution of any such declaration of
amendment by the Trustees, this Agreement shall be deemed to be modified and
amended in accordance therewith and the respective rights, limitations of
rights, obligations, duties and immunities of the Trustees and the Beneficiaries
under this Agreement shall thereafter be determined, exercised and enforced
hereunder subject in all respects to such modification and amendments, and all
the terms and conditions of any such amendment shall be thereby deemed to be
part of the terms and conditions of this Agreement for any and all purposes.
________________________________________________________________________________
APPENDIX I TO EXHIBIT A PAGE 18
<PAGE>
ARTICLE XIV. MISCELLANEOUS PROVISIONS
14.1 FILING DOCUMENTS
This Agreement shall be filed or recorded in such office or offices as the
Trustees may determine to be necessary or desirable. A copy of this Agreement
and all amendments thereof shall be filed in the office of each Trustee and
shall be available at all times during regular business hours for inspection by
any Beneficiary or his duly authorized representative. The Trustees shall file
or record any amendment of this Agreement in the same place where the original
Agreement is filed or recorded. The Trustees shall file or record any
instrument that relates to any change in the office of Trustees in the same
place where the original Agreement is filed or recorded.
14.2 INTENTION OF PARTIES TO ESTABLISH TRUST
This Agreement is not intended to create and shall not be interpreted as
creating a corporation, association, partnership or joint venture of any kind
for purposes of federal income taxation or for any other purpose. Except as
otherwise contemplated by Section 3.3, this Agreement is intended to create a
trust without transferable shares and the trust created hereunder shall be
governed and construed in all respects as a trust.
14.3 LAW AS TO CONSTRUCTION
This Agreement shall be governed by and construed in accordance with the
laws of the State of Washington; the Trustees and the Beneficiaries (by their
vote with respect to the Plan of Complete Liquidation and Dissolution and/or
their acceptance of any distributions made to them pursuant to this Agreement)
consent and agree that this Agreement shall be governed by and construed in
accordance with such laws.
14.4 SEPARABILITY
In the event any provision of this Agreement or the application thereof to
any person or circumstances shall be finally determined by a court of proper
jurisdiction to be invalid or unenforceable to any extent, the remainder of this
Agreement, or the application of such provision to persons or circumstances
other than those as to which it is held invalid or unenforceable, shall not be
affected thereby, and each provision of this Agreement shall be valid and
enforced to the fullest extent permitted by law.
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APPENDIX I TO EXHIBIT A PAGE 19
<PAGE>
14.5 NOTICES
Any notice or other communication by the Trustees to any Beneficiary shall
be deemed to have been sufficiently given, for all purposes, if given by being
deposited, postage prepaid, in a post office or letter box addressed to such
person at his address as shown in the records of the Trustees.
14.6 COUNTERPARTS
This Agreement may be executed in any number of counterparts, each of which
shall be an original, but such counterparts shall together constitute but one
and the same instrument.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed this _____ day of ______________, 1995.
DELTA HOLDING, INC. TRUSTEES:
By --------------------------
---------------------------- Gordon Cheadle
Title
-------------------------
--------------------------
James F. Johannes
--------------------------
Maynard G. Norman
________________________________________________________________________________
APPENDIX I TO EXHIBIT A PAGE 20
<PAGE>
SCHEDULE 1
TO LIQUIDATING TRUST AGREEMENT
OF DELTA HOLDING, INC.
[List of the assets of Delta Holding, Inc. being transferred to the liquidating
trust]
________________________________________________________________________________
APPENDIX I TO EXHIBIT A PAGE 21
<PAGE>
PRELIMINARY COPIES
- -------------------------------------------------------------------------------
DELTA HOLDING, INC.
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS FOR THE ANNUAL
MEETING OF SHAREHOLDERS TO BE HELD ON APRIL 2, 1996
The undersigned hereby appoints Gordon Cheadle, James F. Johannes and
Maynard G. Norman, and each of them, as Proxies, with full power of
substitution, and hereby authorizes them to represent and to vote, as
designated below, all the shares of Common Stock held by the undersigned on
January 22, 1996, at the Annual Meeting of Shareholders to be held on
April 2, 1996, or any adjournments thereof.
YOUR VOTE IS IMPORTANT. PROMPT RETURN OF THIS PROXY WILL HELP SAVE THE
EXPENSE OF ADDITIONAL SOLICITATION EFFORTS.
The Board of Directors recommends a vote "FOR Gordon Cheadle as the Class A
Director" in Item 1 and "FOR" Item 2.
1. Election of Director: Election of Gordon Cheadle as the Class A Director
/ / FOR Gordon Cheadle as / / WITHOLD AUTHORITY to vote
the Class A Director for Gordon Cheadle as the
Class A Director
2. Plan of Liquidation and Dissolution
/ / FOR / / AGAINST / / ABSTAIN
In their discretion, the Proxies are authorized to vote on such other
business as may properly come before the meeting. This Proxy, when properly
executed and delivered, will be voted in the manner directed herein by the
undersigned. If no direction is made, the Proxy will be voted "FOR Gordon
Cheadle as the Class A Director" in Item 1 and "FOR" the approval of the Plan
of Liquidation and Dissolution in Item 2.
- ------------------------------------------------------------------------------
Please sign below exactly as your name appears on your stock certificate.
When shares are held jointly, each person should sign. When signing as
attorney, executor, administrator, trustee or guardian, please give full
title as such. An authorized person should sign on behalf of a corporation,
partnership or association and give his or her title.
Dated :---------------------------, 1996
----------------------------------
Signature
----------------------------------
Signature (if held jointly)
- ------------------------------------------------------------------------------
