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 November 30, 1995 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 November 30, 1995 was 11,452,343.
2
WATERHOUSE INVESTOR SERVICES, INC.
Quarterly Report on Form 10-Q
For the Quarter Ended November 30, 1995
Index
Part I - FINANCIAL INFORMATION PAGE
Item 1. Financial Statements:
Consolidated Statements of Financial Condition as of
November 30, 1995 and August 31, 1995 3
Consolidated Statements of Income for the Three
Months Ended November 30, 1995 and November 30, 1994 4
Consolidated Statements of Cash Flows for the Three Months
Ended November 30, 1995 and November 30, 1994 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 11
Item 2. Changes in Securities 11
Item 3. Defaults upon Senior Securities 11
Item 4. Submission of Matters to a Vote of Security Holders 11
Item 5. Other Information 11
Item 6. Exhibits and Reports on Form 8-K 11
SIGNATURES 11
EXHIBIT A - Computation of Earnings Per Common and Common Equivalent Shares 12
EXHIBIT B - Computation of Ratio of Earnings to Fixed Charges 13
3
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
WATERHOUSE INVESTOR SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Unaudited)
November 30, August 31,
1995 1995
----------- -----------
ASSETS:
Cash and due from banks $ 16,444,829 $ 13,090,043
Interest bearing deposits with other banks 25,000,000 50,000,000
Federal funds sold 73,900,000 54,100,000
Investment securities 250,730,836 146,516,037
Receivable from brokers and dealers 9,496,670 10,576,815
Receivable from customers, net 433,888,072 368,974,021
Deposits with clearing organizations 4,370,753 4,384,568
Furniture and equipment, net 7,079,705 6,716,497
Other assets 12,197,875 11,255,002
------------ ------------
Total assets $833,108,740 $665,612,983
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY:
Liabilities:
Broker loans and overdrafts $ 62,149,109 $ 39,682,966
Interest bearing deposits 330,614,419 231,046,433
Deposits received for securities loaned 143,949,065 107,683,494
Payable to brokers and dealers 5,530,116 4,625,829
Payable to customers 142,302,288 135,975,485
Dividends payable --- 2,288,920
6% convertible subordinated notes 48,500,000 48,500,000
Accounts payable, taxes payable, accrued expenses
and other liabilities 26,978,063 29,095,811
----------- -----------
Total liabilities 760,023,060 598,898,938
----------- -----------
Stockholders' equity:
Common stock, $.01 par value, 20,000,000 shares
authorized and 11,702,345 shares issued at
November 30, 1995 and 11,694,729 shares issued at
August 31, 1995 117,024 116,947
Additional paid-in capital 9,349,382 9,210,037
Retained earnings 64,627,644 58,395,431
Less:
- ----
Treasury stock, 250,002 shares, at cost (1,008,370) (1,008,370)
------------ ------------
Total stockholders' equity 73,085,680 66,714,045
------------ ------------
Total liabilities and stockholders' equity $833,108,740 $665,612,983
============ ============
The accompanying notes are an integral part of these consolidated
financial statements.
4
WATERHOUSE INVESTOR SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended
November 30, November 30,
1995 1994
----------- -----------
INTEREST INCOME:
Margin loans $ 8,015,132 $ 5,037,077
Investment securities 4,390,590 44,986
Other interest income 265,844 97,839
---------- ----------
Total interest income 12,671,566 5,179,902
---------- ----------
INTEREST EXPENSE:
Interest paid on interest bearing deposits 3,504,481 ---
Interest paid on deposits received for securities loaned 1,551,140 ---
Broker loans and overdrafts 869,442 1,026,449
6% convertible subordinated notes 727,500 727,500
Other 308,479 168,478
---------- ----------
Total interest expense 6,961,042 1,922,427
---------- ----------
Net interest income 5,710,524 3,257,475
---------- ----------
NONINTEREST INCOME:
Commissions and clearing fees 33,885,623 20,641,195
Mutual fund revenue 3,269,197 1,969,028
Other 251,905 356,374
---------- ----------
Total noninterest income 37,406,725 22,966,597
---------- ----------
Total income 43,117,249 26,224,072
---------- ----------
OPERATING EXPENSES:
Employee compensation and benefits 13,301,776 8,751,474
Communications and data processing 6,653,540 4,044,146
Advertising and promotion 2,008,566 1,384,962
Stationery and postage 1,609,187 853,780
Equipment 1,489,589 480,435
Occupancy 1,351,633 995,614
Floor brokerage, exchange and clearing fees 1,150,847 1,009,206
Professional fees 723,873 944,451
Depreciation and amortization 681,826 540,073
Other 2,888,050 951,306
---------- ----------
Total operating expenses 31,858,887 19,955,447
---------- ----------
Income before income taxes 11,258,362 6,268,625
Income tax provision 5,026,149 2,604,103
---------- ----------
Net income $ 6,232,213 $ 3,664,522
=========== ===========
Primary earnings per share $ .54 $ .32
Fully diluted earnings per share $ .48 $ .30
Weighted average shares outstanding 11,628,193 11,521,314
The accompanying notes are an integral part of these consolidated
financial statements.
5
WATERHOUSE INVESTOR SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended
November 30, November 30,
1995 1994
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $6,232,213 $3,664,522
Non cash items included in net income:
Depreciation 646,708 504,955
Debt issuance cost 35,118 35,118
Increase in allowance for doubtful accounts 84,631 32,290
(Increases) decreases in operating assets:
Receivable from brokers and dealers 1,080,145 (3,606,630)
Receivable from customers (64,998,682) (12,932,244)
Deposits with clearing organizations 13,815 ---
Other assets (977,993) (568,563)
Increases (decreases) in operating liabilities:
Broker loans and overdrafts 22,466,143 32,581,167
Deposits received for securities loaned 36,265,571 ---
Payable to brokers and dealers 904,287 (6,427,390)
Payable to customers 6,326,803 (4,459,408)
Accounts payable, taxes payable, accrued expenses and
other liabilities (4,406,666) (1,615,690)
--------- ---------
CASH PROVIDED BY OPERATING ACTIVITIES 3,672,093 7,208,127
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Interest bearing deposits with other banks 25,000,000 ---
Federal funds sold (19,800,000) ---
Investment securities purchased (85,274,199) (7,173,735)
Proceeds from maturities of investment securities (18,940,600) 7,582,713
Purchase of furniture and equipment (1,009,916) (330,111)
--------- -------
CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES (100,024,715) 78,867
----------- ------
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid --- (1,830,736)
Exercise of stock options and warrants 139,422 ---
Interest bearing deposits 99,567,986 ---
---------- ----------
CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 99,707,408 (1,830,736)
---------- ----------
INCREASE IN CASH AND DUE FROM BANKS 3,354,786 5,456,258
CASH AND DUE FROM BANKS, beginning of period 13,090,043 7,728,832
---------- ---------
CASH AND DUE FROM BANKS, end of period $ 16,444,829 $ 13,185,090
============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest $ 5,744,031 $ 1,221,297
============ ============
Cash paid for income taxes $ 4,915,561 $ 1,189,711
============ ============
The accompanying notes are an integral part of these consolidated
financial statements.
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, registered with the Securities and Exchange
Commission (the "SEC") and is a member of the National Association of
Securities Dealers, Inc. (the "NASD") and the New York Stock Exchange,
Inc. (the "NYSE")and other exchanges, which 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 November 30, 1995, the Broker had net capital of $45,402,642, which
was 10% of aggregate debit items and $36,131,358 in excess of required
net capital. Further, the amounts in excess of 4% and 5% of aggregate
debit items were $26,860,074 and $22,224,432, 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. Both the
Company's and the Bank's capital ratios were sufficently in excess of the
regulatory requirements to be deemed "Well Capitalized" for the period
ended November 30, 1995.
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
December 7, 1995 to June 26, 2000. The following is a comparison of the
carrying amount and approximate market values:
November 30, 1995 August 31, 1995
------------------------- -------------------------
Carrying Approximate Carrying Approximate
Amount Market Value Amount Market Value
------------ ------------ ------------ ------------
U.S. Government and Agency Securities $249,920,836 $249,619,668 $144,706,037 $144,692,000
Other Securities 810,000 810,000 1,810,000 1,810,000
------------ ------------ ------------ ------------
Total $250,730,836 $250,429,668 $146,516,037 $146,502,000
============ ============ ============ ============
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 Advisory
Act of 1940. The advisory firm, which is a wholly-owned subsidiary of the
Bank, is principally engaged in providing investment management services to
the Waterhouse Investors Cash Management Fund, a money market fund, and
other mutual funds.
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 historical 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.
8
The following table sets forth selected consolidated financial data as
percentages of total revenues and the percentage increase in each item over
the amount for the previous period:
Percentage to total income Period to period change
-------------------------- -----------------------
First QuarterFY 1996
First Quarter First Quarter compared to
FY 1996 FY 1995 First Quarter FY 1995
------- ------- ---------------------
Interest Income:
Total interest income 29.4% 19.8% 144.6%
Total interest expense 16.2% 7.4% 262.1%
----- -----
Net interest income 13.2% 12.4% 75.3%
----- -----
Noninterest Income:
Commissions and clearing fees 78.6% 78.7% 64.2%
Mutual fund revenues 7.6% 7.5% 66.0%
Other noninterest income 0.6% 1.4% -29.3%
----- -----
Total noninterest income 86.8% 87.6% 62.9%
----- -----
Total income 100.0% 100.0% 64.4%
------ ------
Operating Expenses:
Employee compensation and benefits 30.9% 33.4% 52.0%
Communications and data processing 15.4% 15.4% 64.5%
Advertising and promotion 4.7% 5.3% 45.0%
Stationery and postage 3.7% 3.3% 88.5%
Equipment 3.5% 1.8% 210.0%
Occupancy 3.1% 3.8% 35.8%
Floor brokerage, exchange and
clearing fees 2.7% 3.8% 14.0%
All other expenses 9.9% 9.3% 76.3%
----- -----
Total operating expenses 73.9% 76.1% 59.7%
----- -----
Income before income taxes 26.1% 23.9% 79.6%
Income tax provision 11.7% 9.9% 93.0%
----- -----
Net income 14.4% 14.0% 70.1%
----- -----
Income
Net Interest Income. Waterhouse Securities' primary source of interest
income is margin loans to customers. These loans are financed primarily
through capital, bank loans, deposits received for securities loaned, credit
balances in customer accounts (known as free credit balances) and
subordinated debt. Net interest income (interest income less interest
expense) increased for the first quarter of fiscal year 1996 by 75% from that
of the same period in the prior year. This is directly affected by the level
of such loans, the interest rate charged on those loans, which is based on the
broker call rate, and the cost of financing. The Bank has contributed to the
increase in net interest income due to interest earned on short term
investments in excess of interest paid to depositors.
Commissions and Clearing Fees. Waterhouse Securities acts primarily as an
agent for customer trading activity, and therefore, 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.
During the first quarter of fiscal year 1996, the number of trades executed
and cleared by Waterhouse Securities was up 62% as a result of activity from
the addition of new accounts added during the period and increased trading
activity from existing accounts. Included in commissions and clearing fees
are commissions for directing order execution.
Mutual Fund Revenues. Included in mutual fund revenues are commission fees
and loads on mutual fund and money market transfers. Such revenues
increased 66% for the first quarter of fiscal year 1996 over the same period
in the prior year, primarily due to a corresponding increase in volume in
mutual fund transactions.
9
Expenses
Employee Compensation and Benefits. Employee compensation represented
approximately 42% of total operating expenses in the first quarter of fiscal
1996 -- the Company's largest expense. This expense primarily includes
salaries, bonuses, Employee Stock Ownership Plan (ESOP) contributions and
other related benefits and taxes. Employee compensation expense is directly
impacted by the number of employees, and partially impacted by the profits
of the Company, as the bonuses and contributions to the ESOP are dependent on
income before taxes.
Employee compensation increased 52% in the first quarter of fiscal 1996 over
the first quarter of fiscal 1995, primarily as a result of an increase in the
number of employees from 775 as of November 30, 1994 to 1,045 as of November
30, 1995. These increases were necessary to support the rapid branch
expansion from 60 branches as of November 30, 1994 to 74 branches as of
November 30, 1995, as well as increased activity from the customer base of
the existing branches.
Communications and Data Processing. This category is primarily composed
of variable charges related to executing and clearing customer
transactions, telephone, computer service and quotation charges. These
charges increased 65% for the first quarter of fiscal year 1996 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.
Advertising and Promotion. As the branch network expanded at a rapid rate
over the past several years, Waterhouse Securities increased its
advertising campaign with larger and more frequent advertising in national
publications, such as The Wall Street Journal, Barron's and Investor's
Business Daily. In addition, Waterhouse Securities increased its
advertising campaign on national cable television stations. As a result,
advertising and promotion expense increased 45% for the first quarter of
fiscal year 1996 over the first quarter of the prior year.
Stationery and Postage. This includes envelopes, postage charges and
stationery for our brokerage operations. This expense increased 89% for
the first quarter of 1996 over the first quarter of the prior year.
This increase was attributable to the large increase in trade volume
as well as the development of new customer statements, and the
expansion of the Company's branch office network.
Equipment. Equipment expense increased 210% in the first quarter of
1996 over the first quarter of the prior year. This is attributable
to both the rapid expansion of the Company's branch office network
and the increased technology offered by the Company to its customer base.
Occupancy. Occupancy expense increased 36% in the first quarter of
fiscal 1996 versus the first quarter of fiscal 1995. This increase
was primarily attributable to an increase in rental expense resulting
from the expansion of the Company's branch office network and an increase
in space required for the Company's clearing operations and corporate
headquarters.
Floor Brokerage, Exchange and Clearing Fees. This expense increased 14%
for the first quarter of 1996 over the first quarter of the prior year.
This includes both clearance and floor brokerage expense and was affected
by the increase in the trade volume.
Other Expenses. Included in other expenses are depreciation, insurance,
professional fees and other miscellaneous expenses. Other expenses
amounted to $4.3 million in the first quarter of fiscal year 1996,
resulting in an increase of 76% as compared to the first quarter of
fiscal 1995. This increase is primarily attributable to the general
expansion of the Company's business during the period.
10
Financial Condition
As of November 30, 1995, the Company's financial position remained strong
with 98% of total assets consisting of cash and due from banks, deposits,
federal funds sold, investment securities and receivables from
broker-dealers and customers. Customer receivables of $434 million at
November 30, 1995 are secured by readily marketable securities, some of
which are used to collateralize bank loans of $62 million and deposits
received for securities loaned of $144 million. The Company's other
assets consist principally of office and operating equipment.
Stockholders' equity as of November 30, 1995 was over $73 million, an
increase of $6.2 million since August 31,1995. Such increase was
primarily due to earnings during the first three 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 November 30, 1995,
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 $62 million was utilized) at November
30, 1995, which require collateralization upon utilization. These lines
of credit, payables to customers, 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, as well as any possible future acquisitions.
Effects of Inflation
For the three month period ended November 30, 1995, there was no material
effect on the Company due to inflation.
11
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
In the ordinary course of its business the Company is involved in
certain routine legal matters in 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 A - Computation of Earnings Per Common and Common Equivalent
Shares
Exhibit B - Computation of Ratio of Earnings to Fixed Charges
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: January 12, 1996 By: /s/ Lawrence M. Waterhouse Jr.
--------------------------------
Lawrence M. Waterhouse, Jr.
Chairman & Chief Executive Officer
Date: January 12, 1996 By: /s/ Bernard Siegel
--------------------------------
M. Bernard Siegel
Chief Financial Officer