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 February 29, 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 February 29, 1996 was 11,457,706.
1
WATERHOUSE INVESTOR SERVICES, INC.
Quarterly Report on Form 10-Q
For the Quarter Ended February 29, 1996
Index
PART I - FINANCIAL INFORMATION PAGE
Item 1. Financial Statements:
Consolidated Statements of Financial Condition as of
February 29, 1996 and August 31, 1995 3
Consolidated Statements of Income for the Three and Six
Months Ended February 29, 1996 and February 28, 1995 4
Consolidated Statements of Cash Flows for the Six Months
Ended February 29, 1996 and February 28, 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 13
SIGNATURES 14
EXHIBIT A - Computation of Earnings Per Common and Common Equivalent Shares 15
EXHIBIT B - Computation of Ratio of Earnings to Fixed Charges 16
EXHIBIT C - Agreement and Plan of Merger 17
2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
WATERHOUSE INVESTOR SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Unaudited)
February 29, August 31,
1996 1995
------------- -------------
ASSETS:
Cash and due from banks $ 19,599,501 $ 13,090,043
Interest bearing deposits with other banks 10,000,000 50,000,000
Federal funds sold 77,775,000 54,100,000
Investment securities 402,860,581 146,516,037
Receivable from brokers and dealers 9,038,519 10,576,815
Receivable from customers, net 446,655,473 368,974,021
Deposits with clearing organizations 4,421,935 4,384,568
Furniture and equipment, net 7,830,838 6,716,497
Other assets 14,735,884 11,255,002
------------- -------------
Total assets $ 992,917,731 $ 665,612,983
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY:
Liabilities:
Broker loans and overdrafts $ 15,633,929 $ 39,682,966
Interest bearing deposits 462,808,402 231,046,433
Deposits received for securities loaned 190,325,189 107,683,494
Payable to brokers and dealers 6,949,818 4,625,829
Payable to customers 162,314,751 135,975,485
Dividends payable -- 2,288,920
6% convertible subordinated notes 48,483,000 48,500,000
Accounts payable, taxes payable, accrued expenses and
other liabilities 25,328,765 29,095,811
------------- -------------
Total liabilities 911,843,854 598,898,938
------------- -------------
Stockholders' equity:
Common stock, $.01 par value, 20,000,000 shares
authorized and 11,707,708
shares issued at February 29, 1996
and 11,694,729 shares issued at August 31, 1995 117,077 116,947
Additional paid-in capital 9,421,800 9,210,037
Retained earnings 72,543,370 58,395,431
Less:
Treasury stock, 250,002 shares, at cost (1,008,370) (1,008,370)
------------- -------------
Total stockholders' equity 81,073,877 66,714,045
------------- -------------
Total liabilities and stockholders' equity $ 992,917,731 $ 665,612,983
============= =============
The accompanying notes are an integral part of these
consolidated financial statements.
3
WATERHOUSE INVESTOR SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended Six Months Ended
February 29, February 28, February 29, February 28,
1996 1995 1996 1995
------------ ------------ ------------ -----------
INTEREST INCOME:
Margin loans $ 8,592,261 $ 5,867,553 $16,607,393 $10,904,630
Investment securities 5,575,482 531,744 9,966,072 576,730
Other interest income 221,016 145,188 486,859 243,027
----------- ----------- ----------- -----------
Total interest income 14,388,759 6,544,485 27,060,324 11,724,387
----------- ----------- ----------- -----------
INTEREST EXPENSE:
Interest paid on interest bearing deposits 4,557,106 -- 8,061,587 --
Interest paid on deposits received for securities loaned 2,067,651 -- 3,618,791 --
Broker loans and overdrafts 740,452 1,620,475 1,609,895 2,646,925
6% convertible subordinated notes 727,380 727,500 1,454,880 1,455,000
Other 340,201 333,513 648,679 501,990
----------- ----------- ----------- -----------
Total interest expense 8,432,790 2,681,488 15,393,832 4,603,915
----------- ----------- ----------- -----------
Net interest income 5,955,969 3,862,997 11,666,492 7,120,472
----------- ----------- ----------- -----------
NONINTEREST INCOME:
Commissions and clearing fees 39,692,233 21,867,120 73,577,856 42,508,316
Mutual fund revenue 3,044,643 2,229,899 6,313,840 4,198,927
Other 1,597,062 613,416 1,848,966 969,789
----------- ----------- ----------- -----------
Total noninterest income 44,333,938 24,710,435 81,740,662 47,677,032
----------- ----------- ----------- -----------
Net revenue 50,289,907 28,573,432 93,407,154 54,797,504
----------- ----------- ----------- -----------
OPERATING EXPENSES:
Employee compensation and benefits 15,152,180 9,293,711 28,453,956 18,045,185
Communications and data processing 7,551,725 4,411,334 14,205,267 8,455,480
Advertising and promotion 2,302,271 1,908,567 4,310,837 3,293,528
Equipment 2,198,969 528,343 3,688,557 1,008,778
Occupancy 2,191,388 1,029,329 3,543,021 2,024,943
Stationery and postage 1,710,888 1,016,071 3,320,074 1,869,852
Floor brokerage, exchange and clearing fees 1,258,100 1,084,356 2,408,947 2,093,562
Professional fees 1,029,197 557,164 1,753,070 1,501,615
Depreciation and amortization 897,285 558,852 1,579,111 1,098,925
Other 1,578,855 1,185,232 4,466,902 2,136,535
----------- ----------- ----------- -----------
Total operating expenses 35,870,858 21,572,959 67,729,742 41,528,403
----------- ----------- ----------- -----------
Income before income taxes 14,419,049 7,000,473 25,677,412 13,269,101
Income tax provision 6,503,324 2,961,093 11,529,473 5,565,197
----------- ----------- ----------- -----------
Net income $ 7,915,725 $ 4,039,380 $14,147,939 $ 7,703,904
=========== =========== =========== ===========
Primary earnings per share $.68 $.35 $1.22 $.67
Fully diluted earnings per share $.60 $.33 $1.09 $.63
Weighted average shares outstanding 11,655,065 11,502,510 11,642,573 11,502,510
The accompanying notes are an integral part of these
consolidated financial statements.
4
WATERHOUSE INVESTOR SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended
February 29, February 28,
1996 1995
------------- ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 14,147,939 $ 7,703,904
Non cash items included in net income:
Depreciation 1,508,875 1,028,689
Debt issuance cost 70,252 70,236
Increase in allowance for doubtful accounts 244,469 --
(Increases) decreases in operating assets:
Receivable from brokers and dealers 1,538,296 799,747
Receivable from customers (77,925,921) (9,130,820)
Deposits with clearing organizations (37,367) (19,587)
Other assets (3,551,134) (811,557)
Increases (decreases) in operating liabilities:
Broker loans and overdrafts (24,049,037) 23,275,747
Interest bearing deposits 231,761,969 15,872,633
Deposits received for securities loaned 82,641,695 (2,947,500)
Payable to brokers and dealers 2,323,989 (1,207,448)
Payable to customers 26,338,892 11,199,468
Accounts payable, taxes payable,
accrued expenses and other liabilities (6,072,592) (2,231,400)
------------- ------------
CASH PROVIDED BY OPERATING ACTIVITIES 248,940,325 43,602,112
------------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Interest bearing deposits with other banks 40,000,000 (5,000,000)
Federal funds sold (23,675,000) (21,600,000)
Investment securities purchased (458,460,102) (33,806,315)
Proceeds from maturities of investment securities 202,115,558 21,101,245
Purchase of furniture and equipment (2,623,216) (207,064)
------------- ------------
CASH (USED IN) INVESTING ACTIVITIES (242,642,760) (39,512,134)
------------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid -- (1,830,736)
Exercise of stock options and warrants 211,893 --
------------- ------------
CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 211,893 (1,830,736)
------------- ------------
INCREASE IN CASH AND DUE FROM BANKS 6,509,458 2,259,242
CASH AND DUE FROM BANKS, beginning of period 13,090,043 7,728,832
------------- ------------
CASH AND DUE FROM BANKS, end of period $ 19,599,501 $ 9,988,074
============= ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest $ 15,035,146 $ 4,079,908
============= ============
Cash paid for income taxes $ 13,810,782 $ 6,466,888
============= ============
The accompanying notes are an integral part of
these consolidated financial statements.
5
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 February 29, 1996, the Broker had net capital of $49,936,760, which
was 11% of aggregate debit items and $40,523,515 in excess of required
net capital. Further, the amounts in excess of 4% and 5% of aggregate
debit items were $31,110,270, and $26,403,647, 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 in excess of the regulatory requirements
to be deemed "Well Capitalized" at February 29, 1996.
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
March 1, 1996 to June 26, 2000.
The following is a comparison of the carrying amount and approximate
market values:
February 29, 1996 August 31, 1995
------------------------- --------------------------
Carrying Approximate Carrying Approximate
Amount Market Value Amount Market Value
------------ ------------ ------------ ------------
U.S. Government and Agency Securities $402,050,581 $401,868,000 $144,706,037 $144,692,000
Other Securities 810,000 810,000 1,810,000 1,810,000
------------ ------------ ------------ ------------
Total $402,860,581 $402,678,000 $146,516,037 $146,502,000
============ ============ ============ ============
6
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, 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 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
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
------------------------- -----------------------
Second Quarter
Fiscal Year 1996
Second Quarter Second Quarter compared to
Fiscal Year Fiscal Year Second Quarter
1996 1995 Fiscal Year 1995
-------------- -------------- ----------------
Interest Income:
Total interest income 28.6% 22.9% 119.9%
Total interest expense 16.8% 9.4% 214.5%
------ ------
Net interest income 11.8% 13.5% 54.2%
------ ------
Noninterest Income:
Commissions and clearing fees 78.9% 76.5% 81.5%
Mutual fund revenue 6.1% 7.8% 36.5%
Other 3.2% 2.2% 160.4%
------ ------
Total noninterest income 88.2% 86.5% 79.4%
------ ------
Net revenue 100.0% 100.0% 76.0%
------ ------
Operating Expenses:
Employee compensation and benefits 30.1% 32.5% 63.0%
Communications and data processing 15.0% 15.4% 71.2%
Advertising and promotion 4.6% 6.7% 20.6%
Equipment 4.4% 1.8% 316.2%
Occupancy 4.4% 3.6% 112.9%
Stationery and postage 3.4% 3.6% 68.4%
Floor brokerage, exchange and clearing fees 2.5% 3.8% 16.0%
All other expenses 6.9% 8.1% 52.3%
------ ------
Total operating expenses 71.3% 75.5% 66.3%
------ ------
Income before income taxes 28.7% 24.5% 106.0%
Income tax provision 13.0% 10.4% 119.6%
------ ------
Net income 15.7% 14.1% 96.0%
------ ------
------ ------
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
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.
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
dependant 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, professional fees and other
miscellaneous expenses.
Revenue
Net Interest Income. Net interest income increased for the first six months of
fiscal year 1996 by 64% from that of the prior year's first six months, and
increased 54% for the second quarter of fiscal year 1996 from the second quarter
of fiscal year 1995. Such increase is 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 six
months of fiscal year 1996, which amounted to 79% of net revenue, grew to a
record $73.6 million, which represented a 73% increase over commissions and
clearing fees of $42.5 million for the first six months of fiscal year 1995.
Commissions and clearing fees for the second quarter of fiscal 1996 increased by
82% from the second 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 50% for the first six
months of fiscal year 1996 and 37% for the second quarter over the prior year
periods, primarily due to a corresponding increase in volume in mutual fund
transactions.
Operating Expenses
Employee Compensation and Benefits. Employee compensation increased 57.7% for
the first six months of fiscal 1996 over the first six months of fiscal 1995,
and 63% for the second quarter of fiscal 1996 over the second quarter of fiscal
1995, primarily as a result of an increase in the number of employees from 785
as of February 28, 1995 to 1,213 as of February 29, 1996. These increases were
necessary to support the rapid branch expansion from 64 as of February 28, 1995
to 78 as of February 29, 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, 31% for the first six months of
fiscal 1996 and 33% for the first six months of fiscal 1995.
9
Communications and Data Processing. Communications and data processing increased
68% for the first six months of fiscal 1996, and 71% for the second quarter of
fiscal 1996 over the first six months and second 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.
Advertising and Promotion. Advertising and promotion increased 31% for the first
six months of fiscal 1996, over the prior year's period, and 21% for the second
quarter of fiscal 1996 over the second quarter of fiscal 1995. During the first
six 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.
Equipment. Equipment expense increased 266% for the first six months of fiscal
1996, and 316% for the second quarter over the same periods in the prior fiscal
year. This is attributable to the rapid expansion of the branch office network
and increased technology acquired by the Company.
Occupancy. Occupancy expense increased 75% for the first six months of fiscal
1996, and 113% for the second 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 78% for the first six
months of fiscal 1996, over the prior year's period, and 68% for the second
quarter of fiscal 1996 over the second quarter of fiscal 1995. This increase is
attributable to the large increase in trade volume, and the new products
offered by Waterhouse National Bank and Waterhouse Securities.
Floor Brokerage, Exchange and Clearing Fees. Floor brokerage, exchange and
clearing fees increased 15% for the first six months of fiscal 1996, over the
prior fiscal year period, and 16% for the second quarter of 1996 over the second
quarter of fiscal 1995. This expense is directly affected by the increase in the
trade volume.
Other Expenses. Other expenses amounted to $7.8 million and $3.5 million for the
first six months and the second quarter, respectively, increases of 65% and 52%,
over the same periods in the prior fiscal year. These increases are primarily
attributable to miscellaneous costs associated with the general expansion of the
Company's business during the period.
Financial Condition
As of February 29, 1996, the Company's financial position remained strong with
97% of total assets consisting of cash and due from banks, interest-bearing
deposits with other banks, federal funds sold, investment securities and
receivables from broker-dealers and customers. Customer receivables of $447
million at February 29, 1996 are secured by readily marketable securities, some
of which are used to collateralize bank loans of $12 million and deposits
received for securities loaned of $190 million. The Company's other assets
consist principally of office and operating equipment.
Stockholders' equity as of February 29, 1996 was over $81 million, an increase
of $14.4 million since August 31, 1995. Such increase was primarily due to
earnings during the first six months of fiscal 1996.
10
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
February 29, 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 $12 million was utilized) at February 29, 1996, which
require collateralization upon utilization. These lines of credit,
interest-bearing deposits, payable 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 six month period ended February 29, 1996 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 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
On February 6, 1996, the Company held its Annual Meeting of
Stockholders. A proposal to approve the appointment of Price
Waterhouse LLP as the Company's independant accountants for the
fiscal year ending August 31, 1996, was presented to the Stockholders
for ratification. The Stockholders approved such proposal with
10,991,513 votes cast for, 26,888 votes cast against, and 20,345
abstentions.
In addition, the Company nominated five directors to serve until the
Annual Meeting of Stockholders in 1999. Proxy statements listing such
nominations were solicited pursuant to Regulation 14A under the
Securities Exchange Act of 1934 and there was no solicitation in
opposition to management's nominees.
All such nominees were elected with the following votes cast:
For Authority to Vote Withheld
--- --------------------------
Kenneth I. Coco 10,893,869 144,877
Richard H. Neiman 10,892,056 146,690
Frank J. Petrilli 10,894,990 143,756
Arthur J. Radin 10,943,837 94,909
James F. Rittinger 10,939,040 99,706
Item 5. Other Information
Waterhouse Investor Services, Inc., The Toronto-Dominion Bank ("TD
Bank") and TD/Oak, Inc., a newly formed wholly owned Delaware
subsidiary of TD Bank ("Merger Sub") have entered into an Agreement
and Plan of Merger, dated April 9, 1996 (the "Merger Agreement") that
provides for TD Bank's acquisition of the Company through a merger of
the Company into Merger Sub, with Merger Sub as the surviving
corporation, in which each share of the Company's common stock, par
value $.01 per share (the "Company Common Stock") will be exchanged,
at the election of the holder, for either shares of TD Bank common
stock, no par value ("TD Bank Common Stock") with a market value
equivalent to US$38.00 (subject to a maximum of 2.45952 shares and
a minimum of 1.81790 shares of TD Bank Common Stock being exchanged
for each share of Company Common Stock) or US$38.00 net to the seller
in cash; provided that no more than 65% of the outstanding Company
Common Stock will be converted into TD Bank Common Stock and no more
than 35% will be converted into cash, with pro ration in the event
that elections exceed either such percentage.
The Merger Agreement, pursuant to its terms, is subject to termination
at the election of the Board of Directors of the Company if the price
of TD Bank Common Stock is such that 2.45952 shares would have a
market value equivalent to less than US$38.00 on the tenth business
day prior to the scheduled closing of the merger (the "Determination
Date"), unless TD Bank increases the exchange ratio to such number
of shares of TD Bank Common Stock having a market value on the
Determination Date equivalent to US$38.00. The Merger Agreement is
also subject to termination by the Company prior to approval
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of the merger by the stockholders of the Company if the Board of
Directors of the Company determines in good faith after advice
of counsel that the failure to terminate the Merger Agreement could
reasonably be deemed a breach of its fiduciary duties under
applicable law. The Merger Agreement may also be terminated by either
the Company or TD Bank upon the occurrence of certain other events
provided for in the Merger Agreement. The merger is expected to be
tax-free to the holders of Company Common Stock to the extent they
receive TD Bank Common Stock for their Company Common Stock.
Consummation of the transactions contemplated by the Merger Agreement
is subject to the satisfaction of a number of conditions, including
approval of the merger by the Company's stockholders, registration of
TD Bank Common Stock to be issued in the merger under applicable
Canadian and U.S. securities laws and listing of such shares on the
Toronto Stock Exchange and the new listing of TD Bank Common Stock on
the New York Stock Exchange, and receipt of all required U.S. and
Canadian banking and other regulatory approvals, including approval of
the merger by the Board of Governors of the Federal Reserve System,
the Canadian Minister of Finance and the Superintendent of Financial
Institutions of Canada. Due to such requirements, the parties
currently anticipate that consummation of the merger is expected to
occur within four to six months.
The Merger Agreement also contains customary representations and
warranties of the Company and TD Bank as well as certain covenants of
the Company relating to governance of the Company during the period
from the execution of the Merger Agreement to the consummation of the
merger.
The Company's 6% Convertible Subordinated Notes Due 2003 (the "Notes")
will remain outstanding following the merger unless converted by the
holders of such Notes prior thereto in accordance with the provisions
of the indenture governing the Notes.
Lawrence M. Waterhouse, Jr., Chief Executive Officer of the Company,
and certain members of his immediate family, have agreed to vote their
shares of Company Common Stock, aggregating approximately 20% of the
outstanding shares of Company Common Stock, in favor of the merger.
TD Bank currently holds approximately 4.9% of the outstanding shares,
which it intends to vote in favor of the merger.
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
Exhibit C - Agreement and Plan of Merger, dated as of April 9, 1996,
by and among the The Toronto-Dominion Bank, TD/Oak, Inc.
and the Company (including exhibits).
On March 18, 1996, the Company filed 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.
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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: April 10, 1996 By: /s/ LAWRENCE M. WATERHOUSE, JR.
____________________________________
Lawrence M. Waterhouse, Jr.
Chairman & Chief Executive Officer
Date: April 10, 1996 By: /s/ M. BERNARD SIEGEL
____________________________________
M. Bernard Siegel
Chief Financial Officer
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