-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, FZbTSZtZ57blRwQmKfmlvh5KgUqsvMdK8YETSsphqaLjgTdU5JCXlNlP6kYWUaXl JDenvwIwb6prsUiyuPK0Aw== 0000950123-96-003525.txt : 19960712 0000950123-96-003525.hdr.sgml : 19960712 ACCESSION NUMBER: 0000950123-96-003525 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19960531 FILED AS OF DATE: 19960711 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: WATERHOUSE INVESTOR SERVICES INC CENTRAL INDEX KEY: 0000812712 STANDARD INDUSTRIAL CLASSIFICATION: SECURITY BROKERS, DEALERS & FLOTATION COMPANIES [6211] IRS NUMBER: 133400568 STATE OF INCORPORATION: DE FISCAL YEAR END: 0831 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-10983 FILM NUMBER: 96593260 BUSINESS ADDRESS: STREET 1: 100 WALL STREET CITY: NEW YORK STATE: NY ZIP: 10005 BUSINESS PHONE: 2128063500 MAIL ADDRESS: STREET 1: 100 WALL ST CITY: NEW YORK STATE: NY ZIP: 10005 10-Q 1 WATERHOUSE INVESTOR SERVICES, INC. 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 2 WATERHOUSE INVESTOR SERVICES, INC. QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED MAY 31, 1996 INDEX
PART I - FINANCIAL INFORMATION PAGE 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
2 3 PART 1 - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS WATERHOUSE INVESTOR SERVICES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Unaudited) May 31, August 31, 1996 1995 -------------- ------------ 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 ============== ============
The accompanying notes are an integral part of these consolidated financial statements. 3 4 WATERHOUSE INVESTOR SERVICES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Three Months Ended Nine Months Ended May 31, May 31, May 31, May 31, 1996 1995 1996 1995 ----------- ----------- ------------ ----------- 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
The accompanying notes are an integral part of these consolidated financial statements. 4 5 WATERHOUSE INVESTOR SERVICES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Nine Months Ended May 31, May 31, 1996 1995 -------------- ------------ 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
The accompanying notes are an integral part of these consolidated financial statements. 5 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:
May 31, 1996 August 31, 1995 ---------------------------- --------------------------- Carrying Approximate Carrying Approximate Amount Market Value Amount Market Value ------------ ------------ ------------ ------------ 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 ============ ============ ============ ============
6 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 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:
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 ------------- ------------- ---------------- 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% ===== =====
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 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 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 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 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 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 EX-11 2 COMPUTATION OF EARNINGS PER COMMON SHARE 1 EXHIBIT 11 WATERHOUSE INVESTOR SERVICES, INC. AND SUBSIDIARIES COMPUTATION OF EARNINGS PER COMMON AND COMMON EQUIVALENT SHARES
NINE MONTHS ENDED NINE MONTHS ENDED MAY 31, 1996 MAY 31, 1995 PRIMARY FULLY DILUTED PRIMARY FULLY DILUTED ------- ------------- ------- ------------- 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
EX-12 3 COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES 1 EXHIBIT 12 WATERHOUSE INVESTOR SERVICES, INC COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
Fiscal Years Ended August 31, Nine Months Ended ------------------------------------------------------------------ May 31, 1991 1992 1993 1994 1995 1996 ---------- ----------- ----------- ----------- ----------- ----------- 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
EX-27 4 FINANCIAL DATA SCHEDULE
BD 3-MOS 9-MOS AUG-31-1996 AUG-31-1996 MAY-31-1996 MAY-31-1996 22816004 22816004 543277627 543277627 0 0 0 0 576244589 576244589 9447329 9447329 1233659976 1233659976 89512966 89512966 217314303 217314303 0 0 187724045 187724045 0 0 48411000 48411000 0 0 0 0 117512 117512 90500684 90500684 1233659976 1233659976 0 0 16796805 43812738 48041863 121619719 0 0 3474244 9788084 10003776 25397608 17348830 45802785 17020999 42698410 8622063 22770002 0 0 0 0 8622063 22770002 .72 1.93 .65 1.72
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