<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended March 31, 1996 Commission File Number 33-21409
DELTA CLEARING CORP.
(formerly DELTA GOVERNMENT OPTIONS CORP.)
(exact name of registrant as specified in its charter)
Delaware 13-3456486
(state or other jurisdiction of (IRS employer
incorporation or organization) identification no.)
525 Washington Boulevard
Jersey City, New Jersey 07310
(address of principal executive offices) (zip code)
(201) 418-8900
(telephone number)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No ____
This Form 10Q pertains to 250,000 put and call option contracts on U.S.
Treasury securities to be issued from time to time by Delta Government Options
Corp.
Indicate number of shares outstanding of each of the issuer's classes of
common stock as of May 10, 1996: 900,000 shares of common stock, par value $.01
per share.
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TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION Page
----
Item 1. Financial Statements
Statements of Financial Condition
at March 31, 1996 and December 31, 1995 2
Statements of Operations
for the Three Months Ended March 31, 1996 and 1995 3
Statements of Cash Flows
for the Three Months Ended March 31, 1996 and 1995 4
Notes to Financial Statements dated March 31, 1996 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 7
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 9
Item 6. Exhibits and Reports on Form 8-K 9
Signature 10
1
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DELTA CLEARING CORP.
STATEMENTS OF FINANCIAL CONDITION
March 31, December 31,
1996 1995
----------- ------------
ASSETS
Cash $ 634,408 $ 559,802
Cash and cash equivalents held for margin 27,794,578 6,407,840
Investment in U.S. government obligations,
at cost plus accrued interest, which
approximates market value 5,251,858 5,679,022
Prepaid expenses and other current assets 119,154 71,355
----------- -----------
TOTAL CURRENT ASSETS 33,799,998 12,718,019
Office furniture and equipment, at cost,
net of accumulated depreciation of
$89,853 for March 31, 1996 and $64,827
for December 31, 1995 260,492 267,159
Other assets 26,862 26,862
----------- -----------
TOTAL ASSETS $34,087,352 $13,012,040
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Margin Payable 27,794,578 6,407,840
Accrued expenses and other 477,043 252,629
----------- -----------
TOTAL LIABILITIES 28,271,621 6,660,469
----------- -----------
STOCKHOLDERS' EQUITY
Common stock, $.01 par value, 1,000,000
shares authorized, 900,000 shares
issued and outstanding 9,000 9,000
Additional paid-in-capital 8,991,000 8,991,000
Accumulated deficit (3,184,269) (2,648,429)
----------- -----------
TOTAL STOCKHOLDERS' EQUITY 5,815,731 6,351,571
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $34,087,352 $13,012,040
=========== ===========
See accompanying notes to financial statements.
2
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DELTA CLEARING CORP.
STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1996 AND 1995
1996 1995
---- ----
Clearing Fees & Related Income $ 44,148 $ 35,639
Investment Income 78,447 75,738
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TOTAL INCOME 122,595 111,377
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Clearing expenses 256,310 100,000
General and administrative expenses 402,125 146,170
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TOTAL EXPENSES 658,435 246,170
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NET INCOME (LOSS) $(535,840) $(134,793)
========= =========
See accompanying notes to financial statements.
3
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DELTA CLEARING CORP.
STATEMENT OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 1996 AND 1995
1996 1995
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CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(535,840) $(134,793)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 25,026 3,038
(Increase) decrease in prepaid
expenses and other current assets (47,799) (46,502)
(Increase) decrease in accounts
payable and accrued expenses 224,414 (11,258)
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NET CASH USED IN OPERATING ACTIVITIES (334,199) (189,515)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Net Maturity (Purchase) of U.S.
government obligations 427,164 (50,733)
Purchase of office furniture and
equipment (18,359) --
--------- ---------
NET CASH PROVIDED BY (USED IN)
INVESTING ACTIVITIES 408,805 (50,733)
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Increase (decrease) in cash 74,606 (240,248)
Cash, beginning of period 559,802 409,452
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Cash, end of period $ 634,408 $ 169,204
========= =========
Supplemental cashflow disclosures:
Income taxes paid $ -- $ --
========= =========
Interest paid $ -- $ --
========= =========
See accompanying notes to financial statements.
4
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DELTA CLEARING CORP.
NOTES TO FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION:
The financial statements have been prepared in accordance with
applicable requirements for the preparation of quarterly reports on Form 10-Q.
In the opinion of management of Delta Clearing Corp. (the "Company") all
adjustments (consisting of only normal recurring accruals) that are necessary
for a fair presentation of the financial position and results of operations for
the interim periods have been included. Such results of operations are not
necessarily indicative of the results to be anticipated for the entire year or
any other interim period.
2. COMMITMENTS AND CONTINGENCIES:
The Company has the authority to issue up to 250,000 option contracts
consisting of put and call options on U.S. Treasury securities, and in
conjunction with such issuance, purchases matching put and call options from
Participants. Additionally, the Company clears and settles repurchase and
reverse repurchase agreements. The Company, accordingly, acts solely as an
intermediary in principal transactions, running in effect, a "matched book."
The Company is not subject to market risk with respect to issued or purchased
option contracts or repurchase or reverse repurchase agreements. However, these
activities may expose the Company to off-balance-sheet credit risk in the event
a Participant fails to fulfill its contractual obligations and its margin on
deposit is insufficient. To control this risk, the Company collects, on a daily
or intra-daily basis, margin from Participants who write option contracts or
enter into repurchase and reverse repurchase agreements which is deemed
sufficient to cover adverse movements in the value of these positions. To
further control this risk, the Company enforces compliance with its clearing
agency procedures (the "Procedures"), which mandate regulatory and internal
guidelines, control maximum system exposure and establish Participant capital
adequacy standards and trading limits.
The Company has obtained a credit enhancement facility, comprised of a
$250 million surety bond issued by Capital Markets Assurance Corporation (with
maximum coverage of any Participant equal to $30 million), to secure payment of
the obligations owed to the Company by a Participant in the event of a failure
by a Participant to pay premium in connection with the purchase of an option or
to meet any shortfalls in the Participant's account after liquidation. Under
the terms of the Procedures, each Participant account is a party to the credit
facility and the Company is the beneficiary. Accordingly, any reimbursement
obligation under the credit enhancement facility becomes the obligation of the
individual defaulting Participant and not of the Company. The credit
enhancement facility expires on January 27, 1999.
5
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DELTA CLEARING CORP.
At March 31, 1996 the Company had no issued and outstanding put and
call options on U.S. Treasury securities. At March 31, 1996, the Company had a
matched book of repurchase and reverse repurchase agreements with a notional
amount of $11.112 billion.
On October 18, 1995, the Company purchased various software and
hardware relating to the operation of its clearing business (the "Platform")
from RMJ Trading for $250,000. This amount is included in office, furniture and
equipment on the statement of financial condition at December 31, 1995.
Currently, RMJ Trading is responsible for operating the Platform, but the
Company expects to assume operational responsibility for the Platform sometime
during 1996. As additional compensation for its purchase of the Platform and in
further consideration of the termination of its exclusivity arrangement with RMJ
Trading, the Company will pay 20% of its pre-tax operating income (exclusive of
interest income) for the next five full fiscal years and certain other amounts
to an additional maximum price of $2.25 million.
In December 1995, the Company entered into a real estate lease
agreement. The lease became effective upon the Company's taking possession of
the property, which occurred on March 29, 1996. The agreement calls for the
Company to make rental payments totaling $1,551,000 over the next eleven years.
6
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DELTA CLEARING CORP.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The Company commenced operations on January 12, 1989 immediately
following the issuance of the Company's 17A Clearing Agency Order (the "Order")
by the Securities and Exchange Commission (the "Commission"). Also following
the issuance of the Order, the Company commenced solicitation of a number of
qualified financial institutions as Participants for clearing and settlement of
OTC options on U.S. Treasury notes and bonds. Enrollment at March 31, 1996 was
38 Participants, reduced from 45 Participants at March 31, 1995 as inactive
financial institutions were removed as Participants. Participants consist
mainly of dealers in U.S. Treasury securities as well as banks and other
financial institutions. In October 1995, after receiving the approval of the
Commission to amend its Procedures, the Company commenced the clearance and
settlement of repurchase agreements and reverse repurchase agreements ("Repos")
involving U.S. Treasury securities. The Company anticipates the clearance of
Repos to be a primary focus of its activities. Such clearance activities began
producing revenue during the three months ended March 31, 1996.
For the three months ended March 31, 1996, the Company issued 35
matched option contracts to Participants and cleared approximately $75 billion
notional of matched Repos. On March 31, 1996, Participant's cash and cash
equivalents held for margin was approximately $27.8 million. During the three
months ended March 31, 1996, the requirements for the Company for cash and cash
equivalents held for margin fluctuated from a high of $30 million to a low of $6
million due to Participants' clearing activity.
For the three months ended March 31, 1996 and 1995, the Company
reported total revenue of $122,595 and $111,377 respectively, reflecting an
increase of approximately 10% in 1996. This increase includes $42,807 of
clearing fee income from Repos in 1996. Fee Income from the clearance of
options amounted to $1,341 in 1996 versus $18,828 in 1995, reflecting a decrease
of approximately 93%. This decrease reflects the continued diminishing activity
on the part of the sole options broker. Activity on the part of the options
broker began to wane subsequent to the departure of several experienced options
traders from the brokers' options trading desk in September, 1994. On August 3,
1995, the broker agreed to waive its exclusivity rights with respect to the
brokerage of U.S. Treasury options that are cleared and settled by the Company.
Unable to enhance its options trading desk, on April 16, 1996, the broker
formally notified the Company that it was discontinuing the brokerage of U.S.
Treasury options. On April 17, 1996, the Company began utilizing the services
of another options broker. It is the Company's intention to market and expand
its options clearing business. Toward this end, the Company is currently
seeking a regulatory relief letter from the Commission allowing the Company to
transact its options clearing activity through multiple brokers.
7
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DELTA CLEARING CORP.
Clearing expenses are comprised, principally, of fees payable to the
provider of the Company's credit enhancement facility (the "CEF"). In October
1995, the Company increased the CEF to $250 million from $100 million in order
to support the provision of clearing services for Repos. The increase in
clearing expenses of approximately 256% in 1996 to $261,810 from $100,000 in
1995 results from the increased CEF. In November, 1995, the Company began
utilizing a new clearing bank. The contractual terms of the new banking
relationship reflects a fee schedule sensitive to the levels of clearing
activity. In 1996, the Company incurred fees of $25,060 versus $0 in 1995.
Such bank clearing fees are included in clearing expenses. General and
administrative expenses increased approximately 175% to $402,125 in 1996 from
$146,170 in 1995. This increase includes an increase in employee compensation
and benefits of approximately 250% to $250,491 in 1996 from $71,529 in 1995 as a
result of higher staffing levels required to operate and support the Repo
clearing activity. Additionally, costs were incurred in depreciation,
maintenance and related contractual changes that were effective as a consequence
of the purchase of the Company in October 1995. The majority of such increased
costs were incurred as a result of the additional system hardware and software
required to support the Company's options and Repos clearing activities.
The Company's liquidity resources are provided from two sources. The
liquidity requirement for the clearance of Repos is provided through a secured
financing facility in the amount of $250 million provided by the Bank of New
York. All other liquidity needs are provided through the Company's capital
resources of approximately $5.8 million. Due to start-up costs associated with
the introduction of the Repo clearing service, the Company's capital may be
subject to further erosion. At the February 28, 1996 Board of Directors
meeting, at which all shareholders were represented, the potential need for
additional capital was discussed. It was decided that additional commitments of
capital would be made by the shareholders at such time and in such amounts as to
sufficiently meet the Company's capital and liquidity requirements for the
foreseeable future. The operating results of the Company will determine the
timing and the magnitude, if required, of such a capital infusion.
8
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DELTA CLEARING CORP.
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
None
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
None
(b) Reports on Form 8-K - The Company filed no reports on
Form 8-K during the quarter ending March 31, 1996.
9
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DELTA CLEARING CORP.
SIGNATURE
- ---------
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, on May 10, 1996.
DELTA CLEARING CORP.
Stephen K. Lynner
-------------------------
Stephen K. Lynner
President
Ronald H. Buckner
-------------------------
Ronald H. Buckner
Chief Financial Officer
10
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<ARTICLE> 5
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> MAR-31-1996
<CASH> 634,408
<SECURITIES> 5,251,858
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 33,799,998
<PP&E> 260,492
<DEPRECIATION> 89,853
<TOTAL-ASSETS> 34,087,352
<CURRENT-LIABILITIES> 28,271,621
<BONDS> 0
0
0
<COMMON> 9,000
<OTHER-SE> 5,806,731
<TOTAL-LIABILITY-AND-EQUITY> 34,087,352
<SALES> 44,148
<TOTAL-REVENUES> 122,595
<CGS> 0
<TOTAL-COSTS> 658,435
<OTHER-EXPENSES> 256,310
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (535,840)
<INCOME-TAX> 0
<INCOME-CONTINUING> (535,840)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (535,840)
<EPS-PRIMARY> (.59)
<EPS-DILUTED> (.59)
</TABLE>
