<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 June 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 August 13, 1997: 900,000 shares of common stock, par value
$.01 per share.
<PAGE>
TABLE OF CONTENTS
PART I. Financial Information Page
Item 1 Financial Statements
Statements of Financial Condition
at June 30, 1997 and December 31, 1996 2
Statements of Operations,
six months ended June 30, 1997 and 1996 3
Statements of Operations,
three months ended June 30, 1997 and 1996 4
Statements of Cash Flows,
six months ended June 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 11
Item 6 Exhibits and Reports on Form 8-K 11
Signature 12
<PAGE>
DELTA CLEARING CORP.
STATEMENTS OF FINANCIAL CONDITION
JUNE 30, 1997 AND DECEMBER 31, 1996
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
(Unaudited)
--------------- ----------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash $ 2,323,222 $ 1,670,883
Margin accounts of participants 86,201,606 84,056,218
Investment in U.S. Treasury securities,
at amortized cost 3,317,781 3,369,715
Prepaid expenses and other current assets 216,242 290,515
--------------- ----------------
Total current assets 92,058,851 89,387,331
OFFICE FURNITURE AND EQUIPMENT - At cost, net of
accumulated depreciation of $260,131 at June 30, 1997
and $188,857 at December 31, 1996 265,757 309,150
OTHER ASSETS 26,862 26,862
--------------- ----------------
TOTAL ASSETS $ 92,351,470 $ 89,723,343
=============== ================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Margin Payable $ 86,201,606 $ 84,056,218
Accounts payable and accrued expenses 1,048,714 480,845
Deferred revenue 29,204 56,293
--------------- ----------------
Total current liabilitiess 87,279,524 84,593,356
--------------- ----------------
SUBORDINATED BORROWINGS 1,925,500 800,000
--------------- ----------------
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 (5,853,554) (4,670,013)
--------------- ----------------
Total stockholders' equity 3,146,446 4,329,987
--------------- ----------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 92,351,470 $ 89,723,343
=============== ================
</TABLE>
See Notes to Financial Statements.
-2-
<PAGE>
DELTA CLEARING CORP.
STATEMENTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1997 AND 1996 (Unaudited)
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
REVENUES:
Clearing Fees:
Repurchase and reverse repurchase agreements $ 541,638 $ 248,315
Options 2,750 13,416
Investment Income 132,530 147,397
----------- -----------
Total revenues 676,918 409,128
----------- -----------
EXPENSES:
Clearing expenses 624,370 518,535
Employee compensation and benefits 612,989 539,203
Professional fees 246,495 121,448
Depreciation 71,274 54,346
Occupancy 74,936 51,453
Interest expense 36,872 -
General and administrative expenses 193,523 169,664
----------- -----------
TOTAL EXPENSES 1,860,459 1,454,649
----------- -----------
NET LOSS $(1,183,541) $(1,045,521)
=========== ===========
NET LOSS PER SHARE OF COMMON STOCK $ (1.32) $ (1.16)
=========== ===========
</TABLE>
See Notes to Financial Statements.
-3-
<PAGE>
DELTA CLEARING CORP.
STATEMENTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1997 AND 1996 (Unaudited)
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
REVENUES:
Clearing Fees:
Repurchase and reverse repurchase agreements $ 200,172 $ 198,636
Options 750 12,075
Investment Income 65,073 68,950
----------- -----------
Total revenues 265,995 279,661
----------- -----------
EXPENSES:
Clearing expenses 287,615 256,725
Employee compensation and benefits 294,477 288,712
Professional fees 132,800 75,354
Depreciation 35,564 29,320
Occupancy 36,950 39,738
Interest expense 22,176 -
General and administrative expenses 133,323 99,493
----------- -----------
TOTAL EXPENSES 942,905 789,342
----------- -----------
NET LOSS $ (676,910) $ (509,681)
=========== ===========
NET LOSS PER SHARE OF COMMON STOCK $ (0.75) $ (0.57)
=========== ===========
</TABLE>
See Notes to Financial Statements.
-4-
<PAGE>
DELTA CLEARING CORP.
STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 1997 AND 1996 (Unaudited)
<TABLE>
<CAPTION>
1997 1996
--------------- ---------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (1,183,541) $ (1,045,521)
Adjustments to reconcile net loss to
net cash used in operating activities:
Accretion of interest on investments in
U.S. Treasury securities (90,515) (128,675)
Depreciation 71,274 54,346
Decrease (Increase) in prepaid expenses
and other current assets 74,273 (136,843)
(Decrease) Increase in deferred revenue (27,089) 43,189
Increase (Decrease) in accounts payable
and accrued expenses 567,869 (47,243)
--------------- ---------------
Net cash used in operating activities (587,729) (1,260,747)
--------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from (payments for):
Purchase of U.S. Treasury securities (4,710,551) (3,570,895)
Maturity of U.S. Treasury securities 4,853,000 6,100,000
Purchase of office furniture and equipment (27,881) (137,832)
--------------- ---------------
Net cash provided by investing activities 114,568 2,391,273
--------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of subordinated debt 1,125,500 --
--------------- ---------------
NET INCREASE IN CASH 652,339 1,130,526
CASH, BEGINNING OF PERIOD 1,670,883 559,802
--------------- ---------------
CASH, END OF PERIOD $ 2,323,222 $ 1,690,328
=============== ===============
SUPPLEMENTAL CASH FLOWS DISCLOSURES:
Interest paid $ -- $ --
=============== ===============
</TABLE>
See Notes to financial statements.
-5-
<PAGE>
DELTA CLEARING CORP.
NOTES TO FINANCIAL STATEMENTS (Unaudited)
JUNE 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.
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 June 30,1997, the Company was 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
-6-
<PAGE>
$5 million. On July 15, 1997, the credit enhancement facility agreement was
amended to exclude up to $4 million of subordinated notes issued to shareholders
of the Company for the purpose of computing net worth. 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, 2000.
At June 30, 1997 and 1996, the Company had a matched book of Repos with notional
amounts of $23.302 billion and $22.584 billion respectively. Additionally, at
June 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 $0 and $575
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 June 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 June 30, 1997, the Company had
approximately $1,488,000 of payments remaining.
On various dates beginning on September 30, 1996 through June 30, 1997, several
subordinated notes were issued and proceeds were received by the Company in
amounts totaling $1,627,500 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 June 30, 1997, LIBOR was approximately
equal to 5.75%. On July 30, 1997 an additional subordinated note was issued and
proceeds were received by the Company in the amount of $325,500 from
Intercapital Group Limited. Consistent with all previous subordinated notes, the
note is payable on demand after July 31, 1998 and bears interest payable equal
to LIBOR.
-7-
<PAGE>
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 June 30, 1997,
25 Participants were enrolled and authorized by the Company for clearance and
settlement of Repos, representing a 5 Participant increase from June 30, 1996.
Additionally, 36 Participants were enrolled and authorized by the Company for
clearance and settlement of Options transactions, representing a 2 Participant
decrease from June 30, 1996. The increase in the Company's Repos Participant
base reflects its continued efforts to enroll those qualified financial
institutions active in the Repos marketplace. The reduction of Options
Participants reflects the withdrawal of inactive Participants relative to their
corresponding Options activity. 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 July 23, 1997
the Commission noticed for public comment the Company's rule change filing of
its Procedures which will allow the Company to clear and settle mortgage backed
Repos. Upon approval the Company anticipates offering such services shortly
thereafter. On June 30, 1997, the Commission approved a previously pending rule
change filing of its Procedures to allow 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. It is anticipated that renewed growth of the Company's Options
business will occur beginning in the third quarter of 1997.
For the six months ended June 30, 1997, the Company cleared
approximately $1.6 trillion notional of matched Repos and issued 410 matched
option contracts to Participants. On June 30, 1997, margin accounts of
Participants held by the Company amounted to approximately $86 million. During
the six months ended June 30, 1997 margin accounts of Participants held by the
Company fluctuated from a high of about $125 million to a low of approximately
$81 million due to Participants' clearing activity.
For the six months ended June 30, 1997 and 1996, the Company reported
total revenue of $676,918 and $409,128 respectively, reflecting an increase of
approximately 65% in 1997. This increase included an approximate 118% increase
in clearing fees earned on the clearance and settlement by the Company of Repos
to $541,638 from $248,315 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 June 30, 1997 and 1996, Repos
clearing fees increased to $200,172 from $198,636 respectively, representing a
less than 1% increase. This marginal increase reflects the leveling off of the
Company's Repos clearing activity during the period. As mentioned
-8-
<PAGE>
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 six months ended 1997 and 1996 amounting to $2,750 and
$13,416 respectively. Through both periods the Company remained unable to accept
trades from more than one IDB resulting in a restrictive environment. 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 as well. Investment income of $132,530 in 1997 decreased approximately
10% from $147,397 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 $418,750 in 1997 and $462,500 in
1996. This decrease of approximately 10% 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
$205,620 in 1997 from $40,060 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 413% increase in clearing bank fees. In 1997
employee compensation and benefits increased by approximately 14% to $612,989
versus $539,203 in 1996 as a result of an increase in staffing. Professional
fees increased approximately 103% to $246,495 in 1997 versus $121,448 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 46% to $74,936 in 1997 from $51,453 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 31% from $54,346 in 1996 to $71,274 in
1997, reflecting the purchase by the Company of office furnishings and equipment
for its new leased offices. At June 30, 1997, the Company had outstanding
subordinated notes totaling $1,925,500 which accrue interest payable at the
London Interbank Offered Rate ("LIBOR") for three month deposits of U.S.
dollars. The LIBOR rate during the six month period ended June 30, 1997 averaged
approximately 5.65%. The proceeds from subordinated borrowings were received on
various dates beginning in the third quarter of 1996. Accordingly, interest
expense during the six month period ended June 30, 1997 amounted to $36,872
while no such expense was incurred during the six month period ended June 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 $3.1 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 June 30 1997, several subordinated
notes were issued and proceeds were received by the Company in amounts
-9-
<PAGE>
totaling $1,627,500 from Intercapital Group Limited and $298,000 from Dow Jones
Markets Holdings, Inc. (formerly Dow Jones Telerate Holdings, Inc.). On July 30,
1997 an additional subordinated note was issued and proceeds were received by
the Company in the amount of $325,500 from Intercapital Group Limited. 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 May 28, 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.
-10-
<PAGE>
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.
-11-
<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 August 13, 1997.
DELTA CLEARING CORP.
\s\ Stephen K. Lynner
----------------------------
Stephen K. Lynner
President
\s\ Ronald H. Buckner
----------------------------
Ronald H. Buckner
Chief Financial Officer
-12-
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 2,323,222
<SECURITIES> 3,317,781
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 92,058,851
<PP&E> 265,757
<DEPRECIATION> 260,131
<TOTAL-ASSETS> 92,351,470
<CURRENT-LIABILITIES> 87,279,524
<BONDS> 1,925,500
0
0
<COMMON> 9,000
<OTHER-SE> 3,137,446
<TOTAL-LIABILITY-AND-EQUITY> 92,351,470
<SALES> 544,388
<TOTAL-REVENUES> 676,918
<CGS> 0
<TOTAL-COSTS> 1,274,231
<OTHER-EXPENSES> 586,228
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (1,183,541)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,183,541)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,183,541)
<EPS-PRIMARY> (1.32)
<EPS-DILUTED> (1.32)
</TABLE>
