<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended May 31, 1996 Commission file number 0-15948
WATERHOUSE INVESTOR SERVICES, INC.
(Exact name of registrant as specified in its charter)
Delaware 13-3400568
(State or other jurisdiction of (I.R.S. Employer I.D. Number)
incorporation or organization)
100 Wall Street, New York, NY 10005
(Address of principal executive offices and zip code)
Registrant's telephone number, including area code: (212) 806-3500
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.
X Yes No
--- ---
The number of shares outstanding of Common Stock (par value $.01 per share) as
of May 31, 1996 was 11,501,207.
1
<PAGE> 2
WATERHOUSE INVESTOR SERVICES, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED MAY 31, 1996
INDEX
<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION PAGE
<S> <C>
Item 1. Financial Statements:
Consolidated Statements of Financial Condition as of
May 31, 1996 and August 31, 1995 3
Consolidated Statements of Income for the Three and Nine
Months Ended May 31, 1996 and May 31, 1995 4
Consolidated Statements of Cash Flows for the Nine Months
Ended May 31, 1996 and May 31, 1995 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 7
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 12
Item 2. Changes in Securities 12
Item 3. Defaults upon Senior Securities 12
Item 4. Submission of Matters to a Vote of Security Holders 12
Item 5. Other Information 12
Item 6. Exhibits and Reports on Form 8-K 12
SIGNATURES 12
EXHIBIT 11 - Computation of Earnings Per Common and Common Equivalent Shares 13
EXHIBIT 12 - Computation of Ratio of Earnings to Fixed Charges 14
</TABLE>
2
<PAGE> 3
PART 1 - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
WATERHOUSE INVESTOR SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
(Unaudited)
May 31, August 31,
1996 1995
-------------- ------------
<S> <C> <C>
ASSETS:
Cash and due from banks $ 22,816,004 $ 13,090,043
Interest bearing deposits with other banks -- 50,000,000
Federal funds sold 60,400,000 54,100,000
Investment securities 576,244,589 146,516,037
Receivable from brokers and dealers 13,380,317 10,576,815
Receivable from customers, net 529,897,310 368,974,021
Deposits with clearing organizations 4,459,212 4,384,568
Furniture and equipment, net 9,447,329 6,716,497
Other assets 17,015,215 11,255,002
-------------- ------------
Total assets $1,233,659,976 $665,612,983
============== ============
LIABILITIES AND STOCKHOLDERS' EQUITY:
Liabilities:
Broker loans and overdrafts $ 89,512,966 $ 39,682,966
Interest bearing deposits 600,079,466 231,046,433
Deposits received for securities loaned 187,724,045 107,683,494
Payable to brokers and dealers 7,487,663 4,625,829
Payable to customers 171,308,097 135,975,485
Dividends payable -- 2,288,920
6% convertible subordinated notes 48,411,000 48,500,000
Accounts payable, taxes payable, accrued expenses
and other liabilities 38,518,543 29,095,811
-------------- ------------
Total liabilities 1,143,041,780 598,898,938
-------------- ------------
Stockholders' equity:
Common stock, $.01 par value, 20,000,000 shares
authorized and 11,751,209 shares issued at May 31,
1996 and 11,694,729 shares issued at August 31, 1995 117,512 116,947
Additional paid-in capital 10,343,621 9,210,037
Retained earnings 81,165,433 58,395,431
Less:
Treasury stock, 250,002 shares, at cost (1,008,370) (1,008,370)
-------------- ------------
Total stockholders' equity 90,618,196 66,714,045
-------------- ------------
Total liabilities and stockholders' equity $1,233,659,976 $665,612,983
============== ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
3
<PAGE> 4
WATERHOUSE INVESTOR SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
May 31, May 31, May 31, May 31,
1996 1995 1996 1995
----------- ----------- ------------ -----------
<S> <C> <C> <C> <C>
INTEREST INCOME:
Margin loans $ 9,046,376 $ 6,110,191 $ 25,653,769 $17,014,821
Investment securities 7,502,301 702,880 17,468,373 1,279,610
Other interest income 248,128 171,238 690,596 414,265
----------- ----------- ------------ -----------
Total interest income 16,796,805 6,984,309 43,812,738 18,708,696
----------- ----------- ------------ -----------
INTEREST EXPENSE:
Interest paid on interest bearing deposits 5,933,024 -- 13,994,611 --
Interest paid on deposits received for securities loaned 2,239,066 -- 5,857,857 --
Broker loans and overdrafts 801,751 1,381,295 2,411,646 4,028,220
6% convertible subordinated notes 726,935 727,500 2,181,814 2,182,500
Other 303,000 603,775 951,680 1,105,765
----------- ----------- ------------ -----------
Total interest expense 10,003,776 2,712,570 25,397,608 7,316,485
----------- ----------- ------------ -----------
Net interest income 6,793,029 4,271,739 18,415,130 11,392,211
----------- ----------- ------------ -----------
NONINTEREST INCOME:
Commissions and clearing fees 48,041,863 26,790,754 121,619,719 69,299,070
Mutual fund revenue 3,474,244 2,558,246 9,788,084 6,757,172
Investment income 2,257,607 -- 3,551,687 --
Other 339,514 280,556 938,792 1,250,346
----------- ----------- ------------ -----------
Total noninterest income 54,113,228 29,629,556 135,898,282 77,306,588
----------- ----------- ------------ -----------
Net revenue 60,906,257 33,901,295 154,313,412 88,698,799
----------- ----------- ------------ -----------
OPERATING EXPENSES:
Employee compensation and benefits 17,348,830 10,563,021 45,802,785 28,608,207
Communications and data processing 9,137,257 4,810,340 23,213,060 13,265,821
Professional fees 3,274,598 814,951 5,027,668 2,316,566
Equipment 2,593,782 863,449 6,477,738 1,872,228
Advertising and promotion 2,575,721 1,962,495 6,886,559 5,256,022
Occupancy 2,202,671 1,115,604 5,745,692 3,140,547
Stationery and postage 1,953,583 1,708,350 5,273,656 3,578,203
Floor brokerage, exchange and clearing fees 1,391,364 1,148,568 3,800,312 3,242,130
Depreciation and amortization 956,758 592,867 2,535,869 1,691,792
Other 2,450,694 1,512,022 6,851,663 3,648,555
----------- ----------- ------------ -----------
Total operating expenses 43,885,258 25,091,667 111,615,002 66,620,071
----------- ----------- ------------ -----------
Income before income taxes 17,020,999 8,809,628 42,698,410 22,078,728
Income tax provision 8,398,936 3,652,663 19,928,408 9,217,858
----------- ----------- ------------ -----------
Net income $ 8,622,063 $ 5,156,965 $ 22,770,002 $12,860,870
=========== =========== ============ ===========
Primary earnings per share $ .72 $ .45 $ 1.93 $ 1.12
Fully diluted earnings per share $ .65 $ .41 $ 1.72 $ 1.04
Weighted average shares outstanding 11,900,779 11,488,240 11,802,336 11,467,650
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE> 5
WATERHOUSE INVESTOR SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended
May 31, May 31,
1996 1995
-------------- ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 22,770,002 $ 12,860,870
Non cash items included in net income:
Depreciation 2,428,490 1,691,792
Debt issuance cost 107,379 105,354
Increase in allowance for doubtful accounts 412,221 66,129
(Increases) decreases in operating assets:
Receivable from brokers and dealers (2,803,502) 3,397,203
Receivable from customers (161,335,510) (18,906,715)
Deposits with clearing organizations (74,644) (205,087)
Other assets (5,867,592) (1,314,937)
Increases (decreases) in operating liabilities:
Broker loans and overdrafts 49,830,000 (2,917,842)
Interest bearing deposits 369,033,033 49,058,230
Deposits received for securities loaned 80,040,551 (137,243)
Payable to brokers and dealers 2,861,834 812,504
Payable to customers 35,332,612 21,331,673
Accounts payable, taxes payable
accrued expenses and other liabilities 7,133,810 6,455,441
-------------- ------------
CASH PROVIDED BY OPERATING ACTIVITIES 399,868,684 72,297,372
-------------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Interest bearing deposits with other banks 50,000,000 (17,000,000)
Federal funds sold (6,300,000) (24,400,000)
Investment securities purchased (1,067,603,636) (40,272,604)
Proceeds from maturities of investment securities 637,875,084 20,458,619
Notes receivable redeemed\issued 5,000,000 (5,000,000)
Purchase of furniture and equipment (5,159,322) (792,572)
Investment in non-voting security (5,000,000) --
-------------- ------------
CASH (USED IN) INVESTING ACTIVITIES (391,187,874) (67,006,557)
-------------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid -- (1,830,736)
Exercise of stock options and warrants 1,045,151 --
-------------- ------------
CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 1,045,151 (1,830,736)
-------------- ------------
INCREASE IN CASH AND DUE FROM BANKS 9,725,961 3,460,079
CASH AND DUE FROM BANKS, beginning of period 13,090,043 7,728,832
-------------- ------------
CASH AND DUE FROM BANKS, end of period $ 22,816,004 $ 11,188,911
============== ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest $ 23,806,218 $ 5,585,758
============== ============
Cash paid for income taxes $ 20,661,901 $ 7,227,797
============== ============
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING
AND FINANCING ACTIVITIES:
Additional common stock of 3,800 shares was issued upon the conversion
of $89,000 of long-term debt
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
5
<PAGE> 6
WATERHOUSE INVESTOR SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. ORGANIZATION AND SUMMARY OF ACCOUNTING POLICIES
Waterhouse Investor Services, Inc. (the "Company") was formed under the
laws of the State of Delaware on April 10, 1987, and became registered as
a bank holding company on October 13, 1994 under the Bank Holding Company
Act of 1956. The accompanying consolidated financial statements include
the accounts of the Company and its wholly-owned subsidiaries including
Waterhouse Securities, Inc. and Waterhouse National Bank. Waterhouse
Securities, Inc. ("Waterhouse Securities" or the "Broker"), a securities
brokerage firm, is registered with the Securities and Exchange Commission
(the "SEC") and is a member of the National Association of Securities
Dealers, Inc., the New York Stock Exchange, Inc. (the "NYSE") and other
exchanges. Waterhouse Securities provides discount brokerage and mutual
fund services to individual investors. Waterhouse National Bank (the
"Bank") is a federally chartered banking institution which provides
expanded financial services primarily to the customers of Waterhouse
Securities.
The financial statements have been prepared by the Company, without audit,
pursuant to the Rules and Regulations of the SEC and reflect all
adjustments (which include only normal recurring adjustments) which are
necessary to present a fair statement of the results for the interim
periods reported. All intercompany transactions have been eliminated.
Certain footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have
been condensed or omitted pursuant to such rules and regulations, although
the Company believes that the disclosures are adequate to make the
information presented not misleading. It is suggested that these
consolidated financial statements be read in conjunction with the
financial statements and notes thereto included in the Company's Annual
Report on Form 10-K for the year ended August 31, 1995.
2. CAPITAL ADEQUACY
As a registered broker-dealer and member firm of the NYSE, the Broker is
subject to the SEC's Uniform Net Capital Rule (the "Rule") which requires
the maintenance of minimum net capital. The Broker has elected to use the
alternative method, permitted by the Rule, which requires that the Broker
maintain minimum net capital equal to the greater of $250,000 or 2% of
aggregate debit items arising from customer transactions. Additionally,
the NYSE may require a member firm to reduce its business if its net
capital is less than 4% of aggregate debit items and may prohibit the
Broker from expanding its business and declaring dividends if its net
capital is less than 5% of aggregate debit items.
At May 31, 1996, the Broker had net capital of $53,877,370, which was 10%
of aggregate debit items and $42,638,146 in excess of required net
capital. Further, the amounts in excess of 4% and 5% of aggregate debit
items were $31,398,922, and $25,779,309, respectively.
As a bank holding company, the Company closely monitors its capital levels
and the capital levels of the Bank to provide for normal business needs
and to comply with regulatory requirements. At May 31, 1996 the Bank met
all of the applicable regulatory requirements to be deemed "Well
Capitalized".
3. INVESTMENT SECURITIES
The investment securities are held by the Bank and carried at amortized
cost since the Bank has the intent and the ability to hold these
instruments to maturity. The maturity of these instruments range from June
3, 1996 to June 26, 2000 with all but $45,000 maturing within one year.
The following is a comparison of the carrying amount and approximate
market values:
<TABLE>
<CAPTION>
May 31, 1996 August 31, 1995
---------------------------- ---------------------------
Carrying Approximate Carrying Approximate
Amount Market Value Amount Market Value
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
U.S. Government and Agency Securities $574,654,589 $574,405,565 $144,706,037 $144,692,000
Other Securities 1,590,000 1,590,000 1,810,000 1,810,000
------------ ------------ ------------ ------------
Total $576,244,589 $575,995,565 $146,516,037 $146,502,000
============ ============ ============ ============
</TABLE>
6
<PAGE> 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
Waterhouse Investor Services, Inc. is a holding company engaged through its
principal subsidiary, Waterhouse Securities, Inc., in providing discount
brokerage and related financial services primarily to retail customers
throughout the United States. The Bank was established to provide the Company
with the ability to offer expanded financial services and products primarily to
the customer base of Waterhouse Securities.
The securities industry has always been subject to volatility and sizable market
swings. In the past, this volatility has had little effect on the financial
condition of Waterhouse Securities. In addition, management feels that the
effect of this volatility on the results of the Company's operations for any
specific period of time may not be representative of the general trend in the
securities industry or operations of Waterhouse Securities.
The Company has organized an investment advisory subsidiary, Waterhouse Asset
Management, Inc., which is registered under the Investment Advisors Act of 1940.
The advisory firm, which is a wholly-owned subsidiary of the Bank, is
principally engaged in providing investment management and administrative
services to the Waterhouse Investors Cash Management Fund, a money market fund,
and other Waterhouse mutual funds that may be established in the future.
RESULTS OF OPERATIONS
The Company has experienced rapid growth in customer accounts, trade processing
activity and revenues. The Company believes that favorable market conditions and
increasing participation of individual investors have contributed substantially
to this growth. However, the Company also believes that its growth is
attributable in large measure to the expansion of its branch office network, the
development of the Bank, the introduction of new products and services,
increased advertising and marketing expenditures, and growth in the number of
individuals comprising the Company's target market.
Waterhouse Securities derives substantial revenue from commissions charged on
securities transactions and from interest earned on customer margin balances. As
a result, the revenues and earnings of the Company are directly and materially
affected by changes in the volume and price level of securities transactions,
the amount of customer margin loans and the Company's cost of funds used to
finance such loans. Accordingly, the Company's revenues and earnings have
fluctuated materially from quarter to quarter.
The Company's largest expense category is employee compensation. The Company
does not employ commissioned sales representatives, therefore, these expenses do
not vary directly with changes in the Company's trade processing activity or
commission revenues. Increases in the Company's profitability reflect, in part,
greater productivity by the Company's employees, as total revenues continued to
grow more rapidly than the Company's employment requirements.
Communications and data processing charges represent the Company's next largest
expense category. However, because the Company uses third party vendors to
support its order processing activity, these expenses are largely variable in
nature and fluctuate with changes in the Company's order processing activity.
7
<PAGE> 8
The following table sets forth selected consolidated financial data as
percentages of net revenue and the percentage increase in each item over the
amount for the previous period:
<TABLE>
<CAPTION>
Percentage to net revenue Period to period change
------------------------------- -----------------------
Third Quarter
Fiscal Year 1996
Third Quarter Third Quarter compared to
Fiscal Year Fiscal Year Third Quarter
1996 1995 Fiscal Year 1995
------------- ------------- ----------------
<S> <C> <C> <C>
INTEREST INCOME:
Total interest income 27.6% 20.6% 140.5%
Total interest expense 16.4% 8.0% 268.8%
----- -----
Net interest income 11.2% 12.6% 59.0%
----- -----
NONINTEREST INCOME:
Commissions and clearing fees 78.9% 79.0% 79.3%
Mutual fund revenue 5.7% 7.5% 35.8%
Investment income 3.7% -- --
Other 0.5% 0.9% 21.0%
----- -----
Total noninterest income 88.8% 87.4% 82.6%
----- -----
NET REVENUE 100.0% 100.0% 79.7%
----- -----
OPERATING EXPENSES:
Employee compensation and benefits 28.5% 31.2% 64.2%
Communications and data processing 15.0% 14.2% 90.0%
Professional fees 5.4% 2.4% 301.8%
Equipment 4.3% 2.5% 200.4%
Advertising and promotion 4.2% 5.8% 31.2%
Occupancy 3.6% 3.3% 97.4%
Stationery and postage 3.2% 5.0% 14.4%
Floor brokerage, exchange and clearing fees 2.3% 3.4% 21.1%
All other expenses 5.5% 6.2% 61.9%
----- -----
Total operating expenses 72.0% 74.0% 74.9%
----- -----
Income before income taxes 28.0% 26.0% 93.2%
Income tax provision 13.8% 10.8% 129.9%
----- -----
NET INCOME 14.2% 15.2% 67.2%
===== =====
</TABLE>
The Company is required to prepare its financial statements in a format
prescribed for all bank holding companies. This format highlights the Company's
activities which produce net interest income even though the Company's primary
source of revenue continues to be commissions earned by Waterhouse Securities,
acting as agent for its customers' securities trading activities.
8
<PAGE> 9
NET INTEREST INCOME. The Company's primary sources of interest income are margin
loans to customers of Waterhouse Securities and earnings on the Bank's
short-term investments. Margin loans are financed primarily through bank loans,
deposits received for securities loaned, credit balances in customer accounts
(known as free credit balances), subordinated debt and capital. Short-term
investments are funded through the deposit taking activities of the Bank. Net
interest income (interest income less interest expense) is directly affected by
the amount of interest earning assets and interest bearing liabilities and the
interest rates prevailing during the period.
NONINTEREST INCOME. Commissions and clearing fees earned by Waterhouse
Securities comprise the substantial majority of these revenues. The commissions
earned by Waterhouse Securities are directly affected by the number of trades
executed and cleared, as well as the average commission rate per trade. Included
in commissions and clearing fees are fees for directing order execution. During
1995, the SEC imposed new disclosure requirements with regard to receipt of
commissions for directing order execution which the Company is in conformity
with. Management believes that such changes have not had an adverse effect on
the Company's revenues. Mutual fund revenue comprises transaction fees and
commissions on mutual fund and money market transfers. Investment income is from
a passive non-voting investment in Roundtable Partners, L.L.C.
OPERATING EXPENSES. Employee compensation and benefits, which includes salaries,
bonuses, Employee Stock Option Plan ("ESOP") contributions and other related
benefits and taxes, are the Company's largest expense. Employee compensation
expense is directly impacted by the number of employees, and partially impacted
by the profits of the Company, as the bonuses and ESOP contributions are
dependent upon the level of income before income taxes. The communications and
data processing category is primarily composed of variable charges related to
executing and clearing customer securities transactions, telephone, computer
service and quotation charges. Included in other expenses are maintenance,
depreciation and amortization, insurance, and other miscellaneous expenses.
REVENUE
NET INTEREST INCOME. Net interest income increased for the first nine months of
fiscal year 1996 by 62% from that of the prior year's first nine months, and
increased 59% for the third quarter of fiscal year 1996 from the third quarter
of fiscal year 1995. These increases are primarily a result of an increase in
average customer margin loans and a lower cost of funds.
COMMISSIONS AND CLEARING FEES. Commissions and clearing fees for the first nine
months of fiscal year 1996, which amounted to 79% of net revenue, grew to a
record $121.6 million, which represented a 75% increase over commissions and
clearing fees of $69.3 million for the first nine months of fiscal year 1995.
Commissions and clearing fees for the third quarter of fiscal 1996 increased by
79% from the third quarter of fiscal 1995. This trend was a continuation of the
growth in commissions and clearing fees experienced during fiscal 1995.
MUTUAL FUND REVENUES. Mutual fund revenues increased 45% for the first nine
months of fiscal year 1996 and 36% for the third quarter over the prior year
periods, primarily due to a corresponding increase in volume in mutual fund
transactions.
INVESTMENT INCOME. Investment income amounted to 4% of net revenue for the third
quarter and 2% of net revenue for the first nine months of fiscal 1996.
OTHER NONINTEREST INCOME. Other noninterest income decreased 25% for the first
nine months of fiscal 1996 and increased 21% for the third quarter of fiscal
1996 over the first nine months and third quarter, respectively, of fiscal 1995.
9
<PAGE> 10
Operating Expenses
EMPLOYEE COMPENSATION AND BENEFITS. Employee compensation increased 60% for the
first nine months of fiscal 1996 over the first nine months of fiscal 1995, and
64% for the third quarter of fiscal 1996 over the third quarter of fiscal 1995,
primarily as a result of an increase in the number of employees from 815 as of
May 31, 1995 to 1,362 as of May 31, 1996. These increases were necessary to
support the rapid branch expansion from 68 as of May 31, 1995 to 80 as of May
31, 1996 as well as increased activity from the customer base of the existing
branches. As a percentage of net revenue, employee compensation has remained
relatively constant, 30% for the first nine months of fiscal 1996 and 32% for
the first nine months of fiscal 1995.
COMMUNICATIONS AND DATA PROCESSING. Communications and data processing increased
75% for the first nine months of fiscal 1996, and 90% for the third quarter of
fiscal 1996 over the first nine months and third quarter of fiscal 1995,
primarily due to the corresponding increase in the volume of transactions
processed by the Company, and to a lesser extent, the related increases in the
number of branch offices.
PROFESSIONAL FEES. Professional fees increased 117% for the first nine months of
fiscal 1996, over the prior year's period and 302% for the third quarter of
fiscal 1996 over the third quarter of fiscal 1995. These increases are primarily
due to consulting costs associated with the development of our electronic
trading system and a charge of $2.1 million for merger related costs, including
investment banking, legal and other professional costs.
ADVERTISING AND PROMOTION. Advertising and promotion increased 31% for both the
first nine months of fiscal 1996, over the prior year's period, and for the
third quarter of fiscal 1996 over the third quarter of fiscal 1995. During the
first nine months of fiscal 1996, Waterhouse Securities increased its
advertising campaign with larger and more frequent advertising in national
publications, such as The Wall Street Journal, Barron's and Investors Business
Daily. The Company also produced new T.V. commercials during this period.
EQUIPMENT. Equipment expense increased 246% for the first nine months of fiscal
1996, and 200% for the third quarter over the same periods in the prior fiscal
year. These increases are attributable to the rapid expansion of the branch
office network and increased technology acquired by the Company.
OCCUPANCY. Occupancy expense increased 83% for the first nine months of fiscal
1996, and 97% for the third quarter over the same periods in the prior fiscal
year. These increases were primarily attributable to an increase in rental
expense due to the expansion of the Company's branch office network and an
increase in space required for the corporate headquarters during fiscal year
1996.
STATIONERY AND POSTAGE. Stationery and postage increased 47% for the first nine
months of fiscal 1996, over the prior year's period, and 14% for the third
quarter of fiscal 1996 over the third quarter of fiscal 1995. These increases
are attributable to the large increase in trade volume and various new products
offered.
FLOOR BROKERAGE, EXCHANGE AND CLEARING FEES. Floor brokerage, exchange and
clearing fees increased 17% for the first nine months of fiscal 1996, over the
prior fiscal year period, and 21% for the third quarter of 1996 over the third
quarter of fiscal 1995. This expense is directly affected by the increase in the
trade volume.
OTHER EXPENSES. Other expenses amounted to $9 million and $3.4 million for the
first nine months and the third quarter, respectively, increases of 76% and 62%,
over the same periods in the prior fiscal year. These increases are attributable
to miscellaneous costs associated with the general expansion of the Company's
business.
10
<PAGE> 11
FINANCIAL CONDITION
As of May 31, 1996, the Company's financial position remained strong with 97% of
total assets consisting of cash and due from banks, federal funds sold,
investment securities and receivables from broker-dealers and customers.
Customer receivables of $530 million at May 31, 1996 are almost entirely secured
by readily marketable securities, some of which are used to collateralize bank
loans of $87.5 million and deposits received for securities loaned of $188
million. The Company's other assets consist principally of office and operating
equipment, as well as an investment in a non-voting security.
Stockholders' equity as of May 31, 1996 was over $90 million, an increase of
$23.9 million since August 31, 1995. Such increase was primarily due to earnings
during the first nine months of fiscal 1996.
LIQUIDITY AND CAPITAL RESOURCES
With the establishment of the Bank, the Company became subject to regulation as
a registered bank holding company under the Bank Holding Company Act. As such,
the Company is subject to examination by the Federal Reserve Bank (the "FRB"),
regulatory reporting requirements, minimum capital requirements and ratios,
certain restrictions on non-banking activities, transactions with affiliates,
tie-in arrangements, changes in control, dividend payments, redemptions and
other payments to security holders, and other restrictions. Under FRB policy,
the Company, as a bank holding company, will be expected to act as a source of
financial strength to Waterhouse National Bank and to commit resources to
support the Bank. Currently, both the Company and the Bank have adequate
capital, in excess of minimum requirements.
Waterhouse Securities is subject to rules adopted by the SEC, the NASD, the
NYSE, other exchanges of which it is a member and various state securities law
administrators which are designed to measure the general financial integrity and
liquidity of broker-dealers by determining the amount of their net capital.
Waterhouse Securities may not pay dividends, distribute capital, prepay
subordinated indebtedness or redeem or repurchase shares of its capital stock
if, thereafter, it would be in violation of any such rules. Waterhouse
Securities has at all times maintained net capital in excess of the minimum
amount of net capital required to be maintained by such rules, and as of May 31,
1996, had net capital in excess of the minimum amount of the required net
capital.
The Company had available formal and informal lines of credit of approximately
$255 million (of which $87.5 million was utilized) at May 31, 1996, which
require collateralization upon utilization. These lines of credit,
interest-bearing deposits, payable to customers, deposits received for
securities loaned and the convertible subordinated notes are the primary sources
of liquidity for the Company. Management believes that these primary sources of
liquidity, along with the equity of the Company, are sufficient to meet the
working capital needs of its subsidiaries including expansion of the securities,
clearing and banking operations.
EFFECTS OF INFLATION
For the nine month period ended May 31, 1996 there was no material effect on the
Company due to inflation.
11
<PAGE> 12
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In the ordinary course of its business the Company is involved in
certain routine legal matters which, in the opinion of management, based
on its discussions with counsel, are not expected to have a material
adverse effect on the Company's consolidated financial condition.
ITEM 2. CHANGES IN SECURITIES
Not applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable
ITEM 5. OTHER INFORMATION
Not applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibit 11 - Computation of Earnings Per Common and Common Equivalent
Shares
Exhibit 12 - Computation of Ratio of Earnings to Fixed Charges
On March 18, 1996, the Company filed a Form 8-K, reporting an Other
Event in item 5 as follows: The registrant issued a press release
stating that the registrant and a third party have commenced preliminary
discussions with a view to a possible business combination.
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
WATERHOUSE INVESTOR SERVICES, INC.
Date: July 9, 1996 By: /s/ Lawrence M. Waterhouse, Jr.
---------------------------------
Lawrence M. Waterhouse, Jr.
Chairman & Chief Executive Office
Date: July 9, 1996 By: /s/ M. Bernard Siegel
----------------------------------
M. Bernard Siegel
Chief Financial Officer
12
<PAGE> 13
EXHIBIT INDEX
Exhibit 11 - Computation of Earnings Per Common and Common Equivalent Shares
Exhibit 12 - Computation of Ratio of Earnings to Fixed Charges
Exhibit 27 - Financial Data Schedule
<PAGE> 1
EXHIBIT 11
WATERHOUSE INVESTOR SERVICES, INC. AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER COMMON AND COMMON EQUIVALENT SHARES
<TABLE>
<CAPTION>
NINE MONTHS ENDED NINE MONTHS ENDED
MAY 31, 1996 MAY 31, 1995
PRIMARY FULLY DILUTED PRIMARY FULLY DILUTED
------- ------------- ------- -------------
<S> <C> <C> <C> <C>
Weighted average number of common shares
outstanding during the period 11,710,838 11,710,838 11,751,798 11,751,798
Weighted average number of common shares
issuable assuming full conversion of 6%
convertible subordinated notes -- 2,072,009 -- 2,072,650
Weighted average number of common shares
held in treasury (250,002) (250,002) (250,002) (250,002)
Common shares issuable assuming stock options
outstanding were exercised at the beginning
of the period 341,500 436,254 28,355 65,405
----------- ----------- ----------- -----------
Weighted average number of common and
common equivalent shares outstanding at end
of period 11,802,336 13,969,099 11,530,151 13,639,851
=========== =========== =========== ===========
Earnings applicable for common shares $22,770,002 $24,004,914 $12,860,870 $14,126,719
Earnings per common and common equivalent $ 1.93 $ 1.72 $ 1.12 $ 1.04
shares
</TABLE>
<PAGE> 1
EXHIBIT 12
WATERHOUSE INVESTOR SERVICES, INC
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
<TABLE>
<CAPTION>
Fiscal Years Ended August 31, Nine Months Ended
------------------------------------------------------------------ May 31,
1991 1992 1993 1994 1995 1996
---------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Earnings Before Taxes On Income $5,689,134 $15,163,052 $25,791,806 $28,009,177 $33,447,304 $42,698,410
---------- ----------- ----------- ----------- ----------- -----------
Fixed Charges:
Interest 1,388,577 1,958,817 3,043,570 5,791,799 11,805,775 25,397,608
Interest Factor in Rent 418,685 618,012 899,371 1,206,530 1,433,164 1,915,231
---------- ----------- ----------- ----------- ----------- -----------
Total Fixed Charges 1,807,262 2,576,829 3,942,941 6,998,329 13,238,939 27,312,839
---------- ----------- ----------- ----------- ----------- -----------
Earnings Before Taxes On Income
and Fixed Charges $7,496,396 $17,739,881 $29,734,747 $35,007,506 $46,686,243 $70,011,249
========== =========== =========== =========== =========== ===========
Ratio of Earnings to Fixed Charges 4.15 6.88 7.54 5.00 3.53 2.56
</TABLE>
<TABLE> <S> <C>
<ARTICLE> BD
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 9-MOS
<FISCAL-YEAR-END> AUG-31-1996 AUG-31-1996
<PERIOD-END> MAY-31-1996 MAY-31-1996
<CASH> 22816004 22816004
<RECEIVABLES> 543277627 543277627
<SECURITIES-RESALE> 0 0
<SECURITIES-BORROWED> 0 0
<INSTRUMENTS-OWNED> 576244589 576244589
<PP&E> 9447329 9447329
<TOTAL-ASSETS> 1233659976 1233659976
<SHORT-TERM> 89512966 89512966
<PAYABLES> 217314303 217314303
<REPOS-SOLD> 0 0
<SECURITIES-LOANED> 187724045 187724045
<INSTRUMENTS-SOLD> 0 0
<LONG-TERM> 48411000 48411000
0 0
0 0
<COMMON> 117512 117512
<OTHER-SE> 90500684 90500684
<TOTAL-LIABILITY-AND-EQUITY> 1233659976 1233659976
<TRADING-REVENUE> 0 0
<INTEREST-DIVIDENDS> 16796805 43812738
<COMMISSIONS> 48041863 121619719
<INVESTMENT-BANKING-REVENUES> 0 0
<FEE-REVENUE> 3474244 9788084
<INTEREST-EXPENSE> 10003776 25397608
<COMPENSATION> 17348830 45802785
<INCOME-PRETAX> 17020999 42698410
<INCOME-PRE-EXTRAORDINARY> 8622063 22770002
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 8622063 22770002
<EPS-PRIMARY> .72 1.93
<EPS-DILUTED> .65 1.72
</TABLE>
