<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 September 30, 1997 Commission File Number 33-21409
------------------ --------
DELTA CLEARING 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 10-Q pertains to 250,000 put and call option contracts on
U.S. Treasury securities to be issued from time to time by Delta Clearing Corp.
Indicate number of shares outstanding of each of the issuer's classes
of common stock as of November 14, 1997: 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 September 30, 1997 and December 31, 1996 2
Statements of Operations,
nine months ended September 30, 1997 and 1996 3
Statements of Operations,
three months ended September 30, 1997 and 1996 4
Statements of Cash Flows,
nine months ended September 30, 1997 and 1996 5
Notes to Financial Statements 6
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
PART II. OTHER INFORMATION
Item 1 - 5 Not Applicable 10
Item 6 Exhibits and Reports on Form 8-K 10
Signature 12
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DELTA CLEARING CORP.
STATEMENTS OF FINANCIAL CONDITION
SEPTEMBER 30, 1997 AND DECEMBER 31, 1996
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
(Unaudited)
------------ ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash $ 1,786,644 $ 1,670,883
Margin accounts of participants 75,970,834 84,056,218
Investment in U.S. Treasury securities,
at amortized cost 3,363,798 3,369,715
Prepaid expenses and other current assets 185,315 290,515
------------ ------------
Total current assets 81,306,591 89,387,331
OFFICE FURNITURE AND EQUIPMENT - At cost, net of
accumulated depreciation of $295,290 at September 30, 1997
and $188,857 at December 31, 1996 249,590 309,150
OTHER ASSETS 26,862 26,862
------------ ------------
TOTAL ASSETS $ 81,583,043 $ 89,723,343
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Margin Payable $ 75,970,834 $ 84,056,218
Accounts payable and accrued expenses 446,501 480,845
Deferred revenue 20,115 56,293
------------ ------------
Total current liabilitiess 76,437,450 84,593,356
------------ ------------
SUBORDINATED BORROWINGS 2,751,000 800,000
------------ ------------
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 (6,605,407) (4,670,013)
------------ ------------
Total stockholders' equity 2,394,593 4,329,987
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 81,583,043 $ 89,723,343
============ ============
</TABLE>
See Notes to Financial Statements.
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DELTA CLEARING CORP.
STATEMENTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996 (Unaudited)
<TABLE>
<CAPTION>
1997 1996
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<S> <C> <C>
REVENUES:
Clearing Fees:
Repurchase and reverse repurchase agreements $ 676,545 $ 571,525
Options 2,950 17,616
Investment Income 198,444 212,044
----------- -----------
Total revenues 877,939 801,185
----------- -----------
EXPENSES:
Clearing expenses 913,021 803,297
Employee compensation and benefits 953,536 828,227
Professional fees 333,215 216,820
Depreciation 106,433 85,737
Occupancy 111,675 87,283
Interest expense 69,620 -
General and administrative expenses 325,833 242,969
----------- -----------
TOTAL EXPENSES 2,813,333 2,264,333
----------- -----------
NET LOSS $(1,935,394) $(1,463,148)
=========== ===========
NET LOSS PER SHARE OF COMMON STOCK $ (2.15) $ (1.63)
=========== ===========
</TABLE>
See Notes to Financial Statements.
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DELTA CLEARING CORP.
STATEMENTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996 (Unaudited)
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
REVENUES:
Clearing Fees:
Repurchase and reverse repurchase agreements $ 134,907 $ 323,210
Options 200 4,200
Investment Income 65,914 64,647
--------- ---------
Total revenues 201,021 392,057
--------- ---------
EXPENSES:
Clearing expenses 288,651 284,762
Employee compensation and benefits 340,547 289,024
Professional fees 86,720 95,372
Depreciation 35,159 31,391
Occupancy 36,739 35,830
Interest expense 32,748 0
General and administrative expenses 132,310 73,305
--------- ---------
TOTAL EXPENSES 952,874 809,684
--------- ---------
NET LOSS $(751,853) $(417,627)
========= =========
NET LOSS PER SHARE OF COMMON STOCK $ (0.84) $ (0.46)
========= =========
</TABLE>
See Notes to Financial Statements.
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DELTA CLEARING CORP.
STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996 (Unaudited)
<TABLE>
<CAPTION>
1997 1996
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(1,935,394) $(1,463,148)
Adjustments to reconcile net loss to
net cash used in operating activities:
Accretion of interest on investments in
U.S. Treasury securities (136,532) (174,515)
Depreciation 106,433 85,737
Decrease (Increase) in prepaid expenses
and other current assets 105,200 (228,332)
(Decrease) Increase in deferred revenue (36,178) 49,136
(Decrease) Increase in accounts payable
and accrued expenses (34,344) 72,722
----------- -----------
Net cash used in operating activities (1,930,815) (1,658,400)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from (payments for):
Purchase of U.S. Treasury securities (4,710,551) (4,970,704)
Maturity of U.S. Treasury securities 4,853,000 7,500,000
Purchase of office furniture and equipment (46,873) (166,021)
----------- -----------
Net cash provided by investing activities 95,576 2,363,275
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of subordinated debt 1,951,000 651,000
----------- -----------
NET INCREASE IN CASH 115,761 1,355,875
CASH, BEGINNING OF PERIOD 1,670,883 559,802
----------- -----------
CASH, END OF PERIOD $ 1,786,644 $ 1,915,677
=========== ===========
SUPPLEMENTAL CASH FLOWS DISCLOSURES:
Interest paid $ 0 $ 0
=========== ===========
</TABLE>
See Notes to financial statements.
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DELTA CLEARING CORP.
NOTES TO FINANCIAL STATEMENTS (Unaudited)
SEPTEMBER 30, 1997
1. BASIS OF PRESENTATION:
The accompanying unaudited 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. Certain prior
period amounts have been reclassified to conform with current periods
presentation.
2. COMMITMENTS AND CONTINGENCIES:
The Company currently provides two services to its customers
("Participants"): 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 (collectively "Repos"); and the
issuance, clearance and settlement of put and call options written on U.S.
Treasury securities ("Options"). In conjunction with the Company's Options
business, the Company has the authority to issue up to 250,000 option contracts.
The Company issues each put option or call option and interposes itself in each
transaction - acting as writer to each purchasing Participant and as the
purchaser of a matching put or matching call from each writing Participant. The
Company acts solely as an intermediary in principal transactions, maintaining a
"matched book" for both Repos and Options. The Company, therefore, is not
subject to market risk with respect to these transactions, except to a limited
extent in the event of a default by a Participant in the performance of its
obligations. To control this risk, the Company collects, on a daily or intra-day
basis, margin from Participants who clear and settle Repos or Options through
the Company 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.
The Company has obtained a credit enhancement facility (the
"CEF"), 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 in connection with any
financial deficiency associated with the liquidation of a Participant account
with regard to such Participant's default. The credit 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 at September 30,1997, the Company was required to maintain a net worth
(excess of all assets over all
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liabilities, excluding up to $4 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 CEF 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, 2001.
At September 30, 1997 and 1996, the Company had a matched book of Repos with
notional amounts of $4.168 billion and $23.373 billion, respectively.
Additionally, at September 30, 1997 and 1996 the Company had issued and
outstanding matched put and call options on U.S. Treasury securities with a
notional value of $20 and $250 million respectively.
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. Through September
30, 1997, no contingent amounts have been paid to Exco RMJ Trading Corp.
In December 1995, the Company entered into a real estate lease agreement. The
lease became effective on April 5, 1996 The agreement calls for the Company to
make rental payments totaling $1,551,000 over the ten year, ten month term of
the lease. In accordance with the lease agreement, the Company began the payment
of monthly rent on February 5, 1997. At September 30, 1997, the Company had
approximately $1,449,000 of payments remaining.
On various dates beginning on September 30, 1996 through September 30, 1997,
several subordinated notes were issued and proceeds were received by the Company
in amounts totaling $2,453,000 from Intercapital Group Limited and $298,000 from
Dow Jones Markets Holdings, Inc. (formerly Dow Jones Telerate Holdings, Inc.).
These notes are payable on demand after one year from their dates of issue and
bear interest payable equal to the London Interbank Offered Rate ("LIBOR") for
three months deposits of U.S. dollars. At September 30, 1997, LIBOR was
approximately equal to 5.78%. On October 7, 1997 additional subordinated notes
were issued and proceeds were received by the Company in amounts totaling
$298,000 from Dow Jones Markets Holdings, Inc. Consistent with all previous
subordinated notes, these notes are payable on demand after October 8, 1998 and
bear interest payable equal to LIBOR.
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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 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. As of September 30,
1997, 28 Participants were enrolled and authorized by the Company for clearance
and settlement of Repos, representing a 7 Participant increase from September
30, 1996. Additionally, 37 Participants were enrolled and authorized by the
Company for clearance and settlement of Options transactions, representing a 5
Participant increase from September 30, 1996. The increase in the Company's
Repos and Options Participant base reflects its continued efforts to enroll
those qualified financial institutions active in their respective markets While
the growth of the Company's basic Repos product has slowed in a currently
competitive environment, the Company believes introduction of new related
products will reinvigorate the growth of its basic Repos product while providing
additional sources of revenue. On October 14, 1997, the Commission approved the
Company's rule change filing of its Procedures which allows the Company to clear
and settle mortgaged backed Repos. On October 20, 1997, the Company commenced
such clearance and settlement services. On June 30, 1997, the Commission
approved the Company's rule change filing of its Procedures which allows the
Company to utilize multiple inter-dealer brokers ("IDBs") to submit Options
trades to the Company for clearance and settlement. Prior to this approval, the
Company was limited by its Procedures to only one IDB for such submission while
no such restriction applied to the Company's other clearance and settlement
services. While only minimal activity occurred during the third quarter of 1997,
the Company believes a gradual growth of its Options business will occur
beginning in the fourth quarter of 1997.
For the nine months ended September 30, 1997, the Company cleared
approximately $2.1 trillion notional of matched Repos and issued 450 matched
option contracts to Participants. On September 30, 1997, margin accounts of
Participants held by the Company amounted to approximately $76 million. During
the nine months ended September 30, 1997 margin accounts of Participants held by
the Company fluctuated from a high of about $ million to a low of approximately
$ million due to Participants' clearing activity.
For the nine months ended September 30, 1997 and 1996, the Company
reported total revenue of $877,939 and $801,185, respectively, reflecting an
increase of approximately 10% in 1997. This increase included an approximate 18%
increase in clearing fees earned on the clearance and settlement by the Company
of Repos to $676,545 from $571,525 in 1997 and 1996, respectively. The growth of
the Repos business during the period accounts for the corresponding increase in
clearing fees. However, for the three months ended September 30, 1997 and 1996,
Repos clearing fees decreased to $134,907 from $323,210, respectively,
representing an appropriate 58% decrease. This decrease reflects a reduction in
clearance and settlement activity due to increased competition. Additionally, in
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<PAGE>
order to counter such competition, the Company instituted fee reductions during
the three month period. As mentioned above, the Company believes that it will
regain momentum in its Repos business with the introduction of new products. The
Options clearing business saw little activity during the nine months ended 1997
and 1996 amounting to $2,950 and $17,616 respectively. The Company believes that
its ability to accept the submission of trades from multiple IDBs effective June
30, 1997 will initiate renewed growth of this product during the fourth quarter
of 1997. Investment income of $198,444 in 1997 decreased approximately 6% from
$212,044 in 1996 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 amounted to $606,250 in 1997 and $693,750 in
1996. This decrease of approximately 13% was the result of a fee reduction
granted by the CEF provider. The actual size of the CEF remained unchanged in
both 1996 and 1997 at $250 million. Clearing bank fees, however, increased to
$306,771 in 1997 from $93,572 in 1996. In 1996 as the Company began the
introduction of its Repos product, the Company's clearing bank agreed to abate a
substantial portion of fees charged to the Company for the period from April
1996 through October 1996. This abatement coupled with the growth of the Repos
business account for the over 228% increase in clearing bank fees. In 1997
employee compensation and benefits increased by approximately 15% to $953,536
versus $828,227 in 1996 as a result of an increase in staffing. Professional
fees increased approximately 54% to $333,215 in 1997 versus $216,820 in 1996. In
1997, the Company embarked on the development of several new products and has
incurred increased expenditures relative to systems enhancements which required
outside professional consultation. Additionally, legal fees associated with new
product development increased as the Company worked to prepare appropriate rule
change filings of its Procedures corresponding to such development. Occupancy
costs increased approximately 28% to $111,675 in 1997 from $87,283 in 1996, as a
consequence of an over five-fold increase in the square footage of the Company's
leased office space. Occupancy of the new office space took place in April 1996.
Depreciation increased approximately 24% from $85,737 in 1996 to $106,433 in
1997, reflecting the purchase by the Company of office furnishings and equipment
for its new leased offices. At September 30, 1997, the Company had outstanding
subordinated notes totaling $2,751,000 which accrue interest payable at the
London Interbank Offered Rate ("LIBOR") for three month deposits of U.S.
dollars. The LIBOR rate during the nine month period ended September 30, 1997
averaged approximately 5.70%. The proceeds from subordinated borrowings were
received on various dates beginning on September 30, 1996. Accordingly, interest
expense during the nine month period ended September 30, 1997 amounted to
$69,620 while no such expense was incurred during the nine month period ended
September 30, 1996.
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 $2.4 million
obtained from the issuance of its Common Stock in 1989. Due to operating costs
associated with the Company's basic Repos clearing services as well as new
product development costs, the Company's capital has been reduced. On various
dates beginning on September 30, 1996 through September 30, 1997, several
subordinated notes were issued and proceeds were received by the Company in
amounts
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totaling $2,453,000 from Intercapital Group Limited and $298,000 from
Dow Jones Markets Holdings, Inc. (formerly Dow Jones Telerate Holdings, Inc.).
On October 7, 1997 additional subordinated notes were issued and proceeds were
received by the Company in amounts totaling $298,000 from Dow Jones Markets
Holdings, Inc. The Company expects that the introduction of new products coupled
with the reinvigoration of the Company's basic Repos and Options products will
facilitate the enhancement of revenue by the fourth quarter of 1997. At the
October 21, 1997, Board of Directors meeting, the need for additional
subordinated borrowings was discussed. It was decided that such borrowings would
be made available 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 magnitude of such
borrowings.
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DELTA CLEARING CORP.
PART II. OTHER INFORMATION
Item 1 - 5 Not Applicable
Item 6 Exhibits And Reports On Form 8-K
(a) Exhibits
Exhibit No.
27 Financial Data Schedule
(b) Form 8-K
No reports on Form 8-K have been filed during the quarter for
which this Report is filed.
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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 November 14, 1997.
DELTA CLEARING CORP.
\s\ Stephen K. Lynner
--------------------------------
Stephen K. Lynner
President
\s\ Ronald H. Buckner
--------------------------------
Ronald H. Buckner
Chief Financial Officer
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<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 1,786,644
<SECURITIES> 3,363,798
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 81,306,591
<PP&E> 249,590
<DEPRECIATION> 295,290
<TOTAL-ASSETS> 81,583,043
<CURRENT-LIABILITIES> 76,437,450
<BONDS> 2,751,000
0
0
<COMMON> 9,000
<OTHER-SE> 2,385,593
<TOTAL-LIABILITY-AND-EQUITY> 81,583,043
<SALES> 679,495
<TOTAL-REVENUES> 877,939
<CGS> 0
<TOTAL-COSTS> 1,936,177
<OTHER-EXPENSES> 877,156
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (1,935,394)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,935,394)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,935,394)
<EPS-PRIMARY> (2.15)
<EPS-DILUTED> (2.15)
</TABLE>
