<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended March 31, 1997 Commission File Number 33-21409
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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 May 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 March 31, 1997 and December 31, 1996 2
Statements of Operations,
three months ended March 31, 1997 and 1996 3
Statements of Cash Flows,
three months ended March 31, 1997 and 1996 4
Notes to Financial Statements 5
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 7
PART II. OTHER INFORMATION
Item 1 - 5 Not Applicable 9
Item 6 Exhibits and Reports on Form 8-K 9
Signature 10
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DELTA CLEARING CORP.
STATEMENTS OF FINANCIAL CONDITION
MARCH 31, 1997 AND DECEMBER 31, 1996
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<TABLE>
<CAPTION>
March 31, December 31,
1997 1996
(Unaudited)
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<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash $ 1,910,938 $ 1,670,883
Margin accounts of participants 94,157,331 84,056,218
Investment in U.S. Treasury securities,
at amortized cost 3,379,894 3,369,715
Prepaid expenses and other current assets 285,834 290,515
--------------- ----------------
Total current assets 99,733,997 89,387,331
OFFICE FURNITURE AND EQUIPMENT - At cost, net of
accumulated depreciation of $224,567 for
March 31, 1997 and $188,857 for December 31, 1996 279,243 309,150
OTHER ASSETS 26,862 26,862
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TOTAL ASSETS $ 100,040,102 $ 89,723,343
=============== ================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Margin Payable $ 94,157,331 $ 84,056,218
Accounts payable and accrued expenses 551,760 480,845
Deferred revenue 56,655 56,293
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Total current liabilitiess 94,765,746 84,593,356
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SUBORDINATED BORROWINGS 1,451,000 800, 000
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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 (5,176,644) (4,670,013)
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Total stockholders' equity 3,823,356 4,329,987
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 100,040,102 $ 89,723,343
=============== ================
</TABLE>
See Notes to Financial Statements.
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DELTA CLEARING CORP.
STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1997 AND 1996 (Unaudited)
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<TABLE>
<CAPTION>
1997 1996
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<S> <C> <C>
REVENUES:
Clearing Fees:
Repurchase and reverse repurchase agreements $ 341,466 $ 49,679
Options 2,000 1,341
Investment Income 67,457 78,447
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Total revenues 410,923 129,467
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EXPENSES:
Clearing expenses 336,755 261,810
Employee compensation and benefits 318,512 250,491
Professional fees 113,695 46,094
Depreciation 35,710 25,026
Occupancy 37,986 11,715
Interest expense 14,696 -
General and administrative expenses 60,200 70,171
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TOTAL EXPENSES 917,554 665,307
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NET LOSS $ (506,631) $ (535,840)
============ ============
NET LOSS PER SHARE OF COMMON STOCK $ (0.56) $ (0.60)
============ ============
</TABLE>
See Notes to Financial Statements.
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DELTA CLEARING CORP.
STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 1997 AND 1996 (Unaudited)
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<TABLE>
<CAPTION>
1997 1996
--------------- ---------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (506,631) $ (535,840)
Adjustments to reconcile net loss to
net cash used in operating activities:
Accretion of interest on investments in
U.S. Treasury securities (45,101) (72,836)
Depreciation 35,710 25,026
Decrease (Increase) in prepaid expenses
and other current assets 4,681 (47,799)
Increase in deferred revenue 362 --
Increase in accounts payable and
accrued expenses 70,915 224,414
--------------- ---------------
Net cash used in operating activities (440,064) (407,035)
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CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from (payments for):
Purchase of U.S. Treasury securities (1,400,078) --
Maturity of U.S. Treasury securities 1,435,000 500,000
Purchase of office furniture and equipment (5,803) (18,359)
--------------- ---------------
Net cash provided by investing activities 29,119 481,641
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CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of subordinated debt 651,000 --
--------------- ---------------
NET INCREASE IN CASH 240,055 74,606
CASH, BEGINNING OF PERIOD 1,670,883 559,802
--------------- ---------------
CASH, END OF PERIOD $ 1,910,938 $ 634,408
=============== ===============
SUPPLEMENTAL CASH FLOWS DISCLOSURES:
Interest paid $ -- $ --
=============== ===============
</TABLE>
See Notes to financial statements.
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DELTA CLEARING CORP.
NOTES TO FINANCIAL STATEMENTS
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.
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, 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
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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 CEF becomes the obligation of the individual
defaulting Participant. The CEF expires on January 27, 2000.
At March 31, 1997 and 1996, the Company had a matched book of Repos with
notional amounts of $27,255 billion and $11,112 billion respectively. At March
31, 1997 and 1996, the Company had no issued matched put and call options on
U.S. Treasury securities outstanding.
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 March 31,
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.
On February 20, 1997 a subordinated note was issued and proceeds were received
by the Company in the amount of $651,000 from Intercapital Group Limited. The
note is payable on demand after February 21, 1998, and bears interest payable
equal to the London Interbank Offered Rate ("LIBOR") for the three month
deposits of U.S. dollars. At March 31, 1997, LIBOR was 5.8125%. Previously, on
September 30, 1996, the Company received $800,000 of proceeds from the issuance
of two subordinated notes: Intercapital Group Limited, in the amount of
$651,000; Dow Jones Telerate Holdings, Inc., in the amount of $149,000. These
two notes are payable on demand after September 30, 1997 and also bear interest
payable equal to LIBOR.
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<PAGE>
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 March 31,
1997, 25 Participants were enrolled and authorized by the Company for clearance
and settlement of Repos, representing a 15 Participant increase from March 31,
1996. Additionally, 36 Participants were enrolled and authorized by the Company
for clearance and settlement of Options transactions, representing a 2
Participant decrease from March 31, 1996. The increase in Repos Participants
reflects the continued growth of the Company's Repos Participant base and
corresponding activity, and the reduction of Options Participants reflects the
withdrawal of inactive Participants relative to their corresponding Options
activity. While the success of the Repos product is still to be determined, it
has become the dominant business of the Company. Regarding 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 inter-dealer brokers
("IDBs") to submit Options trades to the Company for clearance and settlement.
Currently, the Company is limited by its Procedures to only one IDB for such
submission. It is anticipated that once this rule change is approved the
Company's Options business will increase.
For the three months ended March 31, 1997, the Company cleared
approximately $1 trillion notional of matched Repos and issued 260 matched
option contracts to Participants. On March 31, 1997, margin accounts of
Participants held by the Company amounted to approximately $94 million. During
the three months ended March 31, 1997 margin accounts of Participants held by
the Company fluctuated from a high of about $120 million to a low of
approximately $81 million due to Participants' clearing activity.
For the three months ended March 31, 1997 and 1996, the Company reported
total revenue of $410,923 and $129,467 respectively, reflecting an increase of
approximately 217% in 1997. This increase included an approximate 587% increase
in clearing fees earned on the clearance and settlement by the Company of Repos
to $341,466 from $49,679 in 1997 and 1996, respectively. The growth of the Repos
business during the period accounts for the corresponding increase in clearing
fees. The Options clearing business saw little activity during the 3 month
period in both 1997 and 1996 amounting to only $2,000 and $1,341, respectively.
The Company believes the Options business is dependent on its ability to utilize
multiple IDBs for the submission of trades to the Company for clearance and
settlement as mentioned above. Investment income of $67,457 in 1997 decreased
14% from $78,447 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 does not vary significantly with the levels
of clearing activity or Participant enrollment and, in fact, remained unchanged
for both the three month periods ended March 31, 1997 and 1996, amounting to
$231,250 in each period. Clearing bank fees, however, increased to $105,505 in
1997 from $30,560 in 1996. Since clearing bank fees are sensitive to the levels
of clearing activity processed by the Company, this
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245% increase is a direct result of the growth of the Repos business. In 1997
employee compensation and benefits increased by approximately 27% to $318,512
versus $250,491 in 1996 as a result of an increase in staffing. Professional
fees increased approximately 147% to $113,695 in 1997 versus $46,094 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 224% to $37,986 in 1997 from $11,715 in 1996, as a
consequence of an over five-fold increase in the square footage of the Company's
leased office space. Depreciation increased approximately 43% from $25,026 in
1996 to $35,710 in 1997, reflecting the purchase by the Company of office
furnishings and equipment for its new leased offices. In 1997, the Company had
outstanding subordinated notes totaling $1,451,000 which accrue interest payable
at the London Interbank Offered Rate ("LIBOR") for three month deposits of U.S.
dollars. The LIBOR rate during the three month period ended March 31, 1997
approximated 5.5%. The proceeds from subordinated borrowings were received on
various dates beginning in the third quarter of 1996. Accordingly, interest
expense during the three month period ended March 31, 1997 amounted to $14,696
while no such expense was incurred during the three month period ended March 31,
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 $3.8 million
obtained from the issuance of its Common Stock in 1989. Due to start up costs of
introducing Repos 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 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 borrowings will be sufficient to meet its capital and liquidity
requirements for the foreseeable future.
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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.
<PAGE>
DELTA CLEARING CORP.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, on May 14, 1997.
DELTA CLEARING CORP.
\s\ Stephen K. Lynner
--------------------------
Stephen K. Lynner
President
\s\ Ronald H. Buckner
--------------------------
Ronald H. Buckner
Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 1,910,938
<SECURITIES> 3,379,894
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 99,733,997
<PP&E> 279,243
<DEPRECIATION> 224,567
<TOTAL-ASSETS> 100,040,102
<CURRENT-LIABILITIES> 94,765,746
<BONDS> 1,451,000
<COMMON> 9,000
0
0
<OTHER-SE> 3,814,356
<TOTAL-LIABILITY-AND-EQUITY> 100,040,102
<SALES> 343,466
<TOTAL-REVENUES> 410,923
<CGS> 0
<TOTAL-COSTS> 669,963
<OTHER-EXPENSES> 247,591
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (506,631)
<INCOME-TAX> 0
<INCOME-CONTINUING> (506,631)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (506,631)
<EPS-PRIMARY> (.56)
<EPS-DILUTED> (.56)
</TABLE>
