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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, 1997
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 07310
(Address of principal executive (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 April 14, 1998, 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
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PART I
Item 1. Business........................................................... 1
Item 2. Properties......................................................... 2
Item 3. Legal Proceedings.................................................. 2
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............................................ 3
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations.......................................... 4
Item 8. Financial Statements and Supplementary Data........................ 7
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure........................................... 21
PART III
Item 10. Directors and Executive Officers of the Registrant................. 22
Item 11. Executive Compensation............................................. 24
Item 12. Security Ownership of Certain Beneficial Owners and
Management......................................................... 25
Item 13. Certain Relationships and Related Transactions..................... 25
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K........................................................... 26
EXHIBITS
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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 and mortgage-backed securities sold under
agreement to repurchase and U.S. Treasury and mortgage-backed 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"), 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 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
provides an added measure of protection for the Company and is not a
requirement under the Exchange Act. The CEF currently maintained by the
Company represents an aggregate notional amount of $100 million. From October
25,1995 through November 30, 1997 the Company maintained the CEF at an
aggregate notional amount of $250 million. On December 1, 1997, the CEF was
reduced to $100 million at the Company's request upon a reevaluation of
business volume by the Company. Maximum coverage of any one
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Participant has remained equal to $30 million. Under the current terms, the
Company may purchase coverage up to a total of $300 million. Increases may be
activated upon 10 days' notice with the Company paying an additional fee
chargeable at such time. 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 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. On February 17, 1998, MBIA Inc.
completed a merger with CapMAC Holdings, Inc., (the parent of CapMAC). Under
the terms of the merger, the CEF is backed by the full financial resources of
MBIA Insurance Corporation, the principal operating subsidiary of MBIA, Inc.,
and is rated Triple-A by Moody's Investors Service, Inc., Standard & Poor's
Ratings Services and Fitch IBCA. 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
Under the CEF agreement at December 31, 1997, the Company
was required to maintain a net worth (excess of all assets over all
liabilities, excluding up to $4 million of subordinated notes issued to
Shareholders of the Company) of $5 million. On February 16, 1998, the CEF
agreement was amended, reducing the net worth requirement to $4 million.
On April 3, 1998, Intercapital Group Ltd., an affiliate of a
shareholder, entered into an agreement with the Company which affirms that
Intercapital Group Ltd. will make available financial resources to the Company
in order for the Company to maintain compliance with the CEF through January
1, 1999. Such financial resources are to be made available at such time and in
such amounts as the Board of Directors of the Company identifies, which is
commensurate with the then prevailing level of business activity effected
through and by the Company.
On April 3, 1998, the Company and Intercapital Group Ltd.,
the holder of a series of LIBOR Subordinated Demand Notes (the "Holder")
totaling $2,604,000 payable by the Company, amended such notes to provide that
the Holder shall not be entitled to make demand for payment on or prior to
January 1, 1999. Additionally, said amendments provide that the Company may
not prepay any principal or accrued interest on any of said notes prior to
January 1, 1999.
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
remaining rental payments totaling $1,408,000 over the next nine years.
Item 3. Legal Proceedings
During the fourth quarter of 1997, the Company submitted a
rule change filing of its Procedures which would allow it to issue and clear a
new product, Repurchase Agreement Instrument Transactions (RAITs). RAITs are
the economic equivalent of a series of U.S. Treasury Repos transactions but
possess many features which result in a beneficial impact to a user's
financial statements in comparison with standard U.S. Treasury Repos
transactions. On February 6, 1998 the Commission published for public notice
this rule change proposal. The Company cannot predict when and if the
Commission will approve this rule change proposal.
On December 17, 1997, the Commodity Futures Trading
Commission (the "CFTC") commenced an investigation of the Company to determine
whether, in connection with the issuance and clearing of RAITs by the Company,
the Company or another person or entity would be in violation of the Commodity
Exchange Act or any regulations thereunder. The Company believes that such
transactions, when and if cleared by the Company pursuant to approval by the
Securities and Exchange Commission, would not be in violation of the Commodity
Exchange Act or any regulations properly adopted thereunder.
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Item 4. Submission of Matters to a Vote of Security Holders
None
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
The Company was originally capitalized by the sale of shares
of its Common Stock under an offering exempt from the registration
requirements of the Securities Act of 1933, as amended (the "Securities Act").
As a result, there is no established trading market for the outstanding class
of the Company's Common Stock. On December 19, 1997 the Company amended its
Certificate of Incorporation to increase the number of authorized shares of
the Company from 1,000,000 to 2,500,000 shares of Common Stock, par value one
cent ($.01) per share. As of April 14, 1998, 900,000 shares of the Company's
Common Stock were held by three stockholders. (For a complete description of
the stockholders see Item 12). Coincident with the amended Certificate of
Incorporation, the Company issued options to two of its existing stockholders:
INCAP Netherlands (Holdings) B.V., to purchase 691,068 shares of Common Stock
of the Company; and Dow Jones Markets Holdings, Inc., to purchase 158,203
shares of Common Stock of the Company. The options are exercisable at anytime,
at a price of $.01 per share and expire on December 31, 1998. The Company has
not entered into any arrangement or understanding to issue additional 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.
Item 6. Selected Financial Data
DELTA CLEARING CORP.
Selected Financial Data
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1997 1996 1995 1994 1993
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OPERATING RESULTS:
Clearing fees:
Repos $ 738,996 $ 920,100 $ 337 $ -- $ --
Options 3,610 20,766 110,024 1,140,102 717,906
Interest income 266,403 280,220 343,604 289,663 261,620
Net revenue 1,009,009 1,221,086 453,965 1,429,765 979,526
Operating expenses 3,420,219 3,242,670 1,517,561 959,120 831,663
Net income (loss) (2,411,210) (2,021,584) (1,063,596) 470,645 147,863
YEAR-END BALANCES:
Total assets 68,639,805 89,723,343 13,012,040 59,741,899 110,064,955
Margin payable 62,909,574 84,056,218 6,407,840 52,272,837 103,079,929
Long-term debt 3,200,000 800,000 -- -- --
Stockholders' equity 2,138,377 4,329,987 6,351,571 7,415,167 6,944,522
PER COMMON SHARE DATA:
Income (loss) (2.68) (2.24) (1.18) .52 .16
Cash dividends declared -- -- -- -- --
Book value 2.38 4.81 7.06 8.24 7.72
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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, 1997, 27 Participants were enrolled and
authorized by the Company for clearance and settlement of Repos transactions
while 36 Participants were enrolled and authorized by the Company for
clearance and settlement of Options transactions. These Participant enrollment
levels reflect little change from December 31, 1996 as the Company focused on
the development and enhancement of new and existing services throughout 1997
rather than an expansion of its Participant base. While the growth of the
Company's U.S. Treasury Repos product slowed due to the effects of
competition, on October 20, 1997, the Company commenced clearance and
settlement services for mortgage backed Repos following the approval by the
Commission of the Company's rule change filing of its Procedures on October
14, 1997. The Company is currently the sole provider of this service and hopes
to capitalize on this unique position. Through December 31, 1997, the Company
was able to attract a growing volume of mortgage backed Repos clearing
activity. The Company believes the introduction of new related products may
reinvigorate the growth of its U.S. Treasury Repos product while providing
additional sources of revenue. The Company anticipates that a renewed growth
in its Participant base may occur as new and existing services are offered by
the Company. The success of its new services and the ability of the Company to
recapture market share relative to its existing services is still to be
determined. Regarding its Options business, on June 30, 1997, the Commission
approved the Company's rule change filing of its Procedures allowing the
Company to utilize multiple IDBs to submit Options trades to the Company for
clearance and settlement services. While only minimal activity occurred in
1997, the Company believes a gradual growth of its Options business may occur
throughout 1998 as a consequence of this approval.
During 1997 the Company performed a comprehensive review of its computer
applications to consider the potential impact of date sensitive calculations
related to the year 2000 ("Y2K"). As a result of this review, the Company has
determined that the operational systems relating to its Repos applications are
in full Y2K compliance. However, the Company has adopted a Y2K project plan to
provide comprehensive documentation in support of this assertion. This project
plan undertakes to acquire all vendor Y2K compliance certifications and, where
applicable, to upgrade to certified versions of vendor software. Additionally,
all requisite testing and potential modifications are contemplated for such
upgrades. Upgrades will be performed in accordance with existing operation
system and database maintenance agreements. To further ensure compliance with
regard to these applications the Company has appointed a Y2K committee which
has adopted a rigorous agenda for monthly reevaluation of ongoing and new
transactions in a test environment. This test environment will provide a
complete universe of transaction types to identify any diversion from Y2K
compliance. The Y2K committee is comprised of Company personnel and it is
anticipated that this project will be largely completed by internal staff. The
Company does not expect to spend any significant amounts with outside
contractors relative to the completion of these tasks. The Repos applications
account for approximately 99% of the Company's current revenue source.
Regarding the operational systems relating to the Company's Options
application, Y2K conversion will be required. The Company has developed a plan
to rewrite the Options application onto the platform currently utilized by the
Repos applications. In order to protect against any possible Y2K
irregularities with regard to the Options application, the Company has
instituted a policy to limit the term of Option trades submitted to the
Company for clearance and settlement services to a period not to exceed one
year. This restriction will allow the Company an opportunity to perform a cost
/ benefit analysis to determine whether the growth of the Options business
warrants the required internal resources to facilitate a rewrite of the
Options application. Such cost / benefit analysis will be completed by May 31,
1998. Should this analysis determine that the benefit of continuing the
Options business does not outweigh the cost, the Company will discontinue such
business. Alternatively, should the business warrant continuation, the
implementation of the Options application rewrite plan will commence.
Management believes that with the planned rewrite of the Options application,
the Y2K compliance issue will be resolved on a timely basis and will not pose
significant operational problems for the Company. Rewrite and testing of the
Options application is expected to cost approximately $100,000. Approximately
90% of this estimate relates to internal staff costs. Management believes
that all costs associated with Y2K will not have a material effect on the
Company's financial condition.
Results of Operations
The Year Ended December 31, 1997 Compared with the Year Ended December 31, 1996
For the year ended December 31, 1997, the Company cleared
approximately $2.3 trillion notional of matched Repos and issued 670 matched
option contracts to Participants. On December 31, 1997, Participant's cash and
cash equivalents held for margin by the Company amounted to approximately $63
million. During 1997, the requirements of
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the Company for cash and cash equivalents held for margin fluctuated from a
high of $125 million to a low of $63 million due to Participants' clearing
activity.
For the years ended December 31, 1997 and 1996, the Company reported
total revenue of $1,009,009 and $1,221,086, respectively, reflecting a
decrease of approximately 17% in 1997. This decrease included an approximate
21% decrease in clearing fees to $742,606 from $940,866 in 1997 and 1996,
respectively. U.S. Treasury Repos clearing fees decreased to $731,749 in 1997
from $920,100 in 1996, reflecting the effects of competition coupled with
moderate fee reductions instituted by the Company during 1997. The Company's
mortgage backed Repos service, introduced by the Company on October 20, 1997,
accounted for $7,247 of clearing fee revenue in 1997. Options clearing fees
fell from $20,766 in 1996 to $3,610 in 1997 reflecting only sporadic instances
of trades submitted to the Company for clearance and settlement during 1997.
As a consequence of the Company's approval by the Commission to allow multiple
IDBs to submit Options trades to the Company as mentioned earlier, the Company
believes a gradual growth of its Options business may occur as more
Participants are reintroduced to this service through renewed marketing
efforts in 1998. Investment income of $266,403 in 1997 decreased approximately
5% from $280,220 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 $756,250 in 1997 and $925,000
in 1996. This decrease of approximately 18% was the result of a fee reduction
granted by the CEF provider in April 1997 coupled with the Company's decision
to effectuate a 60% reduction in the coverage amount maintained under the CEF
from $250 million to $100 million in December, 1997. The decision to reduce
the coverage amount was based on the volume of clearance activity. As the
volume of clearance activity increases, the Company will reevaluate the
coverage amount and increase such when and if deemed appropriate. Clearing
bank fees, however, increased to $339,879 in 1997 from $191,793 in 1996 or
approximately 77%. 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 April 1996 through October 1996.
While such abatement was not present in 1997, fees in 1997 were otherwise
mitigated as a result of the diminished volume of clearance activity
experienced by the Company. Overall volume of matched Repos clearance activity
was off approximately 23% from roughly $3.0 trillion in 1996 down to about
$2.3 trillion in 1997.
Professional fees decreased approximately 15% to $371,423 in 1997
versus $435,677 in 1996. In 1996 the Company embarked on the development of
several new products incurring significant legal expense relative to
regulatory rule filings with the Commission. While additional development
occurred in 1997, some of this cost was absorbed through internal preparation
of such filings. In 1997 employee compensation and benefits increased by
approximately 6% to $1,200,871 versus $1,127,891 in 1996. This increase was
the result of the Company's creation of an internal systems development
department in the second half of 1997. The cost associated with staffing this
department was mitigated, however, by the departure of other executive and
administrative staff. Occupancy costs increased approximately 21% to $150,440
from $124,171 in 1997 and 1996, respectively. In April, 1996, the Company
relocated its principle offices to new leased space representing an over
five-fold increase in the square footage of the office space previously
occupied by the Company. The 1997 increase in occupancy costs reflect a full
year in these new offices versus only a partial year in 1996. Depreciation and
amortization increased approximately 130% from $124,030 in 1996 to $285,039 in
1997. This increase includes $110,390 of amortization of options issued to
shareholders in 1997. Additionally, $30,270 of amortized software development
costs are also included in 1997 expense. Such amortization of options and
software development costs were not present in 1996. Depreciation of the
Company's fixed assets amounted to $144,379 in 1997 versus $124,030 in 1996.
This approximate 16% increase reflects increased additions to the Company's
systems asset base throughout 1997. Other expenses decreased approximately 34%
in 1997 to $188,302 from $286,905 in 1996. The decrease reflects the Company's
successful efforts in instituting a policy of cost cutting in the area of
other general and administrative expenses in 1997.
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 amounted to approximately $84
million. 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
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to $920,100 in 1996 from $337 in 1995, reflecting the 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. 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. 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 was 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 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 embarked on the
development of several new products and 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.
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 $2.0 million obtained from the issuance of its Common Stock in
1989. Due to operating losses associated with the Company's Repos clearing
services and increased competition in this area, the Company's capital has
been reduced. On various dates beginning on September 30, 1996 through
December 31, 1997, several subordinated notes were issued and proceeds were
received by the Company in amounts totaling $2,604,000 from Intercapital Group
Limited and $596,000 from Dow Jones Markets Holdings, Inc. (formerly Dow Jones
Telerate Holdings, Inc.). On April 3, 1998, Intercapital Group Ltd. agreed to
amend the earliest demand date on its notes to January 1, 1999.
While 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, the Company's management
has engaged in active discussions with a number of institutions with respect
to such institutions obtaining an equity shareholding in the Company.
While management cannot predict the success of these discussions or the
timing of equity participation, if any, it is the Company's intention to
secure additional capital through such equity participation. In the interim,
on April 3, 1998, the Company has entered into an agreement with Intercapital
Group Ltd. whereby Intercapital Group Ltd. affirms that it will make available
financial resources to the Company in order for the Company to maintain
compliance with the CEF through January 1, 1999. Such financial resources are
to be made available at such time and in such amounts as the Board of
Directors of the Company identifies, which is commensurate with the then
prevailing level of business activity effected through and by the Company. In
addition to these measures, management hopes that new related products, such
as mortgage backed Repos, recently introduced, coupled with additional
products planned for the future, will reinvigorate the growth of its existing
clearance services while providing additional sources of revenue.
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Item 8. Financial Statements and Supplementary Data
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Index to Financial Statements and Financial Statement Schedules
Financial Statements Page
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Independent Auditors' Reports
Deloitte & Touche LLP 8
KPMG Peat Marwick LLP 9
Statements of Financial Condition at December 31, 1997 10
and 1996
Statements of Operations years ended December 31, 1997, 11
1996 and 1995.
Statements of Changes in Stockholders' Equity years ended December 31 12
1997, 1996 and 1995.
Statements of Cash Flows years ended December 31, 1997, 13
1996 and 1995.
Notes to Financial Statements 14
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INDEPENDENT AUDITORS' REPORT
To the Board of Directors of
Delta Clearing Corp.
We have audited the accompanying statements of financial condition of Delta
Clearing Corp. (the "Company") as of December 31, 1997 and 1996, and the related
statements of operations, changes in stockholders' equity and cash flows for
each of the two years in the period ended December 31, 1997. 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 provide 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, 1997 and 1996,
and the results of its operations and its cash flows for each of the two years
in the period ended December 31, 1997, in conformity with generally accepted
accounting principles.
Deloitte & Touche LLP
April 7, 1998
New York, New York
- 8 -
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
Delta Clearing Corp.
We have audited the accompanying statements of operations, changes in
stockholders' equity and cash flows of Delta Clearing Corp. for the year ended
December 31, 1995. These financial statements are the responsibility of
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, the financial statements referred to above present fairly, in
all material respects, the results of operations and cash flows of Delta
Clearing Corp. for the year ended December 31, 1995, in conformity with
generally accepted accounting principles.
KPMG Peat Marwick LLP
March 15, 1996
New York, New York
- 9 -
<PAGE>
DELTA CLEARING CORP.
<TABLE>
<CAPTION>
STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31, 1997 AND 1996
- ---------------------------------------------------------------------------------------------------
ASSETS 1997 1996
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 2,872,259 $ 1,670,883
Margin accounts of participants (Note 3) 62,909,574 84,056,218
Investments in U.S. Treasury securities,
at amortized cost (Note 4) 1,948,178 3,369,715
Prepaid expenses and other current assets 203,110 290,515
------------ ------------
Total current assets 67,933,121 89,387,331
OFFICE FURNITURE AND EQUIPMENT - At cost, net of
accumulated depreciation of $333,236 and $188,857 for
1997 and 1996, respectively 218,506 309,150
CAPITALIZED SOFTWARE DEVELOPMENT COSTS - At cost,
net of amortization of $30,270 (Note 1) 353,128 -
OTHER ASSETS 25,849 26,862
------------ ------------
TOTAL ASSETS $ 68,530,604 $ 89,723,343
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Margin payable (Note 3) $ 62,909,574 $ 84,056,218
Accounts payable and accrued expenses 349,416 480,845
Deferred revenue (Note 1) 42,438 56,293
------------ ------------
Total current liabilities 63,301,428 84,593,356
------------ ------------
SUBORDINATED BORROWINGS (Note 5) 3,200,000 800,000
------------ ------------
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value; 2,500,000 shares authorized,
900,000 shares issued and outstanding 9,000 9,000
Additional paid-in capital 9,210,600 8,991,000
Accumulated deficit (7,081,214) (4,670,013)
------------ ------------
Total stockholders' equity 2,138,386 4,329,987
Less unamortized deferred stock options (109,210) -
------------ ------------
2,029,176 4,329,987
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 68,530,604 $ 89,723,343
============ ============
</TABLE>
-10-
<PAGE>
DELTA CLEARING CORP.
<TABLE>
<CAPTION>
STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
- ---------------------------------------------------------------------------------------------------
1997 1996 1995
<S> <C> <C> <C>
REVENUES:
Clearing fees:
Repurchase and reverse repurchase agreements $ 738,996 $ 920,100 $ 337
Options 3,610 20,766 110,024
Interest income 266,403 280,220 343,604
------------ ------------ ------------
Total revenues 1,009,009 1,221,086 453,965
------------ ------------ ------------
EXPENSES:
Clearing expenses 1,114,354 1,132,768 519,235
Employee compensation and benefits 1,200,871 1,127,891 393,472
Professional fees 371,414 435,677 457,413
Depreciation and amortization 285,039 124,030 27,072
Occupancy 150,440 124,171 24,500
Interest expense 109,790 11,228 -
Other 188,302 286,905 95,869
------------ ------------ ------------
Total expenses 3,420,210 3,242,670 1,517,561
------------ ------------ ------------
NET LOSS $ (2,411,201) $ (2,021,584) $ (1,063,596)
============ ============ ============
NET LOSS PER SHARE BASIC $ (2.68) $ (2.24) $ (1.18)
============ ============ ============
</TABLE>
See notes to financial statements.
-11-
<PAGE>
DELTA CLEARING CORP.
<TABLE>
<CAPTION>
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
- -------------------------------------------------------------------------------------------------------
Common
Stock Additional
($.01 Paid-in Accumulated
Par Value) Capital Deficit Total
<S> <C> <C> <C> <C>
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
Issuance of options - 219,600 - 219,600
Net loss - - (2,411,201) (2,411,201)
------- ----------- ------------ -----------
BALANCE, DECEMBER 31, 1997 $ 9,000 $ 9,210,600 $ (7,081,214) $ 2,138,386
======= =========== ============ ===========
</TABLE>
See notes to financial statments.
-12-
<PAGE>
DELTA CLEARING CORP.
<TABLE>
<CAPTION>
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
- --------------------------------------------------------------------------------------------------------------------
1997 1996 1995
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (2,411,201) $ (2,021,584) $ (1,063,596)
Adjustments to reconcile net loss to net
cash used in operating activities:
Accretion of interest on investments in
U.S. Treasury securities (175,912) (220,676) (211,923)
Depreciation and amortization 285,039 124,030 27,072
Decrease (increase) in prepaid expenses
and other assets 88,427 (219,160) (66,873)
(Decrease) increase in deferred revenue (13,855) 56,293 -
(Decrease) increase in accounts payable and
accrued expenses (131,429) 228,216 198,733
------------ ------------ ------------
Net cash used in operating activities (2,358,931) (2,052,881) (1,116,587)
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from (payments for):
Purchases of U.S. Treasury securities (4,710,560) (6,388,017) (8,728,480)
Maturities of U.S. Treasury securities 6,308,000 8,918,000 10,260,000
Purchase of office furniture and equipment (53,735) (166,021) (264,583)
Capitalized software development costs (383,398) - -
------------ ------------ ------------
Net cash provided by investing activities 1,160,307 2,363,962 1,266,937
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES -
Proceeds from issuance of subordinated debt 2,400,000 800,000 -
------------ ------------ ------------
NET INCREASE IN CASH AND CASH
EQUIVALENTS 1,201,376 1,111,081 150,350
CASH AND CASH EQUIVALENTS,
BEGINNING OF YEAR 1,670,883 559,802 409,452
------------ ------------ ------------
CASH AND CASH EQUIVALENTS,
END OF YEAR $ 2,872,259 $ 1,670,883 $ 559,802
============ ============ ============
SUPPLEMENTAL CASH FLOWS DISCLOSURES:
Interest paid $ 113,767 $ 11,228 $ -
============ ============ ============
SUPPLEMENTAL DISCLOSURE OF NONCASH
FINANCING ACTIVITY:
During 1997, the Company granted stock options to existing shareholders with
a value of $219,600.
</TABLE>
See notes to financial statements.
-13-
<PAGE>
DELTA CLEARING CORP.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
- -------------------------------------------------------------------------------
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. ("INCAP"), which is a wholly-owned
subsidiary of Intercapital Group Limited. Shares in the Company are also
held by Dow Jones Market Holdings, Inc. ("Dow Jones") and Exco, plc. The
Company was sold by DOTS, Inc. and other minority shareholders to the
current shareholders effective October 18, 1995. During 1997, the board
of directors of the Company amended the certificate of incorporation to
increase the authority of the Company to issue shares of common stock
from 1,000,000 to 2,500,000 at $.01 par value.
The Company is engaged in the clearance and settlement of transactions
involving U.S. Treasury and Mortgage-backed 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
("Options"). 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 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 investments.
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. During 1997, the coverage under the bond was
decreased from $250 million to $100 million. The cost of the bond is
being amortized over the respective coverage period.
Cash and Cash Equivalent - Cash and cash equivalents consists of cash,
and cash invested in overnight funds.
-14-
<PAGE>
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.
Amortization - Costs incurred in connection with the development of
software for internal use are capitalized when preliminary testing has
been completed and it is probable that the software will be used for its
intended function. The capitalized costs are being amortized over the
estimated useful life of the software, generally three years, on a
straight-line basis.
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") on January 1, 1994. Under 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. 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.
Earnings per Share - The Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, "Earnings per
Share" ("SFAS 128"). SFAS 128 simplifies the standards for computing and
presenting earnings per share ("EPS") previously found in APB Opinion
No. 15, Earnings per share. SFAS 128 is effective for financial
statements issued for periods ending after December 15, 1997. Basic
earnings per share is calculated by dividing net income by the number of
common shares outstanding. Diluted earnings per share is similar to
basic, but adjusts for the effect of potential common shares.
The Company presents basic loss per share in the statements of
operations. Diluted loss per share which would include potential common
shares resulting from the assumed exercise of stock options issued
during the year has not been presented since inclusion of such shares in
a diluted loss per share computation would have been anti-dilutive.
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
classified for conformity with the current year presentation.
-15-
<PAGE>
2. MANAGEMENT'S PLANS AND INTENTIONS
Management believes that the Company's available financial resources are
adequate to operate the business as a going concern; however, due to
recurring losses and limited capital resources, management has
recognized the need to address the Company's financial condition.
During 1997, the Securities and Exchange Commission ("the Commission")
has approved rule change filings of the Company's clearing agency
procedures ("its Procedures") providing new avenues for business
development. Additionally, the Company's management has undertaken
several new initiatives to increase revenues, reduce expenses and obtain
additional capital.
On June 30, 1997, the Commission approved the Company's rule change
filing of its Procedures which allows the Company to utilize multiple
"IDBs" to submit Options trades to the Company for clearance and
settlement services. While only minimal activity occurred in the second
half of 1997, management believes a gradual growth of its Options
business may occur throughout 1998 as a consequence of this approval.
On October 14, 1997, the Commission approved the Company's rule change
filing of its Procedures which allows the Company to clear and settle
mortgage-backed Repos. On October 20, 1997, the Company commenced such
clearance and settlement services. The Company is currently the only
provider of these services and hopes to capitalize on this unique
position. Through December 31, 1997, the Company was able to attract a
growing volume of mortgage-backed Repos clearing activity. The Company
anticipates expanding the volume of activity in this area throughout
1998.
During the fourth quarter of 1997, the Company's management submitted a
rule change filing of the Company's Procedures which would allow the
Company to issue and clear a new product, Repurchase Agreement
Instrument Transactions ("RAITs"). RAITs are the economic equivalent of
a U.S. treasury Repos transactions, possess many features which result
in a beneficial impact to a user's financial statements in comparison
with standard U.S. treasury Repos transactions. On February 6, 1998 the
Commission published for public notice this rule change proposal. While
management cannot predict when and if the Securities and Exchange
Commission will approve this rule change proposal, management believes
that if approved, RAIT's may have a positive effect on the Company's
financial condition.
Effective December 1, 1997, management decreased the amount of the
Company's Credit Enhancement Facility ("the CEF") to $100 million of
coverage. The CEF had been maintained at $250 million from October 25,
1995 through November 30, 1997. While the reduced coverage poses no
additional exposure to the Company based on the current volume of
clearance activity, the resulting 60% decrease in the cost of the CEF
will have an immediate positive impact on the financial condition of the
Company. As the volume of clearance activity increases, management will
re-evaluate and increase the coverage amount if deemed appropriate.
Finally, the Company's management is engaged in active discussions with
a number of institutions with respect to such institutions obtaining an
equity shareholding in the Company. While management cannot predict the
success of these discussions or the timing of equity participation, if
any, management remains hopeful that the Company may secure additional
capital through such equity participation.
-16-
<PAGE>
3. 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 investments. 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.
4. INVESTMENTS IN U.S. GOVERNMENT OBLIGATIONS
Investments in U.S. Government obligations are recorded at amortized
cost and consisted of the following at December 31, 1997 and 1996:
<TABLE>
<CAPTION>
Name of Issuer Maturity Amortized Market
and Title of Securities Amount Cost Value Maturity
<S> <C> <C> <C> <C>
1997:
U.S. Treasury bill $ 2,000,000 $ 1,948,178 $ 1,949,636 1998
=========== =========== ============
1996:
U.S. Treasury bill $ 3,435,000 $ 3,369,715 $ 3,371,603 1997
=========== =========== ============
</TABLE>
5. SUBORDINATED BORROWINGS
At December 31, 1997 and 1996, the Company had subordinated borrowings
with affiliates as follows:
Amount Outstanding
Affiliate 1997 1996
Intercapital Group Limited (INCAP) $ 2,604,000 $ 651,000
Dow Jones Markets Holdings Inc. (Dow Jones) 596,000 149,000
----------- -----------
$ 3,200,000 $ 800,000
=========== ===========
These amounts are payable on demand, and bear interest payable equal to
the London Interbank Offered Rate ("LIBOR") for three-month deposits of
U.S. dollars. In April 1998, INCAP, the holder of subordinated notes
totaling $2,604,000 payable by the Company, amended such notes to
provide that INCAP shall not be entitled to make demand for payment on
or prior to January 1, 1999. At December 31, 1997, LIBOR was 5.9375%. In
1997, the Company paid interest of $95,706 and $17,661 to INCAP and Dow
Jones, respectively, in connection with the subordinated borrowings. In
1996, the Company
-17-
<PAGE>
paid interest of $9,732 and $1,447 to INCAP and Dow Jones, respectively
in connection with the subordinated borrowings.
6. INCOME TAXES
At December 31, 1997, the Company had a net operating loss carryforward
for Federal income tax purposes of approximately $4,990,000. The tax
loss carryforward is available to offset future taxable income through
the year 2010. Deminimus taxes paid to state and local authorities have
been included within other expenses.
As of December 31, 1997 and 1996, net deferred tax assets, arising
principally from net operating loss carryforwards have been reduced to
zero 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.
7. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET CREDIT RISK
The Company may be exposed to off-balance-sheet credit risks in the
event a Participant fails to fulfill its contracted obligations and its
margin on deposit is insufficient. To control the 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 maintains a credit enhancement facility,
composed of a $100 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 $4 million of subordinated notes
issued to shareholders of the Company) of $5 million. In February 1998,
the credit enhancement facility agreement was amended, reducing the net
worth requirement to $4 million. In April 1998, INCAP agreed that it
will provide financial resources to the Company in order for the Company
to maintain compliance with the credit enhancement facility through
1998. Such financial resources are to be made available at such time and
in such amounts as the Board of Directors of the Company identifies,
which is commensurate with the then prevailing level of business
activity effected through and by the Company. 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 facility
becomes the obligation of the individual defaulting Participant. The
credit enhancement facility expires on January 27, 2001.
-18-
<PAGE>
The Company is not subject to market risk with respect to Repos or
Reverse repos issued or Option contracts purchased or sold.
At December 31, 1997 and 1996, the Company had a matched book of Repos
and Reverse repos with notional amounts of $3,261 million and $13,935
million, respectively. At December 31, 1996, the Company had issued
outstanding matched put and call options on U.S. Government securities
with notional amounts of $75 million. There were no outstanding options
on U.S. Government securities at December 31, 1997.
8. 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.
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 the lease are presented below:
Minumum
Rental
Year Commitments
1998 $ 143,000
1999 143,000
2000 143,000
2001 143,000
2002 693,000
----------
Thereafter $1,408,000
==========
The Company incurred rent expense of $145,000, $119,000 and $21,000 for
the years ended December 31, 1997, 1996 and 1995, respectively.
-19-
<PAGE>
9. RELATED PARTY TRANSACTIONS
In connection with the increase in subordinated debt extended by two of
its existing shareholders INCAP and Dow Jones (see Note 5), the Company
issued stock options during 1997 to these shareholders. These options
grant INCAP and Dow Jones the right to purchase 691,068 and 158,203
shares, respectively, of the Company's common stock. The options are
exercisable at anytime, at a price of $.01 per share and expire on
December 31, 1998. The options were valued at $219,600, which represents
the change in the book value of the shares held by the third shareholder
(Exco plc) assuming all options were exercised and the additional shares
issued. The options are being amortized over the term of the additional
subordinated debt.
In 1996, the Company paid management consulting fees of $32,000 to
Intercapital Group Limited. During the year ended 1995 the Company paid
occupancy expenses of $7,000 to Exco RMJ Securities Corp. and management
fees of $9,000 to Cawsl Corp., a majority shareholder of DOTS, Inc.
10. FAIR VALUE OF FINANCIAL INSTRUMENTS
Substantially all financial instruments on the Company's statement of
financial condition are carried at fair value or at their carrying
amounts, which approximate fair value.
******
-20-
<PAGE>
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None
-21-
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Registrant
The Directors and executive officers of the Company are as follows:
<TABLE>
<CAPTION>
Name Position Held Has Served As a Director and/or
Officer Since.
<S> <C> <C>
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
Stephen K. Lynner Director and President March 1996
John Grebenstein Director and Executive Director October 1995
Ronald H. Buckner Chief Financial Officer and March 1994
Controller
Declan Kelly Secretary October 1995
</TABLE>
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, 73, has been non-executive Chairman of the Company
since May 1996. Mr. Angermueller retired from Citicorp 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, 42, 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, 48, has been a director of the Company since October 1995.
He is currently Chief Operating Officer of Dow Jones Markets, Inc. (Markets).
From 1991 to 1995, Mr. Childs served as Executive Vice President of Markets,
with responsibility for the Asia Pacific region, the Americas and Europe/Gulf.
Prior to that, Mr. Childs was Managing Director of Markets, responsible for
all Asia Pacific operations of Markets.
Peter Edge, 38, 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.
David Gelber, 49, 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
-22-
<PAGE>
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.
Stephen K. Lynner, 46 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, 45 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.
Ronald H. Buckner, CPA, 37 has been the Chief Financial Officer and
Controller of the Company since October 1995. From March 1994 through
September 1995, he served the Company as its Controller. From April 1990 to
March 1994, Mr. Buckner was the Director of Financial Analysis for Panavision
International, L.P.. From 1986 to April 1990, he was Chief Financial Officer
and Corporate Controller for Retail Services, Inc. Prior to that Mr. Buckner
was a Senior Auditor with the firm of Grant Thornton, LLP. Mr. Buckner is a
certified public accountant in the states of New York and New Jersey, and a
member of the American Institute of Certified Public Accountants and the New
York State Society of CPA's.
Declan Kelly, 36 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.
-23-
<PAGE>
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 $100,000.
<TABLE>
<CAPTION>
Name and Other Annual
Principal Salary Bonus Compensation
Position Year ($) ($) ($)
- -------- ---- --- --- ---
<S> <C> <C> <C> <C>
Stephen K. Lynner 1997 $ 200,000 $ 0 $ 0
Director, President 1996 200,000 a 0 0
Ronald H. Buckner 1997 155,000 b 0 0
Chief Financial Officer, Controller 1996 110,000 0 0
1995 110,000 c 7,500 0
John Grebenstein 1997 200,000 0 0
Executive Director 1996 200,000 0 0
1995 200,000 d 0 0
</TABLE>
a Salary became effective March 15, 1996.
Mr. Lynner's salary for the year was $158,333.
b Salary became effective March 10, 1997.
Mr. Buckner's salary for the year was $147,250.
c Salary became effective October 1, 1995.
Mr. Buckner's salary for the year was $71,042.
d Salary became effective November 1, 1995.
Mr. Grebenstein's salary for the year was $33,333.
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 $15,000 and $10,500 in 1997 and 1996,
respectively. The Company does not pay any remuneration to its other
non-executive directors.
-24-
<PAGE>
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) 1,276,968 73.0%
c/o Intercapital Group Limited
153 East 53rd Street
New York, NY 10022
Dow Jones Markets Holdings, Inc. (2) 292,303 16.7%
200 Liberty Street
New York, NY 10281
EXCO plc 180,000 10.3%
Sherborne House
119 Cannon Street
London EC4N 5AX
England
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. Number of Shares includes
691,068 shares which may be acquired upon exercise of an option (See Item
5).
(2) Dow Jones Markets Holdings, Inc. (formerly Dow Jones Telerate Holdings,
Inc.) , is a direct, wholly-owned subsidiary of Dow Jones & Company, Inc.
Number of Shares includes 158,203 shares which may be acquired upon
exercise of an option (See Item 5).
(3) Each of the stockholders of the Company may be deemed to be 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 (as defined in rule 13d-3 under
the Exchange Act) of all of the Company's Common Stock.
Item 13. Certain Relationships and Related Transactions
On various dates beginning on September 30, 1996 through
December 31, 1997, several subordinated notes were issued and proceeds were
received by the Company in amounts totaling $2,604,000 from Intercapital Group
Limited, an affiliate of a shareholder, and $596,000 from Dow Jones Markets
Holdings, Inc., a shareholder. 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 month deposits of U.S. dollars. At
December 31, 1997, LIBOR was approximately equal to 5.94%. On April 3, 1998,
all of the subordinated notes held by Intercapital Group Ltd. totaling
$2,604,000, were amended to provide that Intercapital Group Ltd. shall not be
entitled to make demand for payment on or prior to January 1, 1999.
On December 17, 1997, the Company issued options to two
shareholders, INCAP Netherlands (Holdings) B.V., and Dow Jones Markets
Holdings, Inc. for 691,068 and 158,203 shares, respectively (See Item 5.)
-25-
<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.
-26-
<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 April 14, 1998.
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 April 14, 1998.
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 \s\
- ---------------------------
Michael Spencer Director
- ---------------------------
Julian Childs Director
- ---------------------------
Peter Edge Director
David Gelber \s\
- ---------------------------
David Gelber Director
John Grebenstein \s\
- ---------------------------
John Grebenstein Director, Executive Director
Ronald H. Buckner \s\
- ---------------------------
Ronald H. Buckner Chief Financial Officer and Controller
Declan Kelly \s\
- ---------------------------
Declan Kelly Secretary
-27-
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
No. Description Page
<S> <C> <C>
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(a-1) Certificate of Amendment of Certificate of Incorporation (filed herewith). 29
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 (filed herewith). 32
10(b) 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-1) First Amendment to Second Insurance Agreement dated as of *
September 25, 1996). [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, 1996, Exhibit 10(b-4)]
10(b-2) Second Amendment to Second Insurance Agreement dated as of April 12, 1997
(filed herewith). 37
10(b-3) Third Amendment to Second Insurance Agreement dated as of July 15, 1997
(filed herewith). 39
10(b-4) Amendment to Surety Bond dated as of October 14, 1997 (filed herewith). 41
</TABLE>
- -----------
* Incorporated by reference as indicated.
-28-
<PAGE>
EXHIBIT 3(a-1)
State of Delaware
Office of the Secretary of State
I, EDWARD J. FREEL, SECRETARY OF STATE OF THE STATE OF DELAWARE, DO HEREBY
CERTIFY THE ATTACHED IS A TRUE AND CORRECT COPY OF THE CERTIFICATE OF
AMENDMENT OF "DELTA CLEARING CORP.", FILED IN THIS OFFICE ON THE NINETEENTH
DAY OF DECEMBER, A.D. 1997, AT 4 O'CLOCK P.M.
/s/ Edward J. Freel
---------------------------------
Edward J. Freel, Secretary of State
2149702 100 AUTHENTICATION: 8846818
DATE: 01-05-98
971441570
-29-
<PAGE>
CERTIFICATE OF AMENDMENT
OF
CERTIFICATE OF INCORPORATION
Delta Clearing Corp, a corporation organized and existing under
and by virtue of the General Corporation Law of the State of Delaware,
DOES HEREBY CERTIFY:
FIRST: That by unanimous written consent of the Board of
Directors of DELTA CLEARING CORP. (the "Corporation"), in
accordance with Section 141(f) of the General Corporation Law of
the State of Delaware, resolutions were duly adopted setting forth
proposed amendment (the "Amendment") to the Certificate of
Incorporation of the Corporation, declaring the Amendment to be
advisable, and seeking written consent of the shareholders of the
Corporation in lieu of a meeting in accordance with Section 228 of
the General Corporation Law of the State of Delaware, for the
Amendment, The resolutions setting forth the proposed Amendment are
as follows:
RESOLVED, that the Certificate of Incorporation of the
Corporation be amended by changing the Article IV thereof to read
in its entirety as follows:
ARTICLE IV
The aggregate number of shares of stock which the
Corporation shall have authority to issue shall be two
million five hundred thousand (2,500,000) of Common Stock,
par value one cent ($.01) per share.
In order to allow a stockholder to preserve its
pro rata share of equity ownership and control of the
Corporation in the event of a stock issuance by the
Corporation, stockholders shall have the preemptive right to
subscribe to any or all additional issues of the stock of the
Corporation of any or all classes; such rights of
subscription shall be granted pro rata to stockholders of
record based on holdings of the stockholder in the
Corporation at the record date fixed by the Board of
Directors prior to the proposed issuance,
SECOND; That thereafter, pursuant to resolution of its Board
of Directors, written consent of the shareholders of the
Corporation was sought, in accordance with Section 228 of the
General Corporation Law of the State of Delaware, in lieu of a
meeting, and such consent as required by statute was duly obtained
in favor of the Amendment.
-30-
<PAGE>
THIRD: That the Amendment was duly adopted in accordance with
the provisions of Section 242 of the General Corporation Law of the
State of Delaware.
IN WITNESS WHEREOF, Delta Clearing Corp. has caused this
certificate to be signed by Stephen K. Lynner, its President, and Declan
Kelly, its Secretary, this 16th day of October, 1997.
By: /s/ Stephen K. Lynner
--------------------------
Name: Stephen K. Lynner
Title: President
ATTEST: /s/ Declan Kelly
-------------------------------
Name: Declan Kelly
Title: Secretary
-31-
<PAGE>
EXHIBIT 4(a)
DELTA CLEARING CORP.
Participation Agreement
The undersigned hereby makes application to become a Participant with respect
to the clearance of instruments effected through Delta Clearing Corp. ("the
Issuer") as follows:
1. The undersigned agrees to the terms and conditions of and will abide
by the Procedures as now in force and as amended from time to time in
accordance with the provisions of the Procedures, and all other
provisions adopted by the Issuer pursuant thereto (the "Procedures");
2. The applicable provisions of the Procedures shall be a part of the
terms and conditions of every transaction in respect of (i) options on
U.S. Treasury Securities, (ii) repurchase agreements and reverse
repurchase agreements and/or (iii) other such instruments for which the
Issuer may, from time to time, provide clearing services, which the
undersigned as a Participant may enter into with another Participant and
which is submitted for clearance pursuant to the Procedures;
3. The undersigned represents and warrants to the Issuer that the
execution and delivery of this agreement by or on behalf of the
undersigned does not violate the certificate of incorporation, the
charter, by-laws, partnership agreement or other governing instruments,
as the case may be, of the undersigned, any other agreement which is
binding upon the undersigned or any provision of law applicable.
4. The undersigned acknowledges receipt of the Prospectus of the Issuer,
as amended and supplemented to date, relating to the put and call options
on U.S. Treasury Securities, repurchase and reverse repurchase
agreements, and other instruments as may be described therein.
5. The undersigned agrees to pay Capital Markets Assurance Corporation
("CapMAC"), at its office in lawful U.S. funds, on the date of each
demand for payment under or purporting to be under Surety Bond No. SB-82
of CapMAC dated January 12, 1989, as amended and restated on June 1, 1992
and as further amended and restated on October 25, 1995, October 14, 1996
and October 14, 1997 (the "Surety Bond"), the amount of each demand for
payment with respect to either the failure of the undersigned to pay the
amount of net daily premium due pursuant to the terms and conditions of
the Procedures or the amount due in connection with the liquidating of
the position of the undersigned as a Participant in the System. The
undersigned agrees to pay interest on any amounts not paid when due under
this paragraph at the rate of 5 percent in excess of the Base Rate, as
the Base Rate may change from time to time. The "Base Rate" shall mean
the rate of interest, announced publicly by Citibank, N.A. from time to
time as its "base rate". Interest shall be calculated on a basis of 360
days and actual days elapsed. The undersigned agrees to pay to the Issuer
and CapMAC all expenses of any nature (including reasonable attorney's
fees) incurred by the issuer of CapMAC in enforcing its rights under this
-32-
<PAGE>
Agreement. Any amounts paid by the undersigned under this paragraph shall
be applied, first, to the payment of interest, second, to the payment of
reasonable expenses incurred by CapMAC in enforcing its rights under this
paragraph and, third to the amount of the demands for payment under the
Surety Bond. The undersigned agrees that, in the event of any amendments
or modifications of the terms of the Surety Bond, this Agreement shall be
binding upon the undersigned with regard to the Surety Bond as so amended
without any requirement that the undersigned approve or receive notice of
such amendment. The Issuer shall be deemed the agent of the undersigned
and the undersigned assumes all risks of the Issuer's acts and omission.
The undersigned agrees that any act or omission by CapMAC in connection
with the Surety Bond or related demands for payment, it taken in good
faith, shall be binding on the undersigned and shall not put CapMAC under
any resulting liability to the undersigned. The undersigned waives all
defenses that the undersigned might have against the Issuer with respect
to the obligations of the undersigned to make payments to CapMAC pursuant
to this paragraph, unless CapMAC shall not be deemed to have waived any
rights under this paragraph, unless CapMAC itself shall have signed such
waiver in writing. No such waiver, unless expressly stated therein, shall
be effective as to any transaction which occurs subsequent to the date of
such waiver, nor as to the continuance of a breach after such waiver. The
undersigned acknowledges and agrees that CapMAC shall be suborgated to
the rights of the Issuer against the undersigned to the extent any
payments are made under the Surety Bond with respect to the undersigned.
CapMAC shall be named third party beneficiary of this Agreement and shall
have the right to enforce the terms of this paragraph directly against
the undersigned. This paragraph may not be amended without the written
consent of CapMAC. CapMAC shall not have any duty, responsibility,
obligation or liability under this Agreement or the Procedures by reason
of or arising out of this Agreement, the Surety Bond or any payment
hereunder nor shall CapMAC be required or obligated to perform or fulfill
any obligations of the Issuer of any nature pursuant hereto or thereto.
6. This agreement shall be governed by and construes and interpreted in
accordance with the laws of the State of New York without regard to the
principle of conflicts of laws thereof.
-33-
<PAGE>
Form for Execution by Bank Corporation
Name of Bank or Corporation: __________________________________________________
By:____________________________________________________________________________
Title:_________________________________________________________(Corporate Seal)
Attest:______________________________________________ Dated:________ , 19
Secretary
Bank or Corporate Acknowledgment
State of ______________________________________
ss.
County of ______________________________________
On the _____ day of ____________________________, 19 , before me came
___________________________________________________________ , to me known and
known to me to be the ________________________________________________ of
______________________________________ , acknowledged that as such (1) signed
the foregoing agreement in the name and on behalf of said [bank] [corporation]
and cause the seal of said [bank] [corporation] to be affixed thereto,
pursuant to authority given by the board of directors of said [bank]
[corporation].
Notary Public _________________________________________________________________
Accepted by Delta Clearing Corp. as of the date set forth below:
By:____________________________________________________________________________
Title:_________________________________________ Dated:_________________________
The rights of Capital Markets Assurance Corporation, under paragraph 5 of this
Participation Agreement, are hereby acknowledged:
By:____________________________________________________________________________
Title:_________________________________________ Dated:_________________________
___________
Insert title of signing officer, i.e., President or Vice President
-34-
<PAGE>
Form for Execution by Partnership
Name of Partnership:
___________________
By:
___________________ A General Partner
Dated:_____________________________________, 19
Partnership Acknowledgment
State of__________________________
ss.
County of_________________________
On the _____ day of ___________________________ , 19 , before me came
_______________________________________________, to me known and known to me to
be the individual who executed the foregoing agreement, and acknowledged that
he executed said agreement in the name and on behalf of said firm, pursuant to
authority duly vested in him by said firm.
Notary Public
_____________
Accepted by Delta Clearing Corp. as of the date set forth below:
By:
___
Title: ______________________________ Dated:
_____
The rights of Capital Markets Assurance Corporation, under paragraph 5 of this
Participation Agreement, are hereby acknowledged:
By:
___
Title:_______________________________ Dated:
_____
-35-
<PAGE>
Officers Certificate for Bank or Corporate Participants
I, _____________________________________, the duly elected, qualified and
acting Secretary of _________________________________, a [bank] [corporation]
organized and existing under the laws of the [United States] [state of
__________________________________]
HEREBY CERTIFY that:
1. The following is a correct copy of a resolution duly adopted by the Board
of Directors of the [bank] [corporation] at a meeting thereof duly called
and held on the ________ day of _____________________________, 19 ___,
at which meeting a quorum was present and acting:
RESOLVED, that the President or any Vice President of the [bank]
[corporation] is authorized to execute and deliver, in the name and
behalf of the [bank] [corporation], under its seal attested by its
Secretary or Assistant Secretary, a Participant Agreement between the
[bank] [corporation] and Delta Clearing Corp. in the form presented to
this meeting and hereby approved.
2. The executed Participant Agreement to which this certificate is attached
is in the form presented to and approved by the Board of Directors of the
[bank] [corporation] at the above described meeting.
IN WITNESS WHEREOF, I hereby subscribe my name and affix the seal of the
[bank] [corporation] this _______day of _______, 19___
Secretary________________________________
(Seal)
-36-
<PAGE>
EXHIBIT 10(b-2)
SECOND AMENDMENT
TO
SECOND INSURANCE AGREEMENT
This AMENDMENT, made this 12th day of April, 1997, (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 and CapMAC entered into the First Amendment
to the Second Insurance Agreement, dated September 25, 1996, to exclude from
the definition of New Worth contained in Section 4(g) of the Insurance
Agreement the issuance by Delta to its stockholders of subordinated notes in
an aggregate principal amount not in excess of $2 million;
WHEREAS, CapMAC has agreed, subject to the terms hereof, to
further amend the Insurance Agreement to reduce the premium to be paid by
Delta to CapMAC pursuant to Section 5(a) of such agreement.
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 5 (a) of
the Insurance Agreement is amended by deleting the entire text of such section
and substituting the following text therefor:
The Company agrees to pay to CapMAC premium with respect to
the Amended Surety Bond (the "Scheduled Premium") computed (i) at a
rate of .003 per annum (30 basis points) on the Lowest Aggregate
Surety Bond Amount (as such term is defined in the Amended Surety
Bond) in effect during the term of this Agreement (the "Lowest
Aggregate Surety Bond Amount") plus (ii) in the event that the Lowest
Aggregate Surety Bond
-37-
<PAGE>
Amount is increased at any time during the term of this Agreement in
accordance with Section 9 hereof, such premium as shall be determined
in the sole discretion of CapMAC in accordance with Section 9 (c)
hereof on the amount equal to the difference between (A) the Lowest
Aggregate Surety Bond Amount and (B) the Aggregate Surety Bond
Amount.
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.
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 ___ day of August, 1997
DELTA CLEARING CORP.
By: Stephen K. Lynner \s\
---------------------------
Title: President
CAPITAL MARKETS ASSURANCE CORPORATION
By: Gary Dycus \s\
---------------------------
Title: Vice President
-38-
<PAGE>
EXHIBIT 10(b-3)
THIRD AMENDMENT
TO
SECOND INSURANCE AGREEMENT
This AMENDMENT, made this 15th day of July, 1997, (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 and CapMAC entered into the First Amendment to the
Second Insurance Agreement, dated September 25, 1996, to exclude from the
definition of New Worth contained in Section 4(g) of the Insurance Agreement
the issuance by Delta to its stockholders of subordinated notes in an
aggregate principal amount not in excess of $2 million;
WHEREAS, CapMAC and Delta have entered into the Second Amendment to
the Second Insurance Agreement, effective as of April 12, 1997, pursuant to
which the premium paid by Delta to CapMAC pursuant to Section 5(a) of the
Insurance Agreement has been reduced; and
WHEREAS, CapMAC has agreed, subject to the terms hereof, to further
amend the definition of Net Worth contained in the Insurance Agreement to
allow Delta to raise additional capital through the issuance to its
stockholders of up to an additional $2 million aggregate principal amount of
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, as amended by the First Amendment to the Second Insurance
Agreement, is hereby further 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 $4 million of subordinated
notes issued to stockholders of the Company), as determined and
-39-
<PAGE>
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.
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 ___ day of August, 1997
DELTA CLEARING CORP.
By: Stephen K. Lynner \s\
-------------------------------
Title: President
CAPITAL MARKETS ASSURANCE CORPORATION
By: Gary Dycus \s\
-------------------------------
Title: Vice President
-40-
<PAGE>
EXHIBIT 10(b-4)
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,
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 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,
2001, 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 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
-41-
<PAGE>
Termination, delivered to CapMAC, in the form of Exhibit IV hereto;
provided, however, that on or before October 14, 1998 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, 1997 By: Judith Casey \s\
-----------------------
Title: Vice President
--------------------
-42-
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0
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