<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended: December 31, 1996
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission File Number: 33-21409
DELTA CLEARING CORP.
(Exact name of registrant as specified in its charter)
State of Delaware 13-3456486
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
525 Washington Boulevard, Jersey City NJ 07310
(Address of principal executive offices) (Zip code)
(201) 418-8900
(Registrant's telephone number, including area code)
Securities Registered Pursuant to Section 12(b) of the Act: None
Securities Registered Pursuant to Section 12(g) of the Act: None
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__
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ X ]
There is no public market for the registrant's common stock. See Part II, Item 5
of this Report.
As of March 28, 1997, the registrant had outstanding 900,000 shares of Common
Stock, par value $.01 per share.
DOCUMENTS INCORPORATED BY REFERENCE
None.
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TABLE OF CONTENTS
Page
----
PART I
Item 1. Business...................................................... 1
Item 2. Properties.................................................... 3
Item 3. Legal Proceedings............................................. 3
Item 4. Submission of Matters to a Vote of Security Holders........... 3
PART II
Item 5. Market for Registrant's Common Equity
and Related Stockholder Matters......................... 3
Item 6. Selected Financial Data....................................... 4
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations............................... 4
Item 8. Financial Statements and Supplementary Data................... 6
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure................................ 19
PART III
Item 10. Directors and Executive Officers of the Registrant............ 20
Item 11. Executive Compensation........................................ 21
Item 12. Security Ownership of Certain Beneficial Owners and
Management.............................................. 22
Item 13. Certain Relationships and Related Transactions................ 23
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K................................................ 24
EXHIBITS
<PAGE>
PART I
Item 1. Business
General
Delta Clearing Corp. (the "Company") was incorporated in
January, 1988 in the State of Delaware under the name Delta Options Corp. The
Company amended its Certificate of Incorporation by changing its name to Delta
Government Options Corp. in June, 1988, and once again, to Delta Clearing Corp.
in February, 1996. The Company is a registered clearing agency pursuant to
Section 17A under the United States Securities Exchange Act of 1934, as amended
(the "Exchange Act"). The Company commenced operations on January 12, 1989
immediately following the issuance of the Company's Clearing Agency Order by the
United States Securities and Exchange Commission (the "Commission"). The
business of the Company consists of the clearance and settlement of transactions
involving U.S. Treasury securities sold under agreement to repurchase and U.S.
Treasury securities purchased under agreement to resell ("Repos"). Additionally,
the Company issues and clears put and call options written on U.S. Treasury
securities ("Options") which, prior to engaging in the clearance and settlement
of Repos in the fourth quarter of 1995, represented the Company's sole business
activity.
The Company's customer base is limited to large, well-capitalized
financial institutions ("Participants") active in the over-the-counter
marketplace. Transactions are effected directly between such institutions or
through the services of specialized inter-dealer brokers ("IDBs"). IDBs operate
and maintain computer-supported communications facilities which display and
report transactions between and among the Participants. Such transactions are
submitted to and subsequently cleared and settled by the Company. Pursuant to
the procedures governing the operation of the Company's systems (the
"Procedures"), there is only one (1) IDB for Options, while multiple IDBs are
permitted to submit trades for Repos. However, the Company has submitted a
proposed rule filing with the Commission to authorize multiple IDBs for Options.
The Bank of New York serves as the clearing bank (the "Clearing Bank") for both
Options and Repos.
The Company is the counterparty to all Repos and Options cleared
and settled through it. The Company assumes a reverse repurchase agreement for
every Participant effecting a repurchase agreement with the Company and
conversely, assumes a repurchase agreement for every Participant effecting a
reverse repurchase agreement. The Company assumes all obligations associated
with each repurchase and reverse repurchase agreement including receipt and
payment of coupon interest, substitutions of underlying collateral and repricing
of matched outstanding obligations. With respect to Options accepted for
clearance, the Company issues in book-entry form a put or call option to the
purchasing Participant and simultaneously purchases a matching put or call
option, (as the case may be) from the selling Participant, thereby ensuring that
the Company's short positions are at all times offset by corresponding long
positions. The Company undertakes performance of all obligations arising under
these contracts and, accordingly, the Company undertakes the settlement of
premium obligations and assumes the obligation to sell underlying U.S. Treasury
securities at the strike price from the buyer of a call option upon the exercise
of that option and to purchase underlying U.S. Treasury securities at the strike
price from the buyer of a put option upon the exercise of that option.
A Participant effecting transactions with the Company proceeds in
one of two ways. The Participant may instruct an IDB to effect the trade with
the counterparty on an anonymous or "blind" basis at the price quoted by the
counterparty through such IDB's communications network. The IDB matches each
executed trade and reports matched trades to the Company. Alternatively,
Participants can communicate with another Participant directly, and proceed to
negotiate the trade without using an IDB as intermediary. When a transaction is
executed directly between Participants without the use of an IDB, each
Participant independently reports the trade to the Company.
In addition to acting as issuer and undertaking the performance of
obligations relating to all transactions effected by Participants with the
Company, the Company performs the following functions. First, the Company is
responsible for admitting Participants. This responsibility entails setting
Participant admission criteria and determining whether applicants meet such
criteria. Second, the Company enforces its rules and Procedures. Third, the
Company sets Participant margin requirements, and Participant and system
exposure limits. Fourth, in accordance with its Procedures, the Company makes
determinations concerning the suspension of Participants and directs the
liquidation of a suspended Participant's position. Finally, as described below,
the Company maintains a $250 million Credit Enhancement Facility ("CEF").
The Company maintains a CEF which at all times has an aggregate
amount available to be paid to the Company of at least three times maximum
potential system exposure, as defined in the Procedures. The CEF currently
maintained by the Company represents an aggregate notional amount of $250
million, with the maximum coverage of any Participant equal to $30 million.
Under the current terms, the Company may purchase additional coverage up to a
total of $50 million. These increases may be activated upon 10 days' notice with
the Company paying an additional fee chargeable at such time. The Company, if
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circumstances warrant, may also elect to decrease the amount of the CEF to an
amount not less than $150 million, with the right to purchase additional
incremental coverage as described above. The CEF, composed of an insurance
agreement and surety bond, is currently provided by Capital Markets Assurance
Corporation ("CapMAC"), a financial guaranty insurance company, and is payable
to the Company in the event of a default by one or more Participants on certain
obligations owed to the Company. CapMAC's claims-paying ability is rated "Aaa"
by Moody's Investors Service, Inc., "AAA" by Standard & Poors Corporation and
"AAA" by Duff & Phelps, Inc. Each Participant, which must be accepted as an
insured party under the surety bond, agrees to reimburse CapMAC thereof for any
payments made by CapMAC to the Company resulting from any default in the
performance of such Participant's obligations. CapMAC has been the provider of
the CEF to the Company since the Company's inception.
The Company's principal executive offices are located at 525
Washington Blvd, Suite 3300, Jersey City, New Jersey 07310. Telephone number
(201) 418-8900, see Item 2., "Properties."
Recent Developments
On February 20, 1997, for proceeds received, the Company issued a
subordinated note to Intercapital Group Limited, an affiliate of a shareholder,
in the amount of $651,000. The note is payable on demand after February 20, 1998
and bears interest payable at a rate equal to the London Interbank Offered Rate
("LIBOR") for three month deposits of U.S. dollars.
Item 2. Properties
The Company leases its principal executive office space on the
33rd Floor of 525 Washington Blvd, in Jersey City, New Jersey. The leased
premises consist of approximately 5,348 square feet of office space and certain
leasehold improvements. The offices are leased under a lease which expires on
February 4, 2007. The lease agreement calls for the Company to make rental
payments totaling $1,551,000 over the next ten years.
Item 3. Legal Proceedings
The Company has no pending legal proceedings.
Item 4. Submission of Matters to a Vote of Security Holders
None
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
The Company was originally capitalized by the sale of shares of its
Common Stock under an offering exempt from the registration requirements of the
Securities Act of 1933, as amended (the "Securities Act"). As a result, there is
no established trading market for the outstanding class of the Company's Common
Stock. As of March 28, 1997, 900,000 shares of the Company's Common Stock were
held by three stockholders. (For a complete description of the stockholders see
Item 12). The Company has not entered into any arrangement or understanding to
issue options or warrants to acquire shares of the Company's Common Stock or to
register any shares of such Common Stock under the Securities Act. The Company
has paid no cash dividends since its formation and does not anticipate the
payment of dividends for the foreseeable future.
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Item 6. Selected Financial Data
DELTA CLEARING CORP.
Selected Financial Data
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
OPERATING RESULTS:
Clearing fees:
Repos $ 920,100 $ 337 $ -- $ -- $ --
Options 20,766 110,024 1,140,102 717,906 366,123
Interest income 280,220 343,604 289,663 261,620 305,014
Net revenue 1,221,086 453,965 1,429,765 979,526 671,137
Operating
expenses 3,242,670 1,517,561 959,120 831,663 745,043
Net income
(loss) (2,021,584) (1,063,596) 470,645 147,863 (73,906)
YEAR-END BALANCES:
Total assets 89,723,343 13,012,040 59,741,899 110,064,955 100,829,050
Margin payable 84,056,218 6,407,840 52,272,837 103,079,929 93,988,904
Long-term debt 800,000 -- -- -- --
Stockholders'
equity 4,329,987 6,351,571 7,415,167 6,944,522 6,796,659
PER COMMON SHARE DATA:
Income (loss) (2.24) (1.18) .52 .16 (.08)
Cash dividends
declared -- -- -- -- -- --
Book value 4.81 7.06 8.24 7.72 7.55
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
General
The Company commenced operations on January 12, 1989 immediately
following the issuance of the Company's Clearing Agency Order (the "Order") by
the Commission. Also following the issuance of the Order, the Company commenced
solicitation of a number of qualified financial institutions as Participants. As
of December 31, 1996, 25 Participants were enrolled and authorized by the
Company for clearance and settlement of Repos transactions. Additionally, 36
Participants were enrolled and authorized by the Company for clearance and
settlement of Options transactions. This represents an increase in Repos
Participants of 16 and a decrease in Options Participants of 2 from December 31,
1995. This reflects the continued growth of the Company's Repos Participant base
and corresponding activity, and the removal of inactive Participants relative to
Options activity. While the success of the Repos product is still to be
determined, it has become the dominant business of the Company. With regards to
its Options business, the Company continues to await approval from the
Commission of a pending rule change filing of its Procedures that will allow
multiple IDBs to submit Options trades to the Company. It is anticipated that
with such approval the Company's Options business will increase.
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<PAGE>
Results of Operations
The Year Ended December 31, 1996 Compared with the Year Ended December 31, 1995
For the year ended December 31, 1996, the Company cleared
approximately $2.9 trillion notional of matched Repos and issued 1,970 matched
option contracts to Participants. On December 31, 1996, Participant's cash and
cash equivalents held for margin by the Company was $84,056,218. During 1996,
the requirements of the Company for cash and cash equivalents held for margin
fluctuated from a high of $122 million to a low of $6 million due to
Participants' clearing activity.
For the years ended December 31, 1996 and 1995, the Company reported
total revenue of $1,221,086 and $453,965 respectively, reflecting an increase of
approximately 169% in 1996. This increase included an approximate 752% increase
in clearing fees to $940,866 from $110,361 in 1996 and 1995, respectively. Repos
clearing fees increased to $920,100 in 1996 from $337 in 1995, reflecting the
continued growth of the Repos business. Options clearing fees fell from $110,024
in 1995 to $20,766 in 1996. On April 17, 1996, the original and sole IDB of
Options trades submitted to the Company for clearance and settlement exited the
business. This action followed the departure of several of the IDB's experienced
options traders which occurred in September 1994. Although a new IDB
relationship was immediately established, the success of the Options business is
dependent on the ability of the Company to utilize multiple IDBs pursuant to a
pending rule change filing of its Procedures submitted to the Commission.
Investment income of $280,220 in 1996 decreased 18% from $343,604 in 1995 as a
result of lower available funds for investment.
Clearing expenses are comprised, principally, of fees payable to the
providers of the Company's CEF as well as fees charged by the Company's clearing
bank. The cost of the CEF does not vary significantly with the levels of
clearing activity or Participant enrollment, however, in October, 1995 the cost
of the CEF increased as a result of the Company's decision to enhance the CEF
from $100 million to $250 million to support the provision of clearing services
for Repos. The increased CEF resulted in a corresponding increase in cost of
approximately 80% in 1996 to $925,000 versus $515,208 in 1995 due primarily to
the maintenance of the increased facility for the entire year in 1996 versus
only four months of 1995. In November, 1995, the Company began utilizing a new
clearing bank. The terms of this new banking relationship call for fees
sensitive to the levels of clearing activity. In 1996, the Company incurred bank
charges of $191,793 versus $4,027 in 1995. This increase is due to the growth in
the Repos business. Professional fees decreased approximately 5% to $435,677 in
1996 versus $457,413 in 1995. In 1995, the Company incurred significant costs to
effectuate regulatory rule filings with the Commission as the Company sought
approval for its Repos clearing activity. Additionally, in 1995, costs were
incurred during the transition of the Company's change of ownership, its
purchase of system hardware and software and several related contractual changes
that were effected during the year. These costs were not incurred in 1996.
However, the decrease in such professional fees were mitigated as the Company
has embarked on the development of several new products and has incurred
significant expense relative to other regulatory rule filings with the
Commission. In 1996 employee compensation and benefits increased by
approximately 187% to $1,127,891 versus $393,472 in 1995 as a result of an
increase in staffing. Occupancy costs increased approximately 407% to $124,171
from $24,500 in 1996 and 1995, respectively, as a consequence of an over
five-fold increase in the square footage of the Company's leased office space.
Depreciation increased approximately 358% from $27,072 in 1995 to $124,030 in
1996. This increase reflects the purchase by the Company of systems hardware and
software in October, 1995. Other expenses increased approximately 199% in 1996
to $286,905 from $95,869 in 1995. The increase reflects the additional costs to
the Company of supporting its Repos business.
The Year Ended December 31, 1995 Compared with the Year Ended December 31, 1994
For the year ended December 31, 1995, the Company cleared
approximately $2.4 billion notional of matched Repos and issued 3,945 matched
option contracts to Participants. On December 31, 1995, Participant's cash and
cash equivalents held for margin by the Company was $6,407,840. During 1995, the
requirements of the Company for cash and cash equivalents held for margin
fluctuated from a high of $46 million to a low of $2 million due to
Participants' clearing activity.
For the years ended December 31, 1995 and 1994, the Company reported
total revenue of $453,965 and $1,429,765 respectively, reflecting a decrease of
approximately 68% in 1995. This decrease included an approximate 90% decrease in
clearing fees to $110,361 from $1,140,102 in 1995 and 1994, respectively,
reflecting the continued effect of the simultaneous departure of several
experienced options traders from the sole IDB of Options trades submitted to the
Company for clearance and settlement. Such departures occurred in September
1994. On August 3, 1995, the IDB agreed to waive its exclusivity rights with
respect to the brokerage of Options. This waiver allowed the Company to seek
other IDBs to offer its Options clearing services, however, such use of multiple
IDBs is subject to approval of a rule change
-4-
<PAGE>
filing by the Commission. Investment income of $343,604 and $289,663 in 1995 and
1994, respectively, increased approximately 19% principally as a result of
higher interest rates in 1995.
In October, 1995 the Company increased the CEF to $250 million from
$100 million to support the provision of clearing services for Repos. This
increase represents the only change in the CEF throughout 1995 and 1994. The
increase in clearing expenses of approximately 30% in 1995 to $519,235 versus
$400,000 in 1994 was due primarily to the increased CEF. In November, 1995, the
Company began utilizing a new clearing bank. The terms of this new banking
relationship reflect fees sensitive to the levels of clearing activity. In 1995,
the Company incurred fees of $4,027 versus $0 in 1994. Professional fees
increased approximately 165% to $457,413 in 1995 versus $172,169 in 1994. This
increase primarily reflects the costs to the Company to effectuate regulatory
rule filings with the Commission as the Company sought approval for its Repo
clearing activity. Additionally, costs were incurred during the transition of
its change of ownership, the purchase of the Company's system hardware and
software, and several related contractual changes that were effected during the
year. In 1995 employee compensation and benefits increased by approximately 30%
to $393,472 versus $303,257 in 1994 as a result of an increase in staffing.
Liquidity and Capital Resources
The Company's liquidity currently comes from two sources. The
liquidity for the clearance of Repos is provided through the Participant's
performance of their agreements and, to the extent required, a liquidity
facility in the amount of $250 million provided by the Bank of New York. All
other liquidity needs are met through the Company's capital resources of
approximately $4.3 million obtained from the issuance of its Common Stock in
1989. Due to start up costs of introducing Repo clearing services, the Company's
capital has been reduced. On September 30, 1996, the Company received $800,000
of proceeds from the issuance of two (2) subordinated notes: Intercapital Group
Limited, in the amount of $651,000; and Dow Jones Telerate Holdings, Inc., in
the amount of $149,000. Additionally, on February 20, 1997, an additional
subordinated note was issued and proceeds received by the Company in the amount
of $651,000 from Intercapital Group Limited. The Company expects that its
existing capital resources and subordinated debt proceeds will be sufficient to
meet its capital and liquidity requirements for the foreseeable future.
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<PAGE>
Item 8. Financial Statements and Supplementary Data
Index to Financial Statements and Financial Statement Schedules
Financial Statements Page
----
Independent Auditors' Reports
Deloitte & Touche LLP 7
KPMG Peat Marwick LLP 8
Statements of Financial Condition at December 31, 1996 9
and 1995
Statements of Operations years ended December 31, 1996, 10
1995 and 1994.
Statements of Cash Flows years ended December 31, 1996, 11
1995 and 1994.
Statements of Changes in Stockholders' Equity years ended 12
December 31, 1996, 1995 and 1994.
Notes to Financial Statements 13
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<PAGE>
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INDEPENDENT AUDITORS' REPORT
To the Board of Directors of
Delta Clearing Corp.:
We have audited the accompanying statement of financial condition of Delta
Clearing Corp. (the "Company") as of December 31, 1996, and the related
statements of operations, changes in cash flows and stockholders' equity for the
year then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of the Company at December 31, 1996 and the
results of its operations and its cash flows for the year then ended in
conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
March 15, 1997
New York, New York
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<PAGE>
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INDEPENDENT AUDITORS' REPORT
Board of Directors
Delta Clearing Corp.:
We have audited the accompanying statement of financial condition of Delta
Clearing Corp. as of December 31, 1995, and the related statements of
operations, changes in stockholders' equity and cash flows for each of the years
in the two-year period ended December 31, 1995. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Delta Clearing Corp. as of
December 31, 1995, and the results of its operations and its cash flows for each
of the years in the two-year period ended December 31, 1995, in conformity with
generally accepted accounting principles.
KPMG PEAT MARWICK LLP
March 15, 1996
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<PAGE>
DELTA CLEARING CORP.
STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31, 1996 AND 1995
- -------------------------------------------------------------------------------
ASSETS 1996 1995
CURRENT ASSETS:
Cash $ 1,670,883 $ 559,802
Margin accounts of participants (Note 2) 84,056,218 6,407,840
Investments in U.S. Treasury securities,
at amortized cost (Note 3) 3,369,715 5,679,022
Prepaid expenses and other current assets 290,515 71,355
------------- -------------
Total current assets 89,387,331 12,718,019
OFFICE FURNITURE AND EQUIPMENT - At cost, net
of accumulated depreciation of $188,857 and
$64,827 for 1996 and 1995, respectively 309,150 267,159
OTHER ASSETS 26,862 26,862
------------- -------------
TOTAL ASSETS $ 89,723,343 $ 13,012,040
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Margin payable (Note 2) $ 84,056,218 $ 6,407,840
Accounts payable and accrued expenses 480,845 252,629
Deferred revenue (Note 1) 56,293 -
------------- -------------
Total current liabilities 84,593,356 6,660,469
------------- -------------
SUBORDINATED BORROWINGS 800,000 -
------------- -------------
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value;
1,000,000 shares authorized,
900,000 shares outstanding 9,000 9,000
Additional paid-in capital 8,991,000 8,991,000
Accumulated deficit (4,670,013) (2,648,429)
------------- -------------
Total stockholders' equity 4,329,987 6,351,571
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 89,723,343 $ 13,012,040
============= =============
See Notes to Financial Statements.
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<PAGE>
DELTA CLEARING CORP.
STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
- -------------------------------------------------------------------------------
1996 1995 1994
REVENUES:
Clearing fees:
Repurchase and reverse
repurchase agreements $ 920,100 $ 337 $ -
Options 20,766 110,024 1,140,102
Investment income 280,220 343,604 289,663
-------------- ------------- ----------
Total revenues 1,221,086 453,965 1,429,765
-------------- ------------- ----------
EXPENSES:
Clearing expenses 1,132,768 519,235 400,000
Employee compensation
and benefits 1,127,891 393,472 303,257
Professional fees 435,677 457,413 172,169
Depreciation 124,030 27,072 8,064
Occupancy 124,171 24,500 12,000
Interest expense 11,228 - -
Other 286,905 95,869 63,630
-------------- ------------- ----------
Total expenses 3,242,670 1,517,561 959,120
-------------- ------------- ----------
NET (LOSS) INCOME $ (2,021,584) $ (1,063,596) $ 470,645
============== ============= ==========
NET (LOSS) INCOME PER SHARE
OF COMMON STOCK $ (2.24) $ (1.18) $ 0.52
=============== ============= ==========
See Notes to Financial Statements.
10
<PAGE>
DELTA CLEARING CORP.
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C> <C> <C>
1996 1995 1994
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income $ (2,021,584) $ (1,063,596) $ 470,645
Adjustments to reconcile net (loss) income to net
cash (used in) provided by operating activities:
Accretion of interest on investments in
U.S. Treasury securities (220,676) (211,923) (19,417)
Depreciation 124,030 27,072 8,064
(Increase) decrease in prepaid expenses and
other current assets (219,160) (66,873) 46,558
Increase in deferred revenue 56,293 -- --
Increase in accounts payable and
accrued expenses 228,216 198,733 13,391
------------ ------------ ------------
Net cash (used in) provided by operating activities (2,052,881) (1,116,587) 519,241
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from (payments for):
Purchases of U.S. Treasury securities (6,388,017) (8,728,480) (3,174,521)
Maturities of U.S. Treasury securities 8,918,000 10,260,000 2,800,000
Purchase of office furniture and equipment (166,021) (264,583) (31,422)
------------ ------------ ------------
Net cash provided by (used in) investing activities 2,363,962 1,266,937 (405,943)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES-
Proceeds from issuance of subordinated debt 800,000 -- --
------------ ------------ ------------
NET INCREASE IN CASH 1,111,081 150,350 113,298
CASH, BEGINNING OF YEAR 559,802 409,452 296,154
------------ ------------ ------------
CASH, END OF YEAR $ 1,670,883 $ 559,802 $ 409,452
============ ============ ============
SUPPLEMENTAL CASH FLOWS DISCLOSURES:
Interest paid $ 11,228 $ -- $ --
============ =========== ============
</TABLE>
See Notes to Financial Statements.
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<PAGE>
DELTA CLEARING CORP.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Common
Stock Additional
($.01 Paid-in Accumulated
Par Value) Capital Deficit Total
<S> <C> <C>
BALANCE, DECEMBER 31, 1993 $ 9,000 $ 8,991,000 $ (2,055,478) $ 6,944,522
Net income - - 470,645 470,645
-------- ------------ ------------- ------------
BALANCE, DECEMBER 31, 1994 9,000 8,991,000 (1,584,833) 7,415,167
Net loss - - (1,063,596) (1,063,596)
-------- ------------ ------------- ------------
BALANCE, DECEMBER 31, 1995 9,000 8,991,000 (2,648,429) 6,351,571
Net loss - - (2,021,584) (2,021,584)
-------- ------------ ------------- ------------
BALANCE, DECEMBER 31, 1996 $ 9,000 $ 8,991,000 $ (4,670,013) $ 4,329,987
======== ============ ============= ============
See Notes to Financial Statements.
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<PAGE>
DELTA CLEARING CORP.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
- ------------------------------------------------------------------------------
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND OPERATIONS - Delta Clearing Corp. (the "Company"), a
clearing agency, registered pursuant to Section 17A under the Securities
Exchange Act of 1934, as amended, is a majority-owned subsidiary of INCAP
Netherlands (Holdings), B.V., which is a wholly owned subsidiary of
Intercapital Group Limited. Shares in the Company are also held by Dow
Jones Telerate Holdings, Inc. and Exco, plc. The Company was sold by DOTS,
Inc. and other minority shareholders to the current shareholders effective
October 18, 1995.
The Company is engaged in the clearance and settlement of transactions
involving U.S. Treasury securities sold under agreement to repurchase
("Repos") and securities purchased under agreement to resell ("Reverse
repos"). The Company began to offer these services during the fourth
quarter of 1995. The Company also issues and clears put and call options
written on U.S. Treasury securities. The Company, accordingly, acts solely
as an intermediary in principal transactions, running a "matched book".
The Company's customer base ("Participants") is limited to large,
well-capitalized financial institutions active in the over-the-counter
marketplace. Transactions are effected directly between such institutions
or through the services of specialized inter-dealer brokers ("IDBs"). IDBs
operate and maintain computer-supported communications facilities which
display and report transactions between and among the Company's
Participants. Such transactions are submitted to and subsequently cleared
and settled by the Company.
CLEARING FEE INCOME - Clearing fee income is generated through the
clearance and settlement of transactions involving Repos, Reverse repos,
and put and call options. The Company recognizes income on all trades as
earned. The Company defers the recognition of revenue for the balance of
term Repo and Reverse Repo trades not yet elapsed.
INVESTMENT INCOME - Investment income is generated through interest earned
on the Company's investments in U.S. Treasury securities and other
overnight investment placement.
CLEARING EXPENSES - Clearing expenses include the costs of issuance of a
surety bond provided by Capital Markets Assurance Corporation. During
1995, to support the provision of clearing services for Repos and Reverse
repos, the Company increased coverage under the bond from $100 million to
$250 million. The cost of the bond is being amortized over the respective
coverage period.
DEPRECIATION - Depreciation is provided over the estimated service lives
of office furniture and equipment using the straight-line method for
financial reporting and accelerated depreciation methods for tax purposes.
INVESTMENT SECURITIES - Investment securities consist of U.S. Treasury
securities. The Company adopted the provisions of Statement of Financial
Accounting Standards No. 115, Accounting for Certain Investments in Debt
and Equity Securities ("SFAS No. 115") at January 1, 1994. Under
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<PAGE>
SFAS No. 115, the Company is required to classify its debt and equity
securities in one of three categories: trading, available-for-sale, or
held-to-maturity. Pursuant to SFAS No. 115, the Company has classified
its investments as held-to-maturity securities, as it has the ability and
intent to hold the securities until maturity. These securities are
recorded at amortized cost, adjusted for the accretion of discounts.
INCOME TAXES - The Company accounts for income taxes pursuant to the
provisions of Statement of Financial Accounting Standards No. 109,
Accounting for Income Taxes ("SFAS No. 109"). Under SFAS No. 109, income
taxes are accounted for using the asset and liability method. Deferred tax
assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying
amounts of existing assets and liabilities and their respective tax bases
and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period
that includes the enactment date.
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.
RECLASSIFICATION - Certain amounts in the financial statements have been
reclassified for conformity with the current year presentation.
2. MARGIN ACCOUNTS OF PARTICIPANTS
Participants are required to deposit margin daily, in the form of cash or
U.S. Treasury securities, to secure the obligations of such Participants
arising under the Repos, Reverse repos, or options written by them. Margin
for each Participant is calculated daily to take into account any adverse
movement in the market price of underlying U.S. Treasury securities during
the business day, and an estimate (based upon historical market data) of
the most severe adverse movement in the market price of such U.S. Treasury
securities which reasonably could be anticipated to occur over the course
of the next succeeding business day. In addition, a Participant may be
required to deposit additional margin on an intra-day basis at any time
such action is deemed necessary and advisable under the circumstances to
protect the Company or the public.
Participant margin balances consisting of cash are invested in overnight
Repos or other overnight investment placement. To the extent cash is
invested in overnight Repos, the delivery of collateral consisting of U.S.
Treasury securities is required. Amounts earned on invested margin
balances are allocated among the Participants, less a fee charged by the
Company for investment services.
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<PAGE>
3. INVESTMENTS IN U.S. TREASURY SECURITIES
Investments in U.S. Treasury securities are recorded at amortized cost and
consisted of the following at December 31, 1996 and 1995:
Name of Issuer Maturity Amortized Market
and Title of Securities Amount Cost Value Maturity
1996:
U.S. Treasury bills $3,435,000 $3,369,715 $3,371,603 1997
---------- ---------- ----------
$3,435,000 $3,369,715 $3,371,603
========== ========== ==========
1995:
U.S. Treasury note $ 500,000 $ 500,179 $ 499,690 1996
U.S. Treasury bills 5,300,000 5,178,843 5,187,799 1996
---------- ---------- ----------
$5,800,000 $5,679,022 $5,687,489
========== ========== ==========
4. INCOME TAXES
At December 31, 1996, the Company had a net operating loss carryforward
for Federal income tax purposes of approximately $2,590,000. The tax loss
carryforward is available for offset of future taxable income through the
year 2011. Net operating loss carryforwards were utilized to offset the
provision for income taxes as of December 31, 1994. Deminimus taxes paid
to state and local authorities have been included within other expenses.
As of December 31, 1996 and 1995, net deferred tax assets, arising
principally from net operating loss carryforwards, have been reduced to
zero, offset by valuation allowances for the same amounts.
Through October 18, 1995, the Company filed consolidated Federal income
tax returns with its former parent, DOTS, Inc., and affiliated companies.
The tax benefit of the Company's net operating losses was absorbed by
income from other members of the DOTS, Inc. consolidated group prior to
the sale of the Company on October 18, 1995. As of October 19, 1995, the
Company files its own Federal income tax return. Additionally, the Company
continues to file separate state and local income tax returns for which
net operating loss carryforwards exist.
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<PAGE>
5. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET CREDIT RISK
The Company may be exposed to off-balance-sheet credit risk in the event a
Participant fails to fulfill its contracted obligations and its margin on
deposit is insufficient. To control this risk, the Company collects, on a
daily or intra-day basis, margin from Participants who enter into Repos or
Reverse repos or write option contracts 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 exposure limits.
Additionally, the Company has obtained a credit enhancement facility,
composed 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 in connection with
any financial deficiency associated with the liquidation of a Participant
account with regard to such Participant's default. The credit enhancement
facility provides an added measure of protection for the Company and is
not a requirement under Section 17A of the Securities Exchange Act of
1934. Under the credit enhancement facility agreement, the Company is
required to maintain a net worth (excess of all assets over all
liabilities, excluding up to $2 million of subordinated notes issued to
shareholders of the Company) of $5 million. 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
arising as a consequence of a draw under the credit enhancement facility
becomes the obligation of the individual defaulting Participant. The
credit enhancement facility expires on January 27, 2000.
The Company is not subject to market risk with respect to Repos or Reverse
repos issued or purchased or sold option contacts.
At December 31, 1996 and 1995, the Company had a matched book of Repos and
Reverse repos with notional amounts of $13,935 million and $126 million
respectively. At December 31, 1996 and 1995, the Company had issued
outstanding matched put and call options on U.S. Government securities
with notional amounts of $100 million and $75 million, respectively.
6. COMMITMENTS
On October 18, 1995, the Company purchased various software and hardware
relating to the operation of its clearing business (the "Platform") from
Exco RMJ Trading (a subsidiary of Exco, plc.) for $250,000. This amount is
included in office furniture and equipment on the statements of financial
condition. As additional compensation for its purchase of the Platform and
in consideration for an agreement from Exco RMJ Trading not to compete
with the Company, the Company agreed to pay 20% of its pre-tax operating
income (exclusive of interest income) for five full fiscal years from the
date of purchase and certain other amounts up to an additional maximum
price of $2.25 million.
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<PAGE>
In December 1995, the Company entered into a real estate lease agreement.
The lease agreement became effective on April 5, 1996. Future minimum
rental commitments required under this lease are presented below:
Minumum
Rental
Year Commitments
1997 $ 143,000
1998 143,000
1999 143,000
2000 143,000
2001 143,000
Thereafter 836,000
----------
$1,551,000
==========
The Company incurred rent expense of $119,000, $21,000, and $9,000 for
the years ended December 31, 1996, 1995, and 1994, respectively.
7. RELATED PARTY TRANSACTIONS
In 1996, the Company paid management consulting fees of $32,000 to
Intercapital Group Limited. During the years ended 1995 and 1994 the
Company paid occupancy expenses of $7,000 and, $12,000, respectively, to
Exco RMJ Securities Corp. and management fees of $9,000 and $12,000,
respectively, to Cawsl Corp, a majority shareholder of DOTS, Inc.
8. FAIR VALUE OF FINANCIAL INSTRUMENTS
Substantially all financial instruments on the Company's balance sheet are
carried at fair value or at amounts which approximate fair value.
-17-
<PAGE>
9. SUBORDINATED BORROWINGS:
At December 31, 1996, the Company had subordinated borrowings with
affiliates as follows:
Affiliate Amount Outstanding
--------- ------------------
Intercapital Group Limited $651,000
Dow Jones Telerate Holdings, Inc. 149,000
--------
$800,000
========
These amounts are payable on demand after September 30, 1997, and bear
interest payable equal to the London Interbank Offered Rate ("LIBOR") for
three month deposits of U.S. dollars. At December 31, 1996, LIBOR was
5.625%.
10. SUBSEQUENT EVENTS:
On February 20, 1997, the Company obtained additional subordinated
borrowings of $651,000 from Intercapital Group Limited.
******
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<PAGE>
Financial Statement Schedules
All financial statement schedules have been omitted because they are
inapplicable, not required or the information is presented in the Financial
Statements or the related Notes to Financial Statements.
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure
On November 4, 1996, the firm of KPMG Peat Marwick was
dismissed as the principal accountant to audit the registrant's financial
statements. Reports on the financial statements of the registrant by KPMG Peat
Marwick LLP for the years ending December 31, 1995 and 1994, respectively, did
not contain any adverse opinion or disclaimer of opinion, and were not qualified
or modified as to uncertainty, audit scope, or accounting principles. The
decision to change accountants was approved by the Company's Board of Directors.
During the years ending December 31, 1995 and 1994,
respectively, and for the subsequent interim period, January 1, 1996 through
November 4, 1996, there were no disagreements with KPMG Peat Marwick LLP on any
matter of accounting principles or practices, financial statement disclosure, or
auditing scope or procedure.
On November 4, 1996, the firm of Deloitte & Touche LLP was
engaged as principal accountant to audit the Company's financial statements.
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<PAGE>
PART III
Item 10. Directors and Executive Officers of the Registrant
The Directors and executive officers of the Company are as follows:
Has Served As a
Director and/or
Name Position Held Officer Since.
---- ------------- ---------------
Hans Angermueller Director and Chairman of the Board May 1996
Michael Spencer Director October 1995
Julian Childs Director October 1995
Peter Edge Director October 1995
David Gelber Director October 1995
Michael L. Hein Director March 1994
Stephen K. Lynner Director and President March 1996
John Grebenstein Director and Executive Director October 1995
Barry E. Silverman Executive Director March 1994
Ronald H. Buckner Chief Financial Officer and March 1994
Controller
Declan Kelly Secretary October 1995
Each director and executive officer of the Company will hold office until
the next annual meeting of stockholders of the Company and until his successor
is elected and qualified.
Hans H. Angermueller, 72, has been non-executive Chairman of the Company
since May 1996. Mr. Angermueller retired from Cifticorp in 1989 where his
primary responsibilities were oversight of legal and regulatory affairs and
government relations. Mr. Angermueller serves in an "of counsel" capacity with
the international law firm, Shearman & Sterling, of which he was a partner prior
to joining Citicorp in 1973.
Michael Spencer, 41, has been Chairman and a director of the Company
since October 1995. Since 1986, he has been Chairman of Intercapital. From
1983 to 1986, Mr. Spencer was a director and money broker at Fulton Prebon in
London, and from 1980 to 1983 was an Assistant Vice President and futures broker
at Drexel Burnham Lambert in London. Mr. Spencer is a director of several U.S.
affiliates of Intercapital and of Dart (USA) Inc.
Julian Childs, 47, has been a director of the Company since October 1995.
He is currently Chief Operating Officer of Telerate. From 1991 to 1995, Mr.
Childs served as Executive Vice President of Telerate, with responsibility for
the Asia Pacific region, the Americas and Europe/Gulf. Prior to that, Mr. Childs
was Managing Director of Telerate, responsible for all Asia Pacific operations
of Dow Jones Telerate.
Peter Edge, 37, has been a director of the Company since October 1995. He
is currently Chief Executive Officer of EXCO. He began working for EXCO in 1980
as a deposit broker. In 1989, he was appointed to the Board of Directors of
EXCO. In addition, Mr. Edge is Chairman of EXCO's money markets products
committee.
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<PAGE>
David Gelber, 48, has been a director of the Company since October 1995. He
currently serves as Group Managing Director of Intercapital Group Limited. For
the twelve years prior to joining Intercapital Group Limited in 1994, Mr. Gelber
held a variety of positions in the derivatives areas, including, most recently,
Chief Operating Officer of Midland Global Markets (January 1993 to March 1994)
and Global Manager-Swaps and Options at Hong Kong & Shanghai Bank (March 1989 to
December 1993). Additionally, Mr. Gelber served for four years as a director of
the International Swap Dealers Association (ISDA) and was a member of the
working group that compiled the G30 report on derivatives.
Michael L. Hein, 54, was elected a director of the Company in March 1994.
Mr. Hein has been a managing director of CapMAC since its founding in 1987.
Prior to joining CapMAC, Mr. Hein held several positions at Citicorp/Citibank,
most recently as a Vice President in the rate risk management department of
Citicorp Investment Bank.
Stephen K. Lynner, 45 was appointed president of the Company in March 1996
and elected a director in April 1996. He had previously served on the Board of
the Company from the Company's inception to October 1995. During that time he
served as president of RMJ Options Trading Corporation. From January 1985 to
April 1988, he was managing director of Security Pacific Options Services
Corporation. From September 1981 through December 1984, he was a trader with
Chemical Bank's Primary Dealer Group.
John Grebenstein, 44 has been a director of the Company since November
1995, with the title Executive Director. He is responsible for all repurchase
agreement related activities. From August 1994 until November 1995, he was a
Vice President at RMJS responsible for new product development. From 1989 until
August 1994, Mr. Grebenstein held various management positions at Garban Ltd.,
an interdealer broker of U.S. Treasury securities and money market instruments.
Prior to that, Mr. Grebenstein was a Vice President in the fixed income division
of Nomura Securities International responsible for global financing.
Barry E. Silverman, 38 resigned as a director of the Company in January
1997. He had previously served on the Board of the Company from March 1994.
Until March 1996, he served as president and chief executive officer.
Previously, Mr. Silverman had been elected treasurer and chief financial officer
of the Company and served in that capacity from February 1990. Mr. Silverman has
been the credit manager of the Company since March 1989. From July 1987 to
February 1989, he held several positions at Citicorp/Citibank, most recently as
a manager in the credit department of Citicorp Investment Bank. From November
1985 to July 1987, Mr. Silverman was self-employed as a financial consultant.
Prior to 1985, he was a lending officer with Bank of America commencing in 1983.
Effective March 31, 1997, Mr. Silverman has elected to resign his position as
Executive Director and, additionally, has decided to leave the employ of the
Company.
Ronald H. Buckner, CPA, 36 was hired in February 1994 and elected
controller in March 1994. In October 1995 he was elected chief financial
officer. From April 1990 to March 1994, Mr. Buckner was the director of
Financial Analysis for Panavision International, L.P., an international lessor
of motion picture film equipment and, prior to its reorganization, a
wholly-owned subsidiary of Warburg Pincus, L.P. From 1986 to 1990, Mr. Buckner
was chief financial officer and corporate controller for Retail Services, Inc.,
a publicly held national retail and real-estate development concern.
Declan Kelly, 35 has been Secretary of the Company since October 1995.
Since 1994, he has been a member of the Derivatives Product Group of
Intercapital Group Limited, with the title Head of Strategic Development. From
1987 to 1994, Mr. Kelly was the Head of Global Swaps and Derivatives at BNP
Capital Markets in London. For one year prior to that, Mr. Kelly was a trader in
the Swaps Group at Chase Manhattan Bank in London. He is qualified as a member
of the Institute of Chartered Accountants in Ireland.
Item 11. Executive Compensation
The following table summarizes for each of the Company's last three fiscal
years, all compensation awarded to, earned by, or paid, 1) to the Company's
chief executive officer for services rendered in all capacities to the Company,
and 2) to all other executive officers of the Company whose total annual salary
and bonus exceed $100,000.
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<PAGE>
Name and Other Annual
Principal Salary Bonus Compensation
Position Year ($) ($) ($)
- -------- ---- --- --- ---
Barry E. Silverman 1996 $138,000 $ 0 $ 0
President, Chief Executive
Officer 1995 138,000 a 24,543 0
1994 100,000 20,000 0
Ronald H. Buckner 1996 110,000 0 0
Chief Financial Officer,
Controller 1995 110,000 b 7,500 0
1994 48,125 0 0
John Grebenstein 1996 200,000
Executive Director 1995 200,000 c 0 0
Stephen K. Lynner 1996 200,000 d 0 0
Director, President
a Salary became effective October 1, 1995. Mr Silverman's salary for the
year was $109,500.
b Salary became effective October 1, 1995. Mr. Buckner's salary for the
year was $71,042.
c Salary became effective November 1, 1995. Mr. Grebenstein's salary for the
year was $33,333.
d Salary became effective March 15, 1996. Mr. Lynner's salary for the
year was $158,333.
Compensation of Directors
Effective June 1, 1996, Mr. Angermueller, the Company's non-executive
chairman was approved to receive a per annum retainer of $10,000 payable in four
equal installments, plus an additional $1,000 per meeting of the board of
directors. Mr. Angermueller was paid $10,500 in 1996. The Company does not pay
any remuneration to its other non-executive directors.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Name and Address of Number of Shares Percentage
Beneficial Owner Beneficially Owned Ownership
---------------- ------------------ ----------
INCAP NETHERLANDS (HOLDINGS) B.V. (1) 585,900 65.1%
c/o Intercapital Group Limited
153 East 53rd Street
New York, NY 10022
Dow Jones Telerate Holdings, Inc. (2) 134,100 14.9%
200 Liberty Street
New York, NY 10281
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<PAGE>
Name and Address of Number of Shares Percentage
Beneficial Owner Beneficially Owned Ownership
---------------- ------------------ ----------
EXCO plc 180,000 20%
Sherborne House
119 Cannon Street
London EC4N 5AX
England
-------- -----
900,000 100%
All officers and directors as a group
(ten individuals) (3) (3)
- --------------
(1) INCAP NETHERLANDS (HOLDINGS) B.V. is a wholly-owned subsidiary of
Intercapital Group Limited, U.K. company.
(2) Dow Jones Telerate Holdings, Inc. is a direct, wholly-owned subsidiary
of Dow Jones & Company, Inc.
(3) Each of the stockholders of the Company is an affiliate of a director
of the Company. See "Directors and Executive Officers" above. As a
result, the directors and executive officers may be deemed, as a group,
to be the beneficial owners of all of the Company's Common Stock.
Item 13. Certain Relationships and Related Transactions
On September 30, 1996, for proceeds received, the Company issued
subordinated notes to Intercapital Group Limited, an affiliate of a shareholder,
for $651,000, and Dow Jones Telerate Holdings, Inc., a shareholder, for
$149,000. These amounts are payable on demand after September 30, 1997 and bear
interest payable at a rate equal to LIBOR for three month deposits of U.S.
dollars. At December 31, 1996, LIBOR was 5.625%. On February 20, 1997, the
Company issued an additional subordinate note to Intercapital Group Limited for
$651,000 under similar terms.
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<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) 1. Financial Statements
The financial statements listed under Item 8 are filed
as a part of this Report.
2. Financial Statement Schedules
All financial statement schedules have been omitted
because they are inapplicable, not required or the
information is presented in the Financial Statements
or the related Notes to Financial Statements filed
under Item 8 as part of this Report.
3. Exhibits
The exhibits listed on the accompanying Index to
Exhibits are filed as part of this Report.
(b) Reports on Form 8-K
None.
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<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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 March
28, 1997.
DELTA CLEARING CORP.
By: Stephen K. Lynner \s\
------------------------
Stephen K. Lynner
President
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Company and in the capacities indicated on March 28, 1997.
Signature Title
--------- -----
Stephen K. Lynner \s\
- -----------------------
Stephen K. Lynner Director and President
Hans Angermueller \s\
- -----------------------
Hans Angermueller Director and Chairman of the Board
- -----------------------
Michael Spencer Director
Julian Childs \s\
- -----------------------
Julian Childs Director
- -----------------------
Peter Edge Director
David Gelber \s\
- -----------------------
David Gelber Director
John Grebenstein \s\
- -----------------------
John Grebenstein Director, Executive Director
Michael L. Hein \s\
- -----------------------
Michael L. Hein Director
Barry E. Silverman \s\
- -----------------------
Barry E. Silverman Executive Director
Ronald H. Buckner \s\
- -----------------------
Ronald H. Buckner Chief Financial Officer and Controller
Declan Kelly \s\
- -----------------------
Declan Kelly Secretary
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<PAGE>
EXHIBIT INDEX
Exhibit
No. Description Page
- ------ ------------ -----
3(a) Amended Certificate of Incorporation of the Company *
[Pre-effective Amendment No. 1 to Form S-1, Registration No.
33-21409, dated June 14, 1988, Exhibit 3(a)].
3(b) By-laws of the Company [Form S-1, Registration No. 33-21409, *
dated June 14, 1988, Exhibit 3(b)].
4(a) Form of Participation Agreement [Form S-1, Registration No. *
33-21409, dated June 14, 1988, Exhibit 4(a)].
10(b) Insurance Agreement including Surety Bond [Pre-effective *
Amendment No. 1 to Form S-1, Registration No. 33-21409, dated
June 14, 1988, Exhibit 10(b)].
10(b-1) Amended and Restated Insurance Agreement including Surety Bond *
dated as of June 1, 1992 [Form 10-K, Annual Report pursuant to
Section 13 or 15(d) of the Securities Exchange Act of 1934, for
the fiscal year ended December 31, 1994, Exhibit 10(b-1)]
10(b-2) Amendment to Surety Bond dated October 13, 1994 [Form 10-K, *
Annual Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934, for the fiscal year ended December 31, 1994,
Exhibit 10(b-2)]
10(b-3) Second Insurance Agreement including Surety Bond dated as *
of October 24, 1995 [Form 10-K, Annual Report pursuant to
Section 13 or 15(d) of the Securities Exchange Act of 1934,
for the fiscal year ended December 31, 1995, Exhibit 10(b-3)]
10(b-4) First Amendment to Second Insurance Agreement dated as of 27
September 25, 1996 (filed herwith).
10(b-5) Amendment to Surety Bond dated as of October 14, 1996 29
(filed herewith).
10(c) Form of Amended and Restated Operating and Brokerage Service *
Agreement Relating to the Over-the-Counter Options Trading
System, by and among RMJ Securities Corp., RMJ Options Trading
Corp., Delta Government Options Corp., SPC Securities Services
Corp. and BankAmerica National Trust Co. (New York)
[Pre-effective Amendment No. 2 to Form S-1, Registration
No. 33-21409, dated June 14, 1988, Exhibit 10(c)].
10(d) Stock Purchase Agreement dated as of September 15, 1995 by *
and among Intercapital Group Limited and DOTS, Inc., SMG
Options Corp. and Delta Government Options Corp. [Form 10-K,
Annual Report pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934, for the fiscal year ended December 31, 1995,
Exhibit 10(d)]
27 Financial Data Schedule
- -----------
* Incorporated by reference as indicated.
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</TABLE>
<PAGE>
EXHIBIT 10(b-4)
FIRST AMENDMENT
TO
SECOND INSURANCE AGREEMENT
This AMENDMENT, made this 25th day of September, 1996, (This
"Amendment"), to the Second Insurance Agreement, dated as of October 24, 1995
(the"Insurance Agreement"), by and between Delta Clearing Corp. ("Delta") and
Capital Markets Assurance Corporation ("CapMAC").
WHEREAS, Delta intends to raise additional capital through the
issuance to its stockholders of subordinated notes in an aggregate principal
amount not in excess of $2 million (the "Subordinated Notes"); and
WHEREAS, CapMAC has agreed to amend the definition of Net
Worth contained in Section 4 (g) of the Insurance Agreement to allow Delta to
raise additional capital through the issuance of the Subordinated Notes.
NOW, THEREFORE, for good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereto
agree as follows:
1. Amendment to the Insurance Agreement. Section
4 (g) of the Insurance Agreement is amended by deleting the entire
text of the second sentence thereof and substituting the
following text therefor:
"Net Worth" of the Company shall mean the excess of all
assets (excluding any value for goodwill, trademarks, patents,
copyrights, organization expenses and other similar intangible
items) over all liabilities (excluding up to $2 million of
subordinated notes issued to stockholders of the Company), as
determined and computed in accordance with generally accepted
accounting principles consistently applied. The terms and form of
any subordinated notes issued by the Company to its stockholders
shall be approved by CapMAC prior to issuance.
2. Expenses. The Company agrees to pay CapMAC its
out-of-pocket expenses (including, without limitation, reasonable
attorneys' fees and expenses) in connection with the preparation,
execution and delivery of this Amendment.
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<PAGE>
3. Governing Law. This Amendment shall be governed
by and construed and interpreted in accordance with the laws of
the State of New York without regard to the principles of conflicts of laws.
4. Counterparts. This Amendment may be executed in any number
of counterparts, each of which shall be an original, with the same effect as if
the signatures thereto and hereto were upon the same instrument. This Amendment
shall become effective when each party hereto shall have received a counterpart
hereof duly executed by the other party hereto.
5. Headings. Section headings in this Amendment are
included herein for convenience of reference only and shall not
constitute a part of this Amendment for any other purpose.
IN WITNESS WHEREOF, the parties hereto have caused this
Amendment to be duly executed and delivered by their respective officers
thereunto duly authorized as of the date first written above.
DELTA CLEARING CORP.
Barry E. Silverman
By: Barry E. Silverman \s\
-----------------------
Title: Executive Director
CAPITAL MARKETS ASSURANCE CORPORATION
By: Gary Dycus \s\
------------------------
Title: Vice President
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<PAGE>
EXHIBIT 10(b-5)
AMENDMENT
TO
SURETY BOND
CAPITAL MARKETS ASSURANCE CORPORATION
POLICY NUMBER SB 82
CAPITAL MARKETS ASSURANCE CORPORATION hereby amends its Surety Bond
(Policy Number SB 82) (the "Surety Bond") by amending the sentence on page A-3
of the Surety Bond which presently reads as follows:
The "Termination Date" is the earlier of (i) January 27,
1999, as such date may be extended as set forth below, (ii) the date
which is one Business Day after the date on which all Brokerage
Services Agreements have terminated, no option contracts, repurchase
agreements or reverse repurchase agreements on United States
Treasury securities issued through the System remain outstanding and
Delta has ceased to function as a clearing agency as contemplated by
the Brokerage Services Agreements and the Procedures and (iii) the
date on which Delta exercises its right to terminate this Surety
Bond in accordance with the terms of the Insurance Agreement, in the
case of (ii) and (iii), as indicated in the Certificate of
Termination, delivered to CapMAC, in the form of Exhibit IV hereto;
provided, however, that on or before October 14, 1996 and on or
before the same date of each year thereafter, CapMAC shall notify
Delta in writing, and, upon receipt of such notice from CapMAC,
Delta shall notify each Insured Participant in writing, if the term
of this Surety Bond has been extended for an additional one-year
period beyond the date on which this Surety Bond would otherwise
expire pursuant to clause (i) above.
To read as follows:
The "Termination Date" is the earlier of (i) January 27,
2000, as such date may be extended as set forth below, (ii) the date
which is one Business Day after the date on which all Brokerage
Services Agreements have terminated, no option contracts, repurchase
agreements or reverse repurchase agreements on United States
Treasury securities issued through the System remain outstanding and
Delta has ceased to function as a clearing agency as contemplated by
the Brokerage Services Agreements and the Procedures and (iii) the
date on which Delta exercises its right to terminate this Surety
Bond in accordance with the terms of the Insurance Agreement, in the
case of (ii) and (iii), as indicated in the Certificate of
Termination, delivered to CapMAC, in the form of Exhibit IV hereto;
provided, however, that on or before October 14, 1997
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<PAGE>
and on or before the same date of each year thereafter, CapMAC shall
notify Delta in writing, and, upon receipt of such notice from
CapMAC, Delta shall notify each Insured Participant in writing, if
the term of this Surety Bond has been extended for an additional
one-year period beyond the date on which this Surety Bond would
otherwise expire pursuant to clause (i) above.
CAPITAL MARKETS
ASSURANCE CORPORATION
Dated as of: October 14, 1996 By: Gary Dycus \s\
---------------
Title: Vice President
--------------
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<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 1,670,883
<SECURITIES> 3,369,715
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 89,387,331
<PP&E> 309,150
<DEPRECIATION> 188,857
<TOTAL-ASSETS> 89,723,343
<CURRENT-LIABILITIES> 84,593,356
<BONDS> 800,000
<COMMON> 9,000
0
0
<OTHER-SE> 4,320,987
<TOTAL-LIABILITY-AND-EQUITY> 89,723,343
<SALES> 940,866
<TOTAL-REVENUES> 1,221,086
<CGS> 0
<TOTAL-COSTS> 2,271,887
<OTHER-EXPENSES> 970,783
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (2,021,584)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,021,584)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,021,584)
<EPS-PRIMARY> (2.24)
<EPS-DILUTED> (2.24)
</TABLE>
